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\./5561\'1 MILBERG WEISS BERSHAD L PLEDORIGINA
HYNES & LERACH LLP r------------12 WILLIAM S. LERACH (68581)
PATRICK J. COUGHLIN (111070) sEp Z 1991'3 DARREN J. ROBBINS (168593)
S.600 West Broadway, Suite 1800 DISTRICT COURTaERK, U.4 San Diego, CA 92101Telephone: 619/231-1058
5
27.ranr FCAUS1KAPLAN, KILSHEIMER & FOX, LLP
6 ROBERT N. KAPLAN685 Third Avenue, 26th Floor
7 New York, NY 10017Telephone: 212/687-1980
8SOLTAN & ASSOCIATES SCHIFFRIN & CRAIG, LTD.
9 VENUS SOLTAN (99144) RICHARD S. SCHIFFRIN660 Newport Center Drive Three Bala Plaza East
10 Suite 320 Suite 400Newport Beach, CA 92660 Bala Cynwyd, PA 19004
11 Telephone: 714/729-3100 Telephone: 610/667-7706
12 Attorneys for Plaintiff
13UNITED STATES DISTRICT COURT
14CENTRAL DISTRICT OF CALIFORNIA
r(),<) 15SOUTHERN DIVISION
16 5/%41C4)17 DOROTHY M. McMULLEN, On Behalf of ) Civ. I -I
Herself and All Others Similarly ) IEMSE5C.)
18 Situated, ) CLASS ACTION)
19 Plaintiff, )) COMPLAINT FOR VIOLATION OF
20 vs. ) THE SECURITIES EXCHANGE ACT) OF 1934
21 FLUOR CORPORATION, LESLIE G. )McCRAW, HUGH K. COBLE, DENNIS W. )
22 BENNER, DENNIS G. BERNHART, J. )
MICHAEL CONAWAY, JIM STEIN and )
23 JAMES O. ROLLINS, ))
24 Defendants. ) Plaintiff Demands A ) Trial By Jury
25- • • ;
2 6 • - ; "" •
2 7,
28 • ,
,
ENTERED ICMS
1 SUMMARY AND OVERVIEW
2 1. This is a class action on behalf of all persons who
3 purchased the common stock of Fluor Corporation ("Fluor" or the
4 "Company") between May 22, 1996 and Feb. 18, 1997 (the "Class
5 Period"). This action arises out of a fraudulent scheme and course
6 of business by Fluor and certain of its top executives to
7 artificially inflate Fluor's reported profits and the price of its
8 common stock so that those top executives could collect millions of
9 dollars of incentive and bonus compensation under Fluor's unique
10 executive compensation plan which provided such special bonus
11 compensation to its top executives if, but only if, Fluor's profits
12 met certain predetermined levels and its stock price traded at
13 certain high levels as well. As a result of defendants falsifying
14 Fluor's Fiscal 1996 ("F96") net income and earnings per share
15 ("EPS") and their false and misleading statements assuring
16 investors that the "re-engineering and restructuring'.' of Fluor's
17 largest and most important business unit, the Fluor Daniel
18 Engineering and Construction ("E&C") unit in 1994 had succeeded,
19 that the Fluor Daniel E&C unit's expansion was succeeding and its
20 business was very strong, Fluor reported record net income and EPS
21 of $268 million and $3.17 for F96 ended Oct. 31, 1996. Defendants
22 also assured investors that the success of Fluor's Fluor Daniel E&C
23 unit would enable Fluor to meet its 15%-20% per year growth target
24 in F97 to end Oct. 31, 1997, leading to sharply increased EPS for
25 Fluor in F97 and F98. As a result, Fluor's stock climbed to an
26 all-time high of $75 -7/8 on Feb. 18, 1997, and Fluor's top
27 executives collected millions in special incentive and bonus
, 28 compensation for F96. However, after close of trading on Feb. 18,
-2-,
1 1997, defendants stunned the markets by revealing that Fluor's
2 actual operating earnings for the lstQ F97 -- the quarter ended
3 Jan. 31, 1997 -- were much worse than earlier forecast, in
4 significant part due to huge cost overruns on two Fluor Daniel E&C
5 unit's fixed-price power plant construction Projects which Fluor
6 refused to identify or quantify, as well as soaring overhead costs
7 in its Fluor Daniel unit. Fluor's common stock collapsed from over
8 $75 to $62 on huge volume of 6.7 million shares, the largest one-
9 day price decline on the largest one-day trading volume in Fluor's
10 history -- thus wiping out in one trading day approximately $1
11 billion of Fluor common shareholder market value! Fluor's stock
12 continued to collapse to as low as $46-1/2, as Fluor revealed that
13 its re-engineering and restructuring of the Fluor Daniel E&C unit
14 had failed, it was abandoning its expansion of that unit, was
15 undertaking a huge cost-reduction program involving over $100
16 million in spending cuts, requiring Fluor Daniel office closings
17 and lay-offs and that it had suffered a stupefying $70+ million
18 2ndO F97 loss, the quarter ended April 30, 1997, due to further
19 huge cost overruns on one of the two Fluor Daniel E&C unit's fixed-
20 price power plant construction projects it still refused to
21 identify, as well as millions in cost overruns/losses on other
22 Fluor Daniel E&C construction projects which aggregated over $115
23 million and it was abandoning its plan of achieving 15%-20% EPS
24 growth.
25 2. After increasing from less than $20 per share in the late
26 1980s to more than $50 per share in the early 1990s, Fluor' s stock
27 price stagnated in 1993-1994. Fluor's F93 Annual Report contained
28 a letter from Leslie McCraw that stated that "despite [Fluor's]
-3-
1 record performance our stock has languished." As a result of this
2 poor performance of Fluor's stock, in the Spring of 1994, Fluor
3 announced a major re-engineering and restructuring of its Fluor
4 Daniel E&C unit. According to Fluor, this re-engineering and
5 restructuring would make the Fluor Daniel E&C unit more efficient
6 and effective, permit it to grow rapidly worldwide and for Fluor to
7 achieve 15%-20% EPS growth going forward. Fluor's top executives
8 also created a new compensation system which gave them an
9 opportunity to earn huge amounts of special incentive or bonus
10 compensation if, but only if, Fluor met certain earnings growth
11 targets and its common stock traded at certain high levels, which
12 they knew could only be achieved if the Fluor Daniel E&C unit
13 achieved substantial profitable growth over the next several years.
14 Fluor's Chairman, Leslie McCraw ("McCraw"), stated this plan
15 created "opportunities that can dramatically affect [Fluor
16 executives'] income."
17 3. During F94-F95, Fluor implemented the "re-engineering,"
18 i.e., decentralization and expansion of its Fluor Daniel E&C unit.
19 In Fluor's F94-F95 years ended Oct. 31, 1994 and 1995,
20 respectively, Fluor achieved record earnings and its stock price
21 reached a then all-time high of $59 per share, which resulted in
22 Fluor's top executives receiving at least $15 million in special
23 incentive and bonus compensation under the new Fluor Executive
24 Compensation Program. Fluor's top executives anticipated further
25 EPS gains, stock appreciation and huge incentive/bonus payments for
26 themselves for F96 to end Oct. 31, 1996. However, by May 1996,
27 Fluor's top executives realized that in fact the Fluor Daniel E&C
28 unit was in horrible trouble and the re-engineering of that unit
-4-
1 had failed catastrophically, as it was suffering from escalating
2 and out-of-control overhead expenses; in order to absorb some of
3 its escalating overhead it had undertaken many projects on which it
4 could not make any meaningful profit and was suffering losses on
5 several projects due to cost overruns, including two fixed-price
6 power plant projects (one in Taft, Louisiana and the other in
7 Rabigh, Saudi Arabia) which were suffering losses then aggregating
8 $50 million and which were continuing to mount. Fluor's top
9 executives were covering up these losses and the true adverse
10 impact of the Fluor Daniel E&C unit's excessive costs by very
11 aggressively recognizing profits on its Rayong, Thailand refinery
12 construction project, in a manner inconsistent with its claimed
13 conservative income recognition practices. Because revealing this
14 negative information would result in Fluor's earnings suffering a
15 horrible penalty and the collapse of its common stock, which would
16 eliminate any possibility of Fluor's top executives receiving
17 millions in incentive/bonus compensation for F96 to end Oct. 31,
18 1996, the defendants concealed this adverse information, hoping
19 that it would receive large incentive payments on certain contracts
20 later in F96 which would overcome these losses. Instead of
21 disclosing the truth to the market, they lied. They told the
22 market that Fluor's Fluor Daniel E&C unit's re-engineering,
23 decentralization and expansion had succeeded, that the unit was
24 enjoying strong business conditions and growth, was being selective
25 about the contracts it accepted to assure acceptance only of
26 contracts that provided for adequate profit margins, was operating
27 profitably, was not suffering from any serious problems on any of
28 its major construction projects, and that, while Fluor Daniel E&C
-5-
,
r
1 unit's cost structure had increased significantly as a result of
2 its expansion, these costs were under control and were leading to
3 the securing of large contracts at an increasing pace, which would
4 benefit Fluor's EPS going forward. Thus, they told investors Fluor
5 was on track to achieve 15%-20% EPS growth in F97 and F98, with F97
6 EPS to reach approximately $3.65-$3.75, followed by further EPS
7 gains in F98 to $4.20-$4.30.
8 4. These statements were all false and misleading when made.
9 In fact, Fluor's restructuring and reorganization of its Fluor
10 Daniel E&C unit and decentralizing its management structure had
11 failed badly. The overhead costs in the Fluor , Daniel E&C unit had
12 escalated (and were continuing to escalate) out of control, and in
13 order to help absorb this excess overhead, the Fluor Daniel E&C
14 unit had accepted several contracts on which it had little if any
15 chance to earn a profit while several large Fluor Daniel E&C
16 construction projects were actually suffering large losses,
17 including two fixed-price power plant contracts -- one in Taft,
18 Louisiana and another in Rabigh, Saudi Arabia -- that were
19 suffering cost overruns/losses that by the end of the Class Period
20 aggregated approximately $200 million. While Fluor had been able
21 to conceal the losses on several of its construction projects and
22 the true adverse impact of the Fluor Daniel E&C unit's excessive
23 costs and overhead by aggressively recognizing income from its
24 Rayong contract in Thailand, defendants knew by May 1996 that these
25 cost overruns and losses combined with the Fluor Daniel E&C unit's
26 out-of-control overhead costs, would result in Fluor suffering huge
27 losses in the near term. However, defendants avoided reporting
28 these losses during F96 by falsifying Fluor's F96 financial
-6-
•
1 results, including its net income and EPS, thus enabling them to
2 collect millions in special bonus/incentive compensation based on
3 these inflated EPS and Fluor's artificially inflated stock price.
4 5. Due to defendants' false and misleading statements about
5 the Fluor Daniel E&C unit and Fluor's falsified F96 results, by
6 Feb. 18, 1997 Fluor's stock reached $75-3/4 -- its all-time high.
7 On Feb. 18, 1997, after the close of trading, Fluor stunned the
8 securities markets by reporting lstQ F97 results well below
9 expectations, in large part due to what it described to be large
10 cost overruns/losses on two power construction projects it refused
11 to identify, or quantify. Fluor also revealed that in order to
12 report the EPS of $.73 it did report, it had more than offset the
13 adverse impact of these large Fluor Daniel E&C losses by reversing
14 millions in insurance expense accrual/reserves, generating millions
15 in non-operating earnings. Analysts immediately perceived this as
16 a tactic to attempt to cover-up the fact that Fluor's operating
17 margins, especially in the Fluor Daniel E&C unit, had fallen.
18 precipitously. As a result of these shocking revelations, on Feb.
19 19, 1997, Fluor's stock was suspended from trading; then, when it
20 opened, it collapsed from $75-3/4 per share (its all-time high
21 reached the day before) to just $62 per share on volume of 6.7
22 million shares -- the largest one-day price decline and trading
23 volume in Fluor's history -- a 19% one-day fall, which wiped out
24 over $1 billion of Fluor stockholder value! Shortly thereafter,
25 Fluor admitted that its Fluor Daniel E&C unit's "re-engineering,"
26 i.e., expansion and decentralization had failed and that Fluor was
27 going to have to eliminate over $100 million in operating costs by
28 closing many Fluor Daniel E&C offices and by large layoffs. Most
-7-
1 shocking of all, Fluor later revealed a 2ndQ F97 loss of over $70
2 million, the first quarterly loss Fluor had reported in many years,
3 which was due to huge losses and cost overruns of over $115 million
4 on several Fluor Daniel E&C construction projects, including a
5 further cost overrun/loss of $70-$90 million on one of the fixed-
6 price power plant projects which had contributed to the
7 disappointing 1stQ F97 results, i.e., the Rabigh, Saudi Arabia
8 power plant project. As a result of this disaster, Fluor has been
9 forced to abandon its 15%-20% EPS growth plan and to completely
10 reorganize its Fluor Daniel E&C unit to re-centralize the unit's
11 management controls to significantly strengthen that unit's
12 financial and accounting internal controls and to pare back that
13 unit's operations in an effort to halt the hemorrhaging that had
14 devastated Fluor's operating results thus far during F97.
15 Ultimately, Fluor's stock fell to just $46-1/2 per share -- 36%
16 lower than its Class Period high of $75-7/8 -- a loss of over $2
17 billion in common shareholder value, due to the.blunders and deceit
18 of corporate executives who paid themselves millions in special
19 bonus and incentive compensation.
20 6. Market participants were shocked and furious over these
21 revelations and the collapse of Fluor's stock because they had been
22 misled as to the success of Fluor's business and because Fluor has
23 refused to identify which Fluor Daniel E&C unit's projects were
24 involved or provide other details about other Fluor Daniel troubled
25 projects that were suffering losses. According to the financial
26 media, these revelations "stunned" shareholders and came as "a
27 shock to analysts and investors." "People were definitely caught
28 by surprise" said one analyst, "the chancre hadn't been anticipated"
-8-
1 and "expectations of a good quarter turned into a nightmare," the
2 "lstO earnings announcement was a surprise to everyone," said
3 others. Another added, "there is no excuse for the cost overrun
4 surprise -- FLR's controls should have been much better than that,
5 and management deserves to be criticized for the slip." The Los
6 Angeles Times reported "Fluor's financial report raised questions
7 about management's grip on internal operations. . . and shattered
8 a nearly universal belief that the international engineering and
9 construction services company would continue chalking up a double-
10 digit annual growth rate. . . . The company's first-quarter
11 results missed analysts' expectations 'by a country mile!"
12 Referring to the huge 2ndQ F97 loss, one analyst stated: "[T]his
13 charge is astounding," "a shock" and concluded:
14 It is obvious that management's effort to pursue an
15 accelerated growth strategy beginning in 1993-1994 has
16 lead to:
17 • a bloated cost structure
18 • an organizational structure that has been stretched
19 too thin
20 * * *
21 In essence, to pursue growth which was evidenced by
22 the rapid expansion in new orders and backlog, FLR
23 pursued all types of work, irrespective of potential
24 profitability, executed poorly on a number of prolects
25 and in the process created a bloated cost and overhead
26 structure throughout the world.
27 One analyst bluntly summed it up: "The decision . . . to
28 reengineer Fluor in order to dramatically accelerate the growth
-9-
1 rate . . . was an unmitigated disaster." Instead of achieving 15%-
2 20% EPS growth during F97 as forecast during the Class Period, for
3 the nine months ended July 31, 1997, Fluor had net earnings of only
4 $58.1 million or $.69 per share, a sharp decline from its net
5 income of $189.2 million or $2.24 per share in the same nine-month
6 period in F96 and far less than the $2.59 per share which had been
7 forecast for that nine month period as recently as Feb. 12, 1997.
8 Also, as Fluor stopped accepting marginally profitable or
9 unprofitable contracts, the Fluor Daniel E&C unit's volume of new
10 contracts fell precipitously -- down 15% from prior periods.
11 7. Fluor officials admitted "the company has pushed hard for
12 profit growth and . . . demanded too much of certain operating
13 executives," "they rightfully acknowledgefd] the mistakes," "we
14 tried some things and they didn't work out," "Fluor's ballyhooed
15 corporate 'reengineering' three years ago . . . enabled the Company
16 to grow, but it has grown too freely with too many overlapping
17 support units," "Top management has been too removed from the
18 Company . . . and Fluor has become entangled in too many pursuits
19 that don't bring in much profit," and "We were trying to do too
20 many things in too many countries in too many industries."
21 8. The positive, optimistic statements made by defendants
22 during the Class Period were each false and misleading statements
23 when made. The true facts, including the following adverse
24 internal conditions at Fluor, which contradicted their positive/
25 optimistic public statements and were known to each of the
26 individual defendants, were:
27 (a) That Fluor's Fluor Daniel E&C unit had encountered
28 a huge cost overrun on its Taft, Louisiana power plant project,
- 10 -
1 which exceeded $50 million by the end of the Class Period and would
2 result in a major loss on that project;
3 (b) That Fluor's Fluor Daniel E&C unit had encountered
4 a major cost overrun on its Rabigh, Saudi Arabia power plant
5 project, which exceeded $100 million by the end of the Class Period
6 and would result in Fluor's suffering a major loss on that project;
7 (c) That Fluor's Fluor Daniel E&C unit was suffering
8 from losses exceeding $35-$45 million on other construction
9 projects;
10 (d) That Fluor had been concealing the troubled nature
11 of a large number of projects in its Fluor Daniel E&C unit and the
12 true adverse impact of that unit's excessive overhead costs, by
13 recording income from its Rayong, Thailand project earlier and in
14 amounts larger than was consistent with its stated conservative
15 profit recognition practices with respect to large construction
16 projects;
17 (e) That Fluor had materially overstated its net income
18 and EPS for the 4thQ F96 and F96 ended Oct. 31, 1996 by failing to
19 properly recognize in a timely manner the large losses it knew
20 would result from its fixed-price power plant contracts in Taft,
21 Louisiana and Rabigh, Saudi Arabia, as detailed in ¶158-71;
22 (f) That the decentralized Fluor Daniel E&C unit's
23 management structure did not have in place adequate internal
24 controls and management information systems to enable top manage-
25 ment to detect losses on large projects at an early stage when
26 senior management intervention could have minimized or limited
27 those losses and, as a result, by the time top management learned
28 of the losses being suffered at the Taft, Louisiana and Rabigh,
- 11 -
1 Saudi Arabia projects in the Spring-Summer of 1996, they already
2 exceeded $50 million and were escalating rapidly;
3 (g) That Fluor's rapid expansion of its Fluor Daniel E&C
4 unit and utilization of a decentralized management structure had
5 failed and, as a result, the Fluor Daniel E&C unit's costs had
6 escalated out of control which was having an adverse impact on that
7 unit's actual results;
8 (h) In order to cover-up the true adverse impact of the
9 rapidly escalating overhead and bidding "costs" in the Fluor Daniel
10 E&C unit, the Fluor Daniel E&C unit had accepted and was accepting
11 a large number of contracts on which it could not earn any
12 significant profit and was actually encountering material losses on
13 a number of projects, including the Taft, Louisiana and Rabigh,
14 Saudi Arabia projects;
15 (i) That overhead costs at Fluor's Fluor Daniel E&C unit
16 had escalated out of control and were resulting in serious adverse
17 impact on Fluor Daniel's actual results from operations;
18 (j) That in order to try to help absorb more of the
19 escalating overhead of its Fluor Daniel E&C unit, Fluor was
20 accepting contract awards which it knew would generate little, if
21 any, profit, just to obtain some revenue and thus justify Fluor
22 Daniel's expansion into certain geographic areas, even though the
23 defendants knew this practice would have an adverse impact on
24 Fluor's profit margins going forward;
25 (k) That, as a result of the foregoing, defendants
26 actually knew that Fluor could not achieve the 15%-20% growth
27 target it had established, had publicly committed itself to
28
- 12 -
1 achieving and represented it was on target to achieve in F97 and
2 F98;
3 (1) That, as a result of the foregoing, defendants
4 actually knew that Fluor's forecasts of F97 EPS of $3.60-$3.70 and
5 F98 EPS of $4.20-$4.30 or above were false and could not and would
6 not be achieved, given the serious problems defendants knew were
7 impacting Fluor's Fluor Daniel E&C unit; and
8 (m) That, as a result of the foregoing, statements by
9 Fluor's executives that they were "comfortable" with EPS estimates
10 made by analysts of $3.60-$3.70 for F97 and $4.20-$4.30 for F98
11 were known by defendants to be false when made, as those EPS gains
12 were unachievable, given the serious problems defendants knew were
13 impacting Fluor's Fluor Daniel E&C unit.
14 9. The chart below show Fluor's stock price action during
15 the Class Period: Fluor Corp (FLR)
16 March 13, 1996 - May 7, 1997Daily Common Stock Price
8
170
1875 —
19
20 70 —a)
2165 -
22 get
23 60 --6
2 455
25
2 6 50 —
2 7
45
28 03/13/96 07/16/96 11/14/96 03/20/9705/14/96 09/16/96 01/17/97
— 13 —
1 JURISDICTION AND VENUE
2 10. Plaintiff brings this action pursuant to §§10(b) and
3 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"),
4 as amended (15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5
5 promulgated thereunder (17 C.F.R. §240.10b-5).
6 11. This Court has jurisdiction over the subject matter of
7 this action pursuant to §27 of the Exchange Act (15 U.S.C. §78aa)
8 and 28 U.S.C. §1331, as amended.
9 12. Venue is proper in this District pursuant to §27 of the
10 Exchange Act, 15 U.S.C. §78aa and 28 U.S.C. §1391(b). Many of the
11 acts and transactions giving rise to the violations of law
12 complained of herein, including the preparation and dissemination
13 to the investing public of false and misleading information,
14 occurred in this District.
15 13. In connection with the acts, conduct and other wrongs
16 complained of herein, the defendants, directly or indirectly, used
17 the means and instrumentalities of interstate commerce, including
18 the United States mails and interstate telephone communications,
19 and the facilities of the national securities exchanges.
20 THE PARTIES
21 14. Plaintiff Dorothy M. McMullen purchased 20 shares of
22 Fluor common stock on Dec. 12, 1996, at $64.79 per share, and has
23 been damaged as a result of defendants' conduct.
24 15. Defendant Fluor Corporation ("Fluor") is an international
25 engineering and construction firm with a low-sulphur coal opera-
26 tion. Its Fluor Daniel E&C unit is by far its biggest and most
27 important unit, generating the vast majority of its revenue and net
28 income. Fluor is headquartered in Irvine, California. The Company
- 14 -
1 has over 80 million shares of common stook outstanding. During the
2 Class Period, Fluor's common stock was actively traded on the New
3 York, Midwest, Pacific, Amsterdam, London and Swiss Stock Exchanges
4 in an efficient market.
5 16. (a) Defendant Leslie G. McCraw ("McCraw") was Chairman
6 and Chief Executive Officer of Fluor. McCraw had access to the
7 adverse non-public information about Fluor's businesses and
8 finances via access to internal corporate documents (including
9 Fluor's operating plans, budgets and forecasts and reports of
10 actual operations compared thereto), conversations and connections
11 with other corporate officers and employees, attendance at
12 management and Board of Directors' meetings and committees thereof
13 and via reports and other information provided to him in connection
14 therewith. Defendant McCraw personally profited from his
15 participation in the fraudulent scheme by receiving millions of
16 dollars in special incentive and bonus compensation in F96 by
17 artificially inflating ' Fluor's reported profits and stock price.
18 (b) Defendant Hugh K. Coble ("Coble") was Vice Chairman
19 of Fluor. Coble had access to the adverse non-public information
20 about Fluor's businesses and finances via access to internal
21 corporate documents (including Fluor's operating plans, budgets and
22 forecasts and reports of actual operations compared thereto),
23 conversations and connections with other corporate officers and
24 employees, attendance at management and Board of Directors'
25 meetings and committees thereof and via reports and other
26 information provided to him in connection therewith. Defendant
27 Coble personally profited from his participation in the fraudulent
28 scheme by receiving millions of dollars in special incentive and
- 15 -
1 bonus compensation in F96 by artificially inflating Fluor's
2 reported profits and stock price.
3 (c) Defendant Dennis W. Benner ("Benner") is Vice
4 President and Chief Information Officer of Fluor. Benner had
5 access to the adverse non-public information about Fluor's business
6 and finances via access to internal corporate documents (including
7 Fluor's operating plans, budgets and forecasts and reports of
8 actual operations compared thereto), conversations and connections
9 with other corporate officers and employees, attendance at
10 management and Board of Directors' meetings and committees thereof
11 and via reports and other information provided to him in connection
12 therewith. Defendant Benner personally profited from his
13 participation in the fraudulent scheme by receiving millions of
14 dollars in special incentive and bonus compensation in F96 by
15 artificially inflating Fluor's reported profits and stock price.
16 (d) Defendant Dennis G. Bernhart ("Bernhart") is Fluor
17 Daniel Group President -- America. Bernhart had access to the
18 adverse non-public information about Fluor's business and finances
19 via access to internal corporate documents (including Fluor's
20 operating plans, budgets and forecasts and reports of actual
21 operations compared thereto), conversations and connections with
22 other corporate officers and employees, attendance at management
23 meetings and via reports and other information provided to him in
24 connection therewith. Defendant Bernhart personally profited from
25 his participation in the fraudulent scheme by receiving millions of
26 dollars in special incentive and bonus compensation in F96 by
27 artificially inflating Fluor's reported profits and stock price.
28
- 16 -
1 (e) Defendant Jim Stein ("Stein") is Fluor Daniel Group
2 President -- Diversified Services. Stein had access to the adverse
3 non-public information about Fluor's business and finances via
4 access to internal corporate documents (including Fluor's operating
5 plans, budgets and forecasts and reports of actual operations
6 compared thereto), conversations and connections with other
7 corporate officers and employees, attendance at management meetings
8 and via reports and other information provided to him in connection
9 therewith. Defendant Stein personally profited from his
10 participation in the fraudulent scheme by receiving millions of
11 dollars in special incentive and bonus compensation in F96 by
12 artificially inflating Fluor's reported profits and stock price.
13 (f) Defendant J. Michael Conaway ("Conaway") is Senior
14 Vice President and Chief Financial Officer of Fluor. Conaway had
15 access to the adverse non-public information about Fluor's business
16 and finances via access to internal corporate documents (including .
17 Fluor's operating plans, budgets and forecasts and reports of
18 actual operations compared thereto), conversations and connections
19 with other corporate officers and employees, attendance at
20 management and Board of Directors' meetings and committees thereof
21 and via reports and other information provided to him in connection
22 therewith. Defendant Conaway personally profited from his parti-
23 cipation in the fraudulent scheme by receiving millions of dollars
24, in special incentive and bonus compensation in F96 by artificially
25 inflating Fluor's reported profits and stock price.
26 (g) Defendant James 0. Rollins ("Rollins") is Senior
27 Vice President and Chief Administration Officer of Fluor. Rollins
28 had access to the adverse non-public information about Fluor's
- 17 -
1 business and finances via access to internal corporate documents
2 (including Fluor's operating plans, budgets and forecasts and
3 reports of actual operations compared thereto), conversations and
4 connections with other corporate officers and employees, attendance
5 at management and Board of Directors' meetings and committees
6 thereof and via reports and other information provided to him in
7 connection therewith. Defendant Rollins personally profited from
8 his participation in the fraudulent scheme by receiving millions of
9 dollars in special incentive and bonus compensation in F96 by
10 artificially inflating Fluor's reported profits and stock price.
11 (h) The defendants named in ¶16(a)-(g) are referenced
12 herein as the "Individual Defendants."
13 17. By reason of his stock ownership, management position,
14 and membership on Fluor's Board of Directors,' and his ability to
15 make public statements in the name of Fluor, McCraw was a
16 controlling person and had the power and influence to cause Fluor
17 to engage in the unlawful conduct complained of herein. Because of
18 their Board membership and/or executive and managerial positions
19 with Fluor, each of the Individual Defendants had access to the
20 adverse non-public information about the business, finances,
21 products, markets and present and future business prospects of
22 Fluor particularized herein via access to internal corporate
23 documents, conversations or connections with corporate officers or
24 employees, attendance at management and/or Board of Directors'
25 meetings and committees thereof and/or via reports and other
26 information provided to them in connection therewith.
27 18. Defendants had a duty to promptly disseminate accurate
28 and truthful information with respect to Fluor's operations and
- 18 -
1 financial condition or to cause and direct that such information be
2 disseminated and to promptly correct any previously disseminated
3 information that was misleading to the market. As a result of
4 their failure to do so, the value of Fluor common stock was
5 artificially inflated during the Class Period, damaging plaintiff
6 and the Class.
7 19. The Individual Defendants, because of their positions
8 with Fluor, controlled the contents of quarterly and annual
9 reports, press releases and presentations to securities analysts.
10 Each Individual Defendant was provided with copies of the reports
11 and press releases alleged herein to be misleading prior to or
12 shortly after their issuance and had the ability and opportunity to
13. prevent their issuance or cause them to be corrected. Because of
14 their positions and access to material non-public information
15 available to them but not the public, each of these defendants knew
16 or recklessly disregarded that the adverse facts specified herein
17 had not been disclosed to and were being concealed from the public
18 and that the positive representations which were being made were
19 then false and misleading. As a result, each of the Individual
20 Defendants is responsible for the accuracy of Fluor's 4thQ F96 and
21 F96 financial statements and the corporate reports, filings and
22 releases detailed herein at ¶133, 36, 37, 40, 44, 49, 61 and 63 as
23 "group-published" information and is therefore responsible and
24 liable for the representations contained therein.
25 20. Each of the defendants is liable as a primary violator in
26 making false and misleading statements, and for participating in a
27 fraudulent scheme and course of business that operated as a fraud
28 or deceit on purchasers of Fluor stock during the Class Period.
- 19 -
1 All of the defendants pursued a fraudulent scheme in furtherance of
2 their common goal, i.e., inflating the reported profits of Fluor
3 and the trading price of Fluor stock by making false and misleading
4 statements and concealing material adverse information. The
5 fraudulent scheme and course of business was designed to and did:
6 (i) deceive the investing public, including plaintiff and other
7 Class members; (ii) artificially inflate the price of Fluor stock
8 during the Class Period; (iii) cause plaintiff and other members of
9 the Class to purchase Fluor stock at inflated prices; and (iv)
10 conceal and coverup the Individual Defendants' mismanagement of
11 Fluor, including their disastrous "reengineering" of the Fluor
12 Daniel E&C unit; (v) increase the value, of options to purchase
13 Fluor stock owned by the Individual Defendants, as well as their
14 own Fluor shareholdings; and (vi) permit them to collect millions
15 of dollars in unjustified bonus and special incentive compensation
16 and thus personally profit from the fraudulent scheme and course of
17 business they were pursuing and participating in.
18 MOTIVE AND OPPORTUNITY
19 21. Each defendant had the opportunity to commit and partici-
20 pate in the fraud described herein. The Individual Defendants were
21 top officers and directors of Fluor and they controlled the
22 Company's press releases, corporate reports, SEC filings and/or
23 communications with analysts, as well as the preparation of its
24 financial statements. Thus, they controlled the public
25 dissemination of, and could falsify, the information about Fluor's
26 business and products that reached the public and impacted the
27 price of Fluor stock. Also, because Fluor's Fluor Daniel E&C unit
28 was its most important source of revenue and profit growth, Fluor's
-20-
1 financial future was very much dependent upon the success of its
2 Fluor Daniel E&C business, which was by far the largest part of
3 Fluor's business. Fluor's top executives were fully aware of the
4 problems with Fluor's Fluor Daniel E&C unit's business as they were
5 vitally concerned with how the re-engineering and vast expansion of
6 that business, was working out and, as hands-on managers, they were
7 aware of the serious problems in the Fluor Daniel E&C unit as
8 alleged herein.
9 22. The Individual Defendants, because of their positions
10 with the Company, controlled and/or possessed the power and
11 authority to control the contents of its quarterly and annual
12 reports, press releases and presentations to securities analysts
13 and thereby the investing public. Each defendant was provided with
14 copies of the Company's reports and press releases alleged herein
15 to be misleading prior to or shortly after their issuance and had
16 the ability and opportunity to prevent their issuance or cause them
17 to be corrected. Because of their positions and access to material
18 non-public information available to them but not to the public,
19 each of these defendants knew or recklessly disregarded that the
20 adverse facts specified herein had not been disclosed to and were
21 being concealed from the public and that the positive representa-
22 tions which were being made were then materially false and
23 misleading.
24 23. Each of the Individual Defendants also had the motive to
25 commit and participate in the fraud. The defendants' motive to
26 engage in this conduct included a desire to inflate the price of
27 Fluor stock and to cause it to report inflated profits to: (i)
28 cover up and conceal their mismanagement of Fluor, including the
- 21 -
1 disastrous re-engineering, restructuring and expansion of the Fluor
2 Daniel E&C unit which they conceived and implemented, thus
3 protecting and enhancing their executive positions and the
4 substantial compensation and prestige they obtained thereby; (ii)
5 enhance the value of their holdings of Fluor stock and/or options
6 to purchase Fluor stock; (iii) inflate Fluor's reported profits and
7 stock price of Fluor in order to obtain larger payments under the
8 Company's unique executive bonus compensation plan; and (iv) permit
9 Fluor to complete a $200-$400 million offering of debt securities
10 on more favorable terms if the price of Fluor stock could be
11 inflated long enough, at high enough levels, to complete the debt
12 offering before the revelations of Feb. 18, 1997 took place.
13 24. Fluor's 1996 Proxy described the direct hands-on
14 involvement of Fluor's top executives in the day-to-day operation
15 of the Fluor Daniel E&C unit and Fluor's unique executive incentive
16 compensation program:
17 [T]he Company made substantial changes in its management
18 and organizational structure during fiscal 1994 . . . .
19 A Leadership Team, which consists of all of the Company's
20 executive officers, is focused on overall Company
21 performance and monitors the progress of the operating
22 units in relation to their strategic and operating
23 objectives. . . .
24 . . . The Company's executive compensation program
25 consists of three main components: (1) base salary; (2)
26 potential for an annual bonus based on overall Company
27 performance as well as individual performance; and (3)
28 the opportunity to earn long-term cash and stock-based
- 22 -
1 incentives which are intended to encourage the
2 achievement of superior results over time . . . . [T]he
3 Company . . . has adopted stock ownership tarqets for its
4 officers. These target guidelines are intended to
5 encourage stock ownership by the company's management
6 group. . . .
7 . . . Total compensation is . . . based upon stock price
8 appreciation and achievement of earnings exceeding target
9 levels, with the potential for additional compensation
10 for extraordinary performance as measured by the achieve-
11 ment of specific earnings growth and/or stock price
12 oblectives set by this Committee.
13 Under the Company's Executive Incentive Compensation
14 Plan . . bonuses may not be paid unless net earnings,
15 excluding extraordinary, unusual or infrequently
16 occurring items, exceed a return on average stockholders'
17 equity that is calculated on the basis of average yield
18 for the year on one year United States Treasury
19 Bills. . . .
20 All Leadership Team members participate in the
21 Company's long-term incentive program. This program's
22 primary purpose is to offer an incentive for the
23 achievement of superior operating results . . . .
24 Under the long-term incentive program, the Committee
25 each year may make grants of the following: (a) cash
26 incentive awards which are based upon meeting three-year
27 earnings targets established by the Committee; (b) stock
28 options which become exercisable over a four year period
- 23 -
1 and which have value only if shareholder value is
2 increased and (c) restricted stock which may be awarded
3 only if return on equity targets are achieved. The
4 weighing of awards between the earnings-based cash
5 portion and the stock portion is primarily a function of
6 responsibility with the more senior executives having a
7 greater portion of their awards dependent on stock
8 performance. The 1995 awards to Mr. McCraw and other
9 Leadership Team members were based on placing each of
10 their total compensation levels in the mid-range of the
11 general industry group if target performance was
12 achieved. To achieve higher than mid-range compensation
13 up to the 75th percentile range would require performance
14 in excess of the established targets. Also for 1995,
15 participating Leadership Team members received a payout
16 of a previously granted cash incentive award which was
17 based upon achieving 108% of the target amount for fiscal
18 1993 through 1995 earnings performance.
19 [E]arly in fiscal 1995, a new Director's Achievement
20 Award Program was . . . approved by the Board. The
21 program provides for performance-contingent cash and
22 stock-based awards for members of the Leadership Team
23 which become payable only if the very aggressive earnings
24 growth and stock price performance goals established by
25 this Committee are achieved within a limited time frame.
26 25. The very large compensation of Fluor executives based on
27 their meeting earnings targets and pushing up Fluor's stock price
28 received particular attention from the financial press, which was
- 24 -
1 reported in 1996 and 1997. On Feb. 20, 1996, the Dow Jones News
2 Service reported:
3 Fluor Corp. is seeking to change its long-term
4 stock-incentive plan by increasing the number of shares
5 available for stock options or restricted stock awards.
6 In a proxy statement filed with the Securities and
7 Exchange Commission, the company said it has asked
8 shareholders to approve making available an additional 4
9 million shares for the exercise of options or the award
10 of restricted stock.
11 * * *
12 Separately, Chairman and Chief Executive Leslie G.
13 McCraw received a 1995 bonus of $840,000 in addition to
14 his $754,800 salary, up from his 1994 bonus of $700,000
15 and salary of $710,061. McCraw was also granted $159,794
16 worth of restricted company stock, down substantially
17 from $488,019 in 1994.
18 Hugh K. Coble, the company's vice chairman, was paid
19 $720,020 in 1995 salary and bonus, up from $690,020 in
20 1994. His restricted-stock award jumped to $379,427 from
21 $209,028.
22 26. In early 1997, The Los Angeles Times reported:
23 Fluor Corp., whose annual profit rose nearly 16% to
24 a record $268.1 million in 1996, rewarded Chairman and
25 Chief Executive Leslie G. McCraw with a 15% hike in his
26 annual salary and bonus that pushed his basic pay package
27 to lust over $1.8 million.
28
- 25 -
1 McCraw also received nearly $2.8 million worth of
2 stock and stock options, a payout of $464,160 under the
3 company's loncf-term compensation plan, and a company-paid
4 income tax benefit worth $219,133, bringing his total
5 compensation for the year to $5.3 million . . . .
6 * * *
7 Hugh K. Coble, Fluor's vice chairman, received a
8 $420,000 base salary, up 5% from 1995; a $340,000 bonus
9 that was up 6.25% for the year; $1.4 million in
10 restricted stock and stock options; $198,722 in long-term
11 compensation; and a $99,266 income tax benefit.
12 * * *
13 Fluor paid chief administrative officer J.O. Rollans
14 [sic] a $360,000 salary in 1996, up 7.5%. He also
15 received a $295,000 bonus that was 5% above last year's,
16 stock options and restricted shares worth $513,000,
17 $130,259 in long term compensation and a $56,393 tax
18 benefit.
19 * * *
20 [T]he list of highly paid executives with a salary of
21 $325,020 that was 6.5% above last year's and a $235,000
22 bonus that was up 6.8%. Stock options and restricted
23 shares were worth $276,799 to Stein, who also received
24 $154,334 in long-term compensation and a $32,638 tax
25 benefit.
26 27. In fact, when Fluor reported its 1stQ F96 results in Feb.
27 1996, one of the reasons those results were somewhat below Street
28 expectations was the large amount of bonus and incentive compensa-
- 26 -
,
1 tion paid to Fluor executives during that quarter based on Fluor's
2 F95 results and stock price appreciation. Analysts wrote:
3 The strength of FLR's stock price, which closed the
4 quarter at $67 per share, caused an additional $3 million
5 accrual related to the company's . stock incentive
6 compensation program (including its stock appreciation
7 rights plan) which is designed to better align manage-
8 ment's compensation with stock price performance. This
9 additional accrual impacted earnings by more than 2 cents
10 per share.
11 * * *
12 [C]orporate G&A of $13.3 million included about $3.0
13 million ($0.02 of EPS) of stock price-related compensa-
14 tion adiustments (2/3 tied to stock appreciation rights).
15 In essence, each $1 increase in FLR's stock price causes
16 roughly a $300,000 incremental pretax expense for FLR.
17 Thus, tying management compensation to the stock price
18 has its downside as well.
19 28. Thus, Fluor's top executives were uniquely motivated to
20 cause Fluor to conceal, and avoid recognizing, losses on its Taft,
21 Louisiana and Rabigh, Saudi Arabia construction projects, as well
22 as other Fluor Daniel E&C construction projects during F96, so that
23 Fluor would appear to achieve certain earnings targets and so its
24 stock would trade at high levels and they could receive the huge
25 bonus compensation available to them (and which they wanted). Very
26 few other public companies have a compensation program by which the
27 compensation of its top executives is directly tied to the
28 quarterly price performance of the company's stock or where extra
- 27 -
1 bonus compensation is paid for reaching extra-aggressive earnings
2 goals, as such compensation structure obviously incentivizes top
3 executives to make false and misleading statements to push the
4 company's stock higher and to conceal adverse information from the
5 markets for the same reason and also incentivizes them to
6 manipulate the company's earnings so that the reported earnings
7 will reach targeted levels and enable them to pocket huge bonuses.
8 STATUTORY SAFE HARBOR
9 29. The federal statutory safe harbor provided for forward-
10 looking statements under certain circumstances does not apply to
11 any of the allegedly false statements pleaded in this Complaint.
12 Further, none of the statements pleaded at 11[33-41, 43-45 and 48-51
13 that were forward-looking statements were identified as "forward-
14 looking statements" when made. Nor was it stated that actual
15 results "could differ materially from those projected." Nor were
16 the forward-looking statements made in IT33-41, 43-45 and 48-51
17 accompanied by meaningful cautionary statements identifying
18 important factors that could cause actual results to differ
19 materially from the statements made therein. Defendants are liable
20 for the forward-looking statements in TT33-41, 43-45 and 48-51
21 because, at the time each of those forward-looking statements was
22 made, the speaker knew the forward-looking statement was false and
23 the forward-looking statement was authorized and/or approved by an
24 executive officer of Fluor who knew that those statements were
25 false when made.
26 EVENTS LEADING UP TO THE CLASS PERIOD
27 30. By the outset of the Class Period in May 1996, Fluor had
28 been publicly discussing the impact of the re-engineering,
- 28 -
1 expansion and decentralization of its Fluor Daniel E&C unit for
2 about two years.
3 31. (a) Fluor's 1994 Annual Report discussed the "re-
4 engineering" of Fluor's Fluor Daniel E&C unit in glowing terms:
5 • A major reengineering effort was initiated through-
6 out Fluor Daniel. Both organizational structures and
7 work processes were streamlined to . . . reduce
8 costs . . . .
9 * * *
10 Two senior levels of [management] structure were
11 eliminated. An organization was put in place to
12 capitalize on our vast industry and geographic diversity.
13 Senior executives were reassigned based on their unique
14 skills and experience. . . . This decentralized approach
15 allows us to make better decisions . . . .
16 Elsewhere, Fluor's 1994 Annual Report stated:
17 What Changes Are Being Made To Ensure Continued Success?
18 This is where the reengineering that we announced in
19 1994 primarily applies. We have made a number of
20 structural changes to flatten the organization, making it
21 more effective . . . .
22 (b) Fluor's F95 Annual Report again discussed the Fluor
23 Daniel E&C re-engineering and restructuring, stating:
24 Speaking for both the Leadership Team and the board
25 of directors, I am delighted to report to you that your
26 company has completed the best year in its 106-year
27 history! Net earnings advanced 20 percent over last
28 year's record performance to $232 million or $2.78 per
- 29 -
1 share. This marks the eighth year that earnings from
2 continuing operations have grown on average 15 percent or
3 better. Let me quickly add that, in spite of this record
4 performance, our team believes that we've only scratched
5 the surface of our future potential!
6 * * *
7 In last year's report, we talked about some of the
8 cultural and structural changes we were making in order
9 to improve our performance in a quantum way. We said
10 these changes were being implemented in order to ensure
11 we would be well positioned to capitalize on the wealth
12 of business opportunities we saw ahead of us -- not only
13 for the balance of this decade, but well into the next
14 century. We've seen some gratifying progress . . . .
15 Elsewhere, Fluor's 1995 Annual Report stated:
16 Fluor has achieved consistent growth with earnings
17 from continuing operations growing on average 15 percent
18 or better for the past eight years.
19 * * *
20 At Fluor, we believe we've put a winning strategy in
21 place and have done so during a time when we are already
22 achieving great success.
23 * * *
24 Engineering, Construction and Diversified Services
25 In 1995, Fluor Daniel experienced its eighth
26 consecutive year of double-digit earnings growth.
27 Operating profit was a record $286 million, up 10
28 percent. The improvement in profit margins and earnings
- 30 -
1 was moderated by heavy investments for expansion and
2 strategic business development to enhance future growth
3 . . . and the outlook for new business remains strong.
4 Fluor Daniel's strategy of diversification is
5 designed to expand the company's growth potential . . . .
6 Our broad diversity provides a wide range of oppor-
7 tunities which allow us to be selective in pursuing
8 projects which offer the best return on our resources and
9 where we have a competitive advantage. . . . Addi-
10 tionally, our global network is enhancing our cost
11 competitiveness by allowing greater use of high-value
12 engineering centers located in low-cost areas of the
13 world.
14 32. (a) Thus, during F94-F95, Fluor had reported increasing
15 earnings which had reached all-time record levels and its common
16 stock had advanced to an all-time high of $71 per share in March
17 1996. Fluor had repeatedly told the markets that the restructuring
18 and expansion of its Fluor Daniel E&C unit had succeeded, that the
19 decentralization of its management structure had led to increased
20 efficiencies and competitiveness, that Fluor Daniel was being
21 selective in accepting contracts to ensure only accepting jobs that
22 provided an adequate profitable return, and that the increased
23 spending on Fluor Daniel E&C unit's infrastructure, while
24 moderating the profit growth of that unit, was under control and
25 resulting in the Fluor Daniel E&C unit receiving an increasing
26 number of large contract awards around the world that would result
27 in strong revenue growth, leading to increased EPS and Fluor
28 meeting its target of ongoing EPS growth of 15%-20% per year.
- 31 -
1 Thus, by the Spring of 1996, there was no reason for anyone outside
2 of Fluor to believe that Fluor's re-engineering, expansion and
3 decentralization of its Fluor Daniel E&C unit was anything other
4 than a success.
5 (b) However, in the Spring of 1996, Fluor's stock fell
6 from its all-time high of $71-1/2 on March 13, 1996, to as low as
7 $60 per share on May 8, 1996, due to investor concerns that the
8 increasing costs of Fluor's Fluor Daniel E&C unit might penalize
9 that unit's earnings growth to such an extent that it would prevent
10 Fluor from achieving its 15%-20% EPS growth goal going forward.
11 This stock price decline caused great concern to Fluor's top
12 executives, as that decline jeopardized their ability to get
13 special bonus incentive compensation in F96 like they did in F95.
14 Thus, they "leaked" to the market that Fluor's 2ndQ F96 results
15 would be good and when they announced Fluor's 2ndQ F96 results on
16 May 22, 1996, Fluor's top executives were determined to put a very
17 positive spin on those results, to further convince the market that
18 all was well at Fluor, especially at its Fluor Daniel E&C unit, and
19 to thus drive its stock price higher.
20 FALSE AND MISLEADING STATEMENTSDURING THE CLASS PERIOD
2133. On May 22, 1996, Fluor announced its results for the 2ndQ
22F96, i.e., the three months ended April 30, 1996, via a release
23that stated:
24Fluor Corporation today announced net earnings
25increased 15 percent to $63.7 million, or 75 cents per
26share, for the second quarter ended April 30, 1996,
27compared with $55.3 million, or 66 cents per share for
28
- 32 -
1 the same period a year ago. Revenues advanced 16 percent
2 to $2.6 billion compared with $2.2 billion in the second
3 quarter of 1995.
4 For the first six months of 1996, net earnings were
5 $121.1 million, or $1.43 per share, an increase of 15
6 percent compared with $105.6 million, or $1.27 per share,
7 for the same period in 1995. Revenues for the first half
8 of 1996 increased 16 percent to $5.0 billion compared
9 with $4.3 billion a year ago.
10 Fluor Daniel, the company's core engineering,
11 construction and diversified services business, increased
12 operating profits by 7 percent in the second quarter and
13 11 percent through the first half of 1996, compared with
14 the same periods last year. Fluor Daniel's profit margin
15 and earnings growth were moderated by extensive marketing
16 and proposal costs. These expenditures, which are
17 recognized as they are incurred, reflect strong business
18 opportunities across numerous global markets. New
19 engineering and construction awards for the second
20 quarter increased 9 percent to $3,0 billion, compared
21 with $2.7 billion a year ago. Through the first six
22 months, new awards were $6.0 billion, up 20 percent over
23 the same period in 1995. Backlog rose 7 percent to $15.4
24 billion compared with $14.4 billion last year.
25 * * *
26 Les McCraw, Chairman and Chief Executive Officer of
27 Fluor Corporation, said: "The prospects for continued
28 growth by . . . Fluor Daniel . . . remain encouraging.
- 33 -
1 • • • The industry and geographic breadth of Fluor
2 Daniel's technical services has positioned us to
3 capitalize on these global business opportunities.
4 34. Subsequent to the release of Fluor's 2ndQ F96 results,
5 Fluor held a conference call for securities analysts, money and
6 portfolio managers, institutional investors, large Fluor share-
7 holders and stock traders to discuss Fluor's business. During the
8 call, McCraw, Conaway and Stein made presentations and answered
9 questions, directly disseminating important information to the
10 market, by stating:
11 • Fluor Daniel E&C unit's business was very strong and,
12 while its profit margins were slightly lower than expected,
13 this was due to aggressive marketing and proposal costs that
14 were resulting in an increasing number of contract awards and
15 would lead to accelerating EPS growth, especially during F97.
16 • The Fluor Daniel E&C unit was not pursuing "growth for
17 growth's sake" and was being selective in accepting contracts
18 only if they provided a realistic opportunity for significant
19 profits.
20 • The Fluor Daniel E&C unit was not encountering any
21 serious problems on any of its major construction projects.
22 • Corporate expenses and overhead were under control and
23 Fluor was on track for strong EPS growth meeting its stated
24 15%-20% goal.
25 • Fluor Daniel E&C unit's profit margins would increase
26 during the balance of F96 and during F97, as results would
27 benefit from the completion of several large profitable
28 projects.
- 34 -
1 • Fluor's realignment and decentralization of its Fluor -
2 Daniel E&C unit was continuing to produce positive results.
3 • Fluor expected to achieve 15%-20% EPS growth in F97 over
4 F96, with F97 EPS to reach $3.60-$3.75 per share.
5 35. On June 12, 1996, Fluor held a meeting for analysts in
6 New York City during which Fluor senior executives McCraw, Coble,
7 Conaway and Stein made presentations about Fluor's business,
8 reviewed Fluor's first half F96 results, discussed the trends of
9 Fluor's business and answered questions. The presentations were
10 very positive. The executives directly disseminated important
11 information to the market during this conference by stating:
12 • Fluor's realignment and reorganization of its Fluor
13 Daniel E&C unit had succeeded.
14 • Fluor's Fluor Daniel E&C business was very strong and
- 15 benefiting from strong business conditions.
16 • Fluor Daniel. was making progress in controlling its
17 overhead costs, and as a result, Fluor's EPS growth would
18 accelerate in the second half of F96 and during F97.
19 • Fluor Daniel E&C unit's high bidding and marketing costs
20 were paying off in the award trend of an increasing number of
21 large contracts that would contribute to strong EPS growth in
22 F97.
23 • The Fluor Daniel E&C unit was being selective in
24 accepting contracts only if they provided a realistic
25 opportunity for significant profits.
26 • Fluor was on target to continue to meet its EPS growth
27 objective of 15%-20% due to the strength of its Fluor Daniel
28 E&C business.
- 35 -
1 • Analysts' estimates of F97 EPS of $3.60-$3.75 were
2 reasonable and management was comfortable with those
3 estimates.
4 36. During the Class Period through approximately Oct. 1996,
5 Fluor repeatedly publicly distributed a "FACTCARD" entitled "Fluor
6 -- Sustaining Dynamic Global Growth," which stated:
7 As one of the world's largest engineering, construction
8 and diversified services firms, Fluor is positioned to
9 benefit significantly from this growth. Having demon-
10 strated the success of its diversification strategy with
11 eight years of consistent rapid growth, Fluor is now
12 implementing additional actions to ensure continuing
13 growth into the future.
14 The "FACTCARD" also stated:
15 Reasons To Invest In Fluor
16 * * *
17 • Pursuing a clearly defined diversification strategy
18 with the objective of generating consistent earnings
19 growth at high levels of return on equity.
20 * * *
21 • Highly respected management team motivated by Pay-
22 for-performance incentive program.
23 • Proven track record; earnings from continuing
24 operations have grown on average 15% or better for the
25 past 8 years.
26
27
28
- 36 -
1 The "FACTCARD" also stated:
2 Strategic Priorities
3 • Superior financial performance that consistently
4 ranks Fluor in the top quartile of the S&P 500 in terms
5 of earnings growth, return on shareholder equity and
6 balance sheet strength.
7 * * *
8 • More aggressive use of Fluor's financial strength in
9 a variety of areas to enhance the capability to deliver
10 sustained, dynamic growth.
11 37. On July 1, 1996, Fluor issued its mid-year F96 report
12 which included a letter signed by McCraw and stated:
13 Your company's net earnings through the first half
14 of this year increased 15 percent to $121 million, or
15 $1.43 per share, compared with $106 million, or $1.27 per
16 share, for the same period in 1995. Revenues for the six
17 months were $5 billion, up 16 percent from $4.3 billion
18 last year.
19 * * *
20 Fluor Daniel New Awards Advance 20 Percent, Global Market
21 Potential Remains Strong
22 Operating profits for Fluor Daniel, the company's.
23 core engineering, construction and diversified services
24 business, were up 11 percent for the first six months of
25 1996 compared with the same period a year ago, primarily
26 due to a higher volume of work performed. New awards for
27 the first six months were $6 billion, up 20 percent
28 compared with $5 billion for the same period last year.
- 37 -
1 At the end of the first half of 1996, backlog was $15.4
2 billion, up 7 percent from a year ago.
3 The global outlook for new capital investment is
4 strong and continues to generate significant potential
5 for Fluor Daniel. In particular, strong economic growth
6 and investment in the developing economies of Asia
7 Pacific and Latin America offer significant opportunities
8 for major capital projects. Because of the current
9 strength of the diverse markets we serve, extensive
10 marketing and proposal costs were incurred during the
11 first half of the year. This moderated Fluor Daniel's
12 profit margin and earnings growth for the period. These
13 investments in securing future business are expected to
14 further enhance Fluor Daniel's growth potential in the
15 future.
16 The outlook for Fluor Daniel's Process Group remains
17 strong. Continuing growth in demand for basic energy and
18 chemicals to fuel the developing economies of Asia
19 Pacific is driving expanding opportunities.
20 * * *
21 Prospects for Continued Growth Remain Strong
22 I'm happy to report that our prospects for the
23 balance of this year and beyond remain strong. . . . Our
24 financial performance through the first half of the year
25 also contributes to continuing confidence in our princi-
2 6 pal strategies for long-term growth. Extending our
27 diversification into new growth markets and expansion of
28
- 38 -
1 services remain the cornerstone for achieving our
2 continuing growth oblectives.
3 38. In the week prior to July 17, 1996, McCraw, Coble and
4 Conaway had conversations with Marc Sulam of Donaldson, Lufkin &
5 Jenrette Securities Corp. ("DLJ") to provide him with information
6 about Fluor for a report he was writing, intending and anticipating
7 that the information they gave him would reach the market. Sulam
8 provided a draft of his report to Fluor prior to issuing it and
9 Fluor assured him the report was accurate. On July 17, 1996, DLJ
10 issued its report on Fluor, written by Sulam. The report repeated
11 information those Fluor executives had provided Sulam, including a
12 forecast of F97 EPS of $3.70 and stated:
13 From our recent conversations with management, new order
14 rates are on track with first half levels of $3 billion
15 per quarter as activity levels, particularly in the
16 developing world remains encouraging. Given the
17 diversity of FLR's end markets and geographic exposure,
18 we expect that backlog will continue to expand in the
19 second half.
20 In its upcoming fiscal third quarter, which will be
21 reported on August 21, management remains comfortable
22 with the lower end of the 80-87 cent estimated range.
23 Our estimate is $0.82 compared with $0.72, a 14% year-
24 over-year growth. However, management also remains
25 comfortable with consensus estimates of $3.20 for fiscal
26 1996, implying a significant step-up in earnings in the
27 fourth quarter to the 93-95 cent range, an increase of
28 18-20%. This incremental growth will be driven by:
- 39 -
1 * * *
2 • the completion of several construction projects that
3 include profit incentives, which are realized at the end
4 of a project upon completion;
5 • a moderation of business development activities
6 which have been penalizing earnings for the past several
7 quarters.
8 39. Shortly after Aug. 15, 1996, Smith Barney analyst T.M.
9 Levkovich communicated with Conaway and McCraw of Fluor, who
10 provided him with information about Fluor for a report he was
11 preparing on Fluor, intending and anticipating that the information
12 they provided him would reach the market. They told him that they
13 were "comfortable" with a F97 EPS forecast of $3.75 because of the
14 strength of Fluor Daniel E&C unit's business. on Aug. 15, 1996,
15 Levkovich and Smith Barney issued a report on Fluor forecasting F97
16 EPS of $3.75, and an EPS growth rate of 15%.
17 40. On Aug. 21, 1996, Fluor reported 3rdQ F96 results for the
18 quarter ended July 31, 1996, via a release which stated:
19 Fluor Corporation today announced net earnings for
20 the third quarter ended July 31, 1996, of $68.1 million,
21 or 81 cents per share, a 13 percent increase compared
22 with $60.2 million, or 72 cents per share, for the same
23 quarter last year. . . .
24 For the first nine months of this year, net earnings
25 were $189.2 million, or $2.24 per share, an increase of
26 14 percent compared with $165.8 million, or $1.99 per
27 share, for the same period last year. . . .
28
- 40 -
1 Fluor Daniel, the company's core engineering,
2 construction and diversified services business, increased
3 its operating profits by 9 percent in the third quarter
4 and 10 percent through the first nine months of this
5 fiscal year, compared with the same periods a year ago.
6 Fluor Daniel's profit margins and earnings growth
7 continued to be moderated by higher levels of ongoing
8 investment spending for expansion and strategic business
9 development which were expensed to the current period.
10 Les McCraw, Chairman and Chief Executive Officer,
11 said, "The investment spending is focused on expanding
12 our market potential to help us achieve our goal to
13 accelerate earnings growth. The positive impact of these
14 investments can already be seen in the increasing rate of
15 new awards this year."
16 New engineering and construction awards for the
17 third quarter were $3.1 billion, up 19 percent over $2.6
18 billion last year. Through the first nine months, new
19 awards totaled $9.1 billion, 20 percent ahead of the same
20 period a year ago. Backlog rose 7 percent to $15.6
21 billion, compared with $14.5 billion in 1995.
22 "New business opportunities have been strong across
23 a number of geographic markets and industries, which
24 supports our strategy to further enhance the diversity of
25 our backlog," said McCraw. "We are seeing strength in
26 both large and smaller project opportunities."
27 41. Subsequent to releasing Fluor's 3rdQ F96 results Fluor
28 held a conference call for securities analysts, money and portfolio
- 41 -
1 managers, institutional investors, large Fluor stockholders and
2 stock traders. During that call, McCraw, Conaway, Coble and Stein
3 made presentations and answered questions, directly disseminating
4 the following information to the market:
5 • Fluor's business strategy was working; its Fluor Daniel
6 E&C business was very strong and its increased overhead costs
7 were under control, resulting in large new contract awards
8 that would lead to accelerating EPS growth for Fluor in F97.
9 • Fluor remained on track to meet its 15%-20% EPS growth
10 target going forward.
11 • While Fluor's high spending on infrastructure to pursue
12 large projects in developing markets constrained its EPS
13 growth, Fluor Daniel E&C unit's expenses were under control
14 and that unit's earnings growth would exceed 15% in future
15 quarters, including, during F97.
16 • Fluor Daniel E&C unit was not pursuing "growth for
17 growth's sake" and was being selective in accepting contracts
18 only if they provided a realistic opportunity for significant
19 profits.
20 • Fluor was not encountering any serious problems on any of
21 its major construction projects.
22 • Fluor remained "comfortable" with F97 EPS forecast of
23 $3.60-$3.75 per share.
24 42. The positive, optimistic statements made by defendants
25 during May 22, 1996 through Aug. 21, 1996, were each false and•
26 misleading statements when made. The true facts, including the
27 following adverse internal conditions at Fluor which contradicted
28
- 42 -
1 their positive/optimistic public statements and were known to each
2 of the Individual Defendants, were:
3 (a) That Fluor's Fluor Daniel E&C unit had encountered
4 a huge cost overrun on its Taft, Louisiana power plant project,
5 which exceeded $20 million by May1996, and would result in a major
6 loss on that project;
7 (b) That Fluor's Fluor Daniel E&C unit had encountered
8 a major cost overrun on its Rabigh, Saudi Arabia power plant
9 project, which exceeded $30 million by May 1996, and would result
10 in Fluor's suffering a major loss on that project;
11 (c) That Fluor's Fluor Daniel E&C unit was suffering
12 from losses exceeding $25 million on other construction projects;
13 (d) That Fluor had been concealing the troubled nature
14 of a large number of projects in its Fluor Daniel E&C unit and the
15 true adverse impact of that unit's excessive costs and overhead by
16 aggressively recording income from its Rayong,. Thailand project
17 earlier and in amounts larger than was consistent with its stated
18 conservative profit recognition practices with respect to large
19 construction projects;
20 (e) That Fluor's decentralized Fluor Daniel E&C unit's
21 management structure did not have in place adequate internal
22 controls and management information systems to enable top manage-
23 ment to detect losses on large projects at an early stage when
24 senior management intervention could have minimized or limited
25 those losses and, as a result, by the time top management learned
26 of the losses being suffered at the Taft, Louisiana and Rabigh,
27 Saudi Arabia projects in May-June 1996, they already exceeded $50
28 million and were escalating rapidly;
- 43 -
1 (f) That Fluor's rapid expansion of its Fluor Daniel E&C
2 unit and utilization of a decentralized management structure had
3 failed and, as a result, the Fluor Daniel E&C unit's costs had
4 escalated out of control which was having an adverse impact on that
5 unit's actual results;
6 (g) That overhead costs at Fluor's Fluor Daniel E&C unit
7 had escalated out of control and were resulting in a serious
8 adverse impact on Fluor Daniel's results from operations;
9 (h) In order to try to absorb the rapidly escalating
10 overhead and bidding "costs" in the Fluor Daniel E&C unit, the
11 Fluor Daniel E&C unit had accepted a large number of contracts on
12 which it could not earn any significant profit and was actually
13 encountering significant and material losses on a number of
14 projects, including the Taft, Louisiana and Rabigh, Saudi Arabia
15 projects;
16 (i) That in order to try to help absorb some of the
17 escalating overhead of its Fluor Daniel E&C unit, Fluor was
18 accepting contract awards which it knew would generate little, if
19 any, profit, just to obtain some revenue and thus justify Fluor
20 Daniel's expansion into certain geographic areas, even though the
21 defendants knew this would have an adverse impact on Fluor's profit
22 margins going forward;
23 (j) That, as a result of the foregoing, defendants
24 actually knew that Fluor could not achieve the 15%-20% growth
25 target it had established, had publicly committed itself to
26 achieving and represented that it was on target to achieve in F97
27 and F98;
28
- 44 -
1 (k) That, as a result of the foregoing, defendants
2 actually knew that Fluor's forecasts of F97 EPS of $3.60-$3.75 and
3 F98 EPS of $4.20 or above were false and could not and would not be
4 achieved, due to the serious problems with the Fluor Daniel E&C
5 unit detailed above; and
6 (1) That, as a result of the foregoing, statements by
7 Fluor's executives that they were "comfortable" with EPS estimates
8 made by analysts of $3.60-$3.65 for F97 and $4.20 for F98 were
9 known by defendants to be false when made, as those earnings gains
10 were unachievable, given the serious problems defendants knew were
11 impacting Fluor's Fluor Daniel E&C unit.
12 43. During the first two weeks of Sept. 1996, McCraw, Coble,
13 Rollins and Conaway communicated with P. Gallot, an analyst with
14 Brown Brothers Harriman & Co. ("Brown Brothers Harriman"), who was
15 preparing a major new report on Fluor, intending and anticipating
16 that the information they gave him would reach the market. They
17 provided Gallot with information for his report. Fluor reviewed a
18 draft of the report before it was issued assuring Gallot that the
19 report was accurate. The Brown Brothers Harriman report, issued
20 Sept. 17, 1996, forecast F97 EPS of $3.70 for Fluor and also
21 repeated the following information which the Fluor executives had
22 earlier provided to Gallot:
23 . . . Fluor has above-average earnings growth prospects
24 over the next several years. We expect Fluor to earn
25 $3.70 per share in the year ending October 31, 1997, up
26 almost 17% from this year's estimated $3.17. For the
27 following year, our EPS estimate is $4.20, which would
28 represent a 14% increase. Both the E&C operation and the
- 45 -
1 coal business should contribute to the company's earnings
2 progress.
3 Fluor Daniel, the E&C operation, continues to grow,
4 particularly in overseas markets. At the end of fiscal
5 1996, it should enjoy a backlog of about $16 billion,
6 more than $1 billion higher than a year earlier with a
7 majority generated outside the U.S. Fluor Daniel has
8 positioned itself well in high growth developing areas,
9 especially the Asia/Pacific region and Latin America.
10 Moreover, the company's presence in diversified services
11 is expanding at a good rate, which will have a positive -
12 impact on overall margins.
13 * * *
14 Solid Double-Digit EPS Growth Likely Both in Fiscal 1997
15 and Fiscal 1998
16 [W]e expect Fluor to earn $3.70 per share in fiscal 1997,
17 up almost 1 .7% from our EPS estimate of $3.17 this fiscal
18 year . . and $4.20 in fiscal 1998 (+11%). . . .
19 Fluor Daniel (91% of the 1996 Estimated Revenues and 72%
20 of Estimated Operating income)
21 Fluor Daniel includes Fluor's core Engineering and
22 Construction (E&C) operation as well as its Diversified
23 Services. Its revenues and operating income have
24 expended meaningfully in recent years as the company's
25 diversification strategy -- both in terms of geographical
26 areas and industries -- has proven quite successful.
27 Chart 3 shows the recent trend as well as our forecasts
28 for the next few years. We note upfront that such
- 46 -
1 forecasts can only be imprecise in such an industry due
2 to the involvement in many long-term projects, the delays
3 and cancellations which plague certain projects and the
4 use of the percentage-of-completion method of accounting.
5 . Four specific characteristics limit this risk in Fluor
6 Daniel's case: sheer size, bidding discipline,
7 conservative booking and accounting practices, and
8 generally excellent project execution.
9 * * *
10 In terms of margins, we expect a gradual improvement
11 over the next couple of years due to progress in the
12 basic E&C business . . . .
13 * * *
14 All in all, we expect an improvement in the
15 operating margin of 10 to 20 basis points in each of the
16 next two years, bringing it closer to 4% of revenues.
17 Such an expectation does not appear unduly aggressive,
18 considering the margins relative to revenues were
19 consistently in the 4% to 5% range in the early 1980s, a
20 time when technology was much less advanced (particularly
21 in the computer-aided design area) and Fluor was not
22 marketing Diversified Services on a standalone basis.
23 * * *
24 An Extremely Experienced Management Team
25 * * *
26 As a whole, Fluor's management team clearly appears
27 to possess a large pool of experience and a great deal of
28 expertise. . . .
- 47
1 Record Earnings, "Rock Solid" Financial Condition
• 2 * * *
3 As we discussed previously, Fluor's streak of earnings
4 records is unlikely to stop anytime soon. Following
5 another successful year in fiscal 1996, we expect above-
6 average double-digit earnings growth in each of the next
7 two years, thanks to top-line growth, margin expansion
8 and positive cash-flow generation at both Fluor Daniel
9 and A.T. Massey. In our view, EPS should rise 17% in
10 fiscal 1997 to $3.70 and another 14% in fiscal 1998 to
11 $4.20.
12 44. On Nov. 20, 1996, Fluor reported its results for the 4thQ
13 of F96 and F96 ended Oct. 31, 1996 via a release that stated:
14 FLUOR ANNOUNCES RECORD EARNINGS FOR 1996
15 Fluor Corporation today announced record net
16 earnings of $268.1 million, or $3.17 per share. For the
17 fiscal year ended October 31, up 16 percent compared with
18 $231.8 million, or $2.78 per share in 1995.
19 * * *
20 Fluor Daniel, the company's core engineering
21 construction and diversified services business, reported
22 operating profits of $320 million, the highest in its
23 history and up 12 percent compared with 1995. This
24 strength was primarily due to an increase in the volume
25 of work performed. These results included expenses to
26 enhance future growth through expansion, market diversi-
27 fication and strategic business development. New awards
28 in 1996 increased 22 percent to a record $12.5 billion
- 48 -
1 compared with $10.3 billion last year. Backlog rose 7
2 percent to $15.8 billion from $14.7 billion in 1995.
3 * * *
4 Les McCraw, chairman and chief executive officer of
5 Fluor Corporation, said, "This is the fourth straight
6 year the company as a whole has surpassed previous
7 historic highs. This performance is consistent with our
8 commitment to achieve superior growth while continuing to
9 expand the company through increased internal invest-
10 ments, acquisitions and capital expenditures. These
11 investments have enhanced our competitiveness and
12 positioned us to capitalize on new business oppor-
13 tunities, which remain strong across many of our global
14 markets."
15 45. Subsequent to releasing its F96 results Fluor held a
16 conference call for securities analysts, money and portfolio
17 managers, institutional investors, large Fluor stockholders and
18 stock traders. During the call, McCraw, Coble, Conaway and Stein
19 made presentations and answered questions during which they
20 directly disseminated to the market important information about
21 Fluor's business and prospects by stating:
22 • Fluor's Fluor Daniel E&C business was strengthening and
23 enjoying robust demand worldwide which would lead to 20%
24 growth in Fluor's Fluor Daniel E&C business in F97, higher
25 than the 15%-17% forecast earlier.
26 • Due to the success of its Fluor Daniel E&C unit, Fluor
27 was increasingly confident of its ability to achieve 15%-20%
28 EPS growth going forward.
- 49 -
1 • Fluor was not encountering any major difficulty with any
2 of its major construction projects.
3 • Fluor expected F97 EPS of $3.60-3.70, with further
4 increases in F98 to over $4.20 EPS.
5 46. The positive, optimistic statements made by defendants
6 during Sept. 1996 through Nov. 1996, were each false and misleading
7 when made. The true facts, including the following adverse
8 internal conditions at Fluor which contradicted their positive/
9 optimistic public statements and were known to each of the
10 Individual Defendants, were:
11 (a) That Fluor's Fluor Daniel E&C unit had encountered
12 a huge cost overrun on its Taft, Louisiana power plant project,
13 which exceeded $40 million by this point in the Class Period and
14 would result in a major Loss on that project;
15 (b) That Fluor's Fluor Daniel E&C unit had encountered
16 a major cost overrun on its Rabigh, Saudi Arabia power plant
17 project, which exceeded $60 million by this point in the Class
18 Period and would result in Fluor's suffering a major loss on that
19 project;
20 (c) That Fluor's Fluor Daniel E&C unit was suffering
21 from losses exceeding $30 million by this point in the Class Period
22 on other construction projects;
23 (d) Fluor was covering up and concealing the losses in
24 its Fluor Daniel E&C unit by aggressively recognizing profits on
25 its Rayong, Thailand refinery project much more aggressively than
26 was consistent with its claimed conservative income recognition
27 practices;
28
- 50 -
1 (e) That Fluor had been concealing the troubled nature
2 of a large number of projects in its Fluor Daniel E&C unit and the
3 true impact of that unit's excessive costs and overhead by
4 aggressively and prematurely recording income from its Rayong,
5 Thailand project earlier and in amounts larger than was consistent
6 with its stated conservative profit recognition practices with
7 respect to large construction projects;
8 (f) That Fluor had materially overstated its net income
9 and EPS for the 4thQ F96 and F96 ended Oct. 31, 1996 by failing to
10 properly recognize in a timely manner the large losses it had then
11 incurred on its Taft, Louisiana and Rabigh, Saudi Arabia projects,
12 as detailed in 11[58-71;
13 (g) That Fluor's decentralized Fluor Daniel E&C unit's
14 management structure did not have in place adequate internal
15 controls and management information systems to enable top
16 management to detect losses on large projects at an early stage
17 when senior management intervention could have minimized or limited
18 those losses and, as a result, by the time top management learned
19 of the losses being suffered at the Taft, Louisiana and Rabigh,
20 Saudi Arabia projects, they already exceeded $50 million and were
21 escalating rapidly;
22 (h) That Fluor's rapid expansion of its Fluor Daniel E&C
23 unit and utilization of a decentralized management structure had
24 failed and, as a result, the Fluor Daniel E&C unit's costs had
25 escalated out of control which was having an adverse impact on that
26 unit's actual results;
27
28
- 51 -
1 (i) That overhead costs at Fluor's Fluor Daniel E&C unit
2 had escalated out of control and were resulting in serious adverse
3 impact on Fluor Daniel's results from operations;
4 (j) In order to try to absorb some of the rapidly
5 escalating overhead and bidding "costs" in the Fluor Daniel E&C
6 unit, the Fluor Daniel E&C unit had accepted a large number of
7 contracts on which it could not earn any significant profit and was
8 actually encountering significant and material losses on a number
9 of projects, including the Taft, Louisiana and Rabigh, Saudi Arabia
10 projects;
11 (k) That in order to try to cover-up the escalating
12 overhead of its Fluor Daniel E&C unit, Fluor was accepting contract
13 awards which it knew would generate little, if any, profit, just to
14 obtain some revenue and thus justify Fluor Daniel's expansion into
15 certain geographic areas, even though the defendants knew this
16 practice would have an adverse impact on Fluor's profit margins
17 going forward;
18 (1) That, as a result of the foregoing, defendants
19 actually knew that Fluor could not achieve the 15%-20% growth
20 target it had established, had publicly committed itself to
21 achieving and represented that it was on target to achieve in F97
22 and F98;
23 (m) That, as a result of the foregoing, defendants
24 actually knew that Fluor's forecasts of F97 EPS of $3.60-$3.70 and
25 F98 EPS of $4.20 or above were false and could not and would not be
26 achieved due to the serious problems defendants knew were impacting
27 Fluor's Fluor Daniel E&C unit; and
28
- 52 -
1 (n) That, as a result of the foregoing, statements by
2 Fluor's executives that they were "comfortable" with EPS estimates
3 made by analysts of $3.60-$3.70 for F97 and $4.20 for F98 were
4 known by defendants to be false when made, as those earnings gains
5 were unachievable, given the serious problems defendants knew were
6 impacting Fluor's Fluor Daniel E&C unit.
7 47. During Oct. through Nov. 1996, Fluor's top executives
8 began working on a $200-$400 million debt offering which they hoped
9 to complete as quickly as possible and before the market learned of
10 the serious problems with Fluor's Fluor Daniel E&C unit and Fluor's
11 diminished earnings prospects. One of the factors used to "price"
12 a debt issue is the issuer's ratio of earnings to fixed charges,
13 which shows the safety of the interest payments on the issuer's
14 debt, and must be disclosed in the Registration Statement and
15 Prospectus. Thus, strong earnings and a strong, positive growth
16 trend are important to an issuer of debt securities. On Dec. 20,
17 1996, Fluor filed a Registration Statement to cover the sale of
18 these debt securities and which would permit the sale of these
19 securities when that Registration Statement became effective which
20 included a ratio of earnings-to-fixed-charges based on Fluor's F96
21 results.
22 48. On Dec. 12, 1996, senior management of Fluor (including
23 McCraw, Coble, Rollins, Conaway and Stein) held breakfast and lunch
24 meetings in New York City to brief securities analysts about
25 Fluor's business and its F97 outlook. On Dec. 13, 1996, the same
26 persons held meetings in Boston with securities analysts and mutual
27 fund investment managers there. During these meetings Fluor's
28
- 53 -
1 management was very bullish and upbeat and directly disseminated
2 important information to the market by stating:
3 • Fluor's Fluor Daniel E&C business continued to strengthen
4 with increased orders and backlog.
5 • The Fluor Daniel E&C unit was not pursuing "growth for
6 growth's sake" and was being selective in accepting contracts
7 only if they provided a realistic opportunity for significant
8 profits.
9 • Fluor's Fluor Daniel E&C unit's decentralized operation
10 and expansion was successful in generating new orders and
11 higher backlog. While overhead costs were somewhat higher
12 than management wanted them to be, those costs were under
13 control, Fluor had put in place a process that would reduce
14 those costs going forward, which would assist Fluor in
15 exceeding its 15%-20% EPS growth target.
16 • Fluor's Fluor Daniel E&C unit's business was
17 strengthening and enjoying robust demand worldwide, which
18 would lead to 20% growth in profits from Fluor's Fluor Daniel
19 E&C business in F97, higher than the 15%-17% forecast earlier.
20 • Fluor was increasingly confident of its ability to
21 achieve 15%-20% EPS growth going forward.
22 • Fluor was not encountering any major difficulty with any
23 of its major construction projects.
24 • Fluor was forecasting for F97 EPS of $3.60-3.70, with
25 further increases in F98 EPS to over $4.20-$4.30.
26 49. On Jan. 16, 1997, Fluor issued its F96 Annual Report,
27 again reporting its "record" F96 results. Fluor represented in a
28
- 54 -
1 letter signed by McCraw and Conaway included in its Form 10-K and
2 1996 Annual Report to Shareholders:
3 The company is responsible for preparation of the
4 accompanying consolidated balance sheet and the related
5 consolidated statements of earnings, cash flows and
6 shareholders' equity. These statements have been
7 prepared inconformity with generally accepted accounting
8 principles and management believes that they present
9 fairly the company's consolidated financial position and
10 results of operations.
11 The 1996 Annual Report also included a letter from McCraw which
12 stated:
13 Your company just completed the best year in its
14 history. Records were set in four key areas: earnings
15 up 16 percent; revenues up 18 percent; new awards up a
16 strong 22 percent . . . .
17 * * *
18 Results from continuing operations have now grown on
19 average 15 percent for the past nine years, ranking us
20 among the best performing of all U.S. industry. Yet we
21 believe we can do better in both growth rate and return
22 on shareholders' equity. As we continually remind
23 employees worldwide, this company has only scratched the
24 surface of its potential.
25 As we look ahead, we are very encouraged about our
26 prospects.
27 * * *
28
- 55 -
1 Throughout 1997, we will take steps to strengthen our
2 margins through achievement of greater cost efficiencies
3 in our operations and projects and continue to be highly
4 selective in those projects we choose to pursue.
5 50. In late Jan. 1997, Fluor executives McCraw, Rollins,
6 Conaway and Stein communicated with analyst Levkovich of Smith
7 Barney and provided him with information for a report he was
8 preparing about Fluor, intending and anticipating that the
9 information they gave him would reach the market. They told him
10 Fluor was on track to achieve F97 EPS of $3.70 and F98 EPS of
11 $4.30, that Fluor's Fluor Daniel E&C business was very strong and
12 accelerating, that Fluor's costs were under control and a strong
13 second half F97 increase in earnings would result. On Jan. 27,
14 1997, Smith Barney issued a report repeating this information. The
15 report forecast the following quarterly EPS for Fluor:
16 01 F97 Q2 F97 03 F97 04 F97 F97 $.78 $.87 $.94 $1.12 $3.70
17The report also stated:
18Lastly, despite come concerns that heavy bid
19activity could dampen profits, management continues to
20believe that a 2H97 ramp up in earnings is likely and
21that some concerns that have been raised of late that the
22bid costs could slow the growth seems a bit overdone.
2351. After this report was issued, the price of Fluor's stock
24increased from $67 to $74 per share on Feb. 12, 1997, and analysts
25from Smith Barney again spoke to Fluor management. Fluor
26management reiterated that Fluor Daniel E&C operating margins were
27healthy and strong, and on track to generate EPS of $3.70 in F97
28
- 56 -
1 for Fluor. Smith Barney issued a report on Feb. 12, 1997,
2 repeating this information and stating: "[T]he company remains
3 committed to a 2H97 EPS ramp up."
4 52. On Feb. 14, 1997, Fluor amended its Registration
5 Statement for the possible sale of $200 million in debt securities,
6 in an effort to complete that debt issuance. On Feb. 18, 1997,
7 Fluor reached its all-time high of $75-7/8 per share.
8 53. The positive, optimistic statements made by defendants
9 during Nov. 1996 through Feb. 1997, were each false and misleading
10 statements when made. The true facts, including the following
11 adverse internal conditions at Fluor which contradicted their
12 positive/ optimistic public statements and were known to each of
13 the Individual Defendants, were:
14 (a) That Fluor's Fluor Daniel E&C unit had encountered
15 a huge cost overrun on its Taft, Louisiana power plant project,
16 which exceeded $50 million by this time in the Class Period and
17 would result in a major loss on that project;
18 (b) That Fluor's Fluor Daniel E&C unit had encountered
19 a major cost overrun on its Rabigh, Saudi Arabia power plant
20 project, which exceeded $70 million by this time in the Class
21 Period and would result in Fluor's suffering a major loss on that
22 project;
23 (c) That Fluor's Fluor Daniel E&C unit was suffering
24 from losses exceeding $40 million on other construction projects by
25 this point in the Class Period (which it has refused to identify);
26 (d) Fluor was covering up and concealing the troubled
27 nature of a large number of projects in its Fluor Daniel E&C unit
28 and the losses in its Fluor Daniel E&C unit and the true adverse
- 57 -
1 impact of that unit's excessive costs and overhead by aggressively
2 recognizing profits on its Rayong, Thailand refinery project much
3 more aggressively than was consistent with its claimed conservative
4 income recognition practices;
5 (e) That Fluor had materially overstated its net income
6 and EPS for the 4thQ F96 and F96 ended Oct. 31, 1996 by failing to
7 properly recognize in a timely manner the large losses it had then
8 incurred on its Taft, Louisiana and Rabigh, Saudi Arabia projects,
9 as detailed in 5558-71;
10 (f) That Fluor's decentralized Fluor Daniel E&C unit's
11 management structure did not have in place adequate internal
12 controls and management information systems to enable top
13 management to detect losses on large projects at an early stage
14 when senior management intervention could have minimized or limited
15 those losses and, as a result, by the time top management learned
16 of the losses being suffered at the Taft, Louisiana and Rabigh,
17 Saudi Arabia projects in the Spring/Summer of 1996, they already
18 exceeded $50-$75 million and were escalating rapidly;
19 (g) That Fluor's rapid expansion of its Fluor Daniel E&C
20 unit and utilization of a decentralized management structure had
21 failed and, as a result, the Fluor Daniel E&C unit's costs had
22 escalated out of control which was having an adverse impact on that
23 unit's actual results;
24 (h) That overhead costs at Fluor's Fluor Daniel E&C unit
25 had escalated out of control and were resulting in serious adverse
26 impact on Fluor Daniel's results from operations and any improve-
27 ment in 2H F97 earnings would be much smaller than the "ramp up"
28 Fluor had represented to the market would occur;
- 58 -
1 (i) In order to try to absorb some of the rapidly
2 escalating overhead and bidding "costs" in the Fluor Daniel E&C
3 unit, the Fluor Daniel E&C unit had accepted a large number of
4 contracts on which it could not earn any significant profit and was
5 actually encountering significant and material losses on a number
6 of projects, including the Taft, Louisiana and Rabigh, Saudi Arabia
7 projects;
8 (j) That in order to try to cover the escalating
9 overhead of its Fluor Daniel E&C unit, Fluor was accepting contract
10 awards which it knew would generate little, if any, profit, just to
11 obtain some revenue and thus justify Fluor Daniel's expansion into
12 certain geographic areas, even though the defendants knew this
13 practice would have an adverse impact on Fluor's profit margins
14 going forward;
15 (k) That, as a result of the foregoing, defendants
16 actually knew that Fluor could not achieve the 15%-20% growth
17 target it had established, had publicly committed itself to
18 achieving and represented that it was on target to achieve in F97
19 and F98;
20 (1) That, as a result of the foregoing, defendants
21 actually knew that Fluor's forecasts of F97 EPS of $3.60-$3.70 and
22 F98 EPS of $4.20-$4.30 or above were false and could not and would
23 not be achieved, given the serious problems defendants knew were
24 impacting Fluor's Fluor Daniel E&C unit; and
25 (m) That, as a result of the foregoing, statements by
26 Fluor's executives that they were "comfortable" with EPS estimates
27 made by analysts of $3.60-$3.70 for F97 and $4.20-$4.30 for F98
28 were known by defendants to be false when made, as those earnings
- 59 -
1 gains were unachievable, given the serious problems defendants knew
2 were impacting Fluor's Fluor Daniel E&C unit.
3 54. On Feb. 18, 1997, after the close of trading, Fluor
4 reported its 1stQ F97 results and held a conference call for
5 analysts and others. Fluor revealed that its 2ndQ F97 EPS was less
6 than had been forecast due to large cost overruns on "two fixed
7 price power projects," which Fluor refused to identify, or
8 quantify. Worse yet, Fluor admitted that it had achieved the EPS
9 it did report by reversing certain insurance accruals/reserves, in
10 amounts larger than the two cost overruns, thus indicating that
11 Fluor's actual operating results were far worse than reported.
12 When this shocking news was revealed, trading in Fluor's stock had
13 to be delayed on Feb. 19, 1997. When trading began, Fluor's stock
14 collapsed, falling from its high of $75-7/8 per share on Feb. 18,
15 1997, to $62 per share in an unprecedented 19% one-day drop on
16 volume of 6.7 million shares -- wiping out $1 billion in
17 shareholder value in one day!
18 55. Market participants were shocked and furious over these
19 revelations. First of all Fluor refused to identify what projects
20 were involved or provide other details about these troubled
21 projects. According to the financial media, these revelations
22 "stunned" shareholders and came as "a shock to analysts and
23 investors." "People were definitely caught by surprise" said a UBS
24 analyst, "the charge hadn't been anticipated," "expectations of a
25 good quarter turned into a nightmare," and the "1stO earnings
26 announcement was a surprise to everyone," said others, who added
27 "there is no excuse for the cost overrun surprise -- FLR's controls
28 should have been much better than that, and management deserves to
- 60 -
1 be criticized for the slip." The Los Angeles Times reported
2 "Fluor's financial report raised questions about management's grip
3 on internal operations . . . and shattered a nearly universal
4 belief that the international engineering- and construction services
5 company would continue chalking up a double-digit annual growth
6 rate. . . . The company's first-quarter results missed analysts'
7 expectations 'by a country mile!'"
8 56. Shortly thereafter, Fluor announced over $100 million in
9 spending cuts at its Fluor Daniel E&C unit and numerous office
10 closures and lay-offs there, well beyond those earlier disclosed
11 for its Fluor Daniel E&C unit. Fluor's stock continued to fall to
12 as low as $46-1/2 per share. Then, Fluor announced it was going to
13 abandon its corporate headquarters in Irvine to save money and
14 revealed a huge 2ndQ F97 loss of $70 million due to additional cost
15 overruns of $70-$90 million on the power plant project located
16 outside the U.S. and over $45 million in other write-offs and cost
17 overrun losses in its Fluor Daniel E&C unit. Fluor admitted it was
18 abandoning its goal of earnings growth of "approximately 20%."
19 Again analysts were furious stating: "rTlhis charge is
20 astounding," "a shock" and concluded:
21 It is obvious that management's effort to pursue an
22 accelerated growth strategy beginning in 1993-1994 has
23 lead to:
24 • a bloated cost structure
25 • an organizational structure that has been stretched
26 too thin
27 * * *
28
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1 In essence, to pursue growth which was evidenced by
2 the rapid expansion in new orders and backlog, FLR
3 pursued all types of work, irrespective of potential
4 profitability, executed poorly on a number of proiects
5 and in the process created a bloated cost and overhead
6 structure throughout the world.
7 One analyst bluntly summed it up: "The decision in 1993-94 to
8 reengineer Fluor in order to dramatically accelerate the growth
9 rate to 20% was an unmitigated disaster." Smith Barney lowered its
10 estimated 4thQ F97 EPS from $1.12 to $.87. Instead of achieving
11 15%-20% EPS growth during F97 as forecast during the Class Period,
12 for the nine months ended July 31, 1997, Fluor had net earnings of
13 only $58.1 million or $.69 per share, a sharp decline from its net
14 income of $189.2 million or $2.24 per share in the same nine-month
15 period in F96 and far less than the $2.59 per share, which had been
16 projected for the nine month period as recently as Feb. 12, 1997.
17 Also, as the Fluor Daniel E&C unit stopped accepting marginally
18 profitable or unprofitable contracts the Fluor Daniel E&C unit's
19 volume of new contracts has fallen precipitously -- down 15% from
20 prior periods.
21 57. Fluor officials admitted "the company has pushed hard for
22 profit growth and in its push, demanded too much of certain
23 operating executives," "they rightfully acknowledgerd] the
24 mistakes," "we tried some things and they didn't work out,"
25 "Fluor's ballyhooed corporate 'reengineering' three years ago . . .
26 enabled the Company to grow, but it has grown too freely with too
27 many overlapping support units," "Top management has been too
28 removed from the Company . . . and Fluor has become entangled in
- 62 -
, ,
1 too many pursuits that don't bring in much profit," and "We were
2 trying to do too many things in too many countries in too many
3 industries."
4 FALSE FINANCIAL RESULTS
5 58. Fluor's F96 and F97 results to date are set forth below:
6 Fluor CorporationQuarterly Results
7 (in thousands, except EPS)
Fiscal 1996 8 01/31/96 04/30/96 07/31/96 10/31/96 Year
9 Revenues $2,402,414 $2,582,229 $2,702,821 $3,327,728 $11,015,192Gross profit 99,072 105,054 112,862 132,755 449,743Gross margin 4.12% 4.07% 4.18% 3.99% 4.09%
10 Net earnings 57,448 63,700 68,077 78,859 268,084EPS $.68 $.75 $.81 $.93 $3.17
11Fiscal 1997
12 01/31/97 04/30/97 * 07/31/97 10/31/97 Year
Revenues $3,434,061 $3,185,833 $3,675,90013 Gross profit 106,774 (73,836) 108,600
Gross margin 3.11% -2.32% 2.95%14 Net earnings 62,035 (70,134) 66,200
EPS $.73 ($-83) $.79
15 * The losses in the 2nd Qtr of 1997 were due to the following Charges:Provisions for estimated losses on certain contracts $ 22,850
16 Provisions for estimated losses on the construction
of a power plant located outside the U.S. $ 68,550
17 Impairment, abandonment and sale of certain project-related investments or joint ventures (includingbad debt provisions) $ 26,800
18 Cost reduction initiatives-implement charges of such $ 19,900 Total $138,100
19
20 59. Fluor's failure to properly and adequately recognize the
21 losses it knew it would inour on certain of its Fluor Daniel E&C
22 contracts as of Oct. 31, 1996, caused its results for the quarter
23 and year then ended to be materially overstated and to be presented
24 in violation of Generally Accepted Accounting Principles ("GAAP").
25 60. GAAP are those principles recognized by the accounting
26 profession as the conventions, rules and procedures necessary to
27 define accepted accounting practice at the particular time.
28 Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial
- 63 -
1 statements filed with the SEC which are not prepared in compliance
2 with GAAP are presumed to be misleading and inaccurate, despite
3 footnote or other disclosure.
4 61. Fluor represented in a letter signed by McCraw and
5 Conaway, included in its Form 10-K and Annual Report to
6 Shareholders for the year ended Oct. 31, 1996, that:
7 The company is responsible for preparation of the
8 accompanying consolidated balance sheet and the related
9 consolidated statements of earnings, cash flows and
10 shareholders' equity. These statements have been
11 prepared in conformity with generally accepted accounting
12 principles and management believes that they present
13 fairly the company's consolidated financial position and
14 results of operations.
15 62. This representation was false as Fluor's F96 financial
16 statements did not "present fairly" its financial position and the
17 financial statements were not prepared in conformity with GAAP due
18 to Fluor's failure to disclose and adequately accrue charges
19 relating to its loss contracts.
20 63. Fluor represented the following with regard to its
21 accounting policy with respect to Fluor Daniel E&C contracts:
22 The company recognizes engineering and construction
23 contract revenues using the percentage-of-completion
24 method, based primarily on contract costs incurred to
25 date compared with total estimated contract costs. . . .
26 Changes to total estimated contract costs or losses, if
27 any, are recognized in the period in which they are
28 determined.
- 64 -
1 64. This statement was false and misleading because Fluor had
2 failed to recognize the losses it had determined it would incur on
3 two fixed-price power plant Fluor Daniel E&C contracts prior to the
4 end of F96. Moreover, the percentage-of-completion method requires
5 that such losses be recognized, and Fluor's failure to do so was
6 contrary to the percentage-of-completion method as prescribed by
7 GAAP.
8 65. Fluor's management's statement that its financial state-
9 ments were prepared in conformity with GAAP and that management
10 believed the financial statements were a fair presentation of its
11 results from operations was also false and misleading due to the
12 Company's failure, in violation of GAAP, to recognize losses on
13 contracts for which costs would exceed revenues.
14 66. GAAP, as set forth in AICPA Statement of Position ("SOP")
15 81-1, Accounting for Performance of Construction-Type and Certain
16 Production-Type Contracts, describes the computation of earnings
17 based on the use of percentage of completion accounting. An
18 important element of SOP 81-1 involves a situation, such as that
19 experienced by Fluor, where after a contract is commenced, current
20 estimates of the costs to complete the contract indicate that the
21 contract as a whole will generate a loss. SOP 81-1.85 states:
22 When the current estimates of total contract revenue and
23 contract cost indicate a loss, a provision for the entire
24 loss on the contract should be made. Provisions for
25 losses should be made in the period in which they become
26 evident . . . .
27 67. Two significant contracts in Fluor Daniel's Power and
28 Government group involved contracts for the procurement,
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1 engineering, construction and management of power plants in Taft,
2 Louisiana and Rabigh, Saudi Arabia. By the Summer of 1996, at the
3 latest, Fluor's management was aware that significant construction
4 problems at both sites would eventually lead to losses by Fluor on
5 the contracts:
6 (a) The Taft, Louisiana project, which had been awarded
7 to Fluor by Union Carbide was adversely impacted by labor shortages
8 in Louisiana, which came to the attention of Fluor management in
9 early 1996. Because the contract was for a fixed price of $126
10 million, any increases in costs could not be passed on to Union
11 Carbide and would adversely affect Fluor's margins on the project.
12 By May 1996, Fluor's management learned that the costs of the
13 project would exceed the fixed fee by more than $20 million and by
14 Oct. 31, 1996, the loss was at least $40 million; and
15 (b) The Saudi contract was an especially risky contract
16 to begin with since it was a fixed-price contract where the
17 customer's acceptance criteria was not clearly delineated and Fluor
18 had agreed to build the plant to the sublective satisfaction of the
19 buyer -- an unprecedented construction contract term -- that
20 exposed Fluor to virtually unlimited losses on the contract. By
21 April 1996, it was evident to Fluor's management that cost overruns
22 would severely reduce, if not eliminate Fluor's margins on the
23 project. By May 1996, Fluor's cost overruns on the project
24 exceeded $30 million on the project, indicating to Fluor's
25 management that its losses on the contract would be at least that
26 much by Oct. 31, 1996, the loss on this contract was at least $60
27 million and still escalating.
28
- 66 -
1 68. In the face of these problems, Fluor's top executives,
2 i.e., the Individual Defendants, determined not to recognize these
3 charges in the Company's financial statements at Oct. 31, 1996, in
4 order to show positive earnings growth for the quarter and year
5 then ended. Fluor issued a press release dated Nov. 20, 1996,
6 announcing the Company's results for the quarter and year ended
7 Oct. 31, 1996, in which it reported net income of $78.9 million and
8 $268.1 million, respectively. Flour later included the F96
9 financial statements in its Annual Report and Form 10-K. The
10 results were materially overstated and presented in violation of
11 GAAP due to the failure recognize the losses evident to Fluor's
12 management.
13 69. Ultimately, as the extent of the problems with both
14 projects intensified Fluor was forced to reveal the problems and
15 record the losses. Fluor's problems in Louisiana developed into a
16 dispute with Union Carbide and Fluor's problems on the Saudi
17 contract progressed to the point where Fluor had stopped working on
18 the contract, thus making it more difficult to conceal the losses
19 it was suffering on the contracts. Thus, in the Form 10-Q for the
20 1stQ F97, ended Jan. 31, 1997, Fluor revealed that it had recorded
21 a provision for losses on two contracts, which was offset by an
22 insurance credit Fluor recorded in the quarter. However, Fluor
23 refused to identify the projects or quantify the losses. In the
24 2ndQ F97 an additional provision was recorded in the amount of more
25 than $65 million for the Saudi contract alone.
26 70. If all of the losses on the two contracts which were
27 recognized in the first two quarters of F97 had been recorded in
28 the 4thQ of F96 (as they properly should have been), Fluor would
- 67 -
1 have reported a loss for the F96 fourth Quarter and half of its F96
2 net income would • have been wiped out and its stock would have
3 plunged. The Individual Defendants would not have achieved the
4 millions in special incentive/bonus compensation they got for F96.
5 71. The undisclosed adverse information concealed by
6 defendants during the Class Period is the type of information
7 which, because of SEC regulations, regulations of the national
8 stock exchanges and customary business practice, is expected by
9 investors and securities analysts to be disclosed and is known by
10 corporate officials and their legal and financial advisors to be
11 the type of information which is expected to be and must be
12 disclosed.
13 COUNT I
14 FOR VIOLATIONS OF SECTION 10(b)OF THEEXCHANGE ACT AND RULE 10b-5 PROMULGATED
15 THEREUNDER AGAINST ALL DEFENDANTS
16 72. Plaintiff incorporates by reference 1[51-71.
17 73. During the Class Period, defendants engaged in a scheme
18 and course of business, pursuant to which they knowingly and/or
19 recklessly engaged in acts, transactions, practices, and courses of
20 business which operated as a fraud upon plaintiff and other members
21 of the Class, and made various untrue statements of material fact
22 and omitted to state material facts necessary in order to make the
23 statements made, in light of the circumstances under which they
24 were made, not misleading, to plaintiff and other Class members as
25 set forth above. The purpose and effect of said scheme was to
26 induce plaintiff and the members of the class to purchase the
27 Company's common stock during the Class Period at artificially
28 inflated prices.
- 68 -
1 74. By reason of the foregoing, the defendants knowingly or
2 recklessly violated §10(b) of the Exchange Act and Rule 10b-5
3 promulgated thereunder in that they themselves or a person whom
4 they controlled: (a) employed devices, schemes and artifices to
5 defraud; (b) made untrue statements of material facts or omitted to
6 state material facts necessary in order to make the statements
7 made, in light of the circumstances under which they were made, not
8 misleading; or (c) engaged in acts, practices and a course of
9 business that operated as a fraud or deceit upon plaintiff and
10 other members of the Class in connection with their purchases of
11 the Company's common stock during the Class Period.
12 75. As a result of the foregoing, the market price of the
13 Company's common stock was artificially inflated during the Class
14 Period. In ignorance of the false and misleading nature of the
15 representations described above, plaintiff and other members of the
16 Class relied, to their damage, directly on the misstatements or on
17 the integrity of the market both as to price and as to whether to
18 purchase these securities. Plaintiff and the other members of the
19 Class would not have purchased Fluor stock at the market prices
20 they paid, or at all, if they had been aware that the market prices
21 had been artificially and falsely inflated by the defendants' false
22 and misleading statements and concealments. At the time of the
23 purchase of Fluor common stock by plaintiff and the other members
24 of the Class, the fair market value of said common stock was
25 substantially less than the prices paid by plaintiff. Plaintiff
26 and other members of the Class have suffered substantial damages as
27 a result.
28
- 69 -
1 COUNT II
2 FOR VIOLATIONS OF SECTION 20(a) OF THEEXCHANGE ACT AGAINST DEFENDANTS FLUOR AND McCRAW
376. Plaintiff incorporates by reference and realleges all
4paragraphs previously alleged herein, asserting these claims
5against defendants Fluor and McCraw.
677. Individual Defendant McCraw is liable under §20(a) as a
7control person of Fluor since, by virtue of his executive and
8directorial positions, his knowledge of and involvement in the
9Company's business, and stock ownership, and his power and ability
10to make public statements on behalf of the Company to shareholders,
11potential investors and the media, he had the power and ability to
12control the actions of the Company. Fluor, in turn, controlled
13each of the Individual Defendants.
14BASIS OF ALLEGATIONS
1578. This Complaint is pleaded in accordance with the Federal
16Rules of Civil Procedure, including Rule 11. Because the PSLRA
17§21D(c), which is §78u-4(c) of the Exchange Act, requires
18complaints to be pleaded in conformance with Federal Rule of Civil
19Procedure 11, plaintiff has alleged the foregoing based upon the
20investigation of her counsel, which included a review of Fluor's
21SEC filings, securities analysts' reports and advisories about the
22Company, press releases issued by the Company, media reports about
23the Company, discussions with former employees and consultants,
24and, pursuant to Rule 11(b)(3), believe that after reasonable
25opportunity for discovery, substantial evidentiary support will
26likely exist for the allegations set forth at ¶118, 42, 46, 53, 62,
2764 and 68.
28
- 70 -
1 CLASS ACTION ALLEGATIONS
2 79. Plaintiff brings this action as a class action pursuant
3 to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on
4 behalf of a class (the "Class") consisting of all persons who
5 purchased the common stock of Fluor between May 22, 1996 and
6 Feb. 18, 1997, inclusive (the "Class Period"). Excluded from the
7 Class are the defendants herein, members of each Individual
8 Defendant's immediate family, any entity in which any defendant has
9 a controlling interest, and the legal affiliates, representatives,
10 heirs, controlling persons, successors, and predecessors in
11 interest or assigns of any such excluded party.
12 80. Because Fluor has millions of shares of common stock
13 outstanding, and because the Company's common stock was actively
14 traded, members of the Class are so numerous that joinder of all
15 members is impracticable. While the exact number of Class members
16 can only be determined by appropriate discovery, plaintiff believes
17 that Class members number at least in the thousands and that they
18 are geographically dispersed.
19 81. Plaintiff's claims are typical of the claims of the
20 members of the Class, because plaintiff and all of the Class
21 members sustained damages arising out of defendants' wrongful
22 conduct complained of herein.
23 82. Plaintiff will fairly and adequately protect the
24 interests of the Class members and has retained counsel who are
25 experienced and competent in class and securities litigation.
26 Plaintiff has no interests that are contrary to or in conflict with
27 the members of the Class plaintiff seeks to represent.
28
- 71 -
1 83. A class action is superior to all other available methods
2 for the fair and efficient adjudication of this controversy, since
3 joinder of all members is impracticable. Furthermore, as the
4 damages suffered by individual members of the Class may be rela-
5 tively small, the expense and burden of individual litigation make
6 it impossible for the members of the Class individually to redress
7 the wrongs done to them. There will be no difficulty in the
8 management of this action as a class action.
9 84. Questions of law and fact common to the members of the
10 Class predominate over any questions that may affect only
11 individual members, in that defendants have acted on grounds
12 generally applicable to the entire Class. Among the questions of
13 law and fact common to the Class are:
14 (a) whether the federal securities laws were violated by
15 defendants' acts as alleged herein;
16 (b) whether the Company's publicly disseminated releases•
17 and statements during the Class Period omitted and/or misrepre-
18 sented material facts and whether defendants breached any duty to
19 convey material facts or to correct material facts previously
20 disseminated;
21 (c) whether defendants participated in and pursued the
22 fraudulent scheme or course of business complained of;
23 (d) whether the defendants acted willfully, with
24 knowledge or recklessly, in omitting and/or misrepresenting
25 material facts;
26 (e) whether the market prices of Fluor common stock
27 during the Class Period were inflated artificially due to the
28
- 72 -
1 material nondisclosures and/or misrepresentations complained of
2 herein; and
(f) whether the members of the Class have sustained
4 damages and, if so, what is the appropriate measure of damages.
5 PRAYER FOR RELIEF
6 WHEREFORE, plaintiff, on her own behalf and on behalf of the
7 Class, pray for judgment as follows:
8 1. Declaring this action to be a class action pursuant to
9 Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on
10 behalf of the Class defined herein;
11 2. Awarding plaintiff and the members of the Class
12 rescissory or compensatory damages in an amount which may be proven
13 at trial, together with interest thereon;
14 3. Awarding plaintiff and the members of the Class pre-
15 judgment and post-judgment interest, as well as their reasonable
16 attorneys' and experts' witness fees and other costs; and
17 4. Awarding such other and further relief as this Court may
18 deem just and proper including any extraordinary equitable and/or
19 injunctive relief as permitted by law or equity to attach, impound
20 or otherwise restrict the defendants' assets to assure plaintiff
21 has an effective remedy.
22
23
24
25
26
27
28
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1 JURY DEMAND
2 Plaintiff hereby demands a trial by jury.
3 DATED: September 11, 1997MILBERG WEISS BERSHAD
4 HYNES & LERACH LLPWILLIAM S. LERACH
5 PATRICK J. COUGHLIDARREN J. ROBBIN--
6
7 gd/1/116/0_8 WILLII ERACH
9 600 West Bro,-- Suite 1800San Diego, CA 92101
10 Telephone: 619/231-1058
11 KAPLAN, KILSHEIMER & FOX, LLPROBERT N. KAPLAN
12 685 Third Avenue, 26th FloorNew York, NY 10017
13 Telephone: 212/687-1980
14 SOLTAN & ASSOCIATESVENUS SOLTAN
15 660 Newport Center DriveSuite 320
16 Newport Beach, CA 92660Telephone: 714/729-3100
17SCHIFFRIN & CRAIG, LTD.
18 RICHARD S. SCHIFFRINThree Bala Plaza East
19 Suite 400Bala Cynwyd, PA 19004
20 Telephone: 610/667-7706
21 Attorneys for Plaintiff
22
23
24
25
26
27
28 COMPLNTS \FLUOR.CPT
- 74 -
CERTIFICATION OF NAMED PLAINTIFFPURSUANT TO FEDERAL SECURITIES LAWS
Dorothy M. McMullen ("Plaintiff") declares, as to the claims
asserted under the federal securities laws, that:
1. Plaintiff has reviewed the Complaint and authorized its
filing.
2. Plaintiff did not purchase the security that is the
subject of this action at the direction of Plaintiff's counsel or
in order to participate in any private action.
3. Plaintiff is willing to serve as a representative party
on behalf of the class, including providing testimony at deposition
and trial, if necessary.
4. Plaintiff's transaction in the security that is the
subject of this action during the Class Period is as follows:
PriceSecurity Transaction Date Per Share
Common Stock Purchased 20 shares 12/12/96 $64.79
5. During the three years prior to the date of this
Certification, Plaintiff has sought to serve or served as a
representative party for a class in the following actions filed
under the federal securities laws: N/A
6. Plaintiff will not accept any payment for serving as a
representative party on behalf of the class beyond the Plaintiff's
pro rata share of any recovery, except such reasonable costs and
expenses (including lost wages) directly relating to the
representation of the class as ordered or approved by the Court.
- g"
I declare under penalty of perjury that the foregoing is true
and correct. Executed this 4€1 .1 day of September , 1997.
DOROTHY M. McMU L-FLUOR\MCMULLEN CRT