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UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF WISCONSIN
-----------------------------------x
GREAT NECK CAPITAL APPRECIATION :
INVESTMENT PARTNERSHIP, L.P., on :
behalf of itself and all others :
similarly situated, : C.A. No. [98-CV-524]
: [filed Jun. 5, 1998]
Plaintiff, :
:
vs. : CLASS ACTION COMPLAINT
: FOR VIOLATION OF THE
: FEDERAL SECURITIES LAWS
JEFFREY T. GRADE, JOHN N. HANSON, :
FRANCIS M. CORBY, JR., MARK E. : Jury Trial Demanded
READINGER and HARNISCHFEGER :
INDUSTRIES, INC., :
:
Defendants. :
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Plaintiff, individually and on behalf of all persons
similarly situated, by its undersigned attorneys, for its class
action complaint, alleges upon personal knowledge as to itself and
its own acts and as to all other matters upon information and belief
based upon the investigation made by and through its counsel,
including review of Securities and Exchange Commission ("SEC")
filings, news reports, press releases, and other publicly available
documents. Plaintiff believes that further substantial evidentiary
support will exist for the allegations set forth below after a
reasonable opportunity for discovery.
NATURE OF ACTION
I. Plaintiff brings this action as a class action on behalf of
itself and all other persons or entities, except for defendants, who
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purchased shares of Harnischfeger Industries, Inc. ("Harnischfeger"
or the "Company") common stock (the "Class") during
the period November 20, 1997 through April 27, 1998, inclusive (the
"Class Period").
1. During the Class Period, defendants engaged in a
scheme and course of conduct, in violation of Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
pursuant to which they artificially inflated the price of
Harnischfeger stock through a series of false and misleading
misrepresentations and omissions concerning the Company's financial
statements regarding the Company's financial condition and results
of operations.
2. In particular, defendants knowingly or recklessly
disregarded the lack of internal controls concerning the true costs
of long-term construction projects at the Company's Indonesian
manufacturing plants and improperly recognized revenues and thus,
profits on long-term construction contracts. Cash strapped,
dangerously close to breaching debt covenants, and motivated by a
new stock appreciation incentive award plan, defendants overstated
Harnischfeger's profits from long-term construction projects by at
least $192 million by improperly accounting for such costs. By the
close of the Class Period, to aid their deception, defendants
initiated a massive stock repurchase plan that further served to
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artificially inflate the price of Harnischfeger's stock. However,
defendants could no longer conceal their scheme because, the
magnitude of the unbooked or deferred construction costs grew so
large as to eliminate at least all of the previous years' operating
income.
3. On April 27, 1998, defendants caused the Company to
announce an increase of $100 million to a previously announced
"restructuring charge" of $125 to $150 million, which, for the first
time revealed that such charges included the "cumulative effects"
of "cost overruns" and "accounting irregularities." The market
reacted to this news quickly, driving the price of Harnischfeger's
stock down $1.625 to $28.50 per share on heavy volume. On the next
day, April 28, 1998, Harnischfeger's stock further declined to
$27.813 per share after rating agencies downgraded Harnischfeger's
debt as a result of the prior day's announced charges.
4. Ultimately, on June 1, 1998, defendants announced
that Harnischfeger would restate its 1997 fiscal fourth quarter
earnings by reducing assets and earnings by at least $27.6 million;
the remainder of the $192 million charge was to be allocated between
the first and second fiscal 1998 quarters.
5. During the Class Period, the Company's stock traded
as high as $39.125 per share.
JURISDICTION AND VENUE
6. This action arises under Sections 10(b) and 20(a) of
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the Exchange [sic], 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5
promulgated pursuant to Section 10(b) by the SEC, 17 C.F.R. §
240.10b-5. The jurisdiction of this Court is based on Section 27
of the Exchange Act, 15 U.S.C. § 78aa; and on Sections 1331 and 1337
of the Judicial Code, 28 U.S.C. §§ 1331, 1337.
7. Venue is proper in this District under Section 27 of
the Exchange Act, and Section 1391(b) of the Judicial Code, 28
U.S.C. § 1391(b). Harnischfeger's corporate headquarters is located
in this District, defendants transact/reside in this District and
many of the acts complained of occurred in this District.
8. In connection with the acts and conduct alleged
herein, defendants directly and indirectly, used the means and
instrumentalities of interstate commerce, including the United
States mails and facilities of the national securities exchanges.
PARTIES
9. Plaintiff, Great Neck Capital Appreciation Investment
Partnership, L.P. purchased Harnischfeger common stock during the
Class Period as set forth in the accompanying certification, and has
been damaged as a result of defendants' conduct as described herein.
10. (a) Defendant Harnischfeger is a corporation
organized and existing under the laws of the State of Delaware with
its headquarters located at 13400 Bishops Lane, Brookfield,
Wisconsin 53005.
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(1) Harnischfeger manufactures and sells heavy
machinery and manufacturing systems for papermaking (the "Beloit
Division"), surface mining (the "P&H Mining Equipment Division"),
and underground coal mining (the "Joy Mining Division"). The
Beloit Division accounted for approximately 41% of Harnischfeger's
total sales for the fiscal year ended October 31, 1997.
(2) Harnischfeger's common stock is, and at all
relevant times has been, publicly traded on the New York Stock and
Pacific Stock Exchanges (the "NYSE" and "PSE," respectively). As
of March 13, 1998, there were 47,799,592 shares of Harnischfeger
common stock issued and outstanding. The market for Harnischfeger
common stock is efficient and reflects all publicly available
information.
(3) Harnischfeger maintains a Web Site on the
Internet at www.hii.com. On this site, Harnischfeger disseminates
information about the Company, its products, and financial
condition to customers, vendors, shareholders, and the investing
public.
(a) Defendant Jeffrey T. Grade ("Grade") was, at all
relevant times, the Chairman of the Board, Chief Executive Officer,
and Director of Harnischfeger.
(b) Defendant John N. Hanson ("Hanson") was, at all
relevant times, President, Chief Operating Officer, and a Director
of Harnischfeger.
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(d) Defendant Francis M. Corby, Jr. ("Corby") was,
at all relevant times, Executive Vice-President, Finance and
Administration, and a Director of Harnischfeger.
(e) Defendant Mark E. Readinger ("Readinger") was
Senior Vice President since August 1997 and Chief Operating Officer
of the Joy Mining Division since August 1995. In February 1997,
Readinger became President of Beloit;
11. Defendants Grade, Hanson, Corby and Readinger are
sometimes referred to collectively herein as the "Individual
Defendants."
12. The Individual Defendants, as officers and/or
directors of the Company had a duty, because of the positions they
held, to disseminate complete, accurate, and truthful information
about Harnischfeger's financial condition and business operations.
The Individual Defendants had a duty to correct promptly any public
statements issued by Harnischfeger that had become false and
misleading. Because of their positions, their ability to exercise
power and influence with respect to Harnischfeger's course of
conduct, and their access to material inside information about
Harnischfeger, the Individual Defendants were, at the time of the
wrongs alleged herein, controlling persons within the meaning of
Section 20(a) of the Exchange Act.
13. Defendants Grade, Hanson and Corby signed the
Company's fiscal year ended October 31, 1997 Form 10-K filed with
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the SEC on January 29, 1998 (the "Form 10-K").
CLASS ACTION ALLEGATIONS
14. 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 Harnischfeger common stock between November 20, 1997 and April
27, 1998, inclusive. Excluded from the Class are defendants,
members of the immediate families of the Individual Defendants, any
entity in which any defendant has or had a controlling interest, and
the legal representatives, heirs, successors, or assigns of any
defendant.
15. This action is properly maintainable as a class
action because:
(a) during the Class Period there were more than 47
million shares outstanding. The members of the Class for whose
benefit this action is brought are dispersed throughout the United
States and are so numerous that joinder of all class members is
impracticable. Thousands of Harnischfeger shares were traded
publicly during the Class Period. Plaintiff believes that there are
hundreds, if not thousands, of Class members;
(b) plaintiff's claims are typical of the claims of
the members of the Class and plaintiff and all members of the Class
sustained damages as a result of defendants' wrongful conduct
complained of herein;
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(c) plaintiff will fairly and adequately protect
the interests of the members of the Class and has retained counsel
competent and experienced in class action litigation. Plaintiff has
no interests antagonistic to, or in conflict with, the Class that
plaintiff seeks to represent;
(d) a class action is superior to other available
methods for the fair and efficient adjudication of the claims
asserted herein, because joinder of all members is impracticable.
Furthermore, because the damages suffered by individual members of
the Class may be relatively small, the expense and burden of
individual litigation make it virtually impossible for Class members
to redress the wrongs done to them. The likelihood of individual
class members prosecuting separate claims is remote;
(e) plaintiff anticipates no unusual difficulties
in the management of this action as a class action; and
(f) the questions of law and fact common to the
members of the Class predominate over any questions affecting
individual members of the Class.
16. The questions of law and fact common to the Class
include whether, among others:
(a) the Federal securities laws were violated by
defendants' acts and/or omissions as alleged herein;
(b) the Company's public reports and filings issued
during the Class Period misrepresented and/or omitted material facts
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about Harnischfeger's financial condition, including: the
profitability of Harnischfeger's long-term construction projects;
(c) defendants acted with knowledge or with
reckless disregard for the truth in misrepresenting and/or omitting
material facts;
(d) during the Class Period, the market price of
Harnischfeger common stock was inflated artificially as a result of
defendants' wrongful conduct;
(e) defendants participated in and pursued the
common course of conduct complained of herein; and
(f) the members of the Class have sustained damages
and, if so, what is the proper measure thereof.
FRAUD-ON-THE-MARKET ALLEGATIONS
17. With regard to the allegations arising under Section
10(b) and Rule 10b-5, plaintiff intends to rely on the fraud-on-the
market doctrine, which assumes the existence of an efficient market
for Harnischfeger securities. In that connection, brokers
nationwide have immediate access to press releases and trading
information about Harnischfeger through computer and news wire
systems. These systems display, within minutes of the release or
transaction taking place, pertinent information and the most recent
trades and prices. Among the analysts that followed the Company
during the Class Period were PaineWebber Incorporated, Merrill Lynch
Pierce Fenner & Smith, Inc., and Lehman Brothers, Inc.
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18. Plaintiff will rely, in part, upon the presumption
of reliance established by the fraud-on-the-market doctrine in that:
(a) defendants made public misrepresentations and/or
failed to disclose facts during the Class Period;
(b) the omissions and misrepresentations of fact
were material;
(c) Harnischfeger met the requirements for
listing, and was listed on the NYSE and PSE, open highly efficient,
and automated markets;
(d) as a public company, Harnischfeger filed
periodic public reports with the SEC;
(e) Harnischfeger's trading volume, during the Class
Period, was substantial, thereby reflecting numerous trades each
day;
(f) the misrepresentations and/or omissions
alleged herein would tend to induce a reasonable investor to
misjudge the value of Harnischfeger's common stock;
(g) plaintiff and the members of the Class
purchased their common stock during the Class Period without
knowledge of the omitted or misrepresented facts; and
(h) Harnischfeger was followed by various analysts
employed by major brokerage firms that wrote reports that were
distributed to the sales force and certain customers of their
respective brokerage firms and which were available to the public
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through various automated data retrieval services. Thus, each of
these reports was publicly available and entered the public
marketplace.
19. Based upon the foregoing, plaintiff and the members
of the Class are entitled to a presumption of reliance upon the
integrity of the market for their Section 10(b) claims.
NO SAFE HARBOR
20. The statutory safe harbor provided for forward-
looking statements under certain circumstances does not apply to any
of the allegedly false statements pleaded in this complaint. The
statements alleged to be false and misleading herein all relate to
then-existing facts and conditions. In addition, to the extent
certain of the statements alleged to be false may be characterized
as forward looking, they were not identified as "forward-looking
statements" when made, there was no statement made with respect to
any of those representations forming the basis of this complaint
that actual results "could differ materially from those projected,"
and there were no meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those in the purportedly forward-looking statements.
Alternatively, to the extent that the statutory safe harbor is
intended to apply to any forward-looking statements pleaded herein,
defendants are liable for those false forward-looking statements
because at the time each of those forward-looking statements was
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made, the particular speaker had actual knowledge that the
particular forward-looking statement was materially false or
misleading, and/or the forward-looking statement was authorized
and/or approved by an executive officer of Harnischfeger who knew
that those statements were false when made.
SUBSTANTIVE ALLEGATIONS
Background
21. Harnischfeger is a holding company for subsidiaries
divided into three business segments that manufactures and
distributes worldwide: (1) surface mining and materials handling
equipment (P&H Mining Equipment); (2) underground mining equipment
(Joy Mining Machinery); and (3) pulp and paper machinery (Beloit).
Together, the Beloit and P&H Mining Equipment segments account for
almost 90% of Harnischfeger's sales. Harnischfeger's export sales
represent almost half of the Company's total sales. Harnischfeger
has plants in Australia, Brazil, Canada, Chile, France, Italy,
Mexico, Poland, Singapore, South Africa, the United Kingdom, and
the United States.
22. Beloit (or the "Pulp and Paper Machinery Division")
is a subsidiary of Harnischfeger. The Company's annual report for
fiscal year ended October 31, 1997, filed with the SEC on Form 10-K,
describes Beloit as "a leader in the design and manufacture of pulp
and paper machinery." Beloit operates on a global basis with major
manufacturing facilities in 10 countries, and sales and service
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offices located throughout the world.
23. Beloit's activities include the design, manufacture,
and installation of integrated pulp and papermaking machinery; major
rebuilds and servicing of exiting [sic] systems; and the sale of ancillary
equipment and replacement parts. This machinery is custom designed
to meet the specific needs of each customer.
24. In connection with complete installations and
rebuilds, Beloit engages in "engineer, procure, and construct"
contracts that often involve complex long-term construction
projects.
25. In the fourth fiscal quarter ended October 31, 1996,
Beloit recorded a restructuring charge of $4.3 million. This
restructuring charge purportedly was recorded to promote "organizing
engineering and manufacturing operations into Centers of
Excellence," by reducing costs and, thus, yielding greater profits.
26. On August 14, 1997, the Company announced a new
executive stock compensation plan, which unlike its predecessor
stock options award plan, is "designed to dramatically restructure
incentives toward achieving high performance in the Corporation's
common stock[:]"
[The] awards of up to an aggregate of 1,200,000
shares [are] based upon achievement of pre-
established stock price improvement factors.
The base stock price was set at $40.87 per
share. The minimum requirements of the plan
call for a portion of the shares to be awarded
if a 30% increase in stock price occurs within
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three years. The shares shall be fully awarded
if the stock price increases 50% within three
years or 70% within five years. If the target
prices are not met, none of the shares will be
awarded.
27. The stock price of Harnischfeger closed at $42.063
per share on August 14, 1997; already exceeding the plan's base
price of $40.87 per share.
28. Approximately one month later, on September 12, 1997,
the Company announced a ten million share common stock repurchase
program. In connection therewith, defendant Grade stated: "Our stock
is currently trading at a very attractive price, and we think it is
an excellent investment."
29. In the same press release, defendants announced the
hiring of Merrill Lynch & Co. to assist the Company in the sale of
P&H Mining Equipment's Material Handling Unit.
False And Misleading Statements
During the Class Period
30. On November 20, 1997, the Company reported record
operating earnings for the fiscal year ended October 31, 1997 of
$152.8 million on total sales of $3,088.5 million. Beloit reported
operating income of $104.1 million on revenues of $1,267.8 million.
As a result of Harnischfeger's earnings announcement, the price of
Harnischfeger's stock jumped to $38.00 per share, more than 7%, or
$2.50 per share, from the previous day's close, on heavy trading
volume.
31. In the notes to the Company's financial statements
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defendants stated:
Revenue Recognition: Revenue on long-term
construction contracts is generally recorded
using the percentage of completion method for
financial reporting purposes. Such contracts
include contracts for papermaking machinery,
certain mining equipment and custom engineered
cranes. Losses, if any, are recognized as soon
as identified. Sales of other products are
recorded as products are shipped or services
are rendered.
32. The Company also reported in the Form 10-K, note 7
to the financial statements, that its debt contained the following
loan covenants:
The terms of certain of the debt instruments
place limits on the amount of additional
long-term debt the Company may issue and
require maintenance of a minimum consolidated
net worth as defined. Additional funded debt
may be incurred if immediately thereafter
consolidated funded debt does not exceed 50%
of consolidated total tangible assets, as
defined.
33. During the Class Period, the Company's pre-tax
earnings were overstated, and its expenses and liabilities were
understated, by no less than $155 million due to the Company's
improper and fraudulent use of the percentage-of-completion method
of accounting for certain projects in Indonesia and other
"accounting irregularities."
34. On January 28, 1998, the Company issued a press
release that "forecasted" a decline in earnings. With respect to
future earnings, defendant Grade stated that:
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In regard to Harnischfeger's anticipated first-
quarter earnings performance, the company said
it is experiencing softness in orders for both
mining equipment and pulp and paper machinery.
As a result, management's expectation is that
results for the company's fiscal first quarter
ending Jan. 31, 1998 will fall below the
earnings of 65 cents per share recorded in the
equivalent, year-earlier period.
35. This statement was false and misleading, because
defendants knew or were reckless in not knowing that the reason for
the anticipated decline in the Company's first fiscal quarter
results was from underestimating the costs of long-term
construction contracts at Beloit's Indonesian facilities and other
"accounting irregularities." To blunt the impact of the negative
earnings representations, defendants peppered the market with
positive statements relating to a purported anticipated reduction
in debt and increased common stock repurchases. For example, in the
same press release, defendant Grade announced that the Company found
a buyer that would purchase 80% percent of the Company's interest
in Material Handling for approximately $300 million, after tax. In
addition, the Company would receive preferred stock and royalty
payments from the buyer for ten years. Defendant Grade also stated
that P&H Mining Equipment and its Material Handling unit "registered
record sales of $353 million last year. Going forward, Harnischfeger
is delighted to retain a 20 percent interest in this global
business. [Material Handling] is a superb provider of overhead crane
equipment and services." Grade stated that the proceeds from the
16
sale of Material Handling would be used to "pay down debt and to buy
back stock." The stock price closed at $35.50 on January 28, 1998,
slightly down from the previous day's close of $36.250.
36. On February 12, 1998, the Company issued a press
release wherein defendant Grade announced that Mark E. Readinger
would replace Tom Engelsman as President of Beloit.
37. In contradiction to the Company's January 28th
representations that it intended to use the proposed use of the
proceeds from the sale of its Materials Handling unit to pay down
exiting debt, Harnischfeger filed with the SEC on Form S-3 a shelf
registration for $200 million in debt. As noted on February 19,
1998, by the Milwaukee Journal Sentinel, "Harnischfeger also has $50
million in unsold securities registered in a previous shelf, raising
the total offering to $250 million . . ."
38. Only days after the Company's announcement of new
management at Beloit, the Company issued another press release on
February 23, 1998, announcing its first quarter earnings results for
fiscal 1998. In the announcement, defendants informed investors
that "special charges" would be taken in the second fiscal 1998
quarter:
An update of the company's Beloit Corporation
B2000 strategy indicates that manufacturing
throughput is increasing dramatically while the
global pulp and paper markets continue to
rationalize. Harnischfeger expects to take
restructuring and non-recurring charges in the
range of $125 million to $150 million in the
second quarter, specifically related to Beloit.
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These charges will include significant
reductions in global plant investment and
employment as well as additional reserves for
non-restructuring-related expenses. Preliminary
estimates are that the restructuring actions
will produce savings of $30 million to $40
million annually.
* * *
As previously reported, completion of the sale
of 80 percent of the company's P&H Material
Handling unit to Chartwell Investments, Inc. is
expected by the end of March. Gains from the
sale are expected to more than offset the
restructuring and non-recurring charges
anticipated at Beloit.
39. As before, defendants sought to blunt the impact of
the announcement by including positive news that the proceeds of the
sale of Material Handling will more than offset these reductions.
Defendants were successful in that effort. However, defendants
failed to disclose that at least some of the charges were related
to "accounting irregularities" and "cost overruns." The Company's
stock price barely moved from the previous day's closing price of
$32.175 per share, to close on February 23, 1998, at $32.875 per
share, a decline of only 2%.
40. On March 13, 1998, the Individual Defendants caused
the Company to file with the SEC its quarterly report on Form 10-Q
for the fiscal quarter ended January 31, 1998. Defendants made the
following statements therein:
[Note] (a) [to the financial statements
stated] In the opinion of management, all
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adjustments necessary for the fair presentation
of the results of operations for the three
months ended January 31, 1998 and 1997 . . .
and financial position at January 31, 1998 and
1997 have been made. All adjustments are of a
normal recurring nature.
* * *
[Note] (k) . . . The Company expects to take
restructuring and non-recurring charges in the
range of $125,000[,000] to $150,000[,000] in
the second quarter, specifically related to
Beloit. These charges will include significant
reductions in global plant investment and
employment as well as additional reserves for
non-restructuring-related expenses. Preliminary
estimates are that the restructuring actions
will produce savings of $30,000[,000] to
$40,000[,000] annually.
* * *
[MD&A] Item 3 . . . The 1998 after-tax cash
proceeds from the transaction are expected to
total approximately $300,000[,000]. Gains from
the sale are expected to more than offset the
restructuring and non-recurring charges
anticipated at Beloit.
* * *
As of March 12, 1998, the Company had
repurchased 1,676,400 shares [of the total ten
million announced on September 12, 1997]
through open market transactions at a cost of
approximately $65,000[,000].
41. On March 30, 1998, the Company announced that
Harnischfeger had completed the sale of its Material Handling unit.
Defendant Grade repeated his earlier statement that "Harnischfeger
expects to use the after-tax proceeds from the sale of approximately
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$300 million to pay down debt and to buy back stock."
42. The statements made by defendants in the preceding
two paragraphs were false and misleading, because defendants knew
or recklessly disregarded that, at the time that they were made:
(a) the "restructuring charge" was not solely related
to "significant reductions in global plant investment and
employment;"
(b) the charge was not a "non-recurring charge,"
but was at least partially related to "accounting irregularities;"
(c) it was necessary to increase the charge
substantially in the future, because the Company had long since
lost control of estimating its cost to complete long-term contracts;
and
(d) at least $27.6 million of the charges related
to prior periods to eliminate previously recognized profits on long-
term construction contracts.
43. Harnischfeger held its annual shareholders' meeting
on Tuesday April 14, 1998 in Milwaukee, Wisconsin. Defendants Grade
and Hanson spoke at the meeting. The full text of defendants' speech
is reproduced at Harnischfeger's Web Site. Again, though knowing
that there were undisclosed problems concerning Beloit, and the
related impact on the Company's financial statements, defendants
emphasized the positive prospects for the future of Beloit, and how
the gain on the sale of the Material Handling unit would more than
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offset any restructuring or other non-recurring charges to be taken
by Beloit in the second fiscal quarter. Defendants also stated the
following in regard to the Beloit charges:
In manufacturing, our new strategic focus has
also been able to reduce manufacturing lead
times, which improves throughput in our shops
and makes us more responsive and adept at
accommodating the changing needs of our
customers.
* * *
Our facilities are much more efficient now than
before. One result, coupled with fall off in
demand for new equipment, is the need for
restructuring at Beloit. . . [sic] that is, the
elimination of more capacity. When we announced
our first quarter 1998 results, we told Wall
Street that we anticipated taking a second-
quarter charge for Beloit totaling between $125
million and $150 million.
* * *
Half of these charges are related to
restructuring costs associated with substantial
reduction of fixed plant investment and
employment. We expect to close or downsize
several global operations and reduce Beloit's
work force by 800 or 900 this year. The
remaining portion of the charges relates to
increases in non-restructuring-related reserves
covering a variety of issues, including delays
in machine deliveries in the Pacific Rim.
* * *
All told, the annualized savings from these
efforts is expected to be $30 and $40 million.
We intend to strengthen Beloit's return on
sales and its ability to generate strong
profits regardless of market conditions.
Additionally, the gain on the sale of Material
Handling will more than offset the Beloit
charges.
21
* * *
It is important, however, to note that the
impact of the March 30 sale of [M]aterial
[H]andling is expected to more than offset the
previously announced Beloit Corporation
restructuring and non-recurring charges to be
taken during the quarter. As a result, the net
income for the second quarter is expected to
significantly exceed Harnischfeger's first
quarter reported net income of $0.46 per share.
44. On that same day, April 14, 1998, the Company
issued a press release where defendant Hanson was stated to have
"commented at the Company's annual meeting today that he expects
breakeven operating results for the Company's fiscal second quarter
ending April 30, 1998." Hansen [sic] stated further at the shareholders'
meeting:
The impact of the March 30 sale of [M]aterial
Handling], however, is expected to more than
offset the previously announced Beloit
Corporation restructuring and non-recurring
charges to be taken during the quarter, and, as
a result, net income for the second quarter is
expected to significantly exceed
Harnischfeger's first-quarter reported net
income of $0.46 per share.
* * *
Hanson also told shareholders that
Harnischfeger is strategically well-positioned
for growth. "Our cost-containment and market
development programs are on track. Industry
positioning for our brand franchises continues
to grow and global demand for the commodities
our customers produce, coal, mineral, pulp and
paper products, will expand at more rapid rates
as markets improve."
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As a consequence of defendants' statements, the price of
Harnischfeger increased from the previous days close of $33.125 per
share to $33.875 per share on April 14, 1998.
45. Defendants' statements, made at the April 14, 1998
shareholders meeting, and in the related press release issued the
same day, were false and misleading, because they knew or recklessly
disregarded that:
(a) the restructuring charge was not exclusively
related to "significant reductions in global plant investment and
employment;"
(b) the charge was not a "non-recurring charge"
related solely to "delays in machine deliveries", and was at least
partially related to "accounting irregularities;"
(c) it was necessary to increase the charge
substantially because the Company had long since lost control of
estimating its cost to complete long-term contracts; and
(d) at least $27.6 million of the charges related
to prior periods to eliminate $27.6 million of previously recognized
profits on long-term construction projects.
46. On April 26, 1998, The Milwaukee Journal Sentinel
discussed the cash flow problems that the Company was experiencing:
[Stephen Kean, an analyst at Robert W. Baird &
Co.] notes, though, that Harnischfeger may have
to delay any debt payment or stock repurchase
due to cash flow problems stemming from lack of
payment for two large papermaking machines sold
to Asian buyers.
23
[David Brukardt, a company spokesman] added
that the company hopes to pay down its debt as
soon as possible to keep it below the 50% debt-
to-equity ratio. It was slightly above that in
the first quarter.
The Truth Is Revealed
47. On April 27, 1998, defendants stunned the Market,
when they disclosed that the previously announced charge of between
$125 to $150 million, was increased by $100 million. The Company's
press release stated:
Harnischfeger Industries, Inc. reported today
that it has discovered cost overruns and
possible accounting irregularities in its
Beloit Corporation subsidiary limited to four
large, ongoing projects in Indonesia.
Harnischfeger stated that while the exact
amounts involved are still being determined,
the cumulative effect on Beloit is expected to
be approximately $155 million . . . As a
result, the Company anticipates that it will
increase the previously announced special
charge to be taken during the second quarter by
approximately $100 million . . .
* * *
Grade stated: "The overruns and possible
irregularities appear to relate to changes in
estimates of costs to complete and failures to
estimate certain costs relating to these
complex, large-scale projects. The
Harnischfeger . . . Board of Directors has
ordered a thorough review of Beloit's
accounting and control functions, including
project control, to determine the precise scope
of the problem and how the problem arose as
well as to prevent any repetition."
On the announcement, the price of the Company's stock fell from its
previous days close of $30.125 per share to $28.500 per share.
24
However, the damage did not end here.
48. The rating agencies' reaction to the April 27th
announcement was swift and severe. The following day, April 28,
1998, Standard & Poor's announced that it placed Harnischfeger on
"Credit Watch with negative implications[;] about $475 million of
rated debt securities are affected." The Company's stock price
plummeted on heavy trading volume (of almost three times its daily
average) from its close on Friday, April 24, 1998 of $30.125 per
share to $27.813 on Tuesday April 28, 1998, an almost 10 percentage
point decline; and down $8.062 per share from its Class Period high
of $35.875 per share on January 29, 1998, or a 22.5% decline
therefrom.
49. Ultimately defendants admitted on June 1, 1998 that
Beloit's restructuring charge was the smallest portion of the total
charges identified to date that the bulk of the now $257 million
charges to be taken were related to "anticipated losses with
Indonesian contracts and for resolution of contract disputes" of
$192 million. In addition, the Company revealed that at least $27.6
million of this charge related to the fourth fiscal quarter of 1997,
which now had to be restated. Finally, the Company also admitted
that it still did not have adequate controls over its accounting for
construction contracts as the Company still was unable to determine
the proper allocation of this charge between the first and second
fiscal 1998 quarters.
25
Violations of GAAP
50. Accounting Series Release No. 173 issued by the
SEC states that:
[The] percentage of completion accounting is
normally used in situations where the
conventional approach of recognizing revenue at
the point of sale and delivery would produce a
misleading picture of business activity. This
is normally the case where there are
substantial projects lasting longer than a
year, where ultimate sales are assured by
contract and where reasonable estimates can be
made of the cost to complete the project.
51. Statement of Position 81-1, paragraphs 23 and
32, respectively states:
The use of the percentage-of-completion method
depends on the ability to make reasonably
dependable estimates. For the purposes of this
statement, "the ability to make reasonably
dependable estimates" relates to estimates of
the extent of progress toward completion,
contract revenues, and contract costs. The
division believes that the
percentage-of-completion method is preferable
as an accounting policy in circumstances in
which reasonably dependable estimates can be
made...
* * *
The completed-contract method is preferable in
circumstances in which estimates cannot meet
the criteria for reasonable dependability...
52. During the Class Period, the Company's accounting
and control functions, including project control, were materially
deficient. Therefore, the Company was unable to make reasonably
dependable estimates of contract costs and the extent of progress
26
toward completion in connection with at least four projects in
Indonesia. Accordingly, Harnischfeger was prohibited from using the
percentage-of-completion method of accounting for said projects.
53. The sheer magnitude of the "cumulative effect" of the
charge announced on April 27, 1997 by defendants, $155 million
(wiping out at least the prior 12 months' net income of the Beloit
business segment), is evidence of the duration of the ongoing fraud.
Moreover, the phrase "cumulative effect," as used in the Company's
April 27, 1998 press release, is a technical accounting phrase which
indicates that at least more than one accounting period is involved
(APB Opinion No. 20).
54. According to the February 23, 1998 press release,
charges were to include "additional reserves for
non-restructuring-related expenses." Although not disclosed as such
prior to April 27, 1998, these "non-restructuring-related expenses"
were intended to partially compensate for prior period's undisclosed
fraudulent accounting and "failures to estimate certain costs."
This is evident from the Company's April 27, 1998 press release in
which defendants describe "a $100 million increase" in a previously
anticipated second quarter charge (of between $125 to $150 million)
related to four Indonesian projects after discovering "cost
overruns" and "accounting irregularities."
SCIENTER ALLEGATIONS
55. As alleged herein, defendants acted with scienter
27
in that they knew or recklessly disregarded that the public
documents and statements issued or disseminated in the name of the
Company were materially false and misleading; knew or recklessly
disregarded that such statements or documents would be issued or
disseminated to the investing public; and knowingly participated in
the issuance or dissemination of such statements or documents as
primary violators of the Federal securities laws.
56. SEC Regulation S-X requires that financial
statements filed with the SEC conform with GAAP. Financial
Statements filed with the SEC that are not prepared in conformity
with GAAP are presumed misleading. 17 C.F.R. § 210.401(a)(1);
Accounting Series Release ("ASR") 4, codified at ASR 34. Defendants
filed financial statements during the Class Period that were
materially misleading, which defendants knew or recklessly
disregarded were not in conformity with GAAP.
57. The Individual Defendants, by virtue of their receipt
of information reflecting the true facts regarding the Company
and/or their control over the Company, which made them privy to
confidential proprietary information, participated in the fraudulent
scheme alleged herein. With respect to non-forward-looking
statements and/or omissions, defendants knew and/or recklessly
disregarded the falsity and misleading nature of the information,
which they caused to be disseminated to the investing public.
58. The Individual Defendants engaged in such a scheme
28
and course of conduct to inflate the price of Harnischfeger common
stock in order to, among other things,: (i) comply with the
Company's credit facilities' debt covenants; and (ii) profit from
the future increase in the Company's common stock price to obtain
stock appreciation compensation awards.
59. The Individual Defendants had the opportunity to
commit and participate in the wrongful conduct complained of herein.
Each is, or was, a senior executive officer of Harnischfeger and,
accordingly, controlled the information disseminated to the
investing public in Harnischfeger's press releases, SEC filings, and
communications with analysts. Thus, each could falsify, and did
falsify, the information that reached the public about
Harnischfeger's financial condition and results of operations.
FIRST CLAIM
(Against All Defendants For Violations of
Sections 10(b) of the Exchange Act
And SEC-Rule 10b-5 Promulgated Thereunder)
60. Plaintiff repeats and reallege [sic] each of the preceding
paragraphs, as if set forth fully herein.
61. Throughout the Class Period, defendants caused to be
issued or participated in the preparation and issuance of the
materially false and misleading statements and omissions as
described herein.
62. Defendants as the senior officers and/or directors
of the Company, had actual knowledge or acted in reckless disregard
of the truth concerning the Company's accounting for construction
29
costs during the Class Period. By virtue of their positions within
the Company, and their accounting and finance background, defendants
also knew or recklessly disregarded that the Company's estimates of
construction costs were materially understated and that their
representations about the Company's financial condition and results
of operations in Harnischfeger's public filings, reports and press
releases were false and misleading.
63. As a result of the above-described acts
defendants, severally and in concert, directly and indirectly, by
use of the means and instrumentalities of interstate commerce,
violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder in that they knowingly or recklessly (a)
employed devices schemes and artifices to defraud; (b) made untrue
statements of material facts or omitted to state material facts
necessary in order to make the statements made, in light of the
circumstances in which they were made, not misleading; or (c)
engaged in acts, practices and a course of business that operated
as a fraud or deceit upon plaintiff and the Class in connection with
their purchases of the Company's common stock.
64. As a result of the deceptive practices and false
statements described herein, the market price of the Company's
common stock was inflated artificially throughout the Class Period.
65. Plaintiff and the Class, relying on the integrity
of the market and/or defendants' misrepresentations, purchased
30
Harnischfeger common stock during the Class Period at artificially
inflated prices. Had plaintiff and the Class known the truth
concerning the misrepresented and/or omitted facts described herein,
they would not have purchased the Harnischfeger common stock at the
prices that were paid, if at all. At the time of the purchases by
plaintiff and the members of the Class, the true value of
Harnischfeger common stock was substantially less than the prices
paid by plaintiff and the Class. Accordingly, plaintiff and the
members of the Class have been damaged as a result of defendants'
wrongdoing.
66. This action is brought within three years after the
securities at issue were purchased and within one year after the
discovery, of the untrue statements and omissions or after such
discovery should have been made by the exercise of reasonable
diligence.
67. By virtue of the foregoing, defendants have violated
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder and are liable to plaintiff and the Class in an amount
to be determined at trial.
SECOND CLAIM
(Pursuant to Section 20(a) Of The
Exchange Act Against The Individual Defendants)
68. Plaintiff repeats and reallege [sic] each of
the preceding paragraphs as if fully set forth herein.
69. This claim is brought against the Individual
31
Defendants.
70. The Individual Defendants acted as controlling
persons of Harnischfeger within the meaning of Section 20(a) of the
Exchange Act as alleged herein. By virtue of their high-level
positions, participation in and/or awareness Of the Company's
operations, and/or intimate knowledge of the Company's financial
condition, operations, production cycles, and products, the
Individual Defendants had the power to influence and control and did
influence and control, directly or indirectly, the decision-making
of the Company, including the content and dissemination of the
various statements which plaintiff contends are false and
misleading. The Individual Defendants were provided with or had
unlimited access to copies of the Company's reports, press releases,
public filings, and other statements alleged by plaintiff to be
misleading prior to and/or shortly after these statements were
issued and had the ability to prevent the issuance of the statements
or cause the statements to be corrected.
71. As set forth above, defendants violated Section
10(b), and Rule 10b-5 promulgated thereunder, by their acts and
omissions alleged in this complaint. By virtue of their
positions as controlling persons, the Individual Defendants are
liable pursuant to Section 20(a) of the Exchange Act. As a direct
and proximate result of defendants' wrongful conduct, plaintiff and
the other members of the Class suffered damages in connection with
32
their purchases of the Company's securities during the Class Period.
WHEREFORE, plaintiff on behalf of himself and the Class
prays for judgment as follows:
A. declaring this action to be a proper class action
maintainable pursuant to Rule 23 of the Federal Rules of Civil
Procedure and plaintiff to be a proper class representative;
B. awarding plaintiff and the Class compensatory
damages, together with appropriate prejudgment interest at the
maximum rate allowable by law;
C. awarding plaintiff and the Class their costs and
expenses for this litigation, including reasonable attorneys' fees
and other disbursements; and
D. awarding plaintiff and the Class such other and
further relief as may be just and proper under the circumstances.
Dated: June 5, 1998
O'NEIL, CANNON & HOLLMAN, S.C.
/s/
By:_____________________________
Gregory W. Lyons
State Bar No. 1000492
Bank One Plaza, Ste. 1400
111 East Wisconsin Avenue
Milwaukee, WI 53202-4803
Tel: (414) 276-5000
Fax: (414) 276-6581
Attorneys for Plaintiff
33
Of counsel:
WECHSLER HARWOOD HALEBIAN &
FEFFER LLP
Robert I. Harwood
Jeffrey M. Haber
Frederick W. Gerkens, III
488 Madison Avenue
New York, New York 10022
(212) 935-7400
34
HARNISCHFEGER INDUSTRIES, INC.
CERTIFICATION OF NAMED PLAINTIFF
PURSUANT TO FEDERAL SECURITIES LAWS
GREAT NECK CAPITAL APPRECIATION INVESTMENT PARTNERSHIP,
L.P. ("Plaintiff") declares as to the claims asserted under the
federal securities laws, that:
Plaintiff has reviewed the complaint and authorized its filing.
1. 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 this private action.
2. Plaintiff is willing to serve as a representative
party on behalf of the class, including providing testimony at
deposition and trial, if necessary.
3. Plaintiff's transactions in the securities that are
the subject of this action during the Class Period are as follows:
Security Transaction Price Date
-------- ----------- ----- ----
Common stock 250 Shares Purchased $33.00 March 12, 1998
_____ Shares Purchased ______ ______________
_____ Shares Purchased ______ ______________
_____ Shares Sold ______ ______________
_____ Shares Sold ______ ______________
4. Plaintiff has sought to serve or served as a
representative party for a class in the following actions filed
under the federal securities laws subsequent to December 22, 1995:
Great Neck Capital Appreciation Investment Partnership v.
Corel Corporation et al.
5. 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.
I declare under penalty of perjury that the foregoing is
true and correct. Executed this 3 day of June, 1998, at
Great Neck, New York
(City) (State)
/s/
_________________________________
Mark Filiberto, General Partner
2
Source: Scanned paper copy of court-stamped document