Stanford University Law School - Securities Class Action Clearinghouse

                    
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
__________________________________
                                  |
 STEPHEN A. LEVIN,                |
                                  |
           Plaintiff,             |
                                  |
 VS.                              |     C.A. No. 97-
                                  |
 MOLTEN METAL TECHNOLOGY, INC.,   |
 WILLIAM M. HANEY, III,           |     Jury Trial Demanded
 CHRISTOPHER J. NAGEL, JOHN T.    |
 PRESTON and MAURICE F. STRONG,   |
                                  |
           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 2
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 3
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. 4
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 5
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 6
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 7
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 8
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 9
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. 10
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 11
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 12
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 13
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 14
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." 15
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. 16
"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 17
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. 18
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 19
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 20
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 21
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." 22
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. 24
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

1 May 1997