SEC Accuses Former Waste Execs of Fraud


The Securities and Exchange Commission on Tuesday sued six former executives of Waste Management Inc., the largest U.S. trash hauler, accusing them of inflating profit by $1.7 billion in a “massive financial fraud” the agency said was aided by the Andersen accounting firm.

The case is the latest in a string of corporate accounting-fraud suits brought by the SEC in recent years and may be the first of a new wave: The SEC said it has sharply boosted the number of accounting probes in the aftermath of Enron Corp.'s collapse.

The former Waste Management executives from 1992 to 1997 “fraudulently manipulated the company’s financial results to meet predetermined earnings targets,” the SEC charged.

By deferring or eliminating expenses, among other techniques, the company was able to meet Wall Street profit expectations and boost its stock price, thereby enriching the defendants by more than $28 million in performance-based bonuses and other compensation, the agency said.

Ordinary investors, however, lost $6 billion, as the company’s stock plunged after the firm recorded a $1.7-billion earnings restatement in 1998, the SEC said.


The civil lawsuit, filed in federal court in Chicago, seeks to recover money from the defendants and bar them from working at a publicly traded company. The executives are vowing to fight.

The case is an extension of an SEC investigation that resulted in a settlement last June with Andersen, the company’s former auditor. Andersen paid a record $7 million in fines to settle charges it filed false audit reports of Waste Management for the years 1993-'96.

Andersen, whose chairman, Joseph Berardino, abruptly resigned Tuesday, is struggling for survival after being indicted this month for obstruction of justice in connection with its audit work for Enron.

Waste Management, which isn’t charged in the SEC’s case against the former executives, fired Andersen as its auditor last week.

“Our complaint describes one of the most egregious financial frauds we have seen,” said Thomas C. Newkirk, SEC associate enforcement director. “For years, these defendants cooked the books, enriched themselves, preserved their jobs and duped unsuspecting shareholders.”

Experts said the suit and the harsh language were meant to put corporate America on notice that “earnings management"--companies’ efforts to make sure they hit quarterly earnings targets--will be aggressively prosecuted if the SEC determines that anti-fraud rules have been violated.

“This is very tough language and it does send a signal,” said David S. Ruder, a securities law professor at Northwestern University and former SEC chairman.

In recent years the SEC has sued executives at such firms as Sunbeam Corp. and W.R. Grace & Co., alleging accounting fraud.

Tuesday’s allegations involve activity that predated Waste Management’s 1998 acquisition by USA Waste Services Inc. Although the name is the same, Waste Management today is “a different company” and is not involved in the SEC action, Newkirk said.

The defendants, who include company founder Dean L. Buntrock, deny the charges and contend that Waste Management’s accounting was proper.

Lawyers for several of the defendants say the SEC brought the suit partly to deflect criticism, in the aftermath of Enron, that the agency hasn’t been a tough enough regulator. “The SEC has decided it needs to speak loudly and pound the table post-Enron,” said Sarah R. Wolff, a lawyer for defendant James E. Koenig, Waste Management’s ex-chief financial officer.

Besides Buntrock and Koenig, the accused are Phillip B. Rooney, who was president and chief operating officer; Thomas C. Hau, former chief accounting officer; Herbert Getz, former general counsel; and Bruce D. Tobecksen, ex-vice president of finance.

Rooney, in a statement, declared his innocence and referred to a 1999 letter from Roderick M. Hills, who joined Waste Management in 1997, helped push for accounting changes that resulted in the 1998 earnings restatement and stayed on as chairman of the firm’s audit committee until 2000.

Hills, who led an internal investigation of Waste Management’s bookkeeping, said in the letter to Rooney’s lawyers that he was “not aware of any facts that would suggest that Phil Rooney acted contrary to the securities laws.”

Buntrock, in his defense, apparently will take a more critical view of the Hills investigation: In a suit he filed last month to try to head off the SEC’s charges, Buntrock said the agency’s probe is tainted by conflict of interest because two current SEC officials were involved in Hills’ probe, which began after Buntrock left the firm’s board in 1997.

For his investigation, Hills hired Robert Herdman, then co-chairman of Ernst & Young, and Charles Niemeier, a lawyer and accounting specialist. The two are now the SEC’s chief accountant and the accounting chief of the SEC’s enforcement division, respectively.

Buntrock says Hills’ internal probe formed the basis of the charges that the SEC lodged against him Tuesday and is therefore improper.

John T. McCarthy, a lawyer for Buntrock, said the massive 1998 earnings restatement was part of a “big bath” write-down of assets meant to clear the way for a quick sale of the firm to USA Waste.

The SEC’s case alleges that Buntrock reaped more than $16.9 million in ill-gotten gains. Rooney reaped more than $9.2 million, Koenig more than $900,000, Hau more than $600,000, Tobecksen more than $400,000 and Getz more than $450,000, the SEC contends.

Before it was acquired, Waste Management had a checkered reputation. The company built up its nationwide garbage-hauling business by acquiring many local garbage firms, some of which had unsavory reputations. Waste Management’s business practices also were the targets of dozens of lawsuits nationwide.

In a separate action last November, Waste Management agreed to pay $457 million to settle a class-action lawsuit over fraud allegations involving the firm after the merger with USA Waste.