IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

The Securities and Exchange Commission ("SEC" or the "Commission") alleges that:

SUMMARY

1. This action concerns a massive financial fraud motivated by greed and a desire to preserve professional and social status. The defendants were the highest-ranking officers of Waste Management, Inc. ("Waste Management" or "Company"), the world's largest waste services company. From at least 1992 through part of 1997, Dean L. Buntrock — Waste Management's chief executive officer ("CEO") and founder — and the other defendants engaged in a systematic scheme to falsify Waste Management's earnings and other measures of financial performance. As part of the scheme, they concealed the operating realities of the Company by making or authorizing false and misleading statements about the Company's financial performance to investors, the public, and the Commission. Defendants manipulated the Company's financial results to meet predetermined earnings targets and thus retain their executive positions, reap substantial performance-based bonuses and, in certain instances, enhanced retirement benefits. While the fraud was ongoing and the Company's stock price was inflated, defendants Buntrock, Phillip B. Rooney, and James E. Koenig unloaded Company stock on unsuspecting investors. Their sales enabled them to avoid millions of dollars of losses. Other shareholders, however — mutual funds, pension funds, individual investors, retirement accounts, and others — lost over $6 billion when the Company's improper accounting was later revealed and the stock price dropped by more than 33%. When new management finally announced what was then the largest restatement in history, the Company admitted that its profits had been overstated by $1.7 billion ($1,700,000,000).

2. Defendants' scheme was simple. They improperly eliminated or deferred current period expenses in order to inflate earnings. For example, they avoided depreciation expenses by extending the estimated useful lives of the Company's garbage trucks while, at the same time, making unsupported increases to the trucks' salvages values. In other words, the more the trucks were used and the older they became, the more the defendants said they were worth. Defendants, among other things, also

• made other unsupported changes in depreciation estimates,
   
• failed to record expenses for decreases in the value of landfills as they were filled with waste,
   
• failed to record expenses necessary to write off the costs of impaired 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 environmental and other expenses,
   
• improperly capitalized a variety of expenses, and
   
• failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses.

3. In order to conceal the understatement of expenses, defendants also resorted to an undisclosed practice known as "netting." They used one-time gains realized on the sale or exchange of assets to eliminate unrelated current period operating expenses and accounting misstatements that had accumulated from prior periods. Defendants offset one-time gains against items that should have been reported as operating expenses in current or prior periods and thus concealed the impact of their fraudulent accounting and the deteriorating condition of the Company's core operations. Although the Company's long-time outside auditor, Arthur Andersen LLP ("Arthur Andersen" or "AA"), advised Company management that the use of "`other gains' to bury charges for balance sheet clean-ups . . . and the lack of disclosure[] . . . [was] an area of SEC exposure," the practice persisted. Over the course of the fraud, defendants used netting secretly to erase approximately $490 million in current period expenses and prior-period misstatements. By using netting, defendants effectively acknowledged that their accounting practices were wrong and that the netted prior period items were, in fact, misstatements.

4. The defendants centralized the falsification of the financial results at their corporate headquarters. They made the majority of the accounting manipulations through what were known as "top-level adjustments." Buntrock, Rooney, and others annually set earnings targets for the upcoming year. During the year they monitored the actual operating results and compared them to their quarterly targets. At the end of each reporting period, the Company's operating divisions reported their financial results so that the corporate office could prepare the Company's consolidated financial statements. In consolidating the results of the subsidiary that Rooney managed, which accounted for approximately 70% of the Company's reported earnings, headquarters recorded improper top-level adjustments — made up numbers — that reduced the actual, recorded expenses by Rooney's subsidiary and enabled the Company to report targeted earnings. Having fraudulently achieved their targeted earnings, defendants rewarded themselves with substantial bonuses that, in some instances, doubled their annual compensation.

5. Defendants used other accounting gimmicks to conceal and enhance their fraud. Using what were known as "geography" entries, they moved tens-of-millions of dollars between the various line items on the Company's income statement. The geography entries improved or smoothed over the Company's reported Operating Margins or other quarterly trends discussed in the Company's filings with the Commission. The geography entries also covered up the pervasive use of fraudulent top-level adjustments and thus prevented investors from learning how the Company actually achieved its reported results. The geography entries were used, in Koenig's words, to "make the financials look the way we want to show them."

6. Defendants compounded their fraud by making or authorizing false and misleading disclosures in financial statement footnotes and other portions of the Company's filings with the Commission, annual reports to shareholders, and press releases. Defendants misrepresented the Company's accounting practices, the Company's financial results, how those results had been achieved, and the results of the Company's primary operating divisions.

7. Defendants were aided in their fraud by Arthur Andersen, 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 AA's audit fees and advised the AA engagement partner that the firm could earn additional fees through "special work." Arthur 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 in the Company's financial statements that understated expenses and overstated earnings. Management consistently refused to make the adjustments. Instead, defendants secretly entered into an agreement with AA 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. That four-page agreement, known as the Summary of Action Steps ("Action Steps") (attached as Exhibit 1), identified improper accounting practices that went to the core of the Company's operations and prescribed thirty-two "must do" steps for the Company to follow to change those practices and, in the words of AA, "bring[] the Company to a minimum level of acceptable accounting." 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. Defendants' agreement to the Action Steps also represented their acknowledgment that the identified accounting practices were improper.

8. Buntrock first agreed to the Action Steps. Koenig and defendant Thomas C. Hau then signed it, and the other defendants approved or knew of it. With the agreement approved and in hand, AA then issued unqualified audit reports on the Company's financial statements to be relied on by unsuspecting investors.

9. The Company failed to comply with the Action Steps. Compliance would have prevented defendants from meeting earnings targets and enriching themselves with performance-based bonuses and could have jeopardized their jobs. Indeed, in discussing the impact of the Action Steps on a public earnings projection, defendant Herbert A. Getz, the Company's general counsel, questioned whether "this is securities fraud."

10. Rather than follow the Action Steps, defendants increasingly resorted to netting and adopted even bolder accounting manipulations. For example, in 1994, defendant Bruce D. Tobecksen devised a new method to calculate depreciation of the Company's trucks. When told that the method was flawed and overstated income, Koenig, Hau, and Tobecksen let the error stand and grow and concealed it from AA. By 1996, they knew that the cumulative impact of the error exceeded $100 million.

11. As the fraud progressed, the inflated earnings of prior periods became the floor for future manipulations — one-time adjustments made to achieve a number in one period had to be replaced in the next — and created what Hau called a "one-off" accounting problem. In early 1997, Hau explained to the audit committee that "we've had one off accounting every year that has to be replaced the next year. We've been doing this long enough that the problem has mounted. . . .  Balance sheet created [the] problem by not having cushions."

12. Defendants' fraud eventually unraveled. In mid-1997, the Company's board of directors brought in a new chief executive officer. He ordered a review of the Company's accounting and then resigned after barely four months because, reportedly, he thought that the accounting was "spooky."

13. The accounting review continued, and in February 1998, the Company acknowledged "past mistakes" and announced that it would restate its financial statements for the period 1992 through 1996 and the first three-quarters of 1997 (the "Restatement"). It concluded that, for this period, the Company had overstated its reported pre-tax earnings by approximately $1.7 billion and understated certain elements of its income tax expense by approximately $190 million. In restating it financial statements, the Company revised every accounting practice identified in the Action Steps — practices that defendants had agreed, but had failed, to change four years earlier.

14. In the Restatement, the Company acknowledged that its original financial statements had misstated its net after tax income as follows:

The Company acknowledged that, in total, it had overstated its net after-tax income by over $1 billion.

15. As news of the Company's overstatement of earnings became public, Waste Management's shareholders lost over $6 billion in the market value of their investments when the stock price plummeted from $35 to $22 per share. Crippled by the scandal, the Company was eventually acquired by a smaller competitor that closed the Company's long-time corporate headquarters in Oak Brook, Illinois, terminated nearly every headquarters employee (about 1,500 of the 1,700 employees at the Oak Brook offices), and relocated the new company to Houston, Texas.

16. Although shareholders lost billions of dollars, the defendants profited handsomely from their fraud. Between 1992 and early 1997, all of the defendants received bonuses based on the inflated earnings, were awarded stock options, and held on to their high-paying jobs. Some received enhanced retirement benefits based on the improper bonuses, some received lucrative employment contracts, and some avoided losses by cashing in their Waste Management stock while the fraud was ongoing. Just ten days before some of the accounting irregularities first became public, Buntrock further enriched himself by donating inflated Company stock to his college alma mater to fund a building in his name. The defendants received the following estimated ill-gotten gains from their bonuses, retirement benefits, trading, and charitable giving alone:

	Ill-gotten Gains
Buntrock	$16,917,761
Rooney	$9,286,124
Koenig	$951,005
Hau	$640,100
Getz	$472,500
Tobecksen	$403,779

17. Each of the defendants acted knowingly or recklessly in executing and perpetuating different parts of the fraudulent scheme. Buntrock was the driving force behind the fraud. He set earnings targets, fostered a culture of aggressive 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.

18. Rooney, Waste Management's president, was 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. Because maintaining the appearance of profitable operations did not leave room for compliance with generally accepted accounting principles, Rooney ensured that required write-offs were not recorded and, in some instances, overruled accounting decisions that would have a negative impact on operations. Having been groomed for succession by Buntrock, Rooney continued the scheme when he became CEO in 1996. In fact, the earnings management grew worse under Rooney. Koenig, the chief financial officer ("CFO"), had primary responsibility for executing the scheme. To perpetuate the fraud, Koenig ordered the destruction of damaging evidence, misled the Company's audit committee and internal accountants, and withheld information from the outside auditors. Hau, the chief accounting officer ("CAO"), was the "accounting whiz" and acted as Koenig's sous-chef for cooking the books. Among other things, he devised many "one-off" accounting manipulations to deliver the targeted earnings and carefully crafted the deceptive disclosures. Tobecksen, another accounting expert who served as Koenig's right-hand-man, was enlisted in 1994 to handle Hau's overflow. Getz, the general counsel, blessed the Company's fraudulent disclosures.

19. As a result of their conduct, the defendants each violated section 17(a) of the Securities Act of 1933 ("Securities Act"), section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act rule 10b-5. Each of the defendants also aided and abetted Waste Management's violations of section 13(a) of the Exchange Act and Exchange Act rules 12b-20, 13a-1, and 13a-13. Defendants Koenig, Hau, and Tobecksen each aided and abetted the Company's violations of section 13(b)(2)(A) of the Exchange Act and directly violated Exchange Act rule 13b2-1. Finally, defendants Koenig and Hau each violated Exchange Act rule 13b2-2. The Commission seeks a final judgment as to each defendant that permanently enjoins him, orders the disgorgement of ill-gotten gains plus prejudgment interest, imposes civil penalties as a lesson to him and to others, and prohibits him from serving as an officer or director of a public company.

JURISDICTION AND VENUE

20. The Commission brings this action pursuant to the authority conferred on it by sections 20(b) and 20(d) of the Securities Act [15 U.S.C. §§77t(b) and 77t(d)] and section 21(d) and 21(e) of the Exchange Act [15 U.S.C. §78u(d) and §78u(e)].

21. This Court has jurisdiction over this action pursuant to section 22(a) of the Securities Act [15 U.S.C. §77v(a)] and sections 21 and 27 of the Exchange Act [15 U.S.C. §§78u and 78aa].

22. Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange, in connection with the acts, practices, and courses of conduct alleged herein.

23. Venue is proper in this District pursuant to section 22(a) of the Securities Act [15 U.S.C. §77v(a)] and sections 21(d)(1) and 27 of the Exchange Act [15 U.S.C. §§ 78u(d)(1), 78aa] because, among other reasons, most of the conduct constituting the violations occurred within this District.

DEFENDANTS

24. Dean L. Buntrock, age 71, is a resident of Hinsdale, Illinois. Buntrock founded Waste Management in 1968. During most of the relevant period, Buntrock was the chairman of the Board of Directors ("Board") and CEO of Waste Management. In June of 1996, he retired as CEO but continued to serve as chairman with expanded duties. Buntrock also served as CEO on an interim basis from February of 1997 until July of 1997 and continued to serve on the Board until his resignation on December 31, 1997. During all relevant times, Buntrock signed Waste Management's annual reports on Form 10-K as director, chairman of the board, and CEO of the Company. Buntrock also participated in making public statements concerning the annual and other periodic reports filed with the Commission. During the relevant period, Buntrock served on the boards of other large public companies, including a fast food chicken corporation, where for more than four years he was a member of the audit committee. Buntrock resigned from the board of that company in the midst of an accounting scandal that ultimately lead to the company's bankruptcy.

25. Phillip B. Rooney, age 57, is a resident of Hinsdale, Illinois. Rooney commenced employment with the Company in March of 1969 and first became an officer in 1971. During most of the relevant period, Rooney was a director and the president and chief operating officer of Waste Management. He became chairman of Waste Management's largest subsidiary, Waste Management of North America, Inc. ("WMNA") in October of 1993. In June of 1996, Rooney replaced Buntrock as CEO of the Company. In February of 1997, Rooney, resigned as director and CEO because of mounting shareholder discontent. Until his February 1997 resignation, Rooney signed Waste Management's annual reports on Form 10-K as director and participated in making public statements concerning those and other periodic reports.

26. James E. Koenig, age 54, is a resident of Wheaton, Illinois. Koenig was the former executive vice president and CFO of Waste Management. In January of 1997, Koenig was stripped of the CFO title because of mounting shareholder discontent but thereafter continued to have responsibility for financial, accounting, and reporting matters. Koenig commenced employment with the Company in July of 1977, first became an officer in 1984, and resigned on October 29, 1997. Koenig is a certified public accountant. Like every CFO that preceded him, Koenig was trained as an auditor at Arthur Andersen. Koenig signed Waste Management's periodic reports on Forms 10-K and 10-Q and registration statements, as CFO, and participated in making public statements concerning those reports.

27. Thomas C. Hau, age 66, is a resident of Crown Point, Indiana. Hau was the vice president and corporate controller and CAO of Waste Management from September 1990 to October 1997. Hau remained vice president until his retirement on April 3, 1998. Hau is a certified public accountant. Like every CAO that preceded him, Hau was trained as an auditor at Arthur Andersen where he was a partner for thirty years. While at AA, Hau was the partner in charge of the Waste Management audit from 1976 to 1983 (otherwise referred to as the "engagement partner") and later became head of the AA audit division that handled the Waste Management account. Hau was again slotted to become engagement partner for the Waste Management audit in 1990 but resigned from AA after Buntrock invited him to join Waste Management. As CAO, he among other things, prepared initial drafts of the financial statement footnotes and Management's Discussion and Analysis section of the Company's periodic reports. During all relevant times, Hau signed Waste Management's annual reports on Form 10-K as the CAO.

28. Herbert A. Getz, age 46, is a resident of Naperville, Illinois. Getz was the senior vice president, general counsel, and secretary of Waste Management. He retired from the Company in late 1998. Getz commenced employment with the Company in 1983. Prior to coming to Waste Management, Getz was a lawyer at the firm that had served as outside counsel to Waste Management and its officers since 1968. Getz is an attorney admitted to the Illinois bar. During all relevant times, Getz participated in the preparation of the disclosures in the Company's periodic reports on Forms 10-K and 10-Q, and press releases of earnings and other financial information.

29. Bruce D. Tobecksen, age 57, is a resident of The Woodlands, Texas. Tobecksen was the vice president of finance until December of 1997, when he was asked to leave by the new CFO of Waste Management. Prior to holding that position, from 1987 to February of 1993, Tobecksen was CFO of Chemical Waste Management, Inc., a subsidiary of Waste Management. Tobecksen is a certified public accountant. Before joining Waste Management in 1979, he worked as an audit manager at AA and during a portion of that time, worked on the Waste Management audit. Tobecksen participated in the preparation of the consolidated financial statements and disclosures included in the Company's periodic reports on Forms 10-K and 10-Q.

RELEVANT ENTITIES

30. Waste Management, Inc. was a Delaware corporation with headquarters in Oak Brook, Illinois. On May 14, 1993, the Company changed its name to WMX Technologies, Inc. and then, on May 9, 1997, changed its name back to Waste Management. The Company is referred to as Waste Management or the Company throughout this Complaint. At all times relevant to this action, the Company's common stock was registered with the Commission pursuant to section 12(b) of the Exchange Act and traded on the New York Stock Exchange. Its periodic financial statements were prepared on a calendar-year basis. On July 16, 1998, the Company merged with USA Waste Services, Inc. The newly formed company retained the Waste Management name and relocated to Houston, Texas. The Company's long-time corporate headquarters in Oak Brook, Illinois was shut down and all but 200 of its 1,700 employees were terminated.

31. Waste Management of North America, Inc. was the Company's wholly owned and largest subsidiary, providing solid waste management services. When the Company changed its name to WMX Technologies, Inc. in 1993, WMNA adopted the name Waste Management, Inc. and then, on May 9, 1997, changed its name back to Waste Management of North America, Inc. Waste Management of North America is referred to as WMNA throughout this Complaint. During the relevant period, WMNA accounted for more than 50% of the Company's consolidated revenue and approximately 70% of the reported earnings. Of the $1.7 billion restatement of the Company's consolidated pre-tax income, approximately $1.4 billion related to WMNA items.

32. Arthur Andersen LLP is a national public accounting firm and, during the relevant period, maintained a principal office in Chicago, Illinois. AA audited Waste Management's annual financial statements since before the Company went public in 1971 until 2002. AA also provided substantial non-audit services to Waste Management. Until 1997, every CFO and CAO in Waste Management's history as a public company had previously worked as an auditor at AA. Other former AA employees worked for Waste Management in key financial and accounting positions, including the Company's former CFO who served on the audit committee of Waste Management's Board from 1993 through 1997.

33. Arthur Andersen met regularly with Buntrock, Rooney, Koenig, Hau, and (beginning with the 1993 audit) Getz. As part of its longstanding audit protocols, AA had annual audit closing meetings with Koenig and Hau (or their predecessors) and separate closing meetings with Buntrock and Rooney to discuss the audit and review Arthur Andersen's PAJEs. The AA engagement partner utilized and distributed in each meeting the same closing agenda, which set forth AA's PAJEs and referenced other accounting issues. AA also conducted separate quarterly meetings with Buntrock, Rooney, and Getz, and with Koenig and Hau. Among other things, Getz would review the status of landfill permitting and expansion projects, including projects where the Company was involved in legal actions challenging the issuance or denial of a permit. Koenig and Hau would review, among other items, the quality of earnings for the quarter and the extent to which such earnings were benefited by new accounting entries made in the quarter. Throughout the relevant period, AA documented its meetings with Getz and with Koenig and Hau in quarterly review memoranda.

FACTS

34. Buntrock founded Waste Management in 1968 and took the Company public in 1971. During the 1970s and 1980s, Buntrock built a vast waste disposal empire by acquiring and consolidating local waste hauling companies and landfill operators. At one point, the Company was performing close to 200 acquisitions a year.

35. The Company experienced tremendous growth in its first twenty years — from the initial public offering in 1971 until the end of 1991, Waste Management enjoyed 36% average annual growth in revenue and 36% annual growth in net income; the Company grew from $16 million in revenue in 1971 to become the largest waste removal business in the world, with revenue of more than $7.5 billion in 1991.

36. Waste Management historic growth was buoyed by a longstanding and well-known culture of aggressive accounting. According to one former controller, "[w]e always had a tendency to take aggressive stances. I mean, if there were two options to look at and one was very conservative and one was very aggressive we took the more aggressive approach. I mean, that was what we did." The consistent theme of virtually all of the Waste Management's "aggressive" accounting was avoidance of expenses or deferral of expenses into future periods (thereby increasing current period earnings). Practices euphemistically referred to at Waste Management as "aggressive" in fact deceived investors and violated generally accepted accounting principles ("GAAP"), which are the accounting standards, conventions, and rules required for preparing financial statements.

37. As Waste Management grew, it expanded its operations to Europe and entered new industries, including hazardous waste management, waste-to-energy, and environmental engineering businesses. By the early 1990s, the Company's new businesses were performing poorly. At the same time, the Company's core North American solid waste business was suffering from intense competition and excess landfill capacity in certain of its markets. Additionally, new environmental regulations added to the cost of operating a landfill, and heightened community and political sensitivity to the environment made it more difficult and expensive for Waste Management to obtain permits for constructing new landfills or expanding old ones.

38. Despite these difficulties, Buntrock and others continued publicly to project the image of a high-flying growth company. However, to sustain unrealistic growth expectations and achieve predetermined earnings, Waste Management resorted to fraudulent accounting practices and, in the words of the former head of the consolidation and reporting department, moved from the gray areas of accounting into the "black."

Overview of the Scheme

The Budget Process and the Use of "Top-Level Adjustments" to Manage Earnings

39. To prepare annual and quarterly financial statements, the Company consolidated the results of WMNA with other entities in which Waste Management had an interest. After WMNA closed its books for the quarter and reported its results to the corporate office, accounting adjustments (referred to as "top-level adjustments") were made in consolidation that significantly reduced the expenses reported by WMNA. Although corporate consolidating adjustments themselves are a common accounting practice, Buntrock, Rooney, Koenig, and Hau (collectively "top management"), used the top-level adjustments as the principal vehicle for their earnings management scheme.

40. First, operating results were recorded by the WMNA operating units, known as "Groups," using one set of assumptions and reported to headquarters at the end of each quarter. For example, WMNA recorded the depreciation expense of each of its trucks utilizing an eight-year useful life and no salvage value. Top-level adjustments were then recorded using a different set of assumptions. For example, in 1993 top management assumed trucks had a useful life of 12 years and a salvage value of $30,000. A macro calculation was then made to estimate the impact of utilizing the extended life and increased salvage value, and a top-level adjustment was recorded to reduced WMNA's operating expenses in that amount. Top management hid the top-level adjustments from the WMNA Groups and intentionally did not pass back the expense reductions to the field. Thus, keeping the process secret and centralizing it at corporate made it especially easy for top management to falsify the financial statements by plugging in the additional income needed (by way of reduced expenses) to achieve the desired earnings each quarter. Secrecy also minimized the risk of complaints from other employees concerning these fraudulent practices.

41. The targeted earnings were set through the annual budget process. Historically, the Company followed a "top down budgeting process" whereby Buntrock, Rooney, and others would set aggressive goals for growth in the coming year, and the operating units would then develop their budgets based on those goals. These budgets were consolidated with the budget for top-level adjustments to arrive at the budgeted consolidated earnings. The budgets for the top-level adjustments were based upon the existing accounting assumptions being used. The budget, ostensibly created for administration and planning purposes, became an indispensable tool for top management to manage earnings.

42. During the quarters, top management monitored the actual results of operations versus what was budgeted. When the actual operating results were below budget at the end of a quarter, top management just manipulated the top-level adjustments and added new or "unbudgeted" entries to fill the actual to budget "gap." Some unbudgeted entries related to new entries that were added at the end of a quarter such as the second quarter of 1993 when top management added new top-level adjustments that discounted one type of reserve for the first time, added a salvage value to garbage containers for the first time, and reversed the total amortized costs of all WMNA landfills by an arbitrary 10%. Unbudgeted adjustments made in other periods included changing the assumptions underlying existing adjustments, such as when top management extended the useful lives of trucks by two years and doubled the salvage values of trucks. Still other unbudgeted adjustments related to unsupported reversals of reserves into income, which often resulted from "sweeps" conducted after the close of the quarters. In "sweeps," Koenig and Hau would canvass the balance sheet accounts of the WMNA Groups to identify reserves that could be reversed into income. Finally, Koenig and Hau in some quarters simply "borrowed" from future periods by prematurely recording future top-level adjustments. Because success depended on leaving investors in the dark, defendants never once disclosed the impact of the top-level adjustments (or unbudgeted changes thereto) on the Company's earnings.

43. Arthur Andersen recommended that management stop the practice of recording top-level adjustments in a May 29, 1992 "management letter," which was a post-audit letter recommending accounting or internal control changes. The letter noted that, as a result of the top-level adjustments, "individual divisions are not being evaluated on the true results of their operations." Thus, AA advised that "all such corporate adjustments should be passed back to the respective divisions." Top management rejected that advice.

44. Buntrock, Rooney, Koenig, Hau, and Tobecksen regularly received information on the top-level adjustments and the extent to which the quarterly top-level adjustments, and any unbudgeted increases thereto, improved the results of WMNA's operation. At Buntrock's request, they also received quarterly schedules comparing the actual versus budgeted top-level adjustments. Getz received similar information on the impact of unbudgeted top-level adjustments and participated in decisions not to disclose such items.

45. Throughout the period of the fraud, top management increased the budget for the top-level adjustments, and each year the actual adjustments far exceeded the budgeted adjustments. In 14 of the 21 quarters from the first quarter of 1992 through the first quarter of 1997, top management used arbitrary top-level adjustments to report earnings that met the internal budgeted earnings or within the range of the Company's public earnings projections. In another quarter, top management used arbitrary top-level adjustments to report earnings, but deliberately left them a penny short of consensus expectations. More and more top-level adjustments to manage earnings were required as the scheme progressed. As demonstrated by the following chart, the top-level adjustments had by 1996 grown to become a major component of the Company's reported profits:

Fraudulent Accounting Practices and Related Misleading Disclosures

46. In addition to the top-level adjustments, defendants used other non-GAAP practices, including the misapplication of accounting principles, that impacted virtually all aspects of the Company's core operations. The lynchpin of the fraudulent accounting, much of which was firmly entrenched by 1992, was elimination or deferral of current period expenses, coupled with netting and other practices to bury expenses.

Repeated Changes in Depreciation Estimates

47. The principal fixed assets of Waste Management in the United States and Canada consisted of garbage trucks, containers, and equipment, representing approximately $6 billion of the Company's assets during the relevant period. Accordingly, the Company's depreciation expense was substantial, and rife with opportunities for manipulation.

48. Under the controlling GAAP pronouncement, depreciation expense is determined by allocating the historical cost of tangible capital assets, "less salvage value (if any), over the estimated useful life" of the asset "in a systematic and rational manner." (Emphasis added). However, in each of the nine years from 1988 through 1996 management made unsupported changes to the estimated useful life or salvage value of one or more categories of vehicles, containers, or equipment, always resulting in a net reduction of depreciation expenses. The changes were recorded as top-level adjustments and made during the year, most often in the fourth quarter, and then improperly applied cumulatively from the beginning of the year. Defendants never disclosed the changes and their impact to investors, although disclosure was required by GAAP. Compounding the understatement of depreciation expense, Tobecksen devised a new method to calculate one top-level adjustment that was flawed and overstated income. Koenig, Hau, and Tobecksen let the error stand and grow and concealed it from AA. By 1996, they knew that the cumulative impact of the error exceeded $100 million.

49. Top management's repeated unsupported changes in depreciation estimates prompted Arthur Andersen to recommend changes. In its May 29, 1992 management letter, AA pointed out that "[i]n each of the past five years the Company added a new consolidating entry in the fourth quarter to increase salvage value and/or useful life of its trucks, machinery, equipment, or containers." AA recommended that the Company conduct a "comprehensive, one-time study to evaluate the proper level of [WMNA's] salvage value and useful lives" and pass back the adjustments to the respective WMNA Groups. Top management rejected that advice and continued to manipulate the depreciation estimates at headquarters.

50. In the Action Steps, top management, with Getz's knowledge, agreed to provide support for the salvage values. In March of 1994 — six months after the Company doubled the salvage value of its trucks — Koenig instructed a purchasing agent at WMNA to create a memorandum supporting the predetermined $30,000 salvage value. The page-and-a-half memorandum summarily concluded, as Koenig had instructed, that the Company was "justified" in its position that the salvage value of a 12-year-old truck was $30,000. However, the memorandum was not based on any empirical data or meaningful research.

51. In November 1995, the WMNA corporate controller initiated a comprehensive, one-time study to determine the appropriate lives and salvage of all of the Company's vehicles, equipment, and containers. Koenig, Hau, and Rooney were updated on the progress of the study. When a January 10, 1996 memorandum setting forth results of the study contradicted the Company's salvage values, Koenig ordered the research to stop immediately. Koenig then ordered the destruction of all copies of the memorandum and the deletion of the document from the author's computer hard drive. No additional work was ever performed on the project, and the memorandum was never provided to the auditors. Top management otherwise did not provide support for the salvage value of the Company's trucks, equipment, and containers.

Carrying Land Value at Cost When Impaired

52. Next to vehicles, containers, and equipment, land (primarily landfills) represented the second largest asset of the Company. Waste Management owned and operated more than 100 landfills. GAAP required the Company to record an expense for any decrease in the value of land over the life of the landfill. Indeed, in discussing the Company's accounting policies, defendants disclosed in the footnotes to the Company's financial statements in all annual reports on Form 10-K during the relevant period that "[d]isposal sites are carried at cost and to the extent this exceeds end use realizable value, such excess is amortized over the estimated life of the disposal site." This statement was false. The Company's practice was to carry virtually all of its land on the balance sheet at cost. The disclosure falsely implied that the Company had conducted an appropriate study to determine whether land carrying values were in excess of net realizable value of such land.

53. In connection with the 1988 audit, AA issued a management letter to the Board recommending, among other things, that the Company conduct a "site by site analysis of its landfills to compare recorded land values with its anticipated net realizable value based on end use." Arthur Andersen instructed that "[a]ny excess should be amortized over the active site life" of the landfill. Top management, with the knowledge of Getz, never conducted the study and failed to reduce the carrying values of overvalued land despite their agreement in the Action Steps to do so in 1994.

Deferral of Permitting Costs Related to Impaired and Abandoned Projects

54. Waste Management spent hundreds of millions of dollars to develop new landfills (referred to as "greenfields") and to expand existing landfills. Obtaining the required permits was essential to the Company's business. The Company capitalized the costs related to permitting efforts while those efforts were ongoing (i.e., the Company could treat the permitting costs as an asset and defer recording expenses related to such costs). Generally, a cost may be capitalized if it provides economic benefits to be used or consumed in future operations. However, GAAP required the Company to write off, as a current period expense, deferred permitting costs as soon as the Company learned that such permitting efforts were likely to be unsuccessful ("impairment") or management decided to abandon permitting efforts ("abandonment"). The Company systematically failed to do this.

55. Top management employed a variety of tactics to avoid recording expenses for impaired and abandoned projects. For example, if permitting efforts at one site proved unsuccessful or the project was abandoned, the permitting costs were transferred to a permitted site or another site seeking a permit; thereafter, the impaired or abandoned project costs were commingled with the assets of the permitted site (i.e., "basketing") and amortized over the life of that site. In addition to "basketing," the Company used a similar policy, referred to as "bundling," to transfer unamortized costs from a facility that closed earlier than expected to another facility. Neither bundling nor basketing complied with GAAP, which required that the deferred permitting costs for the impaired or abandoned projects be written off when the impairment or abandonment occurred and that unaccrued costs be recognized.

56. Prior to 1992, when impaired or abandoned projects could not be bundled or basketed, they were sometimes written off against reserves. However, top management was unwilling to pay for the increasing expense of writing off impaired and abandoned projects, so they developed another non-GAAP policy in early 1992. As documented in a Company memorandum, "[i]nstead of writing-off deferred development costs" related to impaired and abandoned projects, the Company would "defer and amortize these costs over a twenty year period." For the most part, the Company did not even comply with this policy. Instead, top management simply left the costs of impaired and abandoned projects on the balance sheet.

57. Buntrock, Rooney, Koenig, Hau, and Getz were well aware of the increasing difficulty in obtaining landfill permits and the mounting costs invested in projects that ultimately were deemed unsuccessful or abandoned. Buntrock and Rooney carefully monitored the status of greenfield and expansion projects given the Company's significant and ongoing investment in those projects. Since at least as early as the 1980s, they regularly received quarterly operating reports ("QORs") that contained information on amounts spent on greenfields and expansion projects and their likelihood of success. Among other things, the QORs provided a narrative status update and rated the project's probability of success on a "high," "medium," or "low/dead" basis.

58. As early as 1991, at an annual strategic planning meeting, the controller for the West Group of WMNA informed Rooney, Buntrock, and others that there were approximately $60 million of deferred permitting costs in the West Group for "low probability" or "dead" projects for which no reserves existed on the books of WMNA. The West Group controller continued to raise the issue at subsequent strategic planning and budget meetings. The West Group experience was symptomatic of a much larger problem related to impaired and abandoned projects. However, top management simply left the permitting costs of impaired and abandoned projects on the balance sheet until future netting or bundling/basketing opportunities arose.

59. Pursuant to the Action Steps, top management, with Getz's knowledge, agreed in 1994 to write off $40 million in dead projects, quantified as PAJEs, over ten years (a practice that still did not comply with GAAP), and promptly write off future impairments and abandonments as they arose. But this never happened. Instead, top management, with the knowledge of Getz, used "netting" in 1994, 1995, 1996, and 1997 to "bury" the write-offs related to impaired and abandoned projects.

60. Throughout the fraud, defendants did not disclose failed investments in landfill development or expansion projects or the accounting practices that concealed those failures. For example, defendants never disclosed the use of bundling and basketing or the policy to write off dead projects over twenty-years. Defendants also failed to disclose in the Management's Discussion and Analysis ("MD&A") or elsewhere that there were in fact substantial impaired or abandoned projects that had not been written off.

61. The general purpose of the MD&A disclosure is to give investors an opportunity to look at the company's business through the eyes of management by providing a historical and prospective analysis of the company's financial condition and results of operations, with a particular emphasis on the company's prospects for the future. Among other things, the MD&A must analyze the revenues, profitability, and cash needs of significant industry segments that contribute in a materially disproportionate way to the company's overall performance. In addition, management is required to disclose non-recurring items or other "unusual or infrequent" events that materially affected the amount of reported income from continuing operations. Non-recurring items include matters that affect the trends from period to period such as matters that have an impact on future operations and have not had an impact in the past, and matters that had an impact on reported operations and are not expected to have an impact upon future operations.

62. Instead of writing off impaired and abandoned landfill permitting projects and disclosing the impact of such write-offs, defendants disclosed only a risk of future write-offs related to projects in the Part I disclosure of the Form 10-K, which is the section that describes the nature of, and risks inherent in, the Company's business. Through 1994, the Part I disclosure represented that "adverse decisions by governmental authorities on permit applications submitted by the Company may result in abandonment of projects, premature closure of facilities or restriction of operations, which could have a material adverse effect on the Company's earnings for one or more fiscal quarters or years." Similarly, beginning in 1995, the Part I disclosures were changed to expressly reference the risk of the potential write-off of deferred permitting costs related to impaired or abandoned projects: "If the inability to obtain and retain necessary permits, the failure of a facility to achieve the desired disposal volume or other factors cause Waste Management to terminate development efforts for a facility, the capitalized development expenses of the facility may need to be written off." In the 1996 annual report, defendants announced the Company's adoption of a new accounting standard that clarified when write-offs for impairments should be recorded, Statement of Financial Accounting Standards ("FAS") No. 121. The MD&A falsely represented that "[t]he adoption of FAS 121 did not have a material impact on the financial statements as the Company's previous accounting was substantially in compliance with the new standard." Contrary to these disclosures, the Company as a matter of practice did not write off the deferred permitting costs of impaired or abandoned projects.

The Non-GAAP Capitalized Interest Methodology

63. Koenig and Hau also reduced current period expenses by using an improper method for capitalizing interest on landfill construction costs. GAAP allows interest to be capitalized as part of the cost of acquiring assets that take time to bring to the condition required for use. Once the asset becomes substantially ready for its intended use, GAAP requires that interest capitalization cease. A landfill qualifies for interest capitalization because a relatively long period is required to obtain permits, construct the facility, and prepare it to begin receiving waste.

64. In 1989, the Company concocted a method of capitalizing interest known as the "net book value method" (the "NBV Method"). Arthur Andersen disagreed with the NBV Method from its inception and advised the Company that the method did not conform with GAAP. Even Hau admitted that the Company's capitalized interest method "was technically inconsistent with FAS 34 [the controlling GAAP pronouncement] because it included interest [capitalization] related to cells of landfills that were receiving waste." Nevertheless, throughout the relevant period, defendants falsely represented in the footnotes to the Company's financial statements that "[i]nterest has been capitalized on significant landfills, trash-to-energy plants and other projects under development in accordance with FAS No. 34."

65. With the Action Steps, top management, with Getz's knowledge, agreed that the Company would develop and implement, effective January 1, 1994, a new capitalized interest methodology that conformed with GAAP. Although a GAAP method was developed in 1994, top management, with Getz's knowledge, chose not to adopt it that year because they did not want to suffer the hit to income. Koenig and Hau determined that the new method would increase interest expense by $25 million annually (which also meant that as of the end of 1994 the cumulative impact of using the non-GAAP method since 1989 was approximately $150 million). Instead, they elected to phase-in the adoption of the new methodology over a three-year period beginning in 1995 in order to minimize the impact of, and conceal, the accounting change. By 1997, the Company was still using the NBV Method and had not implemented the GAAP method the Company developed in 1994.

Other Improper Capitalization Policies

66. The Company improperly capitalized other costs rather than record them as expenses in the period in which they were incurred. For example, Koenig and Hau improperly capitalized systems development costs, such as overhead costs, and used excessive amortization periods (ten and twenty year periods for the two largest systems) that did not recognize the impact of technological obsolescence on useful lives. In 1991 and subsequent years, AA quantified PAJEs to write off improperly deferred systems costs and repeatedly recommended that the Company shorten the amortization periods. In each year, top management refused to record the adjustment. With the Action Steps, top management, with the knowledge of Getz, agreed to shorten the amortization periods and to write off over five years the financial statement misstatements resulting from improperly capitalized systems costs. The Company did not change the amortization periods until 1995 and then used "netting" to write off the improperly capitalized systems costs.

67. Beginning in late 1993, the Company also improperly capitalized expenses through a wholly owned captive insurer, Mountain Indemnity. Mountain Indemnity provided indemnification to Waste Management's operating units for landfill claims not covered by traditional insurance, i.e., Mountain Indemnity insured against such items as property damage claims arising out of environmental contamination, natural disasters, and other causes. Generally, GAAP requires that costs to repair or return property to its original condition, such as remediation costs, be expensed when incurred. However, Hau directed that all claim costs submitted to Mountain Indemnity be capitalized without analyzing whether the expenditures were for properly capitalizable items. Further, most capitalized claims were amortized over an arbitrary 15-year period regardless of the nature of the costs. The result was to inflate reported earnings.

Improper Use of Purchase Acquisition Accounting

68. Waste Management's business was fraught with potential environmental liabilities. As a result, GAAP required that Waste Management establish environmental remediation reserves by recording an expense for such potential liabilities. Yet again, top management circumvented GAAP and found a number of ways to manipulate the accounting for environmental reserves to improperly reduce current and future period operating expenses.

69. First, Koenig and Hau charged certain unrelated operating expenses to previously established environmental reserves instead of expensing such costs out of current period income. This had the effect of improperly reducing current period expenses and increasing income. Arthur Andersen told Koenig and Hau that this practice violated GAAP. In the Action Steps, top management, with the knowledge of Getz, agreed that the Company would stop the practice. That never happened.

70. Second, Koenig and Hau incorrectly applied purchase acquisition accounting principles. Waste Management acquired a number of companies that owned, operated, or transported waste to, landfills. As part of purchase accounting, GAAP required that pre-acquisition liabilities be included in the purchase allocation. Instead of determining the appropriate remediation liability for each acquired business, Koenig and Hau utilized an arbitrary method that assigned an inflated liability based solely upon the amount paid for the acquisition. The inflated liabilities were established by increasing the amount of acquisition goodwill, which was then amortized over a forty-year period. The Company assessed the sufficiency of its liabilities for identified environmental remediation projects at year-end. Koenig and Hau then used over-accruals established for newly acquired companies to offset under-accruals for the identified liabilities of unrelated landfills. The Company, in effect, took these amounts into income because it avoided recording a current period expense to increase the reserves for the under-accrued liabilities of unrelated landfills. AA told top management and Getz that this practice violated GAAP and recommended that it cease. Notwithstanding their agreement in the Action Steps to cease, top management, with the knowledge of Getz, continued the practice.

71. Moreover, defendants failed to disclose in MD&A or elsewhere its arbitrary and improper accrual of environmental reserves through purchase acquisition accounting. Instead, throughout the relevant period, defendants falsely represented in the MD&A and financial statement footnotes in the annual reports that, with respect to environmental matters, "[w]here the Company concludes that it is probable that a liability has been incurred, provision is made in the financial statements." However, the amounts accrued through acquisitions were arbitrary and not "probable" and reasonably estimable. By misapplying purchase acquisition accounting principles throughout the period of the fraud, the Company avoided recording over $100 million in current period expenses for environmental liabilities.

Under-Accrual of Other Reserves and Improper Use of Reserves to Reduce Current Period Expenses

72. Waste Management was self-insured for certain risks incident to its business. The Company historically under-accrued its liabilities arising from self-insured losses. In 1991, Arthur Andersen's actuarial experts determined that the Company's methodology for calculating its insurance reserve was improper. Among other things, Koenig and Hau failed to include certain criteria necessary for evaluating incurred but not yet reported losses, and used an inappropriate discounting methodology for reported claims. Each year between 1991 and 1996, AA quantified the financial statement misstatement that resulted from the under-accrual in Waste Management's insurance reserve, and in each year, top management refused to correct the misstatement. In the Action Steps, top management, with Getz's knowledge, agreed that the Company would write off the estimated insurance misstatement over seven years and change its discounting methodology. That never happened. The Company continued to use the improper methodology and excessive discount rate, and the misstatements continued and accumulated into 1997.

73. Waste Management also was required to recognize corporate federal and state income tax liabilities each year and to record an expense in the period for those taxes. However, Koenig and Hau accrued for these liabilities using a combined tax rate that was too low. Each year between 1991 and 1996 AA quantified the financial statement misstatement that resulted from the under-accrual, and in each year, top management refused to correct the misstatement. In the Action Steps, top management, with Getz's knowledge, agreed that the Company would write off the income tax misstatement over five years, but they never did so. The Company continued to under-accrue income tax liabilities and the misstatements continued and accumulated into 1997.

Concealment of the Fraud

74. Defendants went to extraordinary lengths to conceal their fraud. The Action Steps agreement was one aspect of the cover-up. Spreading the write-offs of misstatements in the Company's financial statements over periods up to 10 years was designed to conceal the write-offs and minimize their impact on earnings. Similarly, the three-year phase-in of the new capitalized interest methodology concealed the changeover from the non-GAAP method and lessened the impact of implementing the GAAP method.

75. Geography entries likewise were designed to cover up items that would lead analysts and investors to question the Company's reported results. These entries simply moved tens-of-millions of dollars from one income statement category of expense to another — from the correct one to an incorrect one — with the sole purpose of disguising the true trends of the business. When pressed by new management in 1997 to defend the practice, Koenig confessed that the entries were recorded to "make the financials look the way we want to show them." Tobecksen likewise admitted to new management that the entries had to continue year-to-year to avoid an "explanation problem."

76. Netting was another practice Buntrock, Rooney, Koenig, Hau, and Getz used to conceal accounting errors. Netting made approximately $490 million in current period expenses and prior-period misstatements (which resulted from the understatement of expenses) simply disappear. This practice was consistent with top management's refusal to correct known accounting errors unless it could be done surreptitiously with no impact on current period operating results.

77. The scheme was kept afloat by the false and misleading disclosures. Defendants never disclosed the Company's actual accounting practices or the substantial impact of the "one-off" entries recorded each quarter to achieve the desired profits. To the contrary, Buntrock, Rooney, and others trumpeted WMNA's purported success and attributed it to their own skill in internalizing costs and recognizing efficiencies.

78. In addition to deceiving the investing public, defendants concealed aspects of the scheme from their subordinates. For example, top management hid the top-level adjustments from the WMNA Groups. Koenig and Hau misled the WMNA corporate controllers by falsely telling them that corporate reserves existed to cover the impaired and abandoned projects the Groups had identified, when in fact there were no such reserves. Likewise, Koenig, Hau, and Getz, who attended all audit committee meetings, never provided a copy of the Action Steps agreement to the committee. Neither Buntrock nor Rooney advised their fellow directors of the Action Steps agreement. The failure to provide the Action Steps to the audit committee or the Board was consistent with what had been done in the past. For example, Koenig and Hau failed to provide the audit committee with AA's 1992 and 1993 management letters, which recommended many of the accounting changes that ultimately were agreed to in the Action Steps. In fact, the chairman of the committee had even asked if such letters had been sent. The failure to provide the management letters violated the Company's audit committee charter, which required Koenig and Hau to discuss with the committee, among other things, "post-audit letters to management and the responses of the Chief Accounting Officer."

The Company's Cap on AA's Audit Fees

79. At the onset of the fraud, Waste Management capped Arthur Andersen's audit fees. However, Hau advised the new AA engagement partner, who also was the marketing director for AA's Chicago office and responsible for cross-selling AA's non-audit services to Waste Management, that AA could earn additional fees for "special work" — e.g., consulting services. Over the succeeding years, AA's corporate audit fees remained flat (approximately $7.5 million in audit fees in total) while the fees for special work multiplied. AA's non-audit fees, as well as the fees of its then related firm, Andersen Consulting, generally increased and were more than double the audit fees — approximately $17.8 million during the same period.

80. Shortly after the Action Steps agreement was negotiated and Andersen issued its unqualified audit report on the Company's 1993 financial statements, Buntrock rewarded AA by awarding a $3.7 million consulting project, titled the "Strategic Review," to Andersen Consulting. The AA engagement partner was instrumental in the contract being awarded to Andersen Consulting, and at Buntrock's request, the engagement partner took an active role in overseeing the project. The Strategic Review lasted eleven-months and resulted in a proposed operating model for the Company that was utilized for less than a year and then abandoned. A former Board member who had approved and reviewed the Strategic Review later described it as a "boondoggle."

Defendants' Role in Preparing and Filing Periodic Reports and Other Public Statements

81. Buntrock and Rooney were responsible for reviewing all annual reports on Form 10-K, which they also signed, and all quarterly reports on Form 10-Q. They reviewed and authorized press releases of annual and quarterly earnings, made statements therein regarding the results of operations, and signed the annual letters to stockholders. Koenig signed the periodic reports on Forms 10-K and 10-Q, as well as registration statements filed with the Commission pursuant to the Securities Act. He reviewed all drafts of annual and quarterly reports, along with Hau, Getz, Tobecksen, and others. After being replaced as CFO, Koenig continued to participate in the preparation and dissemination of periodic reports and related public statements, including press releases, through the end of the first quarter of 1997. Hau drafted the financial statement footnotes and MD&A for the periodic reports on Forms 10-K and 10-Q and signed the Form 10-K. Getz drafted, reviewed, and authorized the MD&A and other disclosures in the Company's periodic reports on Forms 10-K and Form 10-Q. He reviewed and authorized press releases of annual and quarterly earnings, including the release of public earnings projections in 1994 and 1996. Tobecksen prepared books and records that were incorporated into the periodic reports on Forms 10-K and 10-Q. Finally, Buntrock, Koenig, and Hau certified in annual and quarterly representation letters to AA that they were "responsible for the fair presentation in the consolidated financial statements of financial position, results of operations and cash flows in conformity with generally accepted accounting principles."

Chronology of the Fraud

1992 False and Misleading Annual and Quarterly Reports

82. Despite a recession, Waste Management started 1992 with high expectations for growth. Based upon the aggressive goals set by Buntrock, Rooney, and others, revenue and net income were budgeted to increase over 1991 by 26.1% and 16.5% respectively. But during the year, the Company was able to report modest growth, making budget only in the first quarter. Even that moderate growth in earnings was achieved only through non-GAAP accounting practices and unbudgeted top-level adjustments that materially overstated income and other measures of performance by understating expenses. Even after "netting" $111 million in current period expenses and prior period misstatements against an unrelated one-time gain, the Company's financial statements contained additional misstatements in still larger amounts.

Reported First Quarter 1992 Results

83. On April 16, 1992, the Company reported earnings for the first quarter at $0.39 per share and stated that both net income and revenue had increased 16% from the same quarter in 1991. In the press release, Buntrock trumpeted the Company's continued progress in controlling costs and realizing productivity enhancements.

84. While reported revenue was $139 million below the Company's internal budget, the reported earnings of $0.39 per share met the budget. These earnings were achieved only by materially understating expenses. Among other things, top management recorded approximately $20 million in unbudgeted top-level adjustments (representing over $0.02 per share in earnings).

85. On or about May 22, 1992, the Company filed with the Commission its quarterly report on Form 10-Q for the quarter ended March 31, 1992. The report included the financial information that was disclosed in the April 16, 1992 press release. The Company's financial statements for the quarter contained material misstatements resulting from the non-GAAP accounting practices discussed above, including the improper accounting for overvalued land, deferred permitting costs, capitalized interest, purchase acquisition and environmental reserves, income tax and self-insurance reserves, discount rate for the self-insurance reserve, and other practices that were the subject of PAJEs. The misstatements materially understated expenses (thereby overstating reported earnings).

86. Likewise, the MD&A furthered the misrepresentations in the financial statements. For example, in discussing the Company's consolidated results of operations, the MD&A noted that the Company's operating expenses "were 70.6% of revenue in the first quarter of 1992, nearly the same as 70.7% of revenue in the first quarter of 1991." In fact, the true results were much worse than presented.

Reported Second Quarter 1992 Results

87. In the second quarter of 1992, the Company realized a gain resulting from the Company's successful initial public offering ("IPO") of shares in its Waste Management International, plc subsidiary. The gain provided top management an "opportunity" improperly to eliminate accumulated accounting misstatements and reduce current period expenses to achieve a publicly set earnings target.

88. Top management used a portion of the actual gain of $351 million to offset approximately $111 million in unrelated current period expenses and prior period misstatements. The netted items related to, among other things, uncollectable receivables in Venezuela, anticipated costs associated with the subsequent change of Waste Management, Inc.'s name to WMX Technologies, Inc., and the write-off of Kuwaiti equipment losses (i.e., the unrecovered costs of bulldozers shipped to Kuwait in the aftermath of the 1991 Gulf War). None of these expenses or the prior period misstatements related to the IPO. The Company reported only a $240 million gain on the IPO, as a line item in the income statement, "Gains from stock transactions of subsidiaries." It used the other $111 million of the gain to eliminate, without disclosure, current period expenses and prior period misstatements. This inflated the Company's profitability and deceived investors concerning the actual performance of its core business — WMNA, which was managed by Rooney.

89. Prior to the close of the quarter, on June 29, 1992, the Company issued a revised projection for second quarter earnings of between $0.43 and $0.45 per share, down from consensus analyst estimates of $0.47 per share (excluding the impacts of unusual income and expense items). In the release, the Company blamed the lowered expectations on the weak economy.

90. On July 16, 1992, the Company released its earnings for the second quarter in line with its public earnings projection. The release stated that "excluding the impacts of these unusual items of income and expense from 1992 [the IPO gain and special charges], Waste Management's net income for the second quarter rose 11 percent" to $0.43 per share from $0.39 per share a year earlier. The reported $0.43 per share was realized, however, only through the IPO netting and other improper accounting.

91. For example, the netting significantly reduced current period expenses. If top management had properly and truthfully recorded those expenses and not netted them, the reported net income before unusual items would have been reduced, and the Company would have reported a substantial decline in earnings, not an 11% increase.

92. In addition to the "netting," top management made approximately $29 million (representing $0.04 per share in earnings) in unbudgeted top-level adjustments in the second quarter to achieve the targeted $0.43 per share in earnings. They reversed environmental and insurance reserves into income and manipulated the depreciation expenses of landfill equipment. Koenig and Hau, among other things, eliminated an arbitrary $1.5 million in depreciation expenses on the theory that the Company was using equipment less during the recession.

93. On or about August 19, 1992, the Company filed with the Commission its quarterly report on Form 10-Q for the quarter ended June 30, 1992. The report included the financial information that was disclosed in the July 16, 1992 press release. The Company's financial statements for the quarter contained material misstatements resulting from the netting and other non-GAAP accounting practices that continued from the prior period. The misstatements materially understated expenses (thereby overstating reported earnings).

94. The MD&A bolstered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. In addition, the MD&A failed to disclose the material impact the IPO netting had on the reported trends in income and expenses. Top management listed specific external factors, such as an increase in competition and the costs of complying with regulatory mandates, to explain a slight increase in operating expenses as a percentage of revenue. However, the full extent of the decline in the Company's profitability was concealed by the IPO netting. By eliminating current period operating expenses, the netting significantly improved the reported trend in operating expenses as a percentage of revenue. Moreover, top management falsely reported the IPO gain as $240 million, instead of $351 million, in a separate line item ("Gains from stock transactions of subsidiaries") on the income statement and in MD&A ("results of operations, consolidated" and "gains from stock transactions of subsidiaries").

Reported Third Quarter 1992 Results

95. On October 15, 1992, the Company reported earnings for the third quarter at $0.44 per share. The release stated that net income had increased from $0.42 per share in the same quarter in 1991 (representing a 5% growth rate).

96. As it had in prior quarters, top management made approximately $29 million (representing approximately $0.04 per share in earnings) in unbudgeted top-level adjustments to achieve the reported $0.44 per share in earnings. These unbudgeted adjustments alone accounted for all of the Company's reported growth. In fact, had such adjustments not been made, the Company would have reported declining earnings. In a quarterly review meeting with AA, Hau indicated that "it was a difficult quarter to achieve earnings expectations."

97. On or about November 19, 1992, the Company filed with the Commission its quarterly report on Form 10-Q for the quarter ended September 30, 1992. The report included the financial information that was disclosed in the October 15, 1992 press release. The Company's financial statements for the quarter contained material misstatements resulting from non-GAAP accounting practices that continued from the prior period, which understated expenses (thereby overstating reported earnings).

98. During the relevant period, the footnotes to the Company's annual financial statements reported for WMNA and other subsidiary and affiliated companies "Income from Operations," which was defined as the difference between revenue and the combined operating expenses, goodwill amortization, and selling, general and administrative ("SG&A") expenses. Likewise, the discussion of the "results of operations" in the MD&A in quarterly and annual reports separately analyzed WMNA's operating results, which included a discussion of the year-to-year trends in WMNA's "Operating Margins" (which was Income from Operations as percentage or revenue), and trends in WMNA's operating and SG&A expenses as a percentage of revenue. Throughout the relevant period, defendants highlighted and explained in MD&A even the slightest change (e.g., a few tenths of a percentage point) in the trends in Operating Margins and expenses. Typically, defendants identified external factors to explain away any negative trend while falsely crediting any reported positive trends to operating efficiencies, the benefits from restructuring, and other self-serving factors.

99. The MD&A for in the quarterly report for the third quarter of 1992 bolstered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. In the quarterly report for the third quarter of 1992, the MD&A noted that the Operating Margin was 21.5% through the first nine months of 1992, versus 22.6% for the same period in 1991. For example, the MD&A stated that WMNA's "operating expenses as a percentage of revenue are under upward pressure in the domestic solid waste segment in part due to shifting public attitudes and legislative and regulatory mandates." The MD&A went on to note that SG&A expense as a percentage of revenue showed some improvement as a result of a cost reduction program and other factors. However, the MD&A failed to disclose, among other things, the material impact the IPO netting had on WMNA's Operating Margins and the reported trends in income and expenses with respect to the results through the first three quarters of the year. But for the netting, the Company would have reported a significant decline in the Operating Margins of WMNA through the first nine months of 1992.

Arthur Andersen's Audit Closing Meetings with Buntrock, Rooney, Koenig, and Hau

100. In separate year-end closing meetings with Buntrock, with Rooney, and with Koenig and Hau, AA presented PAJEs of $90 million to correct, among other items, shortfalls in the Company's insurance and income tax reserves and to write off deferred systems costs and deferred permitting costs. The PAJEs represented 8.3% of the Company's reported net income before unusual income and expense items. Top management refused to record any of the proposed adjustments. Had they booked the PAJEs as AA proposed (by recording all of the PAJEs as a charge against 1992 earnings), the adjustments would have had a material impact on the Company's reported results, reversing the Company's reported 7% growth in earnings that year.

101. Arthur Andersen's PAJEs themselves represented only the tip of the iceberg as there were additional misstatements resulting from non-GAAP accounting practices that were not quantified as PAJEs by AA. Most notably, the PAJE in 1992 for improperly deferred permitting costs was only $15 million when the actual misstatements were substantially higher. For example, in a November 1992 meeting with the Arthur Andersen engagement team, Hau reported that permitting costs associated with impaired and abandoned landfill projects "may approximate $100 million on a consolidated basis." Nevertheless, top management avoided the expense of writing off these projects by maintaining the deferred permitting costs as assets on the Company's balance sheet. Years later, top management wrote off some of these projects but did so fraudulently by netting the deferred permitting costs against one-time gains, without disclosure, and thus avoided any charge to operating expenses.

102. Also during the 1992 audit, AA reviewed the land values recorded "for landfills at sites anticipated to close within 15 years" and concluded, "in none of the instances did we find that the Company had undertaken a detail study to assess net realizable value." For example, AA identified for Koenig and Hau one site where the "end-use plans did not support the $8 million recorded for the site which is scheduled to close in three years." Koenig and did not write off the overvalued land as AA had recommended.

103. Koenig and Hau improperly charged approximately $8.2 million related to overhead and legal costs to Waste Management's environmental remediation reserves. They also offset $18 million in under-accruals for known environmental liabilities (current period expenses) against overstated reserves for unrelated landfills established through purchase acquisition accounting. Arthur Andersen objected to these practices, but as usual, Koenig and Hau ignored AA's concerns.

Reported Year-End Results

104. On February 4, 1993, the Company reported its earnings for 1992. The release noted that, excluding the impact of unusual income and expense items (the IPO gain and special charges that year), net income was $1.68 per share for 1992 versus $1.57 per share in 1991. By artificially boosting earnings through the fraudulent accounting discussed above, top management received bonuses equal to between 30% and 50% of their salaries.

105. On or about March 29, 1993, the Company filed with the Commission its annual report on Form 10-K for 1992. The report included the financial information that was disclosed in the February 4, 1993 press release. The financial statements in the annual report contained material misstatements resulting from the non-GAAP accounting practices discussed above. The misstatements materially understated expenses (thereby overstating reported earnings for 1992).

106. The annual report likewise contained numerous false and misleading disclosures regarding the Company's accounting practices, results from operations, financial position, and financial performance. For example, top management failed to disclose its accounting practices related to deferred permitting costs, misrepresented that its capitalized interest practices conformed with GAAP, falsely implied that the Company had conducted a study of the net realizable value of its landfills, and failed to disclose the netting of the IPO gain.

107. The MD&A furthered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. For example, the MD&A misrepresented that earnings before unusual income and expense items (the IPO gain and special charges) had increased from $1.57 in 1991 to $1.68 in 1992 (representing a 7% growth in earnings). In fact, top management was able to report earnings growth by engaging in the improper accounting practices discussed above, failing to record any of the PAJEs, and improperly netting $111 million of the IPO gain. Absent these actions, the Company would have reported a decrease in net income for the year.

108. In the MD&A, top management misrepresented the extent of the decline in WMNA's operating performance. They attributed external factors, such as shifting public attitudes and legislative and regulatory mandates, as adding "upward pressure" on operating expenses that caused a slight decline in the Operating Margins to 21.0% of revenue in 1992 compared with 22.5% in 1991. In fact, the increase in the cost of operations was much worse than reported and was mitigated only by the netting of the IPO gain and other improper accounting practices.

109. In the Restatement, the Company acknowledged that the reported net income in its original 1992 financial statements was overstated by 15%. The total restatement for 1992 (not including tax restatements) was approximately $132 million and included, among other things, approximately $37 million for the under-accrual of the self-insurance reserve, $16 million for impaired and abandoned solid waste projects, $18 million for the misapplication of acquisition accounting principles, and $8 million for overvalued land. This was on top of approximately $260 million in restatements for 1991 and prior years for essentially the same issues. The restatement for the tax under-accrual was $24 million for 1992 and $18 million for 1991 and earlier periods.

1993 False and Misleading Annual and Quarterly Reports

110. Entering 1993, Waste Management was experiencing a severe downturn in its business. Nevertheless, the Company, based upon the aggressive goals set by Buntrock, Rooney, and others, still budgeted double-digit earnings growth for the year — a 13.1% increase in earnings from 1992 to 1993. The Company was anticipating even greater growth in earnings (23.2%) for the following year.

111. Even with the non-GAAP accounting practices that continued from the prior years top management still added new accounting entries to manage earnings, achieve a public earnings projection in the second quarter, and stave off plummeting earnings. Ultimately, the Company's aggressive growth expectations for the year would not be met.

Reported First Quarter 1993 Results

112. By April of 1993, analysts began trimming earnings estimates for the Company and questioning whether the Company could ever regain the rapid growth it enjoyed during most of the 1980s. The April 12, 1993 Wall Street Journal contained an unfavorable article about the Company, entitled "Allure of Waste Management is Fading." The article noted that the first quarter "could provide yet another disappointment" for Waste Management. The following day, as the Company's stock price was dropping precipitously, the Company responded with a press release stating that the Company's first quarter earnings "would be in line with the published estimates of leading financial analysts . . . in the range of $0.40 to $0.41 per share."

113. On April 20, 1993 the Company announced its first quarter earnings of $0.41 per share. The release noted that net income had increased $0.02 per share from the same quarter a year ago. In the press release, Buntrock boasted about the Company's purported continued growth in North America and internationally and its continued success in managing costs.

114. In fact, the Company achieved the desired earnings only by top management's recording more than $47 million (or $0.06 in earnings per share) in unbudgeted and undisclosed top-level adjustments. These adjustments included approximately $35 million in reversals of purchase acquisition, environmental, and bad debt reserves into income. Without these adjustments, the Company would have reported a substantial decline in earnings, and not the moderate 5% growth that was reported. As noted in AA's quarterly review memorandum, "Tom [Hau] indicated that it was a difficult quarter to achieve earnings expectations."

115. On or about May 14, 1993, the Company filed with the Commission its quarterly report on Form 10-Q for the quarter ended March 31, 1993, which included the financial information that was disclosed in the April 20, 1993 press release. The financial statements for the quarter contained material misstatements resulting from the non-GAAP accounting practices discussed above, including the improper accounting for overvalued land, deferred permitting costs, capitalized interest, purchase acquisition and environmental reserves, income tax and self-insurance reserves, discount rate for the self-insurance reserve, other items quantified as PAJEs, and the improper reversal of reserves into income. The misstatements materially understated expenses (thereby overstating reported earnings).

116. Likewise, the MD&A bolstered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. Among other things, the MD&A failed to disclose the material impact of the reversal of reserves discussed above. Instead, top management highlighted purported improvements in reducing WMNA's operating expenses, noting that "[o]perating expenses as a percentage of revenue also trended downward slightly due to greater volumes to absorb the fixed portions of these costs."

117. Notwithstanding their failure to disclose significant one-time accounting entries that reduced expenses for the quarter, top management did disclose a one-time gain realized from selling a large block of stock in an affiliated company. The gain, which was recorded in other income and expense, provided the Company with approximately $0.02 in earnings per share. Analysts reacted strongly when they learned that the Company had made its first quarter earnings projection (of $0.41 per share) only by recognizing a gain on the stock sale. An analyst was quoted in the April 21 Wall Street Journal: "That's not real earnings . . . . This is a company that has rabbits hidden in several hats." Another analyst added that "[p]eople were assuming that [the projections] were operations." The incident added to the "debate of management credibility in describing its prospects" and perhaps reinforced a lesson for the future — since they were not going to receive credit for reporting one-time gains, top management should instead "net" such gains to bury and eliminate accumulated misstatements.

Reported Second Quarter 1993 Results

118. Things turned from bad to worse in the second quarter. Actual results were far behind budget and, as a result, the Company issued on June 21, 1993 a revised projection for second quarter earnings. The release noted that the Company expected to be $0.02 to $0.03 per share below leading industry financial analysts' consensus estimates of $0.45 to $0.46 per share. The Company blamed the shortfall on a decline in earnings of Chemical Waste Management, a wholly owned subsidiary, yet still highlighted the expected "modest improvements" in WMNA's operations.

119. On July 20, 1993, the Company reported second quarter earnings of $0.43 per share (excluding extraordinary items) compared with $0.43 per share in the same quarter the prior year. The reported earnings were consistent with the June 21, 1993 projection. In the press release, Buntrock proclaimed: "[t]he growth of our company continues domestically and oversees. . . .  [WMNA's] operations, which represent about 50 percent of our revenue, are improving, although not as rapidly as we had hoped."

120. In fact, the Company was not growing at all. The reported earnings for the quarter were achieved only by recording unbudgeted top-level adjustments after the close of the quarter that significantly reduced expenses. In particular, top management made the following improper and undisclosed reversals of approximately $46 million in reserves into income as follows: (i) $15 million of the environmental remediation reserve, (ii) $20 million of a reserve for closure/post-closure costs associated with landfills, (iii) $5.5 million of the self-insurance reserve, and (iv) $5 million of bad debt reserves. They also added for the first time a salvage value to garbage containers, which resulted in a $2.3 million reduction of depreciation expenses, and increased landfill lives purportedly because of new technologies, which resulted in the reversal into income of $3.75 million of amortized landfill costs.

121. These reversals of reserves and other changes alone, which totaled $52 million, increased reported earnings by 16% (excluding extraordinary items) and represented approximately $0.06 of the reported $0.43 per share in earnings. In fact, the $52 million in adjustments enabled top management falsely to report flat earnings growth instead of a substantial decline. Nevertheless, the impact of such changes was never disclosed. In contrast to the Company's public statements about its continued growth, Hau admitted in AA's quarterly review meeting that it was a "difficult quarter" and that he had "borrowed from [the] 3^rd and 4th quarter" to attain an additional $0.05 to $0.06 in earnings per share for the quarter.

122. On or about August 12, 1993, the Company filed with the Commission its quarterly report on Form 10-Q for the quarter ended June 30, 1993, which included the financial information that was disclosed in the July 20, 1993 press release. The Company's financial statements for the quarter contained material misstatements resulting from the non-GAAP accounting practices that continued from the prior periods.

123. The MD&A bolstered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. For example, the MD&A disclosures failed to mention the material impact of the unbudgeted top-level adjustments, including the $52 million boost WMNA received from reversing reserves into income and changing estimates. Instead, top management falsely credited operational efficiencies as reducing WMNA's reported operating expenses: "Operating expenses as a percentage of revenue are trending downward slightly due to the greater volumes to absorb the fixed portion of these costs. The Company's continuing progress in internalizing disposal volume also has a favorable impact on operating expenses." Likewise, top management attributed a reduction of WMNA's SG&A expenses as a percentage of revenue to an increase in worker productivity resulting from the Company's investment in training sales personnel. In fact, the reported favorable trend in operating and SG&A expenses was attributable solely to the fraudulent unbudgeted top-level adjustments.

Reported Third Quarter 1993 Results

124. The third quarter was even worse than the second, as the Company's actual results were significantly behind budget. As they had in previous quarters, top management masked the true, dire picture of the Company's earnings by making further unbudgeted top-level adjustments after the close of the quarter. Even the inflated earnings still fell short of expectations. Hau concluded his quarterly review with AA by noting that "the quarter was indeed a difficult one, and the analysts would likely be disappointed."

125. On October 19, 1993, the Company announced third quarter earnings of $0.39 per share (excluding special charges), which represented a decline in earnings from the same quarter in the prior year. In the press release, Buntrock noted that the Company was "streamlin[ing] the administration of [WMNA]," under the direction of Rooney, who " will serve as Chairman of [WMNA] . . . [and] provide increased focus on the growth and profitability of the unit with a particular emphasis on cost control and increasing return on invested capital." On the day following the release, the Company's stock plunged $4.87 to close at $24, a 17% drop in response to disappointing third quarter results.

126. The actual deterioration of WMNA's operations, however, was far worse than top management disclosed. The most significant unbudgeted top-level adjustment made to conceal the deterioration involved changes in the estimated useful lives and salvage value of trucks. Buntrock and Rooney, who viewed themselves as the experts on the value of trucks and how long they lasted, authorized the unsupported, undisclosed, and improper changes, in consultation with Koenig and Hau. Without competent support, they extended the useful life of front-end loaders from 8 years to 10 years and rear-end loaders and roll-off trucks from 10 to 12 years. At the same time, they doubled the salvage value of all trucks from $15,000 to $30,000. They made the changes without any research.

127. The new salvage value, especially in light of the extended lives, was patently overstated. Top management effectively found that a garbage truck "driven into the ground" for two additional years would be worth twice as much. As Hau later admitted, the salvage value of trucks was "excessive given 11 year life" and that the "better [salvage value] estimate is probably $10,000." Moreover, the $30,000 salvage value was contrary to the Company's own operating experience. The Company ran its trucks until they could be run no more. To control costs, Buntrock and Rooney instructed the Groups to maximize the use of the older trucks. When taken out of service, the old trucks were cannibalized and almost all usable, transferable parts were retained for spare parts. The value of the junkyard cannibalized parts, which represented the true measure of the economic value to the Company, was nowhere near $30,000. Nevertheless, in representation letters to AA, Buntrock, Koenig, and Hau misrepresented that "fixed asset useful lives and salvage values adopted by the Company reflect the Company's actual experience to date and its best estimates of future experience."

128. Even if the new estimates had been made in good faith, rather than to pump up earnings, the new estimates were applied improperly. As they had in the past, Koenig and Hau applied the changes cumulatively from the beginning of the year, rather than prospectively from the time the changes were made.

129. The unsupported changes in estimates reduced operating expenses for the quarter by approximately $35 million and continued to reduce future period expenses. These changes provided over $0.04 of the Company's reported $0.39 per share in third quarter earnings (excluding extraordinary items) and improved the quarter's earnings by approximately 13%. Top management, however, did not disclose the changes, or their impact on reported earnings, to investors.

130. On or about November 12, 1993, the Company filed with the Commission its quarterly report on Form 10-Q for the quarter ended September 30, 1993, which included the financial information that was disclosed in the October 19, 1993 press release. The financial statements for the quarter contained material misstatements resulting from the falsified depreciation adjustments and other non-GAAP accounting practices that continued from prior periods.

131. The MD&A bolstered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. Among other things, the MD&A failed to disclose the material impact of the changes in depreciation estimates. Once again, top management took credit for WMNA's "continued progress in internalizing disposal volume," which purportedly reduced operating expenses as a percentage of revenue, but blamed the external factor of "price weaknesses in the third quarter" as offsetting those alleged gains. As a result of their manipulations, top management reported only a slight decline in WMNA's Operating Margins — 21.3% in the third quarter of 1993, compared with 21.4% for the same period in 1992. In fact, the depreciation changes alone reduced operating expense by $35 million in the quarter, thereby mitigating the full extent of the decline in Operating Margins and concealing the operating realities of WMNA's declining business.

New Accounting Manipulations in the Fourth Quarter

132. More accounting changes were made in the fourth quarter. Mountain Indemnity, the wholly owned captive insurer, began processing claims in the fourth quarter and the accounting for such claims provided an additional boost to earnings. Hau reduced fourth quarter expenses by more than $20 million by improperly capitalizing Mountain Indemnity claims. In addition, Koenig and Hau, with Tobecksen's assistance, initiated the "geography" entries. In the fourth quarter alone, they "moved" more than $56 million between line items on the income statement as follows: $56 million of operating expense was reclassified to SG&A expense ($31 million), offsets to revenue ($15 million), interest expense ($9 million) and other expense ($1 million). Among other things, the entries significantly improved the trend in operating expenses as a percentage of revenue by decreasing both revenue and operating expenses.

133. The excessive use of unbudgeted top-level adjustments in the first three quarters of 1993 not only benefited earnings but resulted in the reporting of improved margins. During the year, top management boasted that "continued progress in internalizing disposal volume" had reduced operating expenses as a percentage of revenue. In the MD&A of the annual report, top management would have to provide a reason for any change in the trends (even the slightest of changes) in the fourth quarter. A dramatic change would be harder to explain away and might lead readers of the report to question the Company's operations. Thus, the geography entries were used to conceal the scheme and report a more consistent trend in operating expenses as a percentage of revenue.

134. While top management was busy manipulating the presentation of quarterly results, other known misstatements were exploited. For example, the misstatements associated with deferred permitting costs grew, yet known impaired and abandoned projects were not written off. By 1993, over $500 million in deferred permitting costs existed on the Company's balance sheet with no consideration for any understatement of expenses for impaired or abandoned projects. In November of 1993, Rooney instructed the new WMNA corporate controller to assess the status of deferred permitting costs. This was part of the initiative announced in the Company's October 19, 1993 press release for Rooney to "focus on the growth and profitability of the unit with a particular emphasis on cost control and increasing return on invested capital."

135. The WMNA corporate controller prepared a schedule listing, among other things, the anticipated basketing opportunities for impaired and abandoned projects. By basketing such deferred permitting costs, the Company would avoid write-offs. The controller also identified $40 million in dead, "past life support" projects that had no potential basketing opportunities. Instead of taking any write-offs for those dead projects in 1993, which GAAP required, the Company placed the costs in a "corporate pool" pending future write-offs through netting. The deferred projects schedules were provided to Rooney, Koenig, Hau, and others and were updated periodically.

Arthur Andersen's Audit Closing Meetings with Buntrock, Rooney, Koenig, Hau, and Getz

136. The AA engagement partner held separate closing meetings with Buntrock, with Rooney, and with Koenig and Hau in February of 1994, using the same agenda for each meeting. In addition, the engagement partner held a closing meeting with Getz, a practice that continued thereafter. In the meetings, the engagement partner presented cumulative PAJEs representing 14.11% of income after taxes but before special items (or approximately $115 million on an after-tax basis). The accounting practices that gave rise to the 1993 PAJEs essentially were the same old frauds from 1992. However, the 1993 cumulative PAJEs increased by approximately 50% over the 1992 PAJEs. Once again, top management, with the knowledge of Getz, refused to book a penny of the PAJEs.

137. In addition to discussing the PAJEs, the engagement partner discussed with Buntrock, Rooney, Koenig, Hau and Getz the numerous undisclosed changes in estimates booked as top-level adjustments during the quarters. He provided a schedule listing approximately $129 million in changes in estimates and their impact on the pre-tax income before minority interest. The scheduled illustrated that most of the changes ($103 million) benefited the reported results of Rooney's subsidiary, WMNA, and included the $51 million related to changes in depreciation estimates, $26 million related to the reversal of environmental and other reserves into income, and $20 million related to the benefit of discounting of the closure/post-closure reserve for the first time. In fact, the schedule indicated that such changes increased WMNA's pre-tax income before minority interest by approximately 14%. On a consolidated basis, the $129 million in changes in estimates increased the Company's 1993 consolidated pre-tax income before special charges by over 10%.

138. Instead of correcting the Company's fraudulent financial statements for 1993, top management, with Getz's knowledge, struck a deal with AA in the closing meetings. The resulting Action Steps agreement consisted of two components. First, to eliminate the prior-period misstatements that AA had quantified as PAJEs, top management agreed to write off between $165 and $205 million in misstatements over periods of up to 10 years. Spreading the write-offs over a decade — a practice in violation of GAAP — concealed existing misstatements in the Company's financial statements, buried the improper write-offs, and minimized the earnings impact of the agreement. Second, top management agreed to change in the coming year several of the improper accounting practices that had given rise to the misstatements and had been used to inflate the results of the Company's core operations.

139. Top management agreed to implement thirty-two minimum or "must-do" steps related to the following 11 categories:

• Self-insurance reserve
   
• Closure/Post-closure reserve
   
• Deferred Project Costs
   
• Unamortized Land (NRV)
   
• Deferred Systems Costs
   
• Income Tax Reserve
   
• Environmental Reserve
   
• Depreciation/Salvage Value
   
• Landfill Capitalized Interest
   
• Special Gains, and
   
• Discount rates.

140. For example, top management agreed to stop their improper use of purchase accounting and to cease the practice reversing of reserves into income, such as the reversal of reserves discussed above that were recorded in 1993 to manage earnings. They also agreed to develop and implement in 1994 a new capitalized interest method that conformed with GAAP and agreed to provide reports AA had been requesting for years — a study supporting the end-use value of land and analytical support for the changes in truck depreciation estimates. In addition to the must-do steps, the agreement proposed two other alternatives — labeled "reasonable" and "conservative" — to which the Company should aspire.

141. Buntrock, Rooney, Koenig, Hau, and Getz were the only persons at the Company who received a copy of the Action Steps and knew the details of the agreement. Tobecksen later learned of the agreement.

142. AA first secured the Company's commitment to the Action Steps in a February 8, 1994 closing meeting with Buntrock. The AA engagement partner presented Buntrock with the document, and Buntrock agreed that, at a minimum, the Company would implement the "must do" portion beginning in 1994. A few hours after agreeing to the Action Steps, Buntrock approved the issuance of the Company's press release of earnings for 1993, which quoted him projecting earnings growth of between 5% and 10% for 1994. At the time, Buntrock knew or recklessly disregarded that the earnings projections did not account for the reduced earnings that would have resulted from implementing the must do portion of the Action Steps.

143. Koenig and Hau discussed the Action Steps during their closing meeting with AA the day after the Buntrock meeting. Following a heated exchange with the AA engagement partner, Koenig and Hau negotiated additional time to write off one of the misstatements, thereby reducing the annual impact of implementing the Action Steps. They then signed the agreement along with the engagement partner and initialed the negotiated changes. Contemporaneous notes show that the earnings impact of implementing the must do portion of the Action Steps was discussed at the Koenig and Hau closing meeting. The annual impact of writing off the misstatements alone was calculated to be between $46 million and $52 million (or approximately $0.06 in earnings per share annually). The estimated $0.06 per share per year was especially significant because the Company's projected 5% to 10% growth amounted to an increase of only $0.07 to $0.14 per share in 1994 earnings.

144. The AA engagement partner also reviewed the Action Steps agreement in his closing meeting with Rooney, which occurred a few days later, and focused on the "must do" items for which Rooney had the greatest responsibility: the changes in depreciation estimates, the deferred permitting costs, and the need to conduct an appropriate study to assess net realizable value of land.

145. Getz had his closing meeting with the AA engagement partner on February 11 and bluntly identified one obvious concern when presented with the Action Steps. According to the contemporaneous notes from the meeting by a senior member of the AA engagement team, Getz remarked: "Does our plan [the Action Steps] support the budget? Per Herb, this is securities fraud if we know now." Having raised the issue, Getz then learned of or recklessly disregarded the earnings impact of implementing the Action Steps and its impact on the projection in the February 8, 1994 press release. Neither Getz nor top management revised the Company's public projection.

146. On February 16, 1994, after reviewing the Action Steps agreement with each of Buntrock, Rooney, Koenig, Hau, and Getz, AA signed its unqualified audit report on the Company's 1993 financial statements.

Reported Year-End Results

147. In its February 8, 1994 press release of earnings, the Company reported that, excluding the impact of unusual income and expense items, 1993 earnings were $1.53 per share compared with $1.68 in 1992. In the press release, Buntrock stated that "[w]e are obviously disappointed with our 1993 performance, as we know our shareholders are . . . but we believe that we have now taken the steps necessary to return our Company to a position of overall earnings growth for 1994. Our target is a 5 percent to 10 percent growth in earnings per share in 1994." The Company's earnings were significantly below analysts' expectations and the market reacted negatively. The following day the Company's stock price dropped 11.5% from $28.25 to $25 per share. No bonuses were paid for 1993. However, at Buntrock's recommendation, the Board increased by up to 30% the amount of bonuses defendants could receive in 1994.

148. On or about March 30, 1994, the Company filed with the Commission its 1993 annual report on Form 10-K. The report included the 1993 financial information that was disclosed in the February 8, 1994 press release. The financial statements in the annual report contained material misstatements resulting from the inflated salvage values, improper capitalization of Mountain Indemnity claims, and other the non-GAAP accounting practices discussed above. The misstatements materially understated expenses (thereby overstating reported earnings). The improper accounting practices identified in the Action Steps resulted in hundreds of millions of dollars in current and prior period misstatements.

149. In addition, Buntrock, Rooney, Koenig, Hau, and Getz failed to disclose in the annual report the Company's accounting practices related to deferred permitting costs, misrepresented that its capitalized interest practices conformed with GAAP, and falsely implied that the Company had conducted a study of the net realizable value of its landfills. They similarly failed to disclose new accounting practices adopted in 1993, including the discounting of the closure/post-closure reserve for the first time, the improper capitalization of Mountain Indemnity claims, geography entries, and the impact of changes in depreciation estimates, the inflated salvage values used, or the manner in which they were applied.

150. The MD&A also failed to disclose the Action Steps agreement and bolstered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. For example, the impact of the changes in depreciation estimates and reversals of reserves into income (over $100 million alone related to WMNA) was never disclosed. Moreover, the MD&A also misrepresented the trend in WMNA's gross margins: "Operating expenses as a percentage of revenue benefited from increased volumes to absorb the fixed portion of such costs as well as [WMNA's] progress in internalizing disposal volume, but price weakness largely offset these gains." The significant reduction of WMNA's operating expenses through changes in accounting practices and estimates, as well as the geography entries, concealed the fact that, contrary to the Company's disclosure, the margins were declining, not improving.

151. In the Restatement, the Company acknowledged that the reported net income in its original 1993 financial statements was overstated by 57%. The Company restated for all of the accounting practices identified in the Actions Steps. The total restatement for 1993 alone (not including income tax restatements) was approximately $211 million and included, among other things, $97 million for depreciation, $44 million for impaired and abandoned solid waste projects, $21 million for the misapplication of acquisition accounting principles, $22 million for improperly capitalized Mountain Indemnity claims, and $6 million for overvalued land. The restatement for the income tax under-accrual was approximately $19 million. With respect to the salvage value of trucks, the Company determined in the Restatement that the appropriate salvage value was $12,000 (i.e., the $30,000 salvage value adopted in the third quarter was overstated by 150%). The cumulative restatement for the overstated salvage value through the third quarter of 1997 was $141 million.

1994 False and Misleading Annual and Quarterly Reports

152. Because the financial markets reacted negatively to Waste Management's 1993 reported financial results, a major priority for the Company entering 1994 was achieving its public earnings target and regaining credibility with the analysts. A January 24, 1994 article about the Company in Business Week, quoted Buntrock as follows: "We've disappointed investors. . . . To gain back that credibility, we have to deliver on the results that we say we're going to."

153. The Company's public earnings projections of 5% to 10% growth in 1994 earnings and $0.34 per share in earnings for the first quarter of 1994 were based upon the Company's budget, which anticipated earnings of $1.63 per share for the year. The Company achieved its public earnings target (making budgeted earnings for each quarter in 1994) with the help of the same accounting manipulations utilized in the past. Because the Company's results did not leave room for compliance with the Action Steps, top management did not implement the vast majority of the "must do" items.

Reported First Quarter 1994 Results

154. In the first quarter, the Company sold its interest in Modulaire, a company that manufactured modular office trailers. The gain of approximately $25 million provided top management with another netting opportunity. In a February 22, 1994 memorandum copied to Rooney and Hau, the WMNA corporate controller asked the Groups to identify "overvalued assets" and compile a "confidential shopping list" of items that could be netted against the Modulaire gain. The responses far exceeded the projected $25 gain — two Groups alone identified over $90 million in overvalued assets. Only $10 million of the items identified (all current period expenses) and $15 million in other unrelated expenses and misstatements, including certain "must do" Action Steps items, were netted against the Modulaire gain. Among the expenses buried through netting were a $1 million gift sought by Buntrock to the Chicago Symphony Orchestra and Civic Opera and its "Buntrock Symphony Hall."

155. Koenig and Hau, with Tobecksen's assistance, recorded geography entries in the first quarter that manipulated the reported trends and margins. For example, the geography entries materially improved the Operating Margin by reducing reported operating expenses by more than $12 million and making an equivalent increase in interest expense, which was not included in the calculation of the Operating Margin.

156. On April 19, 1994, the Company reported earnings for the first quarter at $0.34 per share, which exactly met the Company's internal budget and public earnings projection and consensus analysts' expectations. In the press release, Buntrock trumpeted WMNA's "improvements" in managing costs and improving returns and noted that "[w]e expect to return to positive earnings growth in 1994 and believe our stated target of 5% to 10% growth in earnings is achievable."

157. On or about May 16, 1994, the Company filed with the Commission its quarterly report on Form 10-Q for the quarter ended March 31, 1994. The report included the financial information that was disclosed in the April 19, 1994 press release. The Company's financial statements for the quarter contained material misstatements resulting from the non-GAAP accounting practices discussed above, including the improper accounting for overvalued land, deferred permitting costs, income tax and self-insurance reserves, discount rate for the self-insurance reserve, other items previously quantified as PAJEs, capitalized interest, purchase acquisition and environmental reserves, other accounting practices identified in the Action Steps agreement, Mountain Indemnity claims, geography entries, inflated salvage values, and the Modulaire netting. The misstatements materially understated expenses (thereby overstating reported earnings).

158. Likewise, the MD&A bolstered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. For example, there was no disclosure of either the one-time gain or the unrelated items that were netted. As a consequence of the netting, the Company understated operating expenses, overstated Income from Operations, and created the misleading impression that the Company achieved its forecasted financial results through operations. Moreover, the MD&A noted improvements in WMNA's Operating Margins, which in fact, resulted from, among other things, the netting and geography entries.

Reported Second Quarter 1994 Results

159. On July 19, 1994, the Company reported earnings for the second quarter at $0.42 per share, which exactly met the Company's internal budget and public earnings projection and consensus analysts' expectations. In the press release, Buntrock again emphasized "our overall growth is in line with our expectations at this point in the year," and WMNA's purported success in improving "profitability and managing costs."

160. In fact, top management achieved the budgeted earnings only by continuing the fraudulent practices of the past. By mid-1994, the Company had made virtually no progress in implementing the "must do" Action Steps.

161. In addition, Koenig and Hau, with Tobecksen's assistance, recorded geography entries that, among other things, materially improved WMNA's Operating Margin by reducing reported operating expenses by more than $11 million and increasing by that same amount other miscellaneous expenses, which were not included in the calculation of the Operating Margin.

162. On or about August 12, 1994, the Company filed with the Commission its quarterly report on Form 10-Q for the quarter ended June 30, 1994. The report included the financial information that was disclosed in the July 19, 1994 press release. The Company's financial statements for the quarter contained material misstatements resulting from the non-GAAP accounting practices that continued from the prior period.

163. The MD&A likewise bolstered the misrepresentations in the Company's financial statements by making false and misleading claims concerning the Company's financial results and how those results had been achieved. For example, the MD&A disclosed that "[o]perating expenses were 68.8% of second quarter 1994 revenue compared to 67.2% in the 1993 quarter, a result of weak pricing in the industry over the past 18 months." In fact, the reported quarter-to-quarter trend was impacted first by the extensive use of unbudgeted top-level adjustments that significantly reduced operating expenses in the second quarter of 1993. The geography entries in the second quarter of 1994 arbitrarily reduced operating expenses by more $11 million, which improved operating expenses as a percentage of revenue. Thus, the geography entries smoothed over the reported trends while concealing items that might lead investors to question the reported results.

Reported Third Quarter 1994 Results

164. On October 18, 1994, the Company reported earnings for the third quarter at $0.44 per share, which exactly met the Company's internal budget and public earnings projection and consensus analysts' expectations. In the press release, Buntrock again trumpeted results "in line with our expectations at this point in the year" and highlighted WMNA's "strong performance."

165. In fact, top management, with the knowledge of Getz, achieved the claimed earnings only by recording unbudgeted and undisclosed top-level adjustments. For example, during the third quarter, Waste Management obtained a $50 million insurance litigation settlement for environmental remediation liabilities. Instead of crediting the entire recovery to its environmental reserves as agreed to in the Action Steps, Koenig and Hau left the environmental reserves under-accrued and took half of the insurance proceeds directly into income by recording a top-level adjustment that reduced operating expenses by $25 million. As Hau explained to AA in their quarterly review, $25 million of the settlement "was . . . taken to income to generate $.03/share in order to achieve the [reported] $0.44" in earnings per share, which was "consistent with market expectations and plan." Despite the fact that the recovery increased the Company's earnings for the third quarter by 7.7%, and was the difference between making and not making the Company's publicly set earnings target, Getz, in consultation with Hau, claimed that the impact of the recovery was not material and did not need to be disclosed.

166. Koenig and Hau, with Tobecksen's assistan