Record Earnings Result In An 11% Drop In Stock Price…seriously NEW!
The financial fundamentals of the markets were also strong. During 1928, the price-earnings ratio for 45 industrial stocks increased from approximately 12 to approximately 14. It was over 15 in 1929 for industrials and then decreased to approximately 10 by the end of 1929. While not low, these price-earnings (P/E) ratios were by no means out of line historically. Values in this range would be considered reasonable by most market analysts today. For example, the P/E ratio of the S & P 500 in July 2003 reached a high of 33 and in May 2004 the high was 23.
Record earnings result in an 11% drop in stock price…seriously
To summarize: There was little hint of a severe weakness in the real economy in the months prior to October 1929. There is a great deal of evidence that in 1929 stock prices were not out of line with the real economics of the firms that had issued the stock. Leading economists were betting that common stocks in the fall of 1929 were a good buy. Conventional financial reports of corporations gave cause for optimism relative to the 1929 earnings of corporations. Price-earnings ratios, dividend amounts and changes in dividends, and earnings and changes in earnings all gave cause for stock price optimism.
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1. This action concerns a massive financial fraud motivated by greed and a desire to preserve professional and social status. The defendants were the highest-ranking officers of Waste Management, Inc. ("Waste Management" or "Company"), the world's largest waste services company. From at least 1992 through part of 1997, Dean L. Buntrock — Waste Management's chief executive officer ("CEO") and founder — and the other defendants engaged in a systematic scheme to falsify Waste Management's earnings and other measures of financial performance. As part of the scheme, they concealed the operating realities of the Company by making or authorizing false and misleading statements about the Company's financial performance to investors, the public, and the Commission. Defendants manipulated the Company's financial results to meet predetermined earnings targets and thus retain their executive positions, reap substantial performance-based bonuses and, in certain instances, enhanced retirement benefits. While the fraud was ongoing and the Company's stock price was inflated, defendants Buntrock, Phillip B. Rooney, and James E. Koenig unloaded Company stock on unsuspecting investors. Their sales enabled them to avoid millions of dollars of losses. Other shareholders, however — mutual funds, pension funds, individual investors, retirement accounts, and others — lost over $6 billion when the Company's improper accounting was later revealed and the stock price dropped by more than 33%. When new management finally announced what was then the largest restatement in history, the Company admitted that its profits had been overstated by $1.7 billion ($1,700,000,000).
4. The defendants centralized the falsification of the financial results at their corporate headquarters. They made the majority of the accounting manipulations through what were known as "top-level adjustments." Buntrock, Rooney, and others annually set earnings targets for the upcoming year. During the year they monitored the actual operating results and compared them to their quarterly targets. At the end of each reporting period, the Company's operating divisions reported their financial results so that the corporate office could prepare the Company's consolidated financial statements. In consolidating the results of the subsidiary that Rooney managed, which accounted for approximately 70% of the Company's reported earnings, headquarters recorded improper top-level adjustments — made up numbers — that reduced the actual, recorded expenses by Rooney's subsidiary and enabled the Company to report targeted earnings. Having fraudulently achieved their targeted earnings, defendants rewarded themselves with substantial bonuses that, in some instances, doubled their annual compensation.
15. As news of the Company's overstatement of earnings became public, Waste Management's shareholders lost over $6 billion in the market value of their investments when the stock price plummeted from $35 to $22 per share. Crippled by the scandal, the Company was eventually acquired by a smaller competitor that closed the Company's long-time corporate headquarters in Oak Brook, Illinois, terminated nearly every headquarters employee (about 1,500 of the 1,700 employees at the Oak Brook offices), and relocated the new company to Houston, Texas.
40. First, operating results were recorded by the WMNA operating units, known as "Groups," using one set of assumptions and reported to headquarters at the end of each quarter. For example, WMNA recorded the depreciation expense of each of its trucks utilizing an eight-year useful life and no salvage value. Top-level adjustments were then recorded using a different set of assumptions. For example, in 1993 top management assumed trucks had a useful life of 12 years and a salvage value of $30,000. A macro calculation was then made to estimate the impact of utilizing the extended life and increased salvage value, and a top-level adjustment was recorded to reduced WMNA's operating expenses in that amount. Top management hid the top-level adjustments from the WMNA Groups and intentionally did not pass back the expense reductions to the field. Thus, keeping the process secret and centralizing it at corporate made it especially easy for top management to falsify the financial statements by plugging in the additional income needed (by way of reduced expenses) to achieve the desired earnings each quarter. Secrecy also minimized the risk of complaints from other employees concerning these fraudulent practices.
42. During the quarters, top management monitored the actual results of operations versus what was budgeted. When the actual operating results were below budget at the end of a quarter, top management just manipulated the top-level adjustments and added new or "unbudgeted" entries to fill the actual to budget "gap." Some unbudgeted entries related to new entries that were added at the end of a quarter such as the second quarter of 1993 when top management added new top-level adjustments that discounted one type of reserve for the first time, added a salvage value to garbage containers for the first time, and reversed the total amortized costs of all WMNA landfills by an arbitrary 10%. Unbudgeted adjustments made in other periods included changing the assumptions underlying existing adjustments, such as when top management extended the useful lives of trucks by two years and doubled the salvage values of trucks. Still other unbudgeted adjustments related to unsupported reversals of reserves into income, which often resulted from "sweeps" conducted after the close of the quarters. In "sweeps," Koenig and Hau would canvass the balance sheet accounts of the WMNA Groups to identify reserves that could be reversed into income. Finally, Koenig and Hau in some quarters simply "borrowed" from future periods by prematurely recording future top-level adjustments. Because success depended on leaving investors in the dark, defendants never once disclosed the impact of the top-level adjustments (or unbudgeted changes thereto) on the Company's earnings.
62. Instead of writing off impaired and abandoned landfill permitting projects and disclosing the impact of such write-offs, defendants disclosed only a risk of future write-offs related to projects in the Part I disclosure of the Form 10-K, which is the section that describes the nature of, and risks inherent in, the Company's business. Through 1994, the Part I disclosure represented that "adverse decisions by governmental authorities on permit applications submitted by the Company may result in abandonment of projects, premature closure of facilities or restriction of operations, which could have a material adverse effect on the Company's earnings for one or more fiscal quarters or years." Similarly, beginning in 1995, the Part I disclosures were changed to expressly reference the risk of the potential write-off of deferred permitting costs related to impaired or abandoned projects: "If the inability to obtain and retain necessary permits, the failure of a facility to achieve the desired disposal volume or other factors cause Waste Management to terminate development efforts for a facility, the capitalized development expenses of the facility may need to be written off." In the 1996 annual report, defendants announced the Company's adoption of a new accounting standard that clarified when write-offs for impairments should be recorded, Statement of Financial Accounting Standards ("FAS") No. 121. The MD&A falsely represented that "[t]he adoption of FAS 121 did not have a material impact on the financial statements as the Company's previous accounting was substantially in compliance with the new standard." Contrary to these disclosures, the Company as a matter of practice did not write off the deferred permitting costs of impaired or abandoned projects.
81. Buntrock and Rooney were responsible for reviewing all annual reports on Form 10-K, which they also signed, and all quarterly reports on Form 10-Q. They reviewed and authorized press releases of annual and quarterly earnings, made statements therein regarding the results of operations, and signed the annual letters to stockholders. Koenig signed the periodic reports on Forms 10-K and 10-Q, as well as registration statements filed with the Commission pursuant to the Securities Act. He reviewed all drafts of annual and quarterly reports, along with Hau, Getz, Tobecksen, and others. After being replaced as CFO, Koenig continued to participate in the preparation and dissemination of periodic reports and related public statements, including press releases, through the end of the first quarter of 1997. Hau drafted the financial statement footnotes and MD&A for the periodic reports on Forms 10-K and 10-Q and signed the Form 10-K. Getz drafted, reviewed, and authorized the MD&A and other disclosures in the Company's periodic reports on Forms 10-K and Form 10-Q. He reviewed and authorized press releases of annual and quarterly earnings, including the release of public earnings projections in 1994 and 1996. Tobecksen prepared books and records that were incorporated into the periodic reports on Forms 10-K and 10-Q. Finally, Buntrock, Koenig, and Hau certified in annual and quarterly representation letters to AA that they were "responsible for the fair presentation in the consolidated financial statements of financial position, results of operations and cash flows in conformity with generally accepted accounting principles."