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U.S. Securities and Exchange Commission

Waste Management Founder, Five Other Former Top Officers Sued for Massive Fraud

Defendants Inflated Profits by $1.7 Billion To Meet Earnings Targets;
Defendants Reap Millions in Ill-Gotten Gains While Defrauded Investors Lose More Than $6 Billion


Washington, D.C., March 26, 2002 — The Securities and Exchange Commission filed suit today against the founder and five other former top officers of Waste Management Inc., charging them with perpetrating a massive financial fraud lasting more than five years. The complaint, filed in U.S. District Court in Chicago, charges that defendants engaged in a systematic scheme to falsify and misrepresent Waste Management's financial results between 1992 and 1997.

The complaint names Waste Management's former most senior officers: Dean L. Buntrock, Waste Management's founder, chairman of the board of directors, and chief executive officer during most of the relevant period; Phillip B. Rooney, president and chief operating officer, director, and CEO for a portion of the relevant period; James E. Koenig, executive vice president and chief financial officer; Thomas C. Hau, vice president, corporate controller, and chief accounting officer; Herbert Getz, senior vice president, general counsel, and secretary; and Bruce D. Tobecksen, vice president of finance.

"Our complaint describes one of the most egregious accounting frauds we have seen," said Thomas C. Newkirk, associate director of the SEC's Division of Enforcement. "For years, these defendants cooked the books, enriched themselves, preserved their jobs, and duped unsuspecting shareholders."

According to the complaint, the defendants violated, and aided and abetted violations of, antifraud, reporting, and record-keeping provisions of the federal securities laws. The Commission is seeking injunctions prohibiting future violations, disgorgement of defendants' ill-gotten gains, civil money penalties, and officer and director bars against all defendants.

"Defendants' fraudulent conduct was driven by greed and a desire to retain their corporate positions and status in the business and social communities," Newkirk said. "Our goal is to take the profit out of securities fraud and to prevent fraudsters from serving as officers or directors of public companies."

The complaint alleges that the defendants played the following roles in the scheme:

  • Buntrock - the driving force behind the fraud. He set earnings targets, fostered a culture of fraudulent accounting, personally directed certain of the accounting changes to make the targeted earnings, and was the spokesperson who announced the company's phony numbers. At the same time, Buntrock posed as a successful entrepreneur. With charitable contributions made with fruits of his ill-gotten gains or money taken from the company, Buntrock presented himself as a pillar of the community. For example, just 10 days before certain of the accounting irregularities first became public, he enriched himself with a tax benefit by donating inflated company stock to his college alma mater to fund a building in his name. He was the primary beneficiary of the fraud and reaped more than $16.9 million in ill-gotten gains from, among other things, performance-based bonuses, retirement benefits, charitable giving, and selling company stock while the fraud was ongoing.
  • Rooney - in charge of building the profitability of the company's core solid waste operations and at all times exercised overall control over the company's largest subsidiary. He ensured that required write-offs were not recorded and, in some instances, overruled accounting decisions that would have a negative impact on operations. He reaped more than $9.2 million in ill-gotten gains from, among other things, performance-based bonuses, retirement benefits, and selling company stock while the fraud was ongoing.
  • Koenig - primarily responsible for executing the scheme. He also ordered the destruction of damaging evidence, misled the company's audit committee and internal accountants, and withheld information from the outside auditors. He profited by more than $900,000 from his fraudulent acts.
  • Hau - principal technician for the fraudulent accounting. Among other things, he devised many "one-off" accounting manipulations to deliver the targeted earnings and carefully crafted the deceptive disclosures. He profited by more than $600,000 from his fraudulent acts.
  • Tobecksen - another accounting expert who was Koenig's right-hand man. In 1994, he was enlisted to handle Hau's overflow. He profited by more than $400,000 from his fraudulent acts
  • Getz - the company's general counsel. Getz blessed the company's fraudulent disclosures and profited by more than $450,000 from his fraudulent acts.

The complaint alleges that defendants fraudulently manipulated the company's financial results to meet predetermined earnings targets. The company's revenues were not growing fast enough to meet these targets, so defendants instead resorted to improperly eliminating and deferring current period expenses to inflate earnings. They employed a multitude of improper accounting practices to achieve this objective. Among other things, the complaint charges that defendants:

  • avoided depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage values and extending their useful lives,
  • assigned arbitrary salvage values to other assets that previously had no salvage value,
  • failed to record expenses for decreases in the value of landfills as they were filled with waste,
  • refused to record expenses necessary to write off the costs of unsuccessful and abandoned landfill development projects,
  • established inflated environmental reserves (liabilities) in connection with acquisitions so that the excess reserves could be used to avoid recording unrelated operating expenses,
  • improperly capitalized a variety of expenses, and
  • failed to establish sufficient reserves (liabilities) to pay for income taxes and other expenses.

Defendants' improper accounting practices were centralized at corporate headquarters, according to the complaint. Each year, Buntrock, Rooney, and others prepared an annual budget in which they set earnings targets for the upcoming year. During the year, they monitored the company's actual operating results and compared them to the quarterly targets set in the budget, the complaint says. To reduce expenses and inflate earnings artificially, defendants then primarily used "top-level adjustments" to conform the company's actual results to the predetermined earnings targets, according to the complaint. The inflated earnings of prior periods then became the floor for future manipulations. The consequences, however, created what Hau referred to as a "one-off" problem. To sustain the scheme, earnings fraudulently achieved in one period had to be replaced in the next.

Defendants allegedly concealed their scheme in a variety of ways. They are charged with making false and misleading statements about the company's accounting practices, financial condition, and future prospects in filings with the Commission, reports to shareholders, and press releases. They also are charged with using accounting manipulations known as "netting" and "geography" to make reported results appear better than they actually were and avoid public scrutiny. Defendants allegedly used netting to eliminate approximately $490 million in current period operating expenses and accumulated prior period accounting misstatements by offsetting them against unrelated one-time gains on the sale or exchange of assets. They are charged with using geography entries to move tens of millions of dollars between various line items on the company's income statement to, in Koenig's words, "make the financials look the way we want to show them."

Defendants were allegedly aided in their fraud by the company's long-time auditor, Arthur Andersen LLP, which repeatedly issued unqualified audit reports on the company's materially false and misleading annual financial statements. At the outset of the fraud, management capped Andersen's audit fees and advised the Andersen engagement partner that the firm could earn additional fees through "special work." Andersen nevertheless identified the company's improper accounting practices and quantified much of the impact of those practices on the company's financial statements. Andersen annually presented company management with what it called Proposed Adjusting Journal Entries ("PAJEs") to correct errors that understated expenses and overstated earnings in the company's financial statements.

Management consistently refused to make the adjustments called for by the PAJEs, according to the complaint. Instead, defendants secretly entered into an agreement with Andersen fraudulently to write off the accumulated errors over periods of up to ten years and to change the underlying accounting practices, but to do so only in future periods, the complaint charges. The signed, four-page agreement, known as the Summary of Action Steps (attached to the Commission's complaint), identified improper accounting practices that went to the core of the company's operations and prescribed 32 "must do" steps for the company to follow to change those practices. The Action Steps thus constituted an agreement between the company and its outside auditor to cover up past frauds by committing additional frauds in the future, the complaint charges.

Defendants could not even comply with the Action Steps agreement, according to the complaint. Writing off the errors and changing the underlying accounting practices as prescribed in the agreement would have prevented the company from meeting earnings targets and defendants from enriching themselves, the complaint says.

Defendants' scheme eventually unraveled. In mid-July 1997, a new CEO ordered a review of the company's accounting practices. That review ultimately led to the restatement of the company's financial statements for 1992 through the third quarter of 1997. When the company filed its restated financial statements in February 1998, the company acknowledged that it had misstated its pre-tax earnings by approximately $1.7 billion. At the time, the restatement was the largest in corporate history.

As news of the company's overstatement of earnings became public, Waste Management's shareholders (other than the defendants who sold company stock and thus avoided losses) lost more than $6 billion in the market value of their investments when the stock price plummeted by more than 33%.

For additional information, see Litigation Release No. 17435. Previously, the Commission instituted and simultaneously settled the following proceedings against Andersen and four of its partners in connection with Waste Management:

SEC v. Arthur Andersen LLP, et al., No. 1:01CV01348 (JR) (D.D.C.) [Release No. LR-17039] (June 19, 2001)
In the Matter of Arthur Andersen, LLP, [Release No. 34-44444] (June 19, 2001)
In the Matter of Robert E. Allgyer CPA, [Release Nos. 33-7986, 34-44445] (June 19, 2001)
In the Matter of Edward G. Maier CPA, [Release Nos. 33-7987, 34-44446] (June 19, 2001)
In the Matter of Walter Cercavschi CPA, [Release Nos. 33-7988, 34-44447] (June 19, 2001)
In the Matter of Robert G. Kutsenda, CPA, [Release No. 34-44448] (June 19, 2001).

These releases may be found at the Commission's web site, www.sec.gov.

Contact:   Thomas C. Newkirk, Associate Director, Division of Enforcement; tel: (202) 942-4550



Modified: 03/26/2002