Excerpts from SEC Case Against Dean Buntrock et al

ON TRUCKS - "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. (from 40)

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

ON CONTAINERS AND DUMPSTERS - "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% (from 42)

188. Notwithstanding that advice, top management picked arbitrary salvage values ranging between $150 to $1,000 per dumpster depending on the size. The salvage values approximated 30% of the cost of the containers, but top management had no data to support the assigned values. By adding those inflated salvage values, top management significantly reduced current period depreciation expenses by approximately $25 million for the year or about $6 million quarterly. The entry had a continuing impact on future periods that, over an eighteen-year period, would reduce operating expense by over $330 million.

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

ON ABANDONED PROJECTS - "As documented in a Company memorandum, "[i]nstead of writing-off deferred development costs" related to impaired and abandoned projects, the Company would "defer and amortize these costs over a twenty year period." For the most part, the Company did not even comply with this policy. Instead, top management simply left the costs of impaired and abandoned projects on the balance sheet. (from 56)

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

Concealment of the Fraud

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

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

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

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

ON SERVICEMASTER - "206. On December 31, 1995, Waste Management exchanged its interest in a privately held subsidiary of ServiceMaster known as Consumer Services for an interest in ServiceMaster itself, a publicly traded entity. The transaction was carefully structured to recognize a $160 million paper gain to Waste Management. The gain could not have come at a better time for purposes of the scheme — it allowed top management to, in AA's words, "bury charges for balance sheet clean ups."

207. Top management, with Getz's knowledge, used the $160 million gain to eliminate unrelated current period expenses and prior period misstatements without disclosing the gain or the netted items. Many of the netted items related to Arthur Andersen's PAJEs, which top management had previously agreed to write off with the Action Steps. For example, the netted items included $54 million in deferred permitting costs related to unsuccessful projects (including dead projects previously identified by the Company), $12 million related to the understatement of the Company's income tax accrual, and $12 million for improperly capitalized computer systems costs. The netted items also included items that were not previously quantified by AA as PAJEs. For example, $27 million of the netting related to miscellaneous errors identified by Koenig and Hau, which included $15 million related to the reversal of the fourth quarter 1994 "sweep" of Group reserves.

208. By netting, top management made $160 million of expenses disappear and effectively admitted that the prior period netted items were in fact misstatements. The ServiceMaster netting further illustrates top management's steadfast refusal to correct known misstatements unless and until it could be done surreptitiously and without reducing net income or Income from Operations.

ON RUST - "234. In addition to the "sweep," top management improved second quarter earnings by misclassifying and netting the gain resulting from the sale of the discontinued operations of Rust Engineering and Consulting Business ("Rust E&C"). In the second quarter, the Company sold its Rust E&C business for $100 million and realized a $58 million pre-tax, pre-minority interest gain. GAAP required that the gain be segregated from continuing operations and reported in discontinued operations on the income statement as a gain on disposal. However, top management netted $23 million in unrelated expenses and misstatements against the gain and misclassified the balance of the gain as income from continuing operations.

243. Also in the third quarter, Waste Management netted and misclassified a $65 million gain (pre-tax and pre-minority interest) realized on the sale of Rust Scaffolding. Like the gain from the sale of Rust E&C, top management netted $42 million of the gain against certain unrelated operating expenses and misclassified the balance as income from continuing operations. The effect of the netting and misclassification of the two Rust transactions was to inflate pre-tax income from continuing operations by $85.1 million.

244. The netting of the Rust gains in the second and third quarters came at a time when analysts were continuing to question the Company's propensity to take special charges. As noted in an Arthur Andersen workpaper, "[a]nalysts complained they could not figure out WMX base line earnings due to these special charges. Therefore, Rooney promised to curtail special charges." Rooney's promise was made in a May 1996 interview with the Wall Street Journal, in which he stated that "[w]e don't plan to have any more special charges. We are sensitive that we have to be predictable. We have to build credibility. Charges . . . aren't some kind of pattern." What was a pattern, however, was the use of netting to, in Arthur Andersen's words, "bury charges for balance sheet cleanups."

Outside Pressure on Rooney From Shareholders

251. In the fourth quarter, large investor groups increased pressure on Rooney and the Company. Investors had been clamoring for the Company to create more shareholder value, and one major investor group demanded the removal of the long-time management team of Buntrock, Rooney, and Koenig. Proxy fights were threatened. A December 23, 1996 article in Crain's Chicago Business reported that Rooney had led the investor group to believe that Koenig would be replaced as CFO, but that that did not happen.

252. Adding to the external pressures the Company was facing, on December 11, 1996, a United States district court awarded more than $76 million in compensatory damages and $15 million of punitive damages against the Company's subsidiary, Chemical Waste Management, Inc. ("CWM"), for a massive fraud involving a contract to pay royalty fees for an acquired landfill (Emelle). 

294. The details of the massive Restatement finally came in early 1998. In February 1998, Waste Management announced that it was restating its financial statements for the period 1992 through 1996 and the first three quarters of 1997. At the time, the Restatement was the largest in history. In the Restatement, the Company admitted that, through the first three quarters of 1997, it had materially overstated its reported pre-tax earnings by approximately $1.7 billion and understated certain elements of its tax expense by $190 million as follows:

295. Additionally, contemporaneous to the Restatement, the Company also recorded approximately $1.7 billion in impairment losses and other charges. The total amount of the Restatement and fourth quarter charges was approximately $3.6 billion.

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