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Stanford University Law School
- Securities Class Action Clearinghouse
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UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
__________________________________
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STEPHEN A. LEVIN, |
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Plaintiff, |
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VS. | C.A. No. 97-
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MOLTEN METAL TECHNOLOGY, INC., |
WILLIAM M. HANEY, III, | Jury Trial Demanded
CHRISTOPHER J. NAGEL, JOHN T. |
PRESTON and MAURICE F. STRONG, |
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Defendants. |
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COMPLAINT
Plaintiff, individually and on behalf of all others
similarly situated, by and through his attorneys, alleges the
following upon information and belief, except as to the
allegations which pertain to the named plaintiff and his counsel,
which are alleged upon personal knowledge. Plaintiff's
information and belief is based, inter alia, on the investigation
made by and through his attorneys, which investigation included,
among other things, a review of the public documents and press
releases of Molten Metal Technology, Inc. ("Molten Metal" or the
"Company"), interviews with witnesses, review of documents of the
United States Department of Energy and consultations with experts
in chemistry and hazardous waste processing.
NATURE OF ACTION
1. Plaintiff brings this action on behalf of himself and
all other persons who purchased the common stock of Molten Metal
during the period from March 28, 1995 through and including
October 18, 1996 (the "Class Period").
2. Molten Metal claims to be an environmental technology
company with innovative, proprietary processing technologies
known as "Catalytic Extraction Processing" ("CEP") and "Elemental
Recycling," which are purportedly capable of processing hazardous
wastes and recycling them into products which can be reused.
Molten Metal claims that its proprietary technology utilizes a
molten metal bath to break down the molecular structure of wastes
and industrial by-products, including hazardous wastes, into
their elements. Moreover, Molten Metal claims that by
introducing selected chemicals into the bath, usable products can
be formed and recovered from the bath for use or sale, a
capability that Molten Metal calls "Elemental Recycling."
3. A major source of Molten Metal's revenue has come from
research and development ("R&D" ) grants received from the United
States Department of Energy ("DOE"). From 1992 through 1995,
Molten Metal received approximately $25 million from the DOE in
the form of research grants. The Company repeatedly disclosed
that a primary source of its 1996 revenues was to come from DOE
R&D grants.
4. Throughout the Class Period, Molten Metal, through a
series of public announcements, artificially inflated the price
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of Molten Metal's stock by materially misrepresenting the
capability of its technology. In particular, Molten Metal has
falsely claimed that its Elemental Recycling technology can
produce a variety of valuable products that can be used or sold
to third parties. Molten Metal has falsely represented that this
Elemental Recycling capability gives Molten Metal a cost
advantage over other waste processing technologies. Molten Metal
has also falsely represented that it has a facility capable of
processing two tons of waste per hour, when in fact Molten Metal
has taken five days to process approximately two tons of waste.
The rate of processing waste is a material factor in assessing
the commercial viability of waste processing technology.
5. In addition to the scheme to misrepresent Molten
Metal's technological capability, in March, 1996 Molten Metal
represented that it expected to receive substantial funding in
the amount of $20 million from the Department of Energy ("DOE")
for research and development in 1996. This statement was either
false or recklessly misleading when made or known to be false or
recklessly misleading by the end of April 1996 when the Company
was told privately by DOE that additional funding for the year to
end March 31, 1997 would total a maximum of $8 million.
6. When the Company disclosed on Sunday, October 20, 1996,
that DOE funding for research and development would be below
previously announced expectations, and that major commercial
projects were being delayed indefinitely, Molten Metal's stock
price collapsed, plunging 49% in a single day, from its closing
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price of $28.125 per share on Friday October 18, 1996 to close at
$14.25 per share on October 21, 1996, on extraordinarily high
volume of 5.6 million shares, or 40 times the three month daily
average.
7. During the Class Period, defendants Maurice Strong and
John Preston, both directors of Molten Metal, sold $2.5 million
worth of their Molten Metal common stock, and Ian C. Yates, a
vice president of Molten Metal, sold almost 77,000 shares,
representing virtually his entire holding of Molten Metal stock.
JURISDICTION AND VENUE
1. This Court has jurisdiction of this action pursuant to
Section 27 of the Exchange Act [15 U.S.C. § 78aa] and 28 U.S.C.
§§ 1331 and 1337.
2. This action arises under and pursuant to Section 10(b)
of the Securities Exchange Act of 1934 (the "Exchange Act") [15
U.S.C. § 78j(h)], Rule lob-5 promulgated thereunder by the
Securities and Exchange Commission ("SEC") [17 C.F.R. § 240.10b-
5] and Section 20(a) of the Exchange Act [15 U.S.C. §§ 78t(a)].
3. Venue is proper in this District pursuant to Section 27
of the Exchange Act and 28 U.S.C. § 1391(b) and (c). Molten
Metal Technology, Inc. has its corporate headquarters in this
District, and the acts complained of herein, including the
preparation, issuance and dissemination of materially false and
misleading information to the investing public, occurred in
substantial part in this District.
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4. In connection with the acts alleged in this Complaint,
the defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including, but not
limited to, the mails, interstate telephonic communications and
the facilities of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), a national securities
exchange.
PARTIES
5. Stephen A. Levin purchased 200 shares of Molten Metal
stock in the open market during the Class Period as follows and
was damaged thereby:
No. Shares Trade Date Price
---------- ---------- -----
200 06/20/96 $29.50
6. Defendant Molten Metal Technology, Inc. ("Molten Metal"
or the "Company") is a Massachusetts corporation with its
principal office in Waltham, Massachusetts. Molten Metal
describes itself as an environmental technology company
commercializing cost-effective high-quality environmental
solutions for converting hazardous wastes to useful materials.
At all relevant times, Molten Metal common stock was publicly
traded on the NASDAQ National Market system and was registered
pursuant to Section 12 of the Exchange Act (15 U.S.C. § 78e).
The market for Molten Metal common stock was therefore open,
well-developed and efficient at all relevant times. Molten Metal
files annual, quarterly and other reports with the SEC in
accordance with the Exchange Act. As of November 12, 1996, the
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Company had outstanding more than 23 million shares of common
stock.
7. Defendant William M. Haney, III ("Haney") is, and at
all times relevant hereto has been, President, Chief Executive
Officer and Chairman of the Board of Directors of Molten Metal.
In fiscal year 1995, Haney received cash compensation in excess
of $300,000, plus options to purchase Molten Metal stock. As of
March 11, 1996, Haney was a beneficial owner of approximately 5.4
million shares of Molten Metal common stock, including 754,860
shares issuable upon exercise of outstanding options,
representing approximately 23 percent of all shares then
outstanding. Haney was a co-founder of Molten Metal.
8. Defendant Christopher J. Nagel ("Nagel") is, and at all
times relevant hereto, has been Executive Vice President of
Science and Technology and a Director of Molten Metal. In fiscal
year 1995, Nagel received cash compensation in excess of
$200,000, plus options to purchase Molten Metal stock. As of
March 11, 1996, Nagel was a beneficial owner of approximately
2.07 million shares of Molten Metal common stock, almost all of
which were issuable upon exercise of outstanding options,
representing approximately 8 percent of all shares then
outstanding.
9. Defendant John T. Preston ("Preston") is, and at all
times relevant hereto, has been a Director of Molten Metal and a
member of the Audit Committee and Compensation Committee of the
Board of Directors. Preston owned approximately 2.3 million
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shares of Molten Metal stock as of March 11, 1996. He
participates in the Company's Amended and Restated 1989 Long-Term
Incentive Compensation Plan, which provides for the grant of
stock options to non-employee directors.
10. Defendant Maurice F. Strong ("Strong") is, and at all
times relevant hereto, has been a Director of Molten Metal.
Strong owned approximately 40,000 shares of Molten Metal stock as
of March 11, 1996. Another 262,000 shares of Molten Metal stock
were owned by a company of which Strong is Chairman. He
participates in the Company's Amended and Restated 1989 Long-Term
Incentive Compensation Plan, which provides for the grant of
stock options to non-employee directors.
11. Defendants Haney, Nagel, Preston and Strong are
sometimes referred to herein collectively as the "Individual
Defendants."
12. It is appropriate to treat the Individual Defendants as
a group for pleading purposes and to presume that the false and
misleading information conveyed in the Company's public filings,
press releases and other publications as alleged herein are the
collective actions of the Individual Defendants and others. Each
of the Individual Defendants, by virtue of his high-level
positions with the Company, directly participated in the
management of the Company, was directly involved in the day-to-
day operations of the Company at the highest levels and/or was
privy to confidential proprietary information concerning the
Company and its operations, performance, technological
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capabilities and future prospects as alleged herein. Said
defendants were involved in drafting, producing, reviewing and/or
disseminating the false and misleading statements alleged herein,
were aware or recklessly disregarded that false and misleading
statements were being issued regarding the Company and approved
or ratified these statements, in violation of the federal
securities laws.
13. Each of the Individual Defendants, by reason of his
management position, his membership on the Molten Metal Board of
Directors and stock ownership was, at all relevant times, a
"controlling person" of Molten Metal within the meaning of
Section 20(a) of the Exchange Act.
14. Each of the defendants is liable as a participant in a
fraudulent scheme and course of business that operated as a fraud
and deceit on purchasers of Molten Metal stock.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
15. Plaintiff brings this action as a class action pursuant
to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of
a Class consisting of all persons who purchased shares of Molten
Metal common stock on the open market during the period from
March 28, 1995 through October 18, 1996, inclusive (the "Class
Period"), and who were damaged thereby (the "Class"). Excluded
from the Class are defendants; members of the immediate family of
each of the Individual Defendants; any director, officer,
subsidiary, affiliate or a joint venture partner of Molten Metal;
any entity in which any excluded person has a controlling
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interest; and their legal representatives, heirs, successors and
assigns.
16. The members of the Class are so numerous that joinder
of all members is impracticable. While the exact number of Class
members is unknown to plaintiff at this time and can only be
ascertained through appropriate discovery, plaintiff believes
that there are thousands of members of the Class located
throughout the United States. As of November 12, 1996, there
were more than 23 million shares of Molten Metal common stock
outstanding. Throughout the Class Period, Molten Metal common
stock was actively traded on the NASDAQ National Market System.
Record owners and other members of the Class may be identified
from records maintained by Molten Metal and/or its transfer agent
and may be notified of the pendency of this action by mail and
publication, using forms of notice similar to those customarily
used in securities class actions.
17. Plaintiff's claims are typical of the claims of the
other members of the Class as all members of the Class were
similarly affected by defendants' wrongful conduct in violation
of federal law that is complained of herein.
18. Plaintiff will fairly and adequately protect the
interests of the members of the Class and has retained counsel
competent and experienced in class and securities litigation.
19. Common questions of law and fact exist as to all
members of the class and predominate over any questions solely
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affecting individual members of the Class. Among the questions
of law and fact common to the Class are:
(a) Whether the federal securities laws were violated
by defendants' acts and omissions as alleged herein;
(b) Whether defendants participated in and pursued the
illegal course of conduct complained of herein;
(c) Whether documents, press releases, public filings,
and other statements disseminated to the investing public and the
Company's shareholders during the Class Period misrepresented
material facts about the business, financial condition and
operations of Molten metal;
(d) Whether the market price of Molten Metal common
stock during the Class Period was artificially inflated due to
the material misrepresentations and omissions complained of
herein; and
(e) To what extent the members of the Class have
sustained damages and the proper measure of damages.
20. A class action is superior to all other available
methods for the fair and efficient adjudication of this contro-
versy since joinder of all members is impracticable. As the
damages suffered by individual Class members may be relatively
small, the expense and burden of individual litigation make it
impossible for members of the Class individually to seek redress
for the wrongs done to them. There will be no difficulty in the
management of this suit as a class action.
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FACTUAL ALLEGATIONS
I. The Company's Technology
21. Molten Metal claims to be an environmental technology
company with an innovative, proprietary processing technology
known as "Catalytic Extraction Processing" ("CEP"), which is
purportedly capable of processing hazardous wastes. Molten Metal
claims that its proprietary technology utilizes a molten metal
bath to break down the molecular structure of wastes and
industrial by-products, including hazardous wastes, into their
elements. Industrial by-products or wastes, referred to as
"feedstocks," are introduced into a molten metal bath operating
at approximately 3,000° Fahrenheit. The feedstocks dissociate
into their constituent elements and dissolve into the molten
metal.
22. The Company, through a series of public announcements,
has represented to the investing public that the Company's
proprietary CEP technology is capable of recycling hazardous
wastes so that a variety of commercially useful products can be
recovered and re-used as raw materials or sold to others. Molten
Metal refers to this recycling as "Elemental Recycling." Molten
Metal has claimed that by adding selected chemicals, referred to
as "reactants," to the molten metal bath, it can reformulate
waste products into new usable products that can be recovered.
In fact, Molten Metal's technology has not recovered any such
reformulated or recycled products, nor does Molten Metal have the
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ability to recover any such products in pure, usable form, with
one possible exception.
23. Molten Metal was established in 1989. In its current
marketing materials, the Company claims the following
developments in the commercialization of its CEP technology:
1991 "bench-scale CEP experiments conducted"
1992 "commercial-scale CEP trials held in Sweden"
1993 "commercial-scale CEP demonstrations began at
Recycling-R&D Facility; Plans announced for initial
commercial CEP systems."
24. On September 20, 1993, Molten Metal issued a press
release announcing that the Company had officially opened its $15
million Recycling-Research & Development (R&D) Facility in Fall
River, Massachusetts (hereafter the "Fall River Facility"). The
press release stated that the opening of the facility marked "the
facility's commencement of commercial-scale demonstration of
Catalytic Extraction Processing (CEP), Molten Metal Technology's
breakthrough technology for recycling hazardous and non-hazardous
wastes." The press release further represented that the facility
housed seven CEP systems, "the largest of which is a commercial-
scale prototype capable of recycling up to two tons of waste per
hour." Defendant Haney was quoted in the press release as
stating that the opening of the facility "represents a
cornerstone achievement in the commercialization of CEP."
25. The representation that Molten Metal had a commercial-
scale facility capable of recycling up to two tons of waste per
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hour was material to any evaluation of the Company's commercial
potential. Because waste processing companies are typically paid
a given pride per unit of weight recycled, the rate at which
waste is recycled is a material element in calculating the
economics of a waste processing facility. Molten Metal has never
withdrawn or retracted the representation that it has a
commercial-scale facility capable of recycling up to two tons of
waste per hour.
26. Molten Metal's claim that its Fall River facility is
capable of processing two tons of waste per hour is false or
misleading. In fact, according to a report by the National
Research Council issued in or about September, 1996, the Fall
River facility has require 120 hours, or five days, to process
two tons.
27. In an article carried over PR Newswire on November 21,
1995, Ian C. Yates, Vice-President of Sales and Market
Development for Molten Metal, stated that "Our technology has
been successfully demonstrated on a wide variety of industrial
and government wastes."
28. On March 28, 1995, Molten Metal filed with the SEC an
annual report on Form 10-K for the year ended December 31, 1994
(hereafter sometimes referred to as the "1994 Form 10-K").
Defendants Haney, Nagel, Preston and strong signed the 1994 Form
10-K.
29. The Company represented in the 1994 Form 10-K that the
Fall River Facility was "equipped with several commercial-scale
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CEP systems" and that the Company had "conducted numerous ...
commercial-scale demonstrations" in the Fall River Facility. The
report further represented that the Company had conducted "[a]
series of pre-operational tests and commercial-scale
demonstrations on feedstock samples representative of those of
prospective customers . . . [which] have shown the safety and
reliability of CEP."
The Company's Representations as to
its Ability to Recover Recycled Products
with its Elemental Recycling Technology.
30. As alleged above, defendants have represented that the
Company's CEP technology has the ability to recycle products, a
claimed technology that Molten Metal refers to as "Elemental
Recycling." The Company has falsely claimed that its CEP
technology can recover recycled products for re-use or sale.
31. Molten Metal's Form 1994 Form 10-K described its
Elemental Recycling as follows:
"The addition of various reactants to the molten metal
enables reformation and recovery of products
("Elemental Recycling") for reuse as a raw material by
the feedstock generator or for sale to other users."
32. In the 1994 Form 10-K, defendants also represented that
a "series of pre-operational tests and commercial-scale
demonstrations on feedstock samples representative of those of
prospective customers . . . . have demonstrated product recovery
from such feedstocks."
33. The Company also represented in the 1994 Form 10-K that
it "has demonstrated that CEP systems can be customized to make
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specific products by adding different reactants or by varying the
composition of the molten metal bath."
34. In the section entitled the "Fall River Facility," the
1994 Form 10-K represented:
The primary use of [the] Fall River Facility is to
perform TDPs [Technical Development Programs] that
demonstrate CEP's Elemental Recycling capability on a
variety of feedstocks . . . ."
35. These representations in the 1994 Form 10-K were false
or misleading as alleged below.
36. Molten Metal's annual report on Form 10-K for the year
ended December 31, 1995, was filed with the SEC on or about
April 1, 1996 (hereafter the "1995 Form 10-K"). It was signed by
defendants Haney, Nagel, Preston and Strong.
37. In its 1995 Form 10-K, Molten Metal again represented
that the CEP process is capable of Elemental Recycling and that
"recovered products can be re-used as raw materials in the
production process or sold to other industrial customers."
38. The 1995 Form 10-K also referred to the "ability of CEP
to process . . . wastes and industrial by-products while
recovering products for re-use or sale." The Company reinforced
the impression it believed it could recycle and recover
commercial quantities of useful materials by representing in the
1995 Form 10-K that it "has formed, and is in the process of
forming, relationships with market leaders to deliver initial CEP
systems" for, among other things, "conversion of waste streams
into industrial gasses."
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39. In a section of the 1995 Form 10-K entitled
"Technological Demonstration and Testing of CEP," the Company
represented that it "has demonstrated CEP's ability to dissociate
feedstocks and recover products in laboratory, bench-scale,
pilot-scale and commercial-scale trials in its Fall River
Facility." In a section of the 1995 Form 10-K entitled "Fall
River Facility," Molten Metal stated that, "The primary use of
[the] Fall River Facility is to perform TDPs that demonstrate
CEP's Elemental Recycling capability . . . ." and that the Fall
River Facility contains an area for "recovered material storage."
40. The Company further represented in the 1995 Form 10-K,
in a section entitled "Recoverable Products," that
"commercial-scale trials . . . have demonstrated that
CEP has the potential, through Elemental Recycling, to
recover commodity and specialty products, such as
industrial gasses, ceramics and metals, from
feedstocks.
It was further represented that Molten Metal
"has demonstrated that CEP systems can be customized to
make specific products by adding different reactants or
by varying the composition of the molten metal bath.
CEP is designed to permit recovered products to be re-
used as raw materials by the feedstock generator in
potential closed-loop applications or to be sold to
other industrial customers."
41. Molten Metal filed a registration statement on Form S-3
with the SEC on August 28, 1996, to register $142,750,000 of
convertible subordinated notes sold by the Company in May, 1996.
The registration statement contained the following
representations about the Company's CEP technology, including
Elemental Recycling.
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"The addition of various selected chemicals
('reactants') to the molten metal enables reformation
and recovery of products ('Elemental Recycling (TM)')
for re-use as a raw material by the feedstock generator
or for sale to other users."
Each of the Individual Defendants signed the registration
statement.
42. This registration statement also repeated the Company's
earlier representations that the Fall River facility "is equipped
with several commercial-scale CEP systems," and that "the Company
has demonstrated CEP's ability to dissociate feedstocks and
recover products in ... commercial-scale trials in its Fall River
facility."
43. Although the registration statement contained the
disclaimer that "there can be no assurance" the Company's CEP
process will be successful in recovering materials in a form that
is commercially usable or saleable, this warning was misleading,
because the Company in fact knew that its CEP process is not
capable of recovering materials in a form that is commercially
usable or saleable, with the possible exception of synthesis
gas. And, even as to synthesis gas, Molten Metal's technology is
not competitive with other methods of producing the gas.
44. In both the Form 10-Q for the quarter ended March 31,
1996, filed with the SEC on or about May 13, 1996, and the Form
10-Q for the quarter ended June 30, 1996, filed with the SEC on
or about August 12, 1996, Molten Metal described its technology
as broadly applicable to a wide variety of wastes and capable of
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recycling elements into useful raw materials. In the Forms 10-Q,
Molten Metal represented as follows:
Molten Metal ... is an environmental technology company
commercializing pollution prevention and waste
recycling methods that are broadly applicable to a wide
variety of hazardous, non-hazardous and radioactive
wastes. The Company developed its core technology,
Catalytic Extraction Processing ("CEP"), to dissolve
waste compounds to their constituent elements in a
molten metal bath and reconfigure the elements into
useful raw materials. (Emphasis added.)
45. The Company's repeated representations that it had
recovered a variety of products for re-use or sale in commercial-
scale trials and that the products recovered can be customized by
the selection of specific reactants and/or varying the
composition of the molten metal bath, were false and misleading.
Molten Metal has not been able to recover reformulated products
by means of its Elemental Recycling technology, with the sole
exception that Molten Metal apparently can produce synthesis gas.
Molten Metal's representations that it can recover commodity and
specialty products, such as industrial gases, chemicals and
metals through elemental recycling and that it can customize CEP
systems to make specific products by adding different reactants
and/or by varying the composition of the Molten Metal bath as
alleged above are therefore false and misleading.
46. Moreover, the cost of producing synthesis gas by means
of Molten Metal's technology is not competitive with other
methods for producing synthesis gas. Therefore, Molten Metal's
ability to produce synthesis gas is economically and commercially
worthless.
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47. In a press release issued on February 22, 1996, Molten
Metal announced the signing of a letter of intent to create a
joint venture with two Japanese companies, Nichimen Corporation
("Nichimen") and NKK Plant Engineering Corporation ("NKK"), to
process Japanese municipal solid waste incinerator fly ash and to
recycle the incinerator ash to recover ceramic and metal
products. The press release indicated that this joint venture
had tremendous revenue potential for Molten Metal. It
represented that the joint venture would sell, license, own and
operate CEP facilities to service more than 1,800 municipal solid
waste incinerators in Japan, and that NKK operated 85 of the 100
largest municipal waste incinerators in Japan. The press release
further stated that the joint venture intended to purchase
approximately 40 CEP systems from Molten Metal over the first ten
years of operations, starting with a $9-15 million commercial-
scale demonstration system to be ordered when the joint venture
agreements were finalized. The press release stated that the
first CEP system was expected to be commissioned in 1996. These
representations imply that Molten Metal believed it had the
ability to build such a commercial-scale system.
48. The press release announcing this joint venture was
deceptive and misleading, because Molten Metal did not and does
not have the ability to recover ceramic and metal products.
49. The 1995 Form 10-K reported the signing of the letter
of intent to create a joint venture with Nichimen and NKK, and
stated that "once formed, the joint venture would employ [Molten
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Metal's] proprietary Cerex-CEP technology to recycle incinerator
ash to recover ceramic and metal products." This statement is
false and misleading, because Molten Metal's technology is not
able to recover ceramic and metal products.
II. DOE Research Funding
50. Prior to 1996, a major source of revenues for Molten
Metal was R&D grants from the DOE pursuant to a cost-sharing
contract between Molten Metal and the DOE entered into on
September 30, 1993 (the "September 30, 1993 Contract").
51. Pursuant to the contract, on September 30, 1993, Molten
metal entered into a cost-sharing "Research of Contaminated Scrap
Metal" contract with the DOE. Pursuant to the contract, the DOE
provides part of the cost of the research and development for
CEP. The percentage of the total costs to be borne by the DOE
was 68.5 percent.
52. From September 30, 1993 through December 30, 1995,
Molten Metal received a total of $25.2 million in research grants
from DOE.
53. During 1993, 1994, 1995 and 1996, a series of
Modifications of the Contract were issued by DOE in order to
authorize additional fundings for the project. Substantial
increases in funding were made when the Statement of Work to be
performed was revised an March 24, 1994 and February 15, 1995.
54. On June 14, 1995, a Modification Contract was issued
which increased the total estimated cost of the project to
$36,830,594 and added $4 million to DOE's share of funding, for a
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total of $19,227,853 in funds available to Molten Metal from DOE.
The time for completion of the project was extended until April
30, 1996.
55. Over the next six months, DOE's share of the funding
was gradually increased to 68.5 percent, or $25,227,853. This
phase of the project was completed on or about May 15, 1996 after
a two-week extension of the period of performance.
56. In late April and early May, 1996, Molten Metal and DOE
discussed certain additional work to be performed after
completion of the current phase. Agreement was reached, and on
May 10, 1996, a Modification of Contract, including a new
Statement of Work, was signed.
57. In the May 10, 1996 Modification, Molten Metal and DOE
agreed that the estimated cost to complete was raised $2 million
to $38,830,594 and $2 million was added to DOE's current funding,
bringing it to $27,227,853. The period of performance was
extended until September 30, 1996.
58. In late April and early May, 1996, DOE and Molten Metal
also discussed the next phase of the project to be completed on
or about March 31, 1997, and the amount of funding available from
DOE for that purpose. According to sources at DOE, DOE informed
Molten Metal that it could expect a maximum of $6 million in DOE
funding in addition to the Modification signed an May 10, 1996.
59. Douglas Augenthaler is a stock market analyst at
Oppenheimer & Co., Inc. ("Oppenheimer") who has followed and
written research reports concerning Molten Metal since at least
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1994. During discussions with Augenthaler in March, 1996, Molten
Metal executives stated that they expected to receive $20 million
in R&D grants from the DOE during 1996. As Oppenheimer stated in
its report concerning the Company dated March 13, 1996:
A brief review of 1996 revenue projections. We
expect Molten Metal's revenue to approximate $95
million in 1996, which completely excluded M4
operations (which will be accounted as equity income)
but includes the operations of the SEG/Molten Metal
facility, which the company hopes to consolidate. On
this basis, we expect plant operations to contribute
$8-$10 million, contract R&D activity to contribute
about $20 million, construction and equipment activity
to contribute roughly $60 million and license fees to
add $6-$7 million. (Emphasis added.)
60. Oppenheimer's March 13, 1996 report concluded that:
We continue to rate Molten Metal a buy. We are
entering the commercialization phase for the CEP
technology and expect that harder data on plant
economics won't be available until the second quarter
earnings release. Management continues to express its
satisfaction with plant operations to date. Our
earnings estimates reflect an expectation of five to
six plants commissioned by year end 1996, but the bulk
of revenue and income for the year will be derived from
other sources (construction license fees, R&D
contracts). (Emphasis added.)
61. Molten Metal's 1995 Form 10-K, filed with the SEC on or
about April 1, 1996, described the history of the DOE contract
and represented as follows:
"During 1995, revenue from the DOE accounted for
approximately 30% of the Company's total revenue, and
the Company anticipates that a substantial portion of
its revenue for 1996 will also be from the DOE.
Failure to reach agreement with the DOE regarding
additional funding could have a material effect on 1996
revenue."
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Molten Metal had approximately $44 million in revenues in 1995.
The approximately 30% of total revenue received from DOE was
therefore approximately $13.2 million.
62. Augenthaler, on August 26, 1996, issued another
research report regarding Molten metal. He continued to rate the
stock a buy (priced at $31.75 per share) and stated that "Our
earnings estimate for 1996 remains $0.75 to $1.00 although we are
focusing on the low end of that range. The primary sources of
revenue during the year will be R&D funding from the government,
construction-related revenue and technology transfer fees.
Although EPS in the first half of 1996 is meager relative to the
target for the year, we note that both construction and R&D
revenue will be weighted to the second half of the year . . ."
(emphasis added).
63. On or about July 2, 1996, Molten Metal filed a Form 8-K
with the SEC which purported to contain certain risk disclosures
regarding the purchase of Molten Metal securities by investors.
On page 2 of the Form 8-K, the Company disclosed as follows:
The Company has historically been dependent on two
customers, M4 Environmental L.P. and the Department of
Energy, for a substantial portion of its revenues and
anticipates that a substantial portion of its revenues in
1996 will be from these two customers. Variations from this
expectation could have a material effect on the Company's
1996 revenues. (Emphasis added.)
64. This "risk disclosure" was materially false and
misleading when made. The Company, as of July 2, 1996, knew that
DOE had granted Molten Metal only an additional $2 million, and
that Molten Metal could reasonably expect only an additional $6
23
million by March 31, 1997, far less R&D funds than the $20
million the Company and the financial markets expected the
Company to receive in 1996, based upon the Company's statements
to Augenthaler, the Oppenheimer analyst. Consequently, this
statement was materially misleading in that it failed to disclose
that 1996 revenues from the DOE will be substantially less than
the Company's prior expectations, as reflected in Oppenheimer's
research report.
65. The Form 8-K also contained another misleading "risk
disclosure:"
The Company anticipates that a significant portion of the
market for CEP systems will be United States government
agencies such as the Department of Energy and the Department
of Defense. The Company's existing government contracts can
generally be canceled, delayed or modified at the sole
option of the government and are generally subject to annual
funding limitations and public sector financing constraints.
The Company believes that any future government contracts
will be structured similarly. (Emphasis added.)
66. This "risk disclosure" was false and materially
misleading when made. As of July 2, 1996, Molten Metal knew that
the DOE had already materially modified the existing contract the
Company had with the DOE regarding R&D funding, and that only $2
million in additional DOE funding was currently committed. The
failure to disclose this material fact rendered this alleged
"risk disclosure" inherently incomplete and misleading.
67. On July 18, 1996, DOE issued a "Stop Work" Modification
directing Molten metal to stop all work except as necessary to
finalize certain reports and resubmit them prior to August 15,
1996. Defendants did not disclose this fact.
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68. During a conference call with stock market analysts, on
or about August 8, 1996, to discuss the Company's just released
1996 second quarter results, Molten Metal's management indicated
that, at that time, it hoped to receive "additional R&D funding
from the DOE." Once again, the statement was misleading because
it failed to reveal that only $2 million had been committed, that
the Company expected only an additional $6 million at best, and
that a Stop Work Order had been received.
69. On August 28, 1996 Molten Metal filed an S-3 Notes
Registration Statement. Each of the individual defendants signed
the notes registration statement. Although Molten Metal was
obligated by the federal securities laws to disclose all material
information concerning the Company, it omitted from disclosure in
the notes registration statement the material fact that the
Company's R&D funding from DOE would be significantly less than
the Company's expectations as expressed to the public by the
Company's statements to Augenthaler of Oppenheimer, and that this
would adversely effect results for its 1996 third and fourth
quarters.
70. Additionally, the notes registration statement
contained the following false and misleading statement at page 8:
Also, during 1995, revenue from the DOE accounted for
approximately 30% of the Company's total revenue, and
the Company anticipates that a substantial portion of
its revenue for 1996 also will be from the DOE.
Failure to reach agreement with the DOE regarding
additional funding could have a material adverse effect
on 1996 revenue and results of operations.
25
71. This statement was materially false and misleading when
made on or about August 28, 1996. At the time, the defendants
knew or recklessly disregarded the fact that the DOE had already
informed Molten Metal that it had granted Molten Metal only an
additional $2 million on May 10, 1996, and that DOE would be
providing Molten Metal with R&D funding of only $6 million more,
and not the $20 million that the Company had been expecting to
receive. The statement that "a substantial portion of its
revenue from 1996 also will be from the DOE" was materially
misleading in that it failed to disclose to investors that the
DOE had already informed Molten Metal that 1996's level of R&D
funding was significantly less than 1995's level and even more
below the $20 million the Company had told the financial markets
it was expecting. Additionally, the statement that "Failure to
reach agreement with the DOE regarding additional funding could
have a material effect on 1996 revenue and results of operations"
was false as the Company already knew that DOE's commitment was
only for $2 million and perhaps an additional $6 million by March
31, 1997. Further, the defendants failed to disclose that Molten
Metal had received a Stop Work Order on July 18, 1996.
72. Molten Metal, on September 20, 1996, filed another Form
S-3 Registration Statement to register 307,735 shares of 308,000
shares of common stock which were given to Lockheed Martin
Corporation ("Lockheed") as part of the expansion of a joint
venture partnership between Molten Metal and Lockheed known as M4
(the "Lockheed Registration Statement"). Lockheed was the sole
26
selling shareholder in this offering. The Lockheed Registration
Statement, which was signed by each of the Individual Defendants
on September 19, 1996, failed to disclose the material fact that
the Company's R&D funding from DOE was set at a level
significantly less than the Company's expectations which would
adversely affect results for its 1996 third and fourth quarters.
73. On September 30, 1996, DOE issued a Modification of
Contract which canceled the July 18, 1996 Stop Work Order, and
revised the estimated contract costs and scheduling. Under the
new Modification, the estimated contract costs were increased to
$48,514,336. and the period of performance was extended to March
31, 1997. The DOE's share of current funding was increased
$3,631,8l2. to $30,859,665.
74. On September 30, 1996, Molten Metal and DOE understood
that DOE's share of the funding would increase to a fully funded
amount of $33,227,853. or 68.5 percent of the total estimated
contract costs, as progress was made. A Modification authorizing
this funding was issued by DOE on November 18, 1996.
75. Accordingly, on September 30, 1996, defendants knew
that DOE had authorized an additional $3.6 million in current
funding, and would likely authorize an additional $2.4 million in
the near future, consistent with DOE's statements to Molten in
April and May of 1996.
76. Molten Metal failed to update or correct the statement
in its 1995 Form 10-K quoted above that "failure to reach
27
agreement with the DOE regarding additional funding could have a
material effect on 1996 revenue."
The End of the Class Period
77. On Sunday, October 20, 1996, Molten Metal issued a
press release entitled "Molten Metal Technology Updates Research
and Development Funding." The Company stated that "government-
funded research and development revenues will not meet company
expectations for 1996." The press release continued that "this
research and development revenue shortfall [is expected to]
adversely effect its third and fourth quarter earnings."
78. In an interview with Bloomberg Business News, an
officer of Molten Metal stated that "The U.S. Department of
Energy will give the company only $8 million of an expected $20
million for research into the recycling of radioactive scrap
metal."
79. The Company subsequently clarified that its R&D funding
was not being "cut" by the DOE but that the Company had
"overestimated how much it would receive from the DOE." A
Company spokeswoman, Sarah Lawson, said that "In our internal
estimate, made earlier this year, we were off."
80. Molten Metal held a conference call with securities
analysts on Sunday night, October 20, 1996. In addition to
discussing the level of government-funded research and
development revenues, Molten Metal stated that it would delay
entry into the incinerator fly ash market and other markets,
28
because Molten Metal believed it may be overextending its
resources by pursuing too many markets at once.
81. In a second conference call with securities analysts on
October, 21, 1996, defendant Haney gave a different reason for the
delay with the Japanese joint venture. In a report by Reuters
Financial Service on October 21, 1996, Haney was quoted as
stating that the delay came because "the negotiations are going
slower than we expected." Haney claimed that the Japanese joint
venture parties were still interested in the technology.
82. During the Class Period, Molten Metal shares traded as
high as $41.25 per share and closed at $28-1/8 per share on
Friday, October 18, 1996. The price of Molten Metal shares
dropped approximately 50% on October 21, 1996, to a closing price
of $14-1/4, an extraordinarily high volume of over 5.7 million
shares. Molten Metal shares are currently trading in a range
below $14. As a result of this plunge in the price of Molten
Metal shares, plaintiff and the class have suffered damages
aggregating millions of dollars.
The Importance of Molten Metal's
Stock Price to the Defendants
83. Defendants had several personal and corporate reasons
for causing Molten Metal shares to trade at artificially inflated
prices. First, as alleged above, at least certain of the
Individual Defendants owned substantial numbers of shares of
Molten Metal common stock and had stock options.
84. Second, in May, 1996, shortly after the filing of
Molten Metal's 1995 Form 10-K, Molten metal raised $142,750,000
29
from the issuance of Convertible Subordinated Notes Due 2006 (the
"Notes"). The Notes are convertible into common stock at a
conversion price of $38.75 per share.
85. Third, Molten Metal has used its stock as currency to
pay for part of its 50% equity investment in M4 Environmental LP,
a Delaware limited partnership ("M4") formed by the Company and
Lockheed Martin Corporation ("Lockheed"), in which the Company
and Lockheed each effectively own 50%. In March, 1996, Molten
Metal used 307,735 shares of its common stock to purchase certain
assets that were contributed to M4 to match an investment in M4
by Lockheed. On September 20, 1996, as noted above, Molten Metal
filed the Lockheed Registration Statement to register those
307,735 shares.
86. Finally, certain of the individual defendants sold over
$2.5 million in Molten Metal stock at artificially inflated
prices during the Class Period. Those sales were as follows:
Defendant Date Number of Shares Proceeds
--------- ---- ---------------- --------
Preston September, 1996 40,000 1,260,000
Strong September, 1996 41,000 1,290,020
------ ----------
81,000 $2,550,020
In addition, Ian C. Yates, a vice president of Molten Metal, sold
77,000 shares of Molten Metal stock, representing virtually his
entire holdings, at artificially inflated prices. Yates sold
15,000 shares in March 1996, 34,638 shares in May 1996, 10,000
shares in July 1996, and 17,333 shares in August 1996, totaling
almost 77,000 shares.
30
COUNT I.
[Against All Defendants For Violations of
Section 10(b) Of the Exchange Act] and Rule 10b-5
87. Plaintiff repeats and realleges each and every
allegation set forth above.
88. This claim is brought pursuant to Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated pursuant thereto against
all defendants.
89. Defendants individually and in concert, directly and
indirectly, by the use of means or instrumentalities of
interstate commerce and/or of the mails, engaged and participated
in a continuous course of conduct to misrepresent material
information about the operating conditions, technology and future
prospects of Molten Metal as specified herein. Defendants
employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged
in acts, practices, and a course of conduct as alleged herein in
an effort to mislead investors of Molten Metal's value and
potential, which included the making of, or the participation in
the making of, untrue statements of material facts and omitting
to state material facts necessary in order to make the statements
made about Molten Metal in the light of the circumstances under
which they were made, not materially misleading, as set forth
more particularly herein, and engaged in transactions, practices
and course of business which operated as a fraud and deceit upon
the purchasers of Molten Metal common stock during the Class
Period.
31
90. The defendants had actual knowledge of the
misrepresentations and omissions of material facts set forth
herein, or acted with reckless disregard for the truth in that
they failed to ascertain and to disclose such facts, even though
such facts were available to them. Such defendants' material
misrepresentations and/or omissions were done knowingly or
recklessly and for the purpose, and which had the effect, of
misrepresenting and concealing material information about Molten
Metal from the investing public and supporting the artificially
inflated price of its stock.
91. Defendants knew that the marketplace would rely upon
the statements they were making about Molten Metal's technology
and future prospects in establishing the price at which Molten
Metal's common stock would trade, and that plaintiff and the
class would rely, directly or indirectly, upon that information
in deciding whether to purchase shares of Molten Metal stock.
92. As a result of the dissemination of the materially
false and misleading information and failure to disclose material
facts, as set forth above, the market price of Molten Metal
common stock was artificially inflated throughout the Class
Period. In ignorance of the materially false and misleading
nature of the reports and statements described above, plaintiff
and other members of the Class relied, to their damage, on the
reports and statements described above and/or on the integrity of
the market price of Molten Metal common stock and the
completeness and accuracy of the information disseminated to
32
Molten Metal investors in connection with the purchase of the
Company's common stock.
(a) At the time of said misrepresentations and omissions,
plaintiff and other members of the Class were ignorant of their
falsity, and believed them to be true. In reliance on said
misrepresentations and in reliance upon the superior knowledge
and expertise of defendants, plaintiff and other members of the
Class were induced to and did purchase Molten Metal common stock
at artificially inflated prices. Had plaintiff and other members
of the Class known the truth, they would not have purchased their
Molten Metal stock during the Class Period or, if they had
purchased Molten Metal stock during the Class Period, they would
not have done so at the artificially inflated prices that were
paid.
93. Plaintiff and the Class were injured because the risks
that materialized were risks of which he was unaware as a result
of defendants' misrepresentations, omissions and other fraudulent
conduct.
94. By virtue of the foregoing, defendants have violated
Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated
thereunder.
95. Plaintiff and other members of the Class has been
damaged by defendants' violations as described in this Count and
seek recovery for the damages caused thereby.
33
COUNT II.
[Against the Individual Defendants For Violations
Of Section 20(a) of the Exchange Act]
96. Plaintiff repeats and realleges each and every
allegation set forth above.
97. This claim is brought pursuant to Section 20(a) of the
Exchange Act against the Individual Defendants.
98. Throughout the Class Period, each of the Individual
Defendants was a "controlling person" of Molten Metal within the
meaning of § 20(a) of the Exchange Act.
99. Because of his position as an executive and/or director
of Molten Metal during the relevant period, each of the
Individual Defendants had access to the adverse and material
information about Molten Metal, approved the misleading
statements and omissions described above and acted to conceal
such adverse information from the investing public. Because of
their respective positions of control and authority as principal
executive officers and/or directors of Molten Metal during the
relevant time period, the Individual Defendants were able to and
did directly or indirectly control the contents of Molten Metal's
various publicly disseminated reports, press releases and filings
with the SEC.
100. As officers and/or directors of a publicly held
company, the Individual Defendants had a duty to disseminate
accurate and truthful information with respect to Molten Metal's
business operations so that the market price of Molten Metal's
34
securities would be based on truthful, accurate and timely
disclosure of all material information.
101. By virtue of the defendants named in this Count each
being a "controlling person", they are liable for the violations
of Section 10(b) of the Exchange Act and Rule 10b-5 committed by
defendant Molten Metal as alleged in Count I above.
PRAYERS FOR RELIEF
WHEREFORE, plaintiff prays for judgment as follows:
A. declaring this action to be a plaintiff class action
properly maintained pursuant to Rule 23(a) and (b)(3)
of the Federal Rules of Civil Procedure and certifying
the plaintiff as an appropriate plaintiff and class
representative;
B. awarding plaintiff and other members of the Class
damages, with interest thereon;
C. awarding plaintiff and other members of the Class their
costs and expenses of this litigation, including
reasonable attorneys' fees, accountants' fees and
experts' fees and other costs and disbursements; and
35
D. awarding plaintiff and other members of the class such
other and further relief as may be just and proper
under the circumstances.
By his attorneys,
/s/
Thomas G. Shapiro
(BBO #454680)
Michelle H. Blauner
(BBO #549049)
Shapiro Haber & Urmy LLP
75 State Street
Boston, MA 02109
(617) 439-3939
Jeffrey C. Block
Berman, DeValerio & Pease
One Liberty Square
Boston, MA 02109
(617) 542-8300
Frederic S. Fox
Kaplan Kilsheimer & Fox, LLP
685 Third Avenue
New York, NY 10017
(212) 687-1980
Andrew M. Schatz
Jeffrey Nobel
Schatz & Nobel
216 Main Street
Hartford, CT 06106
(860) 493-6292
36