NORTHERN DISTRICT OFTEXAS -r FILED

MAY 9

UNITED STATES DISTRICT C O T CLERK, U.S.1M T COURT By NORTHERN DISTRICT OF y _Deput

DALLAS DIVISION

THE ARCHDIOCESE OF MILWAUKEE § Civil Action No . 3 :02-CV-1152-M SUPPORTING FUND, INC ., et al., On Behalf of Itself and All Others Similarly Situated, § CLASS ACTION

Lead Plaintiff, § THIRD CONSOLIDATED AMENDE D § COMPLAINT FOR VIOLATION OF THE vs. § SECURITIES EXCHANGE ACT OF 1934

HALLIBURTON COMPANY, DAVID J. LESAR, DOUGLAS L . FOSHEE, GARY V § MORRIS and ROBERT C. MUCHMORE,

Defendants . § § § DEMAND FOR JURY TRIAL

Copyright O 2005 by William S . Lerach, Lerach Coughlin Stoia Geller Rudman & Robbins LLP and Scott + Scott LLC. William S . Lerach, Lerach Coughlin Stoia Geller Rudman & Robbins LLP and Scott + Scott LLC will vigorously defend all of their rights to this writing/publication . No copyright is claimed in the text of statutes, regulations, and any excerpts from news articles or analysts' reports quoted within this work .

All rights reserved - including the right to reproduce in whole or in part in any form . Any reproduction in any form by anyone of the material contained herein without the permission of William S . Lerach, Lerach Coughlin Stoia Geller Rudman & Robbins LLP and Scott + Scott LLC is prohibited .

r • C

~1 This Third Consolidated Amended Complaint, filed pursuant to leave of Court, i s

intended to consolidate and relate back to all prior complaints previously filed in this action ,

including the Moore complaint, the first and second consolidated amended complaints, the

Kimble complaint and the Murphey complaint.

INTRODUCTION

1 . This is a securities class action on behalf of purchasers of the common stock of

Halliburton Company ("Halliburton" or the "Company") between 9/29/98 and 12/7/01 (th e

"Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the

"1934 Act"). The defendants include Halliburton, David J . Lesar, Halliburton' s President and

COO during 96-7/00 and who succeeded Richard Cheney as Halliburton's Chairman/CEO i n

7/00, Gary V . Morris, Halliburton's EVP/CFO through 8/01, and Douglas L. Foshee,

Halliburton's EVP/CFO after 8/01, and Charles C . Muchmore, EVP, Principal Accounting

Officer/Controller (the "Individual Defendants") . These Individual Defendants were

Halliburton's top executives and were each Certified Public Accountants . They controlled the

accounting policies and practices and public statements of the Company . They operated under

the leadership of Richard Cheney, who became CEO/Chairman of Halliburton in 8/95 and served

as its CEO/Chairman until 7/00, when he left to run for Vice President - hailed on his departur e

as a successful corporate executive who had turned Halliburton around, reorganized it s

construction businesses, made a very successful acquisition, i.e., Dresser Industries, Inc.

("Dresser"), led Halliburton to record profitability and positioned Halliburton to continue t o

achieve growing profits going forward .

2 . This action arises out of a scheme to manipulate and falsify Halliburton's 1998-

2001 financial results and statements, including a series of false and misleading statements tha t

misrepresented the condition and success of Halliburton's business, including its constructio n

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.s operations, the benefits of its acquisition of Dresser, its exposure to asbestos liabilities ,

Halliburton's financial condition and results of operations and its future business and financia l

prospects. These misstatements stressed the supposed successful restructuring of Halliburton' s

construction businesses during 97-98, Halliburton's new practice of accepting more large fixed-

price/lump-sum contracts which were improving its profitability due to its expertise in managin g

and successfully performing these large fixed-price/lump-sum construction contracts, including

the $2 .5 billion Barracuda/Caratinga contract (the largest contract in Halliburton's history) ,

Halliburton's success in obtaining large liquefied natural gas ("LNG") contracts in the major oil-

producing nation of Nigeria, the beneficial impact of Halliburton's acquisition of Dresse r

(including the successful integration of Dresser's construction operation (Kellogg) int o

Halliburton's construction operation (Brown & Root)), and the balance sheet strengthening an d

net income enhancements to be and being achieved as a result of that acquisition, which did not

expose Halliburton to material financial liabilities due to asbestos claims/suits . However, b y

these false statements, defendants were concealing ever increasingly serious operationa l

problems with Halliburton's construction businesses, huge unpaid change orders and cost

overruns ("Unapproved Claims") it was suffering on several of its large fixed-price/lump-sum

contracts, the negative impact of the Dresser acquisition - including the true extent of the

financial liabilities Halliburton was facing due to asbestos suits/claims Halliburton inherited via

the Dresser acquisition - and some $180 million in improper/illegal payments made i n

connection with obtaining the Bonny Island, Nigeria LNG plant contract . In truth, pervasive

accounting manipulations were being engaged in at Halliburton to conceal mounting losses o n

several of Halliburton's large fixed-price/lump-sum construction contracts, including ever-

increasing losses being suffered on Halliburton's huge $2.5 billion Barracuda/Caratinga offshore

-2- 0 0 drilling contract in Brazil and Halliburton's truly gargantuan financial liabilities arising out of it s exposure to asbestos suits/claims.

3 . As a result of defendants' scheme to defraud and the resulting artificial inflatio n in Halliburton's stock price due to defendants' financial falsifications and other misleadin g statements, investors who purchased Halliburton stock during the Class Period suffere d significant damages, as defendants' prior manipulations, misrepresentations and other fraudulen t conduct was revealed and Halliburton's stock price collapsed to much lower levels . As at least some of the true adverse facts came out in a series of revelations and disclosures, Halliburton' s stock collapsed to as low as $8-$10 per share - a 15-year low and well below the stock's Clas s

Period high of $55 . Calculated in accordance with accepted securities class action damag e methodologies, class-wide damages suffered by investors are approximately $3 .1 billion. By contrast, Halliburton's top insiders did quite well for themselves. During the Class Period they sold off 1 .34 million shares of their Halliburton stock - 61% of the Halliburton stock they owne d

- for illegal insider trading proceeds of $68 million . In addition, during 97-01, Halliburton's top executives (Cheney, Lesar, Morris, Coleman, Bradford and Vaughn) collected aggregate salaries and bonus payments of $17 million and $19 million, respectively, which were based upon the appearance of business success and profits reported by Halliburton and which have subsequently been all but wiped out by the recognition of Halliburton's actual losses on fixed-price construction contracts (including Barracuda/Caratinga) and Halliburton's actual asbesto s liabilities ! Halliburton's stock, which soared to a Class Period high of $56 per share in 9/0 0 based on Halliburton's false earnings reports, false positive statements and false forecasts o f future success, collapsed to $10 per share at the end of the Class Period and to as low as $8 pe r share a few weeks later - a 15 year low - as shown in the following graph :

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HaRiburton September 1, 1998 - January 15, 2002 Daily Share Prices 60

90

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a N 30

sp

20

10

0140"1 "4Aa09 31-Dec49 30•Aag40 02401ay49 07-Jan42 314ec43 01-ep-f0 024fty400 204)w-00 30,A"-01

SUMMARY OF COMPLAIN T

Pre-Class Period Event s

4. After years of mediocre business performance, in 8/95 Halliburton hired Richar d

Cheney as its new CEO/Chairman . When Cheney took over the reins at Halliburton ,

Halliburton's stock was trading at around $20 per share . Cheney's challenge was to lead a new executive team and successfully manage Halliburton's business so that it could achieve strong, profitable growth, which would cause its stock to reach higher levels . Cheney elevated Lesar, who had been Halliburton's CFO, to be Halliburton's President and Chief Operating Officer

("COO"). They, along with Morris (CFO) and Muchmore (Controller), became Halliburton' s new executive team.

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5 . Prior to 8/95, Cheney had been a politician . He had never been an executive at a public corporation, let alone the Chairman/CEO of a multi-billion dollar New York Stoc k

Exchange-listed company. Thus, there was considerable skepticism in the financial communit y as to whether or not Cheney and his new executive management team could successfully oversee and manage Halliburton's worldwide operations . According to a Wall Street Journal article reporting Cheney's selection as Halliburton's CEO :

[S]ome questioned if Mr . Cheney has the business background for the job .

"There's a pretty big difference between the world of government and the private sector," said James Stone, who follows Halliburton for Schroder Wertheim & Co. "Whether or not he is capable of running" a $6 billion-a-year company, "clearly is an issue that must be addressed in the next couple of months. "

Bloomberg reported:

Halliburton Choice of Cheney as CEO Prompts Analyst Downgrad e

A NatWest Securities Corp . analyst cut his rating on Halliburton Co . after the oilfield service company named former Defense Secretary Dick Cheney as chief executive.

NatWest analyst Wes Maat said he downgraded Halliburton ... because he expects disappointment over Cheney's hiring to drive the stock down ... during the next three months.

"Most industry observers believed that the company would select a candidate with extensive senior management experience in the oil services or oil and gas sectors ," Maat said in a report.

6. This skepticism placed pressure on Cheney to demonstrate his executiv e competence and the effectiveness of his management team by producing successful results - growing Halliburton into a larger and more profitable company. Cheney and his executive team had additional compelling motives to produce results that appeared to be successful, as thi s would allow them to pocket large bonus payments and if such profitable results pushed

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Halliburton's stock higher, it would enable them to pocket millions of dollars via stock optio n

profits.

7. During 95-97, according to the Cheney executive team, Halliburton achieve d

success, reporting improved earnings per share ("EPS") of $1 .00 in 95, $1 .30 in 96 and $1 .79 in

97 . Cheney and Lesar assured investors that Halliburton's construction operations, the mos t

important part of Halliburton's business, had been successfully restructured and that Halliburto n

would achieve increased profits due to several large, fixed price construction contracts which

were being pursued by Halliburton , purportedly as part of an important change in busines s

strategy decided upon by the Cheney team and undertaken at their direction, because Halliburto n

had the skills, resources and management to successfully, i.e., profitably, perform such contracts ,

which gave Halliburton a competitive advantage. As Halliburton continued to report solid

results and forecast future success, its stock moved higher, reaching over $60 per share in late

97 . It continued to trade as high as $56 per share in 5/98 . Cheney's executive team appeared to be succeeding.

Class Period Events

8 . The highlight of the Cheney executive team's efforts to grow Halliburton

occurred in early 98 when Halliburton announced it was going to acquire its competitor, Dresser

- a $7 billion deal. This was the largest and most important acquisition in Halliburton's history . This acquisition, driven by Cheney's determination to grow Halliburton, was

undertaken at his insistence - his "pet project ." Halliburton and Dresser had previousl y

discussed a merger, but rejected the idea due to the differences in the "culture" of the tw o

corporations and the lack of a good business "fit," i.e., the perceived difficulties in integratin g

their respective construction operations. Nevertheless, during 98, Halliburton assured investor s

that the Dresser acquisition was a "win" for Halliburton shareholders, that Halliburton an d

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Dresser were "an outstanding business and cultural fit," that Dresser's operations would be

quickly and effectively integrated into Halliburton's operations and that the acquisition o f

Dresser would strengthen Halliburton 's balance sheet and immediately boost Halliburton's

"bottom-line" by $250 million in the first year following the acquisition and by $500 million

annually later on.

9. However, during 98, lower oil prices and reduced capital spending by oi l

exploration and production companies negatively impacted Halliburton's construction

businesses. These negative industry conditions were exacerbated by investor concerns as to

whether Dresser's operations could be effectively integrated into Halliburton's and the promise d

annual "bottom-line" gains achieved . As a result, Halliburton's stock plummeted, falling fro m

$56 in 5/98 to as low as $26 by 8/31/98 - a 53% decline in a few months ! This huge declin e

wiped out all the stock's gains in the prior two years, took the stock back down to near where it

was when Cheney took over and severely impaired the value of Cheney 's, Lesar's and other

Halliburton executives' stock options, which had been worth many millions of dollars at the stock's peak in late 97 but by 8/98 were for the most part "under water!"' This collapse in

' The stock option grants to and exercise prices of the grants to Halliburton's top executives during 95-97 are set forth below :

Name Year Options Granted Exercise Price ($/share) Cheney 1995 400,000 $21 .00 1996 160,000 $26.44 200,000 $29.56 1997 100,000 $54.50 Lesar 1996 30,000 $26.43 80,000 $29.56 1997 60,000 $54.50 Morris 1996 35,000 $29.56 1997 20,000 $54.50 Muchmore 1996 24,000 $29.56 1997 6,000 $54.50

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Halliburton's stock created a crisis for the Cheney executive team, which became determined to

convince investors that the Dresser acquisition was a success and that even with negativ e

industry conditions Halliburton's business operations and financial performance were better than

its peer competitors, as were its future prospects. They hoped this would halt the stock's decline

and push it back up higher.

10. In truth, by late 98, things regarding Halliburton were not at all as Cheney' s executive team was representing them to be to the investment community . Halliburton' s construction operations were encountering serious difficulties with at least seven of its new larg e

fixed-price/lump-sum construction contracts, encountering cost overruns and delays i n performance on them, resulting in an inability to collect millions of dollars in change orders/cost overruns, i.e., Unapproved Claims, from customers. As a result, Halliburton was incurring foreseeable losses in escalating amounts on these contracts . While Halliburton could always submit claims to its customers for part of these change order/cost overrun charges , the customers were not legally obligated to pay for them under lump-sum/fixed-price contracts

and had told Halliburton they would not do so. Cheney and Halliburton's other top executive s knew that if they disclosed the true extent of these escalating unpaid Unapproved Claims and th e

doubtful nature of their collectability and took the required write-offs or recognized the losses they created, this would expose the fact that Halliburton's construction operations had not, i n

fact, been successfully reorganized and restructured, but were encountering serious problems

with Halliburton's exceptionally important new large fixed-price contracts . Investors would then

see that, in fact, Halliburton and its construction operations were not actually achieving th e

All Optionees 1995 2,713,000 $21 .30 * 1996 3,218,000 $28 .98 * 1997 1,263,600 $52.19 * * The exercise price is the weighted average price of all options granted during fiscal year.

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operating profits, net income and EPS being publicly reported - which positive results wer e

necessary to make the Cheney-led executive team appear successful .

11 . Knowing Halliburton was having problems with these large construction projects ,

Halliburton's top executives - including the Individual Defendants - secretly changed the way

Halliburton was accountingfor Unapproved Claims on construction contracts to conceal thes e

problems. Any such change in accounting policy impacting the largest and most important par t

of Halliburton's business and involving many millions of dollars required the assent of Chene y

and Halliburton's other top operating and accounting officers, i.e., Lesar, Morris and Muchmore.

For several years, Halliburton had consistently represented that all "anticipated " losses on contracts were provided for currently and that revenues represented by cost overrun/chang e

order charges, i.e., Unapproved Claims, were recognized only when the customer had agreed to pay the Unapproved Claim . But, without disclosing it, in late 97 or early 98, Halliburton bega n

to record unpaid Unapproved Claims as revenue even if the customer had not agreed to pay th e

claim. They did this even though they knew that the collection of those Unapproved Claims wa s

dubious, as Halliburton was obligated under fixed-price/lump-sum contracts to do the contracte d

work for a set price/lump sum within a set period of time, and Halliburton 's customers were

voicing objections to paying these Unapproved Claims . Halliburton's executives made this secret change at a time when they were actually encountering increased customer resistance t o paying Unapproved Claims on certain older contracts that would result in Halliburton taking

a $60 million charge at year-end 98! In other words, they secretly changed Halliburton' s

accounting practices in a manner directly inconsistent with the actual conditions prevailing i n

Halliburton's business operations at the time they made the change !

12. In connection with reporting its year-end 98 results, Halliburton disclosed it ha d

taken a $60 million charge in the 4thQ 98 for Unapproved Claims for which its customers would

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I not agree to pay . Halliburton told analysts the charge-off was not due to premature recognition

of Unapproved Claims as revenue, but rather to client refusals to pay for the Unapproved Claims ,

purportedly a change of attitude . Halliburton told analysts that as a result it had changed its

procedures and in the future it would not accept or perform change orders unless the

customer agreed upfront to pay for the extra work, i.e., Unapproved Claims . These statement s

indicated to analysts that Halliburton was still following its stated policy of recognizin g

Unapproved Claims as revenue only after the customer agreed to pay for such claims . In fact,

Halliburton had made no such change and was continuing to perform millions of dollars o f

Unapproved Claims just hoping customers would later pay for them .

13. This manipulation and contrivance was part of a scheme whereby Cheney and

Halliburton's other top executives fraudulently converted by financial alchemy what were, i n

fact, losses into profits and thus falsely inflated Halliburton's Energy Services ("ES") an d

Engineering and Construction ("E&C") Groups' reported operating incomes, as well a s

Halliburton's reported operating income, net income and EPS . This was a particularly insidious

accounting trick because not only was Halliburton now accounting for Unapproved Claims in a

manner different from the way in which it had long represented it accounted for such claims, but ,

because there were no costs of performance associated with the recognition of these claims as

revenue, the entire amount (100%) of the bogus revenue flowed directly to the "bottom line, "

i.e., magnifying the impact on the reported amount of operating income and profit margins o f

Halliburton and its ES and E&C Groups.

14. All during 98 and 99, Cheney and Halliburton's other top executives continued t o

conceal that they had secretly changed the manner by which Halliburton accounted fo r

Unapproved Claims . They told investors that the favorable financial results of Halliburton's

construction operations were due to their "successful consolidation and restructuring" and,

_10- 0 0 when negative industry conditions emerged, that the "benefits of [Halliburton's] . . . restructuring activies allowed [them] to remain profitable during this most difficult period ." Halliburton said that the integration of Dresser's and Halliburton's construction operations had been "particularly effective" and had resulted in "strength in all facets of construction and project management ."

They also told investors that the "keys" to improving Halliburton' s "profit margins ... will be ... acceptance of more ... fixed price contracts" and "reiterated their confidence in the integrity

(i.e., margins)" of Halliburton's construction backlog . Not until Halliburton issued its 99

Annual Report in 3/00 did it insert a sentence in the notes to Halliburton's financial statement s stating that Halliburton recognized claims for construction cost overruns or change orders whe n collection of such items was deemed probable. However, this belated disclosure itself wa s misleading because Halliburton had already recognized hundreds of millions of dollars of such claims even though its executive team knew they were very unlikely to be collected, and, in any event, the amount to be collected could not be accurately estimated - two strict requirements under Generally Accepted Accounting Principles ("GAAP") for recognizing Unapproved

Claims as revenue under any set of circumstances . Going forward, throughout the balance of the Class Period, Halliburton continued to improperly record as revenue millions of dollars of such Unapproved Claims every quarter, even though Halliburton's top executives knew collection of them was not probable and that without doubt the recoverable claims could no t be accurately estimated.

15 . With respect to the Dresser acquisition - when it was first announced, Halliburto n told investors they had "agreed upon [an] organizational structure, which will facilitate a quick, smooth integration ," that the merger would "lower costs," resulting in "very significant savings ... in excess of $114 billion" per year, and result in "strengthening and improving

Halliburton 's balance sheet ." At the same time, Halliburton assured investors the "combination

-11- will be especially effective." Later, it represented the integration of the two firms' constructio n

businesses was "particularly effective," resulting in "strength in all facets of construction and project management." The Cheney executive team represented that the acquisition of Dresse r

would be and had been a huge success for Halliburton and that the completion of the merge r

resulted in the successful integration of Dresser's construction unit (Kellogg) into Halliburton' s

construction operations (Brown & Root) . They said the acquisition was contributing in a

positive fashion to Halliburton's financial results, initially generating bottom-line benefits of

$250 million annually (later stated to have increased to $500 million annually), had significantly

strengthened Halliburton's financial condition and that Halliburton's accrued liabilities fo r

asbestos suits/claims (mostly against Harbison-Walker, a former Dresser subsidiary), ha d

been properly calculated and the resolution of such suits/claims would not have any material

impact on Halliburton's financial condition or results from operations .

16. When Halliburton addressed its potential financial exposure to asbestos-relate d

claims due to the involvement of a former subsidiary of Dresser (Harbison-Walker Refactorie s

Company ("Harbison-Walker")) in asbestos claims /suits in Halliburton' s financial statements, it

consistently assured investors that due to substantial insurance coverage, defenses to the suits ,

the age of the claims and the effective management of those suits/claims, they would be resolved

without any material impact on Halliburton's financial condition or results from operations .

Consistent with these representations, Halliburton at 12/31/98, 6/30/99, 12/31/99 and 6/30/00

had established accrued liabilities for asbestos suits/claims of only $12 million, $8 million, $2 5

million and $24 million, respectively . The Cheney-led executive team consistently represented

that these accrued liabilities, i.e., reserves for Halliburton's potential asbestos liability, wer e

adequate .

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17. However, even by the Fall of 98, the situation with respect to the impact of the

Dresser acquisition, the integration of Dresser's construction operations into Halliburton's an d the true extent of Dresser's legacy asbestos liabilities on Halliburton was quite different from - and far worse than - what was being publicly represented . In fact, even by the time the Dresse r acquisition closed on 9/29/98, Halliburton's top executives knew (or recklessly disregarded) that the representations and forecasts made in connection with that acquisition were false . In fact,

Cheney and Halliburton's other top executives had been warned about Dresser's potentially huge asbestos liabilities, but decided to go ahead with the acquisition and take the risk of the liabilities, because disclosure of those potential asbestos liabilities would likely mean tha t

Halliburton's shareholders would not vote to approve the merger . So, in order to avoid creating a documentary trail of the significant risk of huge financial exposure to Dresser's legacy asbesto s claims they knew existed and the serious differences in how Halliburton and Dresser operated their construction businesses and the likely difficulties to be encountered in integrating thei r operations, Halliburton's executives - especially Cheney - had insisted on proceeding with th e

Dresser acquisition without performing any due diligence examination or investigation of

Dresser's business and finances - an unprecedented step in a $7 billion merger! According to the Baltimore Sun in a 6/10/02 article written after the revelations of Halliburton's actual hug e asbestos liabilities, "[a]ccording to executives at Halliburton , Mr. Cheney knew about the asbestos liability before the merger and considered the risk ." On 8/1/02, The New York Times reported that evidence existed to prove that Dresser and Halliburton knew of the existence of significant additional asbestos liability from the time of the Dresser merger :

At issue now is whether Halliburton . . . was aggressive enough in investigating the asbestos liabilities it was taking on in acquiring Dresser, and whether it adequately informed shareholders of the risks at the time they were asked to approve the deal .

-13- Previously undisclosed court documents show Dresser was notified a month before the merger that it might face greater asbestos liability from its former subsidiary than it had disclosed .

18 . Not only did Halliburton's executives know (or recklessly disregard) tha t

Halliburton was assuming very substantial (probably unquantifiable) asbestos liability i n

acquiring Dresser, they also knew that the forecast of $250 million in annual net incom e enhancements was little more than a pipedream, which was extremely unlikely to be achieved .

In fact, the attempted integration of Dresser's construction operations into Halliburton' s construction operations immediately resulted in severe and protracted difficulties, as the culture of the conservative and restrained Dresser executives immediately came into severe conflict wit h the overly aggressive, risk-oriented and fraud-prone Halliburton executives . Top officials in

Dresser's construction operations discovered that Halliburton's construction operations wer e increasingly plagued with millions of dollars of uncollectible Unapproved Claims on fixed-pric e contracts - yet Halliburton was improperly recognizing such Unapproved Claims as revenue !

Even worse, Halliburton executives immediately began to draw down upon previously established conservative reserves for overruns and change orders in the Dresser operations to help cushion and conceal the poor results of the Halliburton construction operations, furthe r infuriating Dresser managers . Instead of successful integration, there was turf, cultural an d

operational warfare, resulting in confusion, delay and excessive costs .

19. The cultural clashes and fallout between the Dresser and Halliburton executive s

after the acquisition were reported by The New York Times :

In early 1998, Mr. Cheney went quail hunting in South Texas with William E. Bradford, chairman and chief executive of Dresser Industries . The two companies, industry leaders in oil services, had looked several times at the possibility of merging but had been unable to make a deal.... [Now, however] . . . [w]ithin weeks, the two companies had plans to join forces, creating a company that would be headed by Mr. Cheney.

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Mergers typically include a process of what is known in the business world as "due diligence," in which both companies look hard at each other's pending projects to make sure their assumptions about each other's value are based on solid numbers .

In this case, however, the two chief executives felt so comfortable with each other they decided this would not be necessary, according to Mr. Vaughn, who was then Dresser's president.

The deal closed in September 1998 and cultural clashes quickly emerged .

One of the most jarring, present and former executives said, was over the arcane art of how to account for the profits produced by long-term projects . Dresser's Kellogg unit was known in the industry for its conservative approach and its executives prided themselves on never having to erase profits once they were entered in the ledgers. Halliburton officials, the executives said, were quicker to log the profits, relying on their ability to forecast how projects would turn out. This stirred resentment among Dresser managers who joined the new company. "They would work you through the meat grinder," said one former executive. "They would always opt for the most aggressive treatment ."

Tensions between the two management teams deepened in the months after the merger with the discovery of large losses on some of the Halliburton projects.

Dresser's construction unit had forecast a banner year for 1999, expecting profits of more than $200 million, including gains from the Halliburton contracts . But a spate of unexpected losses after the merger, mostly from Halliburton projects, shrunk those profits to roughly $100 million, a former company official said.

20. Throughout the Class Period, Halliburton represented it had an effective Code of

Business Conduct throughout its worldwide operations which were conducted in a strong ethical setting. Also in 3/99, Halliburton told the investment community that a consortium it was part o f had received very large contracts for the expansion of the huge LNG terminal at the Bonn y

Island, Nigeria project, originally participated in by Dresser's construction arm, Kellogg.

Obtaining this extension/expansion of the LNG contract in Nigeria was especially important for

Halliburton, as gaining international contracts was indispensable to the appearance o f

Halliburton's success, especially in Nigeria, which had become one of the largest oil and ga s producing nations in the world. Halliburton said it was "proud" to be awarded the contract

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extension which "extends [its] track record in the LNG market." However, Halliburto n

concealed that to obtain the contract extension it had , in violation of its own Code of Business

Conduct, continued an ongoing practice of making improper illegal payments to obtain the LN G contracts in Bonny Island, Nigeria. By 99, these improper or illegal payments totaled an

astonishing $180 million, millions of which were paid during the Cheney team's reign . These massive illicit payments were funneled through a London-based sole practitioner lawyer , purportedly to pay for his consulting services, when, in fact, the sole practitioner (who had bee n to Nigeria only once in his entire career) distributed the money, via secret Swiss bank accounts , to top Halliburton officials to reward them for their participation in this dangerous and illegal

activity and to Nigerian officials to steer the contract extension to the Halliburton consortium .

Payments of this size, which blatantly violated Halliburton's Code of Business Conduct and required circumvention of its internal controls to assure compliance with the Foreign Corrup t

Practices Act, were made only with the approval of Halliburton's top executive team .

21 . Due to the foregoing problems, by the Fall of 99, Cheney was well aware of hi s executive team's trail of concealed failures and improper conduct. The failed restructuring of

Halliburton's construction businesses, the growing fiasco with regard to the escalatin g uncollectible Unapproved Claims on Halliburton's large fixed-price contracts, the failure t o

successfully integrate Dresser's construction operations into Halliburton's, Halliburton's much

larger than disclosed asbestos liabilities, and the Nigerian payoffs were all ticking "time bombs "

which Cheney knew could not be concealed forever . Cheney thus wanted to get away from

Halliburton and return to politics, hopefully securing a major position in a new administration i f

George W. Bush, the then Republican Governor of Texas, was elected President . By late 99 or

early 00, Cheney, who was heading Bush's Vice Presidential selection task force, knew that h e

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had a significant chance to be picked by Bush for a major position in a new Bush Administration ,

possibly even as his Vice Presidential running mate .

22 . So, during the first half of 00, Halliburton kept up the stream of positiv e

assurances to investors. Halliburton said that the Dresser acquisition, which Cheney had championed and spearheaded, was "behind us," that "integrating [its] operations [was] an importantpart of our transition to the future," that "costs have been permanently reduced in- line with prior guidance" and that the "potential rewards to our shareholders are vast."

Halliburton' s "engineering excellence and construction experience make it possible to take on end-to-end projects of any size [including the] ability to take on massive international lump- sum projects that are beyond the range of smaller companies ," and Halliburton's construction operations "will continue to generate good profits." In sum, according to Cheney, Halliburton' s stock is "one of the best investment opportunities ."

23 . Cheney knew that any disclosure of his team's management failures, bad decisions, improper or illegal overseas payments and the financial chicanery and manipulatio n they were using to cover up Halliburton's problems would have undermined any opportunity

Cheney had to be a top level member of a new Bush Administration . Such revelations woul d also cause Halliburton's stock to plunge, which would cost Cheney, Lesar and other to p

Halliburton executives millions and millions of dollars in valuable stock option profits, whic h profits were now available to them as their false statements about the success of Halliburton' s business and accounting manipulations to boost its reported financial results had succeeded in driving Halliburton's stock back up to near its all-time highs of $52 per share in the Spring of 00 .

24. Disclosure of the financial chicanery and serious operational problems insid e

Halliburton was no mere hypothetical possibility . Former Dresser executives who had joined

Halliburton's construction operations in connection with the merger were increasingl y

-17- 0 0 scandalized by and increasingly voicing objections to Halliburton's improper accountin g manipulations, i.e., turning losses into profits, as well as other accounting improprieties that

Halliburton's executives were engaging in, including reversing previously established , conservative reserves in the old Dresser part of the business so as to artificially boos t

Halliburton's construction operations' reported operating income and Halliburton's reported ne t income. Also, the Cheney executive team's actions to try to achieve "bottom line" gains for

Halliburton as a result of the Dresser acquisition had resulted in the firing of hundreds of Dresse r managers, greatly increasing the risk of exposure of Halliburton's illicit practices .

25 . In addition, by 99-00, the situation with respect to public revelations o f

Halliburton's probable asbestos liability was also increasingly threatening . Growing awarenes s in the investment community of the dangers of possible asbestos liabilities to public companie s with exposure to such claims was increasing . Several companies with such exposure had eithe r filed for bankruptcy or taken huge financial write-downs and/or reserves for such liabilities , causing Wall Street analysts to press Cheney and Lesar as to whether Halliburton' s accrued liabilities, i.e., reserves, for such suits/claims were adequate . Halliburton's executives repeatedl y asserted that Halliburton's $24-$25 million in accrued liability for asbestos suits/claims durin g the Cheney era was adequate and an accurate reflection of Halliburton's actual financia l exposure, when, in fact, they knew Halliburton's probable asbestos liabilities were much, muc h larger than that - likely unquantifiable. In fact, they had deliberately never had any expert , objective or independent study evaluate or quantify Halliburton's asbestos liabilities - because they knew any such study would show Halliburton 's existing accrued liabilities were grossly inadequate.

26. Thus, by early 00, the business and financial situation with respect to Halliburto n internally was constantly worsening and the Halliburton executives, including Cheney, kne w

-18- 0 9 there was an ever-increasing risk of at least some of these negative conditions and illicit practice s becoming public . In fact, they knew it was likely just a question of time until Halliburton itsel f had to admit to the reality of its fixed-price/lump-sum contract fiasco, the accounting manipulations being used to cover up its increasing construction operation losses and its multi- billion dollar financial exposure to asbestos claims, which would require Halliburton to tak e giant write-downs to properly account for these concealed liabilities and losses . This would crush the price of Halliburton stock and, if it occurred before Cheney left to return to politics , impair, if not destroy, his new and valuable reputation as a successful corporate busines s executive and badly damage his political ambitions .

27 . During mid-00, as a result of their increasing knowledge of these accumulatin g and escalating negative conditions that were adversely impacting Halliburton's businesses an d operations - during 5/00 through 8/00 - Cheney and several of Halliburton's other top executives bailed out of their Halliburton stock at highly inflated prices . In the aggregate, during these three months, as Halliburton's stock soared higher based on the surprisingly high profits Halliburto n reported and increased future profitable growth it forecast, Halliburton's insiders sold off ove r

1.1 million of their Halliburton shares at as high as $53 .93 per share, pocketing $61 million i n illegal insider trading proceeds! During this time period, Cheney sold 760,000 shares for $4 0 million - over 80% of his Halliburton stock holdings. Bradford, Halliburton's Chairman, sol d

137,375 shares for $7. 1 million - over 32% of his Halliburton stock holdings . Vaughn,

Halliburton's Vice Chairman, sold 150,500 shares for $7 .6 million. All of these sales were completely voluntary, including those of Cheney . To the extent these sellers exercised option s to acquire the stock they sold, those options were in no danger of expiring any time soon .

Cheney himself was under no obligation, legal or otherwise, to divest himself of his Halliburto n holdings, even if he were to be selected to run for Vice President. In fact, later on, Lesar wa s

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quoted as stating : "The future Vice President Cheney did not have to sell at that time, did not have to sell his stock or his options, but he insisted ...." And, in fact, Cheney held onto shares

of stock in other public companies he was affiliated with even though he resigned his positions

with those companies when he ran for Vice President. Had their positive statements about

Halliburton's business, finances and future prospects been true, the Halliburton executives '

shares would have increased in value in the future had they held onto them . Yet they sold.

28. During the 2ndQ 00, Cheney knew Republican Presidential candidate Bush would

likely select him as his Vice Presidential candidate . So he and his colleagues made sure

Halliburton reported much better-than-expected 2ndQ 00 results in 7/00 due to what they said

was the stronger-than-expected performance of Halliburton's ES Group . These results were reported just as Cheney announced he would resign from Halliburton to run for Vice President .

At the time of his announcement and in his last conference call as Halliburton's Chairman/CE O

on 7/26/00, Halliburton reported much better-than-expected 2ndQ 00 results - net income of

$75 milion/$.17 per share - a 50% increase in operating income, driven by especially stron g results from Halliburton 's construction operations in its ES unit.

29 . On 7/26/00, Halliburton held a conference call for investors, analysts and mone y

managers to discuss its financial results, the success of its construction businesses an d

Halliburton's future prospects . During the call, Cheney, Lesar and Morris stated :

Cheney: ... I have got every confidence that Halliburton has a very bright future ahead of it. I think we have done a good deal over the last several years to strengthen the company . . ..

Lesar: ... Halliburton is well positioned . . . . If you look at our engineering and construction group, we continue to have good quality backlog in those businesses.... That backlog continues to provide us profitable work . . . .

Morris : . . . We have got a lot of big numbers to talk about today Halliburton Company's operating income up 50% . . . .

-20- C •

[D]uring June we finalized negotiations to develop the Barracuda and Caratinga oil fields in deep water Brazil for Petrobras and, on July 5th we signed the contract. This contract is a turn-key fixed-price EOC contract . . . . This contract is a major win for Halliburton and clearly demonstrates the numerous integrated offshore capabilities and technologies that we have been developing . . ..

[T]he indications are positive for BRES' future, revenues and profits from the Barracuda project will begin to be recognized in the late, in the fourth quarter and will contribute to continued momentum in 2001 .

A few weeks later, Lesar publicly stated that the Barracuda/Caratinga contract was a "model demonstrating the capabilities of the entire Halliburton Group" and that "[t]he direction now seems to be toward [a] fixed price for projects" and "Halliburton has the advantage here." Just a few days later, Halliburton's stock hit is Class Period high of $55 .18 per share.

30. Thus, with Halliburton's stock back to near all-time high levels and its busines s reporting strong and better-than-expected profits and forecasting increased profitability goin g forward, Cheney left Halliburton, appearing to epitomize the successful corporate CE O returning to "public service ." The importance of Cheney leaving Halliburton on a high not e amid apparently successful corporate operations and profits is highlighted by the fact that Kare n

Hughes, communications director of the Bush presidential campaign, said in 8 /00: "The

American people should be pleased they have a vice-presidential candidate who has been successful in business." Cheney himself said when he left to run for Vice President : "[O]ne of the things that I'll bring to this time in government that wasn 't there before is that for five years I've run a Fortune 500 company ." Another Bush spokesperson said, "Governor Bush values a team member who has met great success in business ."

31 . But, very shortly after Cheney left Halliburton to return to politics, some of th e serious and pervasive financial manipulations and misrepresentations that had secretly permeated his tenure at Halliburton began to unravel and become public . In early 10/00, Lesar, the ne w

-21- 0 0

Chairman/CEO, quietly met with selected analysts and leaked to them that there were serious operational problems in Halliburton's construction businesses (which had supposedly bee n

successfully restructured in 97-98 and into which Dresser's construction operations ha d

supposedly been successfully integrated during 98-99) and that a new majo r restructuring/reorganization (which would inevitably result in large charge-offs) was necessary .

As this information concerning Halliburton's prior misrepresentations and other fraudulen t conduct leaked into the market and was absorbed into Halliburton's stock price, the stock, which traded at over $51 per share on 10/2/00, fell to as low as $40 .75 per share by 10/24/00, closing at

$41 .62 - a company -specific statistically significant decline of about 20% in just a few weeks, as some of the prior artificial inflation in the stock price came out of the stock.

32. After the close on 10/24/00, Halliburton shocked the investment community at large by publicly revealing that, due to serious operational problems, management inefficiencie s and excessive costs, Halliburton would have to restructure and reorganize its constructio n operations, which would reduce Halliburton's net income and EPS during the balance of 00 an d during 01 . Analysts said this was a "shock" and a "big surprise" and they down graded

Halliburton's stock. Since Halliburton's construction operations had supposedly bee n

successfully restructured and reorganized in 97-98 and were supposedly successfully and profitably performing several large fixed-price contracts all over the world, this shocking publi c revelation of Halliburton's prior misrepresentations and other fraudulent conduct in this regar d

crushed Halliburton's stock, driving it down from a high of $42 .68 on 10/24/00 to as low as

$34.18 on 10/25/00, a further one-day, company-specific statistically significant decline of

20%, as some of the prior artificial inflation in the stock price came out of the stock . This decline came on extraordinary volume of 25.3 million shares, compared to Halliburton's average daily trading volume of 3-4 million shares, the largest one-day trading volume in

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Halliburton 's stock up to that point in time ! Neither of the 10/00 Halliburton stock pric e declines were due to general stock market movements, changed economic conditions, change d investor expectations or company-specific negative events or information unrelated to th e alleged misrepresentations and other fraudulent conduct .

33 . Shortly thereafter, Halliburton confirmed that it was taking huge charge-offs in it s construction operations (on several fixed-price contracts Halliburton refused to specificall y identify) of $193 million, some $157 million of which was to write off uncollectible cost overruns and change order claims - the very items which the Cheney-led executive team ha d been improperly recognizing as revenue to boost Halliburton's operating and net income and

EPS to make the Cheney-led executive team look successful, enable them to pocket large cas h performance-based bonuses and boost Halliburton 's stock price so the executives could personally profit by selling off their shares at artificially inflated prices ! Now that

Halliburton's stock had collapsed and continued to languish in the low- to mid-$30 range durin g late 00 and through early 4/01, the Halliburton executive team - now led by Lesar, who succeeded Cheney as Chairman and CEO - stopped their insider selling .

34. These Fall 00 partial revelations of the problems in Halliburton's overall busines s and its construction operations and the losses actually being incurred on several large fixed-pric e construction contracts caused a substantial decline in the price of Halliburton stock . However, the price of Halliburton stock continued to trade at artificially inflated levels because defendant s did not make full and complete disclosure of the true extent of the operational and financial problems plaguing Halliburton and continued to misrepresent Halliburton's financial condition , operations, business success and future prospects, including Halliburton's actual asbesto s liabilities, its Bonny Island, Nigeria LNG contract and the status and circumstances of its $2 .5 billion Barracuda/Caratinga offshore drilling project in Brazil .

-23- 0 0

35 . Once the partial disclosures and leakage of the truth into the market in 10/00

had occurred , Cheney was gone and some of the excesses and financial manipulations of th e

Cheney era had been disclosed, Lesar, Morris and Muchmore needed to boost Halliburton' s

stock price to demonstrate their own managerial success and also to restore the value of the stoc k

options they held, which had been greatly impaired by the 10/00 decline in Halliburton's stoc k

price upon the partial disclosure of the problems with and losses in Halliburton's constructio n businesses detailed above.2 So, beginning in 3/01 or 4/01, through a series of extremely positiv e

statements, they drove Halliburton's stock back up to as high as $49.20 by 5/21/01 .

36. During this part of the Class Period, Lesar and Morris told investors and analyst s that Halliburton was "confident" its new, i.e., latest, restructuring of its construction operation s

would be completed by lstQ 01, that ES' s operating profit would double in 01 and that the

Barracuda/Caratinga contract, which "demonstrate[ed] Halliburton 's end-to-end project management and execution capability," would "contribute significantly" to Halliburton's 0 1

results. When Halliburton reported its lstQ 01 results, they were exceptionally strong - "an excellent quarter," in which ES's operating income "quadrupled," "benefit[ing] from ... the ramp up of Barracuda-Caratinga," leaving management "encouraged with the progress resulting from the restructuring ." As a result, Halliburton sharply increased its earning s

forecast for 01 . Throughout late 00 and early 01, Halliburton assured investors its asbesto s

2 During 98 and 99, Lesar, Morris and Muchmore had been awarded the following options :

Name Year Options Granted Exercise Price ($/share ) Lesar 1998 65,000 $28.1 3 1999 260,100 $39.50 Morris 1998 25,000 $28.1 3 1999 45,000 $39.50 Muchmore 1998 6,900 $28.1 3 1999 10,500 $39.50

-24- 0 0 liabilities remained under control - leading analysts to describe them as a "minor concern ."

Consistent with this, Halliburton increased its accrued liabilities for asbestos liability by just $ 2 million in the 3rdQ 00, just $3 million in the 4thQ 00 and just $1 million in the 1 stQ 01 - resulting in an accrued liability at 3/3 1/01 of only $30 million, assuring analysts Halliburton had

`fully accrued" for any asbestos liabilities .

37. As Halliburton's stock soared higher again , Halliburton executives , knowing that

Halliburton was still grossly understating its asbestos liabilities and concealing that an y conceivable resolution of those claims would have a material adverse impact on Halliburton' s financial condition and results, that Halliburton had obtained the Bonny Island, Nigeria LN G contracts via $180 million in improper payments, and that Halliburton was suffering seriou s problems, performance delays and excessive costs on the giant Barracuda/Caratinga fixed-pric e contract in Brazil, Halliburton insiders took advantage of the again inflated price of Halliburton stock by selling off 113,823 shares at as high as $48.79 per share during 4/01-5/01, pocketing over $4.6 million in additional illegal insider trading proceeds .

38 . On 6/28/01, just a few weeks after the Halliburton insiders had completed thei r second spurt of Class Period insider trading, Halliburton for the first time revealed that a forme r

Dresser subsidiary had been requesting Halliburton's financial help in dealing with an increasin g number of asbestos claims, even though they had known this throughout the Class Period . As investors digested this negative information and its implications for Halliburton's financia l exposure to asbestos suits/claims, more of the artificial inflation in Halliburton's stock came ou t of the stock's price and it declined to as low as $29 .24 on 7/18/01 and continued to decline due to company-specific factors . This stock price decline was not due to general market movements , changed economic circumstances, changed investor expectations or company-specific negativ e events or information unrelated to the fraud . Halliburton belatedly increased its net reserves fo r

-25- 0 0

asbestos claims in the 2ndQ 01 to $125 million . However, Halliburton's executives continued t o

represent that due to substantial insurance coverage and other factors its exposure to asbesto s claims was "manageable," and those claims were "adequately " reserved for and would b e resolved without any material impact on Halliburton 's financial condition or results of operations. Through the end of the Class Period, defendants intentionally concealed and

affirmatively misrepresented the true significance of Halliburton's actual exposure to asbesto s liabilities in Halliburton's SEC filings, press releases and communications with analysts an d investors.

39. The intentional nature of the defendants' now years-long asbestos-related misrepresentations is highlighted by the events of 9/01-12/01 . On 9/12/01, defendants learned that a jury had returned a $130 million verdict against Halliburton and a co-defendant for fiv e asbestos plaintiffs - stunning confirmation that Halliburton's prior reassurances and representations regarding its asbestos liability exposure were completely false . However,

Halliburton did not publicly disclose this verdict or correct those false reassurances regardin g

Halliburton's asbestos liability exposure . On 10/23/01, five weeks after they had learned of th e verdict, Lesar and Foshee hosted a conference call with analysts and investors to discus s

Halliburton's 3rdQ 01 results . In this call, neither Lesar nor Foshee (Halliburton 's new CFO effective 8/01) revealed the verdict; rather, they stated that the news regarding Halliburton' s asbestos liability in the quarter was "positive." In response to a question regarding asbesto s

claims relating to Harbison-Walker (such as the claims leading to the 9/12 verdict), they stated as

follows :

Foshee : . . . There really is not any, anything new to report on Harbison -Walker other than the fact that, that new claims, during the quarter, naming Dresser as a defendant were only 1 ,300....

Lesar: . . .[T]here have been no adverse developments, at all with respect to the Harbison-Walker situation . . . . [C]laims are coming down . .. and more

-26- 0 0

importantly, our settlement rate continues to be at historical levels [of $200 per claim] . . . . [A]nd the third point is that we keep getting paid by our insurers for those that we do settle . And I think those are three really positive data points that people need to start putting into their thinking .. ..

When a few analysts independently learned of the Texas verdict and then questioned Halliburto n about it, Lesar and Foshee assured them the verdict was an aberration and was not indicative o f any change in Halliburton's asbestos liability exposure . In Halliburton's next 3rdQ 01 10-Q, filed on 11/8/01, two months after defendants learned of the Texas verdict, Halliburton maintained its accrued liability for asbestos claims/suits at $125 million and again represented that Halliburton 's exposure to asbestos claims/suits would have no material adverse effect on its financial condition or results from operations .

40. During the first few days of 12/01, in SEC filings, Halliburton publicly revealed recent large asbestos verdicts against it, but made no further public comment or explanation .

Then, on 12/7/01, Halliburton issued a release detailing the recent asbestos verdicts against it, which made it clear to all that Halliburton's existing $125 million accrued liability for it s asbestos exposure was grossly inadequate and that the Company's prior reassurances regarding the financial impact of its exposure to asbestos liabilities were false . Investors instantly realized that the Company had been affirmatively misleading them in its assurances regarding th e

Company's asbestos exposure. Thus, Halliburton shares collapsed from $21 to as low as

$10.94 on 12/7/01, on astonishingly huge volume of 76. 8 million shares, its largest one-day stock volume ever, as most of the remaining artificial inflation in the price of the stock cam e out of the price, a huge statistically significant, company -specific stock decline. This huge stock price decline was not due to general market movements, changed economic circumstances, changed investor expectations or company -specific negative events or information unrelated to the fraud. TheStreet.com reported: "Halliburton Buried as Investors

-27- 0 0

Stop Believing" : "Halliburton's shares dove to nine-year lows Friday as investors lost faith i n the company 's claims . . . ." As investors digested the extremely negative implications of thes e revelations and tried somehow to compute Halliburton's now disclosed vast asbestos liability , rumors of bankruptcy circulated and Halliburton's stock continued to fall to as low as $8 .60 per share on 1/4/02 - a 15 year low! According to Cedric Burgher, Halliburton's director of investo r relations:

"Unfortunately the stock is not trading on the basis of its oil operations ... the specter of asbestos lawsuits is hanging over it . We're really just trying to understand how these issues will play out."

41 . Several analysts also downgraded the stock . For instance, on 12/7/01, Salomon

Smith Barney issued a report on Halliburton :

HAL : Downgrading on Mounting Asbestos Liabilities

Summary

• We are downgrading Halliburton ... due to mounting asbestos liabilities .. . .

42. On 12/7/01, Jefferies & Company issued a report on Halliburton, written by Sen , which stated:

Halliburton: Update On Asbestos Litigation ; Stay Cautious

• This morning Halliburton indicated that a Baltimore jury has awarded $30 million in damages against its Dresser subsidiary . This follows two recent significant adverse verdicts against the company .

• These are surprising developments following management 's rather positive asbestos update during its 3Q01 conference call on October 23....

• We now believe that HAL's asbestos-related net liabilities could be significantly higher than currently estimated (estimated at $125 million by the company) .

-28- r1 E

Clearly, these are surprising developments following management's rather positive asbestos update during its 3Q01 conference call on October 23 . . . . [W]e now believe that the net asbestos liability reserves of $125 at the end of 3Q01 (gross liability $704) probably needs to be increased .

43. During the relevant portions of the Class Period, defendants concealed and faile d to disclose the following facts :

(a) Due to intense competitive pressures brought about by lowered capita l

spending budgets by oil exploration companies, Halliburton's construction operations wer e

being forced to make dangerously low bids providing for only razor-thin margins, while

accepting fixed-price terms on huge contracts, making it very likely that due to the inevitabl e

Unapproved Claims which occur on any large construction contract, Halliburton would likely

suffer losses on those contracts.

(b) It was not true that Halliburton had switched to fixed-price contract s

because they would create greater profits for Halliburton or because Halliburton had a

competitive advantage in such contracts . In truth, the switch to fixed-price contracts was drive n

by intensifying competition, whereby Halliburton and its competitors were fighting to obtain a

shrinking number of contracts available from oil exploration companies which were curtailin g

their capital expenditures; thus, the fixed-price contracts were, in fact, forced upon Halliburto n

by competitive pressures and undertaken by Halliburton without sufficient controls, procedures ,

monitoring systems and personnel to perform such contracts profitably .

(c) Halliburton did not have in place adequate contract performance

monitoring, cost control and accounting systems that would enable it to effectively monitor th e

progress being made toward contract completion, the actual costs being incurred or the curren t

state of performance of large contracts and also lacked an adequate system of internal financial

and accounting controls to permit the proper monitoring, control of and accounting for costs o n

fixed-price/lump-sum construction projects .

-29- 0 0

(d) Halliburton had secretly changed the way it was accounting fo r

Unapproved Claims on construction contracts and was now recognizing them as revenue whe n the claims were asserted, even though the customer had not yet agreed to pay the Unapprove d

Claims and more and more customers were refusing to pay millions of dollars of existing

Unapproved Claims .

(e) Halliburton was recording millions of dollars of Unapproved Claims a s revenue, including on the Barracuda/Caratinga contract, even though its top executives kne w that collection of those Unapproved Claims was not probable and that they were not capable o f accurately estimating what amount could ultimately be collected under any circumstances .

(f) Contrary to its claims, Halliburton had not changed the way it was dealing with or its procedures for customer change work orders/Unapproved Claims and wa s not securing advance agreement to pay for such work as it had claimed, but rather, wa s continuing its traditional process of accepting and performing change orders as demanded b y customers or required by the progress of the contract work, without any agreement to pay , merely hoping to later collect on those Unapproved Claims .

(g) Halliburton knew from the outset that it was likely to suffer a significant loss on the Barracuda/Caratinga contract because, in order to obtain this huge fixed-price/lump- sum contract, Halliburton had been forced to submit a "low-ball" bid with a dangerously thi n projected profit margin, which was all but certain to be wiped out by the change orders/Unapproved Claims that would be unavoidable in a project of this size and whic h

Halliburton knew the customer (Petrobras) would refuse to pay for, as this customer ha d refused to pay millions in Unapproved Claims on an earlier contract completed in 98, whic h was part of the reason Halliburton had to take a $60 million charge for uncollectibl e

Unapproved Claims at year-end 98 .

-30- • •

(h) Halliburton' s construction operations had not been effectively reorganized and restructured during 97-98 as claimed ; in fact, in the field, these operations wer e disorganized and lacked adequately skilled personnel and the procedures necessary to perform fixed-price contracts of the size and scope being undertaken by Halliburton, which greatl y increased the probability of performance delays, cost overruns, Unapproved Claims and thu s losses on those contracts .

(i) Halliburton's financial results issued during the Class Period were false , having been manipulated and artificially inflated higher due to the fraudulent and illicit accounting practices detailed in 19[226-321 of this Complaint .

0) Halliburton's Code of Business Conduct and Ethics was not, in fact, being enforced or followed in the Company's international operations, and in order to obtai n and retain the Bonny Island, Nigeria LNG contract and extension thereof, the consortium of which Halliburton was the dominant member had made and was making substantial payoffs and bribes, including payments to Nigerian officials to get the contract and its extension and payoffs to top executives of Halliburton's Kellogg unit to reward them for participating in this risky an d illegal activity, which payments were being funneled through Swiss bank accounts controlle d by a London lawyer.

(k) Halliburton had acquired Dresser without doing due diligence into

Dresser's business, operations, financial condition and potential liabilities, in part because

Cheney demanded that the acquisition be completed in an unreasonably expedited fashion an d because he did not want to create a paper trail documenting what he and other Halliburto n executives knew were liabilities of potentially hundreds of millions of dollars for existing and anticipated asbestos suits/claims against entities for which Dresser was legally responsible, a significant amount of which would likely not be covered by insurance.

-31- •

(1) The award of the Barracuda/Caratinga contract was not a result of, nor did it demonstrate, Halliburton's unique ability to manage and execute large offshore fixed- price construction contracts, but rather, it reflected Halliburton's willingness to submit a low- ball bid with razor-thin margins to get a fixed-price contract with a customer that it knew had a track record of refusing to pay for the inevitable Unapproved Claims and cost overruns tha t would inevitably occur on a $2 .5 billion contract.

(m) The acquisition of Dresser was not a "win" for Halliburton' s shareholders. In fact, it represented an enormous risk due to Dresser's concealed potentia l asbestos liabilities and because, contrary to the representations that the two companies were a good cultural and business fit and that there were plans in place to achieve a smooth, quic k transition and successful integration of the operations of both companies, there were no transition plans in place and the Dresser executives and managers were known to b e conservative, system and process oriented managers with a very conservative approach t o percentage-of-completion/contract accounting, while the Halliburton executives and manager s were just the opposite - virtually guaranteeing a cultural clash .

(n) In fact, the construction operations of Dresser were not bein g successfully integrated into the construction operations of Halliburton, as the managers an d executives of the two companies had very divergent approaches to business and accounting an d constantly fought with one another, resulting in distracting turf battles, operating inefficiencie s and duplicative layers of management - all resulting in an inability to integrate the two operations and thus in excessive costs.

(o) Halliburton, in fact, had not adequately reserved or accounted for it s accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities for

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asbestos claims and suits were unquantifiably large, but certainly exceeded the stated reserve s

as disclosed throughout the Class Period by a huge multiple.

(p) Halliburton's reserve for its accrued asbestos liabilities had not bee n

objectively measured or determined or subjected to any expert review or consultation and thu s

represented nothing more than a self-interested management's claim, which management kne w

was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y

representation that management believed that Halliburton's asbestos claims and suits would be

resolved without any material impact on Halliburton's financial condition or results o f

operations. Management did not believe this representation or statement of opinion when i t

was made and knew that it was highly likely that the ultimate resolution of the asbestos claim s

involving Halliburton would, in fact, materially adversely impact Halliburton's balance shee t

and results of operations as, in fact, it did.

(q) Because of the existence of Dresser's very substantial potential asbesto s

liabilities and due to the known difficulties of attempting to blend the management of the two

companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

(r) As a result of the foregoing undisclosed problems and practices, th e

defendants actually knew that their statements regarding Halliburton's future business prospect s

and performance and their forecasts of improved future financial performance were false whe n

made and would not be achieved.

44 . At the end of the Class Period, Halliburton's stock was just one-half the $20 pe r share the stock sold at when Cheney joined Halliburton as its CEO in 8/95 . In the interim,

Halliburton's executives had driven Halliburton ' s stock to a Class Period high of $55 by

-33- 0 •

Halliburton Co . All Defendants Quarterly Insider Sales : 1997 - 200 1 $50 $70 f Class Period : 9/29/98 - 12/7/01 ►

$60

$40

$50

$30 0 $40 i3 d E 0 $30 a $20 0 Class Penod $20 Shares Sold : 1,344,064 Proceeds- $68,262,75 8 $1 0 Pre - Class Penod $10 Shares Sold 59,362 Proceeds . $2,100,004

$0 $ 0 Q1 Q2 03 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1997 1998 1999 2000 2001

Post-Class Period Events

45. Events subsequent to the revelations of 12/7/01, which end the Class Period, have confirmed the existence, and serious nature of, the undisclosed adverse information during th e

Class Period, as well as the Halliburton executives' manipulation of Halliburton's financia l reports and statements to cover up those problems .

46 . In 3/02, after learning that The New York Times was working on a story to expose

Halliburton's fraudulent accounting practices in 98-00, Halliburton's Board of Directors forced

out four executives, including the head of its ES unit and Morris, who had been Halliburton's

CFO during most of the Class Period. Then, in 5/02, The New York Times published an expose

on Halliburton's accounting manipulations, reporting how it turned losses from cost overrun s

and unpaid change order claims into profits after secretly changing how it accounted for

Unapproved Claims . This forced the SEC to undertake an investigation, notwithstanding tha t

-35- 0 0

falsifying Halliburton's financial results and misrepresenting the state of its business, the succes s

of the Dresser merger and Halliburton' s future prospects - allowing them to sell off 1,344,064

shares of their Halliburton stock - 61% of the shares they owned - pocketing $68.2 million in illegal trading proceeds before adverse revelations drove the stock down to as low as $10 and then to $8.60. Halliburton insiders' Class Period stock sales are set forth below :

Name Common Common Proceeds Percent Shares Owned Shares Sold of Shares Owned Sold

Jerry Blurton 70,156 44,592 $ 2,182,051 63 .6 % William Bradford 422,564 137,375 $ 7,146,798 32.5 % Richard Cheney 949,800 760,000 $40,055,750 80.0% Lester Coleman 133,064 82,001 $ 3,604,880 61 .6 % John Kennedy 21,520 6,520 $ 331,666 30.3 % David Lesar 218,373 35,000 $ 1,644,550 16.0% James Martin 91,446 71,345 $ 3,417,671 78 .0% Gary Morris 59,052 7,500 $ 401,250 12.7 % Donald Vaughn 230,645 199,731 $ 9,478,142 86.6% Totals: 2,196,620 1,344,064 $68,262,758 61 %

As the graph below shows, these stock sales were markedly out of line with these individuals' prior sales of Halliburton stock and most took place at or near the Class Period high of

Halliburton's stock price .3

Pre-Class Period sales of Dresser stock by Dresser executives are reflected in this chart .

-34- Cheney was, by then, the Vice President of the United States . When this article appeared,

Foshee (Halliburton's current CFO) said "he was certain that the accounting change wa s approved by ... David Lesar." Later, Lesar said, "Cheney was aware Halliburton was counting projected cost-overrun payments as revenue. `The Vice President was aware of who owed us money, and he helped us collect it. "' According to Paul Brown, Chairman of the Accounting

Department at the Stem School of Business at New York University, the change was "clearly a way of pumping up revenues and receivables ." "If it looks like they were just fabricating the numbers, that verges on fraud," said J. Edward Ketz, Professor of Accounting at Penn State

University. Nevertheless, Halliburton vehemently denied any impropriety, insisted the amounts involved were immaterial and that its disclosure and accounting practices were correct .

47 . However, after a long, extensive investigation, in 8/04, the SEC filed suit , alleging extensive accounting violations in connection with Halliburton's constructio n businesses, instituted Cease and Desist proceedings and issued a Cease and Desist Order, whic h included findings that Halliburton and its top financial officers had, in fact, violated the reportin g and disclosure requirements of the federal securities laws by failing to disclose in 98 tha t

Halliburton had changed the manner in which it was accounting for cost overruns and chang e order claims, thus improperly inflating its ES unit's operating income (and Halliburton' s operating income, net income and EPS) for several quarters during 98 and 99, fining Halliburton

$7 .5 million, in part because Halliburton refused to cooperate with the SEC during it s investigation. The SEC Complaint/Cease and Desist Order are attached as Exhibits A and B hereto.

48. As to Halliburton's heralded shift into "fixed-price/lump-sum" projects, like

Barracuda/Caratinga, which supposedly gave it a competitive advantage and would increase it s

profits and Halliburton's expertise and management and execution capabilities, just a few

-36- 0 months after the end of the Class Period, Halliburton abandoned acceptance of fixed price contracts and exited the fixed price offshore engineering, procurement and commissions

("EPC") business . According to Lesar in 7/02, Halliburto n

would no longer pursue lump sum engineering procurement and commissioning contracts, EPC contracts, for the offshore oil and gas business ....

Our bottom line is we're no longer going to accept that lump sum risk . . . . [T]he potential rewards [are] unacceptable, and are [sic] no longer going to take them on.

In Halliburton's 02 Annual Report, Halliburton stated it had decided

it will no longer pursue lump-sum engineering, procurement, installation and commissioning (EPIC) projects for the offshore oil and gas industry until and unless the current business model improves to allow for reasonable profits at reasonable risks.

49. During 01, the Barracuda/Caratinga $2 .5 billion lump-sum/fixed-price contract, which Halliburton trumpeted as an example of its expertise and ability to successfully manag e and execute giant oil service/construction contracts and which Halliburton consistently represented was proceeding successfully and driving Halliburton's better-than-expected financia l performance during 01, was, in fact, a disaster - the worst contract catastrophe in Halliburton' s history - increasingly behind schedule and awash in cost overruns that would result in ove r

$760 million in losses - the largest loss Halliburton ever suffered on a single contract !

50. In 7/02, just a few months after the Class Period ended, Halliburton announced an initial $119 million loss on Barracuda/Caratinga due to unpaid Unapproved Claims . In 2/03 ,

Halliburton admitted the "project continues to experience significant cost increases and tim e delays" and that Halliburton had incurred another $81 million in losses . In 4/03, Halliburton admitted to further "scheduling delays ," "higher cost trends" and "actual and committed costs exceeding estimated costs ," resulting in an additional $55 million loss on the project . 6/03 brought an additional $104 million loss on Barracuda/Caratinga . By this point in time, with the

-37- project only 75% completed, Halliburton had suffered a $345 million loss on Barracuda /

Caratinga, including an increased 2ndQ 03 loss of $173 million. Early 04 brought an additional

$62 million loss . 7/04 brought another $200 million loss on the project, which Halliburton, with remarkable understatement, described as "disappointing ," indicating it had "enhanced [its] project management and increased [its] effort to complete this difficult project."

51 . Thus, this showcase project, which Halliburton represented during the Clas s

Period was proceeding successfully and contributing to increased ES operating profits an d

Halliburton' s net income/EPS, has, to date, lost $762 million (or $1 .08 per share) . And there are likely to be further losses before the project is completed . While Halliburton told investor s during the Class Period that fixed-price/lump sum contracts gave it a competitive advantage an d would increase Halliburton's profits, in fact, it lacked the construction project managemen t monitoring and oversight capabilities and systems and internal cost and accounting controls t o successfully undertake and perform large fixed-price contracts like Barracuda/Caratinga. And, in fact, Halliburton knew that it would never collect any cost overruns/change order claims on

Barracuda/Caratinga because in a prior fixed-price contract with Petrobras, its customer on th e

Barracuda/Caratinga contract, Petrobras had absolutely refused to pay millions of dollars o f

Unapproved Claims, resulting in Halliburton taking a $60 million charge at year-end 98 . This

Barracuda/Caratinga fiasco contributed in no small part to Halliburton's admission in 7/02 that it was abandoning fixed-price/lump sum EPC contracts .

52. During most of the Class Period through 6/30/01, Halliburton maintained only a minimal accrued liability for asbestos claims of between $8-$30 million and consistently represented that these asbestos provisions were adequate and that "we believe that the ope n

asbestos liability claims pending against us will be resolved without a material adverse effect on

our financial position or the results of our operations ." Then, even when Halliburton revealed in

-38- 0

6/01 that a former subsidiary of Dresser had requested that Halliburton provide it with claim s management and financial assistance regarding the asbestos claims/suits being asserted against it ,

Halliburton told analysts that this development exposed Halliburton to "worst case" asbestos liability costs of $60 million . Even when Halliburton then increased its asbestos accrued liabilities in the Fall of 01 to $125 million, it continued to assure investors the "asbestos claim s asserted against us will be resolved without a material adverse effect on our financial positio n or results of operations" and that, due to Halliburton' s "substantial amount of coverage," the asbestos claims were a "manageable problem ." But then, in early 12/01, Halliburton, in SE C filings and a release, disclosed that it had suffered huge verdicts in a number of asbestos cases , demonstrating to investors that Halliburton's prior representations regarding its exposure t o asbestos litigations and claims, including its representation that known claims against it would b e resolved without any material adverse impact on its financial condition or results fro m operations, were false and that its previously reported accrued liabilities for those suits/claim s had been grossly inadequate .

53 . In 7/02, just months after the stunning revelations of early 12/01, Halliburto n admitted that after it had its asbestos liabilities looked at by an independent expert, its asbestos liabilities were at least $2.2 billion, some 73 times more than the highest amount of accrued liability for asbestos liabilities it reported until almost the end of the Class Period, less some amount of hoped-for insurance recoveries, resulting in Halliburton later taking hundreds o f millions of dollars of charge-offs/losses . Combined with the first revelations of $119 million in

Barracuda/Caratinga losses, Halliburton's 7/02 asbestos charges resulted in Halliburton sufferin g a 2ndQ 02 loss of $498 million ($1 .15 per share) . Credit Suisse First Boston wrote on 7/25/02 , in terming Halliburton's stock "unattractive" :

Management finally admitted, following the appointment of an independent third party to conduct a study, that it has underestimated the exten t -39- P-.~ •

of asbestos exposure. Accordingly, management has taken a further charge for asbestos liabilities over the next 15 years until 2017 of approximately $700 million, taking the total estimated (undiscounted) asbestos liability to $2 .2 billion .

54. Then, a few months later, Halliburton revealed it had agreed to pay $4 billion t o settle the asbestos suits/claims against it, resulting in another $781 million charge, causing a n additional 4thQ 02 loss of $129 million ($0.33 per share), warning that further multi-hundred million dollar losses were likely. In fact, Halliburton's recoveries from insurance companie s have been hundreds of millions of dollars less than hoped for. As a result, Halliburton recorde d another huge $615 million charge ($1.40 per share) in the 2ndQ 04 which , combined with continuing huge losses of $200 million ($ .46 per share) on the Barracuda/Caratinga project , resulted in Halliburton suffering a $663 million ($1 .51 per share) 2ndQ 04 loss . In the 3rdQ 04,

Halliburton recognized additional large losses of $44 million, including charges of $230 millio n to settle asbestos liabilities. Most recently, on 1/3/05, Halliburton announced it had finall y resolved the asbestos liabilities . A settlement calls for Halliburton to set up a $4 .8 billion trust to pay asbestos and silica claimants by the end of 1/05 . The trust will be funded with $2 .78 billion of cash, 59.5 million shares of common stock and a $54 million note . It is quite clear that

Halliburton 's acquisition of Dresser did not strengthen Halliburton 's balance sheet and did not boost Halliburton 's bottom line by $250-$500 million per year, and that the resolution of the asbestos claims/suits involving Halliburton had an adverse impact on its financia l condition and its results from operations .

55. During the Class Period, Halliburton frequently mentioned the Bonny Island ,

Nigeria LNG contract that it, as part of the TSKJ consortium, was performing, stressing that thi s contract showed Halliburton's ability to successfully compete for large overseas LN G construction contracts - a very important market . The Bonny Island, Nigeria LNG contract was originally signed by a Dresser subsidiary (Kellogg) in 95 . However, after the Dresser

-40- 0 0 acquisition, in 5/99, the TSKJ consortium (and Halliburton) received a new huge follow-o n contract to expand the facility . Halliburton's agent in getting and holding on to this hug e contract was Jeffrey Tessler, a London-based sole practitioner attorney. The day-to-day oversight and management of this contract was under Albert "Jack" Stanley, the CEO o f

Halliburton's Kellogg Brown & Root, Inc . ("KBR") subsidiary, and William Chaudan, a high- ranking KBR executive.

56 . In 5/03, Halliburton admitted to improper payments of $2.4 million to a Nigerian official in connection with the LNG contract, which payments it admitted "clearly violated our

Code of Business Conduct and internal control procedures." It later was revealed that

Halliburton's consortium had made $180 million in illegal payments to obtain and retain th e

Nigerian LNG contract. Some $5 million of this money ended up in a Swiss bank account belonging to Stanley, while $1 million ended up in Chaudan's Swiss bank account - payoffs to reward them for their participation in these risky, illegal practices - payments Halliburto n admitted violated its Code of Business Conduct. However, most of the money went into and through Swiss bank accounts maintained in the name of Tri-Star Investments - an entity owne d by Jeffrey Tessler, the London-based sole practitioner attorney who practices out of a storefron t office and has no associates or partners, but is well-known for his connection to top governmen t officials in Nigeria and has worked with Halliburton for over 10 years . Tessler has been to

Nigeria only once in 20 years, yet was paid $180 million as a fee by TSKJ consortium fo r

"consulting services," although they have never been documented . Lesar has admitted that

"criticism on an issue such as this one is expected" and that these payments and the conduct of

Stanley and Chaudan violated Halliburton 's "code of business conduct." Halliburton has also

admitted that there are internal corporate documents discussing paying bribes to public official s in Nigeria in connection with the LNG contract.

-41- 0 0

57. So far, French investigators have traced $30 million of these illicit funds to a

"close associate" of the former President (dictator) of Nigeria, General Sani Abacha - a countr y noted for its corrupt business practices, coming in second in Transparency International's 2003 survey of most corrupt countries . On 10/13/04, the Los Angeles Times reported:

Investigation Widens In Nigeria Oil Case Involving Halliburto n

[I]nformation obtained by The Times, including documents from a French investigation, shows that Halliburton, through a subsidiary, was more involved in some of the suspicious deals than it has acknowledged. In his deposition to an investigating judge, Jeffrey Tesler - a British lawyer who served as the consortium's agent in Nigeria and the central figure in the alleged bribery scandal - stated that Halliburton fought to retain him even after a consortium partner moved to have him dismissed.

Payments are alleged to have come from $176 million that the consortium paid to Tesler in five contracts signed between 1995 and 2002 . Four of the five contracts were signed after Halliburton joined the consortium in 1998 through its purchase of Dresser Industries.

An attorney for Georges Krammer, a former executive with another consortium member ... said . . . Tesler made questionable payments after Halliburton became involved in the project.

"The plan was to corrupt Nigerian officials," Olivier Schnerb, Krammer's attorney, said in an interview at his Paris office .

The project began in the early 1990s, when M .W. Kellogg, a subsidiary of Dresser Industries, formed a consortium with Technip, Snamprogetti of Italy and JGC of Japan to bid on a contract for the natural gas complex in energy-rich Nigeria.

The consortium, known as TSKJ, won a $2 .2 billion contract in 1995 ... . That same year, according to the copies of Tesler's deposition and other documents obtained by The Times, Tesler was retained to find subcontractors and help arrange meetings with Nigerian officials - including its military ruler at the time, Gen. Sani Abacha, who was notorious for corruption and human rights abuses.

-42- 0

Tesler is little known in British legal circles . His office, a rundown storefront in a poor North London neighborhood of African and Caribbean immigrants, sits next to a Somali butcher shop .

Documents show that he was hired - over the objections of Technip, which preferred another candidate - after meeting with A . Jack Stanley, the head of Kellogg's operations in Nigeria, and other company officials . According to an internal consortium memo, he "reported directly to Kellogg" and had worked on projects for that company since the 1980s .

The original contract called for payments of $60 million to Tri-Star Investments, a Gibraltar-based firm Tesler established to help manage the consortium's Nigerian business .

The consortium paid Tri-Star through LNG Services, a company set up on the Portuguese island of Madeira.

"Madeira was picked [by the consortium] because it is a tax paradise with rigid secrecy laws," said Schnerb, the French attorney . "LNG Services was a corrupting machine ."

He said that in Abacha's Nigeria, winning a contract without paying bribes was "as rare as a flying fish" and that the dictator "was the No . 1 person to be paid off. "

Halliburton became part of the consortium in September 1998, when it acquired Dresser. After the Dresser takeover, Kellogg was merged with Brown & Root, a Halliburton unit, to form Kellogg Brown & Root.

Cheney named Stanley chairman of the Kellogg Brown & Root subsidiary, and he continued to oversee the Nigeria project .

In March 1999, TSKJ won a second contract, worth $1 .4 billion, to build additional facilities at the natural gas complex . Twelve days after that contract was finalized, the consortium signed its second deal with Tri-Star, this one for $37 .5 million, the copies of the documents show .

That same year, Tesler said in his deposition, Technip sought to replace him with one of its own consultants but was overruled by the other consortium members, led by Kellogg Brown & Root, at a meeting in London .

In 2002, ... the consortium won a third contract for the project, this one worth $1 .7 billion. The bribery allegations emerged that year after Krammer told French investigators that the consortium had established a "slush fund" to bribe Nigerian officials.

-43- 0 0

An ensuing investigation uncovered the first two contracts between the consortium and Tri-Star, as well as three others in July 2001, December 2001 and June 2002, the copies of the documents show .

The French investigation triggered inquiries in Nigeria and the United States, where the Justice Department and the Securities and Exchange Commission have ongoing investigations .

Le Figaro, a Paris daily, reported this year that Tesler deposited several million dollars in a Swiss bank account controlled by Stanley, who retired last year as chairman of KBR - as Kellogg Brown & Root is now known - but remained on contract as a consultant.

Tesler acknowledged in his deposition that he made payments to Stanley and to an offshore account controlled by Wojciech Chodan, a KBR consultant involved in the Nigerian project.

Most of the money to Stanley came from funds paid to Tri-Star under the March 1999 contract, according to the deposition .

In June, Halliburton severed all ties with Stanley and Chodan. Hall said in an e-mail that the two men were dismissed because they had violated the company's codes of business conduct.

58 . As a result of this fiasco, a Nigerian parliamentary report has recommended that

Halliburton be suspended from receiving any more Nigerian contracts - a severe blow to

Halliburton, as Nigeria is now one of the most important oil-producing nations . Halliburton is also now subject to a formal SEC investigation into these matters and a DOJ inquiry as well .

French criminal authorities are also investigating the matter . In early 11/04, Halliburton, in an

SEC filing, disclosed that the DOJ has expanded its investigation of the matter and ha s determined that bribes may have been made in Nigeria, involving Stanley . Halliburton ha s conceded that there can be no assurance that U .S. officials will not conclude these payment s violated the U .S . Foreign Corrupt Practices Act.

59. As a result of the artificial inflation in Halliburton's stock price during the Clas s

Period due to defendants' financial manipulations and other false statements and the decline i n -44- 0 0 the price of the stock as the defendants' prior misrepresentations and other fraudulent conduc t entered the market, purchasers of Halliburton stock during the Class Period suffered significan t damages - some $3.1 billion as measured by standard methodologies . In contrast to the huge damage they inflicted on investors, Halliburton's top insiders did quite well for themselve s during this period of fraud. Halliburton top insiders sold off over 1 .3 million shares of their

Halliburton stock for illegal insider trading proceeds of $68 million . In addition, during 97-01 ,

Halliburton's top executives (Cheney, Lesar, Coleman, Morris, Vaughn and Bradford) collected aggregate salaries and bonus payments of over $36 million - bonuses which were based largel y upon the contrived and false appearance of business success and faked profits alleged herein an d which have subsequently been wiped out by recognition of Halliburton's actual asbesto s liabilities, its construction operations' losses and charge-offs and the huge losses on th e

Barracuda/Caratinga project to date, and undermined by the revelations of huge illegal payment s made in connection with the Bonny Island, Nigeria LNG contract . When Cheney became

CEO/Chairman of Halliburton its stock sold for about $20 per share . After the revelations of

12/7/01 were absorbed by the market, the stock sold for as low as $8 .60 per share - its lowest level in 15 years! This collapse also took Halliburton's stock down to less than 50% of the level it had been at when Cheney took over leadership of Halliburton in 8/95, as shown by the chart below:

-45- • •

Halhbur#on August 1, 1996 - January 15, 2002 Daily Share Price s

70

60

30

-C 40

a.

30

20

10

0 01-Aug-95 23-Aug-96 18-Sep-07 14-Oct-9E8 09-Nov-09 04-Dec400 07-Jan-02 12-Feb-06 07-Mar-07 02-Apr.96 29-Apr-99 23-May-00 19-Jun-0 1

Not surprisingly, Cheney's resume on the White House Web site no longer contains any mentio n of his tenure as CEO/Chairman of Halliburton .

60. The fold-out graph below sets forth these events and Halliburton's stock price :

-46- • •

2126/98 Dresser merger will create oustanding business. Win for HAL shareholders . Quick, smooth integration Accretive to EPS -- minimum $250 million annually . POST CLASS PERIOD EVENTS : 250 • NY Times expose of secret change in accounting for Unapproved Claims forces SEC investigation. 4/98 97 Annual Report. 3/99 98 • HAL abandons fixed price/lump sum contracts Successfully completed merger . because of inability to make profits . restructuring of HAL construction particular • Barracuds/Caratinga project suffers huge cost business Strong turnaround in manage segment. Key to increased profits million. overruns/losses of over $762 million ( $1 .08 per is more fixed-price contracts . HAL rov share). code of business conduct requires inaccourp )01 Resu lts. Major ion, in net income and E S • HAL reveals illegal payments of $180 mi ll ethical and legal conduct. All Asbestos violating HAL' s code of conduct, to get Bonny w/o mate tee . ES driving anticipated losses on contracts Island, Nigeria contracts. Top E&C officials provided for currently. Claims for mings growth due to additional compensation recognized Garatmga . EP S ousted. SEC civil and DOJ criminal 60 when resolved. HAL/Dresser creased investiga tions. French criminal investigation . outstanding cultural fi t HAL admits documents show questionab le payments. HAL It a 01 10-Q . • HAL asbestos losses/charges of $2. 2 billion. 200 lability $30 million. Later settles claims for $4 billion ; hundreds of be resolved w/o millions not covered by insurance. • SEC finds HAL violated securities laws duri ng 98-®8 by secretly changing accounting for Unapprov ed Claims, Improperly recognizi ng discloses former mi llions in revenue to boost operating income diary requesting and EPS for several quarters. 50 10/29/98 3rd Q Results Higher fiance with ES revenues despite weaker as. 'At most' will market conditions . Dresser ty to $6o million merger positions HAL as ats not a maw premier company . Very ssue. optimistic . Merger to achieve annual benefits of $250 million ; 2nd 0 00 results 'strong' - 'continue to soar ." strengthen balance sheet , mt quarter," 'positive upside surprise" - ES strong ante . First $100 million operating income month . k Improvement is Barracuda/Caratinga -- "ver y 150 for HAL "Very optimistic" as to 2002 . 'Very Increases EPS forecasts 0 L 40 Ito 10/23/01 3rd Q 01 Results . Net income $179 million/$ 42 per Go a Index share - highest since Dresser merger. "Fundamentals strong.' y Adequately reserved and insured for asbestos Nothing new to 6/26/98 report on asbestos. No adverse developments. 'Positive" HAL/Dresser asbestos data points merger O approved . C G

11/8/01 3rd Q 01 10-0 . Asbestos liability $125 million. Claims will be resolved w/o 30 material impact. 18167Nl1 HAL discloses huge 100 asbestos verdi cts. Exis ti ng accrued 1/22/98 4th Q 97 liabililin of $125 million grossly Results . Substantially I 1/25/99 4th 0 98/9 8 insdoillwH . MoodysS&P cut HAL improved future outlook Results. 4th 0 net credit Mire. AnatysSs downgrade and competitive 7/22/98 2nd Q Results . $90 millron/$ .20 per stock due to 'surprising position . Successful ES Group posts very share ; 98 net $731 developments' after positive 1W2a )1 restructuring of strong results Making million/$1 67 pe r Conference Call . construction operations good financial progress share. Write off $60 20 provides excellent million in anapproved growth opportunities. claims customers 12/s 1 would not pay. New procedures to avoid $22.04 losses require clien t Huge asbestos 1 agreement 'up front' t in Texas Not to pay . Optimistic sed by HAL. about the long-term outlook 9/28/98 Dresser merger completed. 4/22/98 1st Q 98 Results Will add at least $250 million to 1 50 Construction operations earnings per year and result in long- positioned for unproved 1 0 performance term benefits for shareholders. Will . Increased lower coststincrease operating income backlog will contribute Merger looks better every day favorably to future results. . Future excellent 1/04 pop: $8 .60 15-year LJ 2/712/7 IOW $10.94 0 1 1 50% 0 01/09/1998 / 07 10/1998 01 /0 01/04/2002 r~N 04/10/1998 10/ Copynght 02005 by William S. Lerach and Lerach Cough lin Stoia Ge ller09/1998 Rudman & Robbins LLP /05/2001 rxs , . Cough lin Stoia Gell er Rudman & Robbins LLP will vigorously defend all of their rights to this wntin 0 0

PARTIES AND OTHER KEY ACTORS

61 . (a) Lead Plaintiff Archdiocese of Milwaukee Supporting Fund, Inc . purchased the securities of Halliburton at artificially inflated prices during the Class Period and has suffere d damages of approximately $71,308, subject to proof at trial .

(b) Plaintiff Laborers National Pension Fund purchased the securities o f

Halliburton at artificially inflated prices during the Class Period and has suffered damages o f

approximately $1,161,894, subject to proof at trial .

(c) Plaintiff Plumbers and Pipefitters National Pension Fund purchased th e

securities of Halliburton at artificially inflated prices during the Class Period and has suffere d

damages of approximately $530,134, subject to proof at trial .

(d) Plaintiff City of Dearborn Heights Act 345 Police & Fire Retiremen t

System purchased the securities of Halliburton at artificially inflated prices during the Clas s

Period and has suffered damages of approximately $253,526, subject to proof at trial .

(e) Plaintiff John Kimble purchased the securities of Halliburton a t

artificially inflated prices during the Class Period and has suffered damages of approximately

$3,322, subject to proof at trial.

(f) Plaintiff Ben Alan Murphey purchased the securities of Halliburton at

artificially inflated prices during the Class Period and has suffered damages of approximately

$11,768, subject to proof at trial .

62. (a) Defendant Halliburton is a public corporation with its executive offices i n

Houston, Texas . Halliburton is a diversified energy services, engineering, maintenance an d construction company, offering energy services and products, industrial and marine engineerin g

and construction services . The Company's address is 5 Houston Center, 1401 McKinney ,

Houston, Texas 77010 .

-48- 0 0

(b) During the Class Period, Halliburton's stock traded on the NYSE, a

highly efficient market . Halliburton filed periodic public reports with the SEC . Halliburton

regularly communicated with the investment community through press releases and had other

communications with the financial press . Halliburton was followed by several securities

analysts who wrote reports that were widely distributed .

63 . (a) Richard B . Cheney ("Cheney") became CEO and then Chairman of

Halliburton in 8/95. Cheney continued in these positions (except when he gave up the

Chairmanship for a year or so after the Dresser acquisition) until he resigned in late 7/00 to return to politics. During the Class Period, Cheney sold 760,000 shares of his Halliburton common stock (80% of the shares he owned) for $40 million in insider trading proceeds . These sales were unusual in timing and amount and inconsistent with Cheney's historical Halliburto n stock sales, as the following chart shows :

Halliburton Co. Richard B . Cheney - Chairman of the Board Quarterly Insider Sales : 1997 - 2001 $70 Class Period : 9/29/98 - 1217/01

Class Perio d $60 Shares Sold : 760,000 Proceeds $40,055,750 330 • $50

N 0C O $40

N E '20 t- 0 co 9 $30 0 0

$20

Pre - Class Period $10

Shares Sold : 0 Proceeds : $0

cn $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1997 1998 1999 2000 2001

-49- 0 0

Cheney received bonuses for 97-00 of $4.5 million based on Halliburton's apparent business success and false profits and a departure bonus worth millions when he left the Company in 7/00, also justified by Halliburton's apparent business success and false profits .

(b) William Bradford ("Bradford") was Chairman and CEO of Dresser when

Halliburton acquired Dresser. Bradford became Chairman of Halliburton in 9/98 when the

Dresser acquisition was completed and held that position until 2/00 . During the Class Period,

Bradford sold 137,375 shares of Halliburton stock (32.5% of the shares he owned) for $7.1

million in illegal insider trading proceeds . Bradford's stock sales were unusual in timing and

amount and out of line with his historical Halliburton stock sales, as the chart below shows: 4

Halliburton Co. William E. Bradford - Chairman of the Board Quarterly Insider Sales : 1997 - 2001

$8 $70 Class Period : 9/29/98 - 12/7/01 -►

Class Period $7 $60 Shares Sold : 137,375 Proceeds : $7,146,798

$6 $50

$5 0 O $40

CD E $4 0 $30 o $3

$20 $2

Pre - Class Period $10 $1 Shares Sold : 0 Proceeds : $0

$0 $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1997 1998 1999 2000 200 1

Bradford is not sued because the statute of limitations as to him has expired .

4 In the case of former Dresser officers named herein who joined Halliburton upon the merger, their pre-Class Period sales are sales of their Dresser stock. Records show no such sales during 97-98.

-50- • S

(c) Defendant David J . Lesar ("Lesar") was the President and Chie f

Operating Officer of the Company as of the beginning of the Class Period . Lesar may be

served at 5110 San Felipe, Unit 233W, Houston, Texas 77056. During this period, he was on e

of three members of Halliburton's Executive Committee, along with CEO Cheney and Donal d

Vaughn, former head of Dresser, which was acquired by Halliburton at the beginning of th e

Class Period . Upon Cheney's resignation in 7/00, Lesar assumed the roles of Chairman, Chie f

Executive Officer and President of Halliburton, in which positions he remained until the end o f the Class Period . Prior to the Class Period, he had served from 95 to 97 as Halliburton's Chie f

Financial Officer . In addition, as of the beginning of the Class Period until 1/99, Lesar wa s

President and Chief Executive Officer of Halliburton's principal subsidiary, KBR, the locus o f the majority of the accounting improprieties detailed herein . From 1/99 to 8/00, his title at

KBR shifted from President and Chief Executive Officer to Chairman of the Board, althoug h according to Halliburton's SEC filings, no one replaced Individual Defendant Lesar as

President and Chief Executive Officer of KBR until 10/00, implying that he retained principa l executive control of KBR until 8/00 despite the change in title . Prior to joining the Company,

Lesar was Halliburton's auditor at Arthur Andersen, LLC. His former partners at Anderse n continued to audit the Company throughout the Class Period. Statements by former Halliburto n executives procured in plaintiff's attorneys' investigations indicate that, throughout the Clas s

Period, Lesar was the "mastermind" of the accounting schemes detailed herein . He was paid

$8 .3 million in salary and bonuses by the Company during the Class Period, his bonuses bein g based on Halliburton's apparent business success and false profits . During the Class Period ,

Lesar sold 35,000 shares of his Halliburton common stock, 16% of his holdings, for $1 .6 million in illegal insider trading proceeds . These sales were unusual in timing and amount an d out of line with Lesar's historical sales of Halliburton stock, as shown by the following graph :

-51- 0 0

Halliburton Co. David J. Lesar - Chairman of the Board/President/Chief Executive Officer Quarterly Insider Sales : 1997 - 200 1

$1000 $7 0 Class Period: 9/29/98 - 12/7/01 ► $900 $60

$800

$700 $50

o $600 0 0 $40 f N N v 0E $500 m fU $30 o $400

$300 $20

$200 Class Perio d Pre - Class Period Shares Sold : 35,000 $10 Proceeds: $1,644,550 $100 Shares Sold : 13,200 Proceeds: $476,784

$ 0 $ 0 Q1 Q2 Q3 Q4 01 02 Q3 Q4 Q1 Q2 Q3 04 0 1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1997 1998 1999 2000 200 1

In a 9/1/00 Offshore interview, Lesar was quoted as follows :

Offshore: How important is the stock price to your business plan ?

Lesar: You have to please the analysts and shareholders on a quarterly basis .. ..

(d) Defendant Gary V. Morris ("Morris") served as Chief Financial Officer

of the Company from 5/97 to 8/01 . From 8/01 to the end of the Class Period, Morris was

Executive Vice President with ultimate executive control of KBR (renamed the "Engineering

and Construction Group" for the purposes of segment reporting beginning 1/01), the locus of

the majority of the accounting improprieties detailed herein . Prior to the Class Period, Morris

had served as head of Finance for KBR during 95-96 . He then served as head of Finance for

Halliburton as a whole in 97, after which he became CFO of Halliburton, and then president of

KBR in 01, as described above. Defendant Morris may be served at 19214 Kessington,

Houston, Texas 77094 . During the Class Period, Morris sold 7,500 shares of his Halliburto n

-52- 0 0

common stock, 12 .7% of the stock he owned, for $401,250 in illegal trading proceeds . These

sales were unusual in timing and amount and out of line with Morris' historical sales o f

Halliburton stock, as shown by the following graph :

Halliburton Co. Gary V. Morris - Chief Financial Officer/Executie Vice President Quarterly Insider Sales : 1997 - 200 1

$500 $7 0 Class Period : 9/29/98 - 12/7/01 W

$60 $400

$50

$30 0 0 $40 Wo 4) E 7 0 7 CU $3 0 o $20 0 Class Period

Shares Sold : 7,500 $20 Proceeds : $401,25 0

$10 0 Pre - Class Period $10 Shares Sold : 0 Proceeds : $ 0

$0 $ 0 01 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1997 1998 1999 2000 2001

(e) Defendant Douglas L . Foshee ("Foshee") from 8/01 to the end of the

Class Period served as Executive Vice President and Chief Financial Officer of the Company .

He sold no stock because he owned no Halliburton stock outright and had no vested Halliburto n

stock options during the Class Period. Defendant Foshee may be served at 1001 Louisiana

Street, Houston, Texas 77002 .

(f) Defendant Robert C . Muchmore ("Muchmore") was, throughout the

Class Period, the Principal Accounting Officer, Controller and an Executive Vice President of

Halliburton, a position that placed him in direct control, along with the other Individua l

-53- 1 0

Defendants, of the Company's accounting activities and financial reporting . Defendant

Muchmore may be served at 201 Vanderpool Lane, Unit 29, Houston, Texas 77024 .

(g) Donald C. Vaughn ("Vaughn") was Vice Chairman of Halliburton after

the Dresser acquisition. During the Class Period, Vaughn sold 199,731 shares of his

Halliburton stock, 86% of the shares he owned, for $9 .4 million in illegal insider trading

proceeds . These sales were out of line with Vaughn's historical sales of Halliburton stock, a s

shown by the following graph:

Halliburton Co . Donald C. Vaughn - Vice Chairman Quarterly Insider Sales : 1997 - 2001 $6 $70 . Class Period : 9/29/98 -12/7/01 No

$60 $ 5

$50 $4

0 $40

4) E $3 0 0)

a $30 0 0 $ 2 Class Period $20 Shares Sold . 199,731 Proceeds . $9,478,142

$ 1 Pre - Class Period $10 Shares Sold . 0 Proceeds: $0

$0 $ 0 Q1 Q2 Q3 04 Q1 Q2 Q3 Q4 01 Q2 Q3 Q4 Q1 02 Q3 04 Q1 Q2 Q3 Q4 1997 1998 1999 2000 200 1

Vaughn is not sued because the statute of limitations as to him has expired .

(h) James L. Martin ("Martin") was a director of Hallibu rton during the

Class Period. He sold 71 ,345 shares of his Halliburton stock, 78% of the shares he owned, for

$3.4 million in illegal insider trading proceeds . These sales were out of line with his historical

sales of Halliburton stock, as shown by the following graph :

-54- Halliburton Co . James L . Martin - Directo r Quarterly Insider Sales : 1997 - 200 1 $2 .5 $70 4111 Class Period : 9/29/98 - 12!7/01 -►

$60

$2 .0

$50

o $1 .5 0 $40 9 a ~ -o E CD 0 CO $30 0 $1 .0 0 Class Peno d

Shares Sold. 71,345 $20 Proceeds: $3,417,67 1

$0 .5 Pre - Class Penod $1 0 Shares Sold : 0 Proceeds : $0

$0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 $0 1997 1998 1999 2000 200 1

Martin is not sued because the statute of limitations as to him has expired.

(i) Lester Coleman ("Coleman") was the EVP and General Counsel of

Halliburton during the Class Period . He sold 82,001 shares of his Halliburton stock, 61 % of the

shares he owned, for $3.6 million in illegal insider trading proceeds . These sales were out of

line with Coleman's historical sales of Halliburton stock, as shown by the following graph :

-55- is 0

Halliburton Co. Lester L. Coleman - Executive Vice President/General Counsel Quarterly Insider Sales: 1997 - 200 1 $2.0 Class Period : 9/29/98 - 12/7/01 No

Class Period

Shares Sold: 82,001 Proceeds : $3,604,880 rl $1 . 5

0 0 0 a 9 $1 .0 a 0 aw m

$0 .5

Pre - Class Pe riod

Shares Sold : 22,162 Proceeds $774,340

$0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1997 1998 1999 2000 2001

Coleman is not sued because the statute of limitations as to him has expired .

(j) Jerry Blurton ("Blurton") was VP/Treasurer of Halliburton during the

Class Period. He sold 44,592 shares of his Halliburton stock, 63% of the shares he owned, for

$2.1 million in illegal insider trading proceeds . These sales were out of line with Blurton's

historical sales of Halliburton stock, as shown by the following graph :

-56- 0 0

Halliburton Co. Jerry H . Blurton - Vice President/Treasurer Quarterly Insider Sales : 1997 - 200 1 $900 $70 - Class Period : 9/29/98 - 1217/01 ►

$800 Class Period $6 0 Shares Sold- 44,592 Proceeds $2,182,051 $700 rY ,

$50 $600

0 $40 w $ $500 -c m

$400 $3 0 6

$300 $20

$200

Pre - Class Period $1 0 $100 Shares Sold 24,000 Proceeds . $848,880

$0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 $0 1997 1998 1999 2000 200 1

Blurton is not sued because the statute of limitations as to him has expired .

(k) John Kennedy ("Kennedy") was EVP Global of Halliburton during the

Class Period . He sold 6,520 shares of his Halliburton stock, 30% of the shares he owned, for

$331,666 in illegal insider trading proceeds . These sales were out of line with Kennedy's

historical sales of Halliburton stock, as shown by the following graph :

-57- 0 0

Halliburton Co. John W. K edy - Executive Vice President Global Quarterly Insider Sales: 1997 - 2001 $350 $70 Class Period: 9/29198 -12f7/01

Class Period $300 $60 Shares Said. 6,520 Proceeds: $331,666

$250 $50

$200 $40

N I $150 $30 R

$100 $20

Pre - Class Peno d $5 0 $10 Shares Sold- 0 Proceeds $0

$0 $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1997 1998 1999 2000 2001

Kennedy is not sued because the statute of limitations as to him has expired .

64. During the Class Period, Halliburton's outside auditor was Arthur Andersen, which certified Halliburton's 98-00 annual financial statements . However, Andersen did not properly audit or review Halliburton's financial statements in significant part because Lesar,

Morris and Muchmore, as former Andersen partners, had close relationships with the current

Andersen personnel in charge of the audit . In addition, Andersen was the auditor of choice for many notorious fraudulent public companies, including Enron, WorldCom, Dynegy, Global

Crossing, Qwest and Waste Management - especially in Texas, where the Andersen office in charge of the Halliburton audit was located. Andersen was criminally convicted for destroying evidence to conceal the full extent of its involvement in the Enron fraud - one of the worst an d

-58- most widespread accounting frauds in history - and was disqualified from continuing to operat e

as a public accounting firm.

65. Andersen is a repeat offender with a history of failed audits, conflicts of interes t and document destruction in some of the most egregious cases of accounting fraud in history .

Moreover, Andersen's conduct in these cases often shares the same underlying themes as it s conduct in the Enron and WorldCom debacles . Such cases include:

(a) Waste Management . In 98, Waste Management restated its 92-9 6

financial statements which had been audited by Andersen's Houston office, revealing a massiv e

fraud that included the overstatement of profits by as much as $1 .7 billion . At the time, this

was the largest restatement of earnings in history . In 6/01, as a result of its egregious behavio r

associated with its audits of its Waste Management client, the SEC hit Andersen with the firs t

anti-fraud injunction in 20 years and the largest civil penalty ($7 million) in SEC history for an

accounting firm. The SEC also required Andersen to sign a consent decree promising to refrai n

from wrongdoing in the future. As with Enron, Andersen's willingness to keep quiet abou t

fraudulent accounting to protect the huge fees it earned played a significant role in Waste

Management's ability to perpetrate one of the largest accounting frauds in history . Andersen

recognized Waste Management's "aggressive" accounting as early as 88, according to SE C

documents, and by 93, Andersen had documented that Waste Management was a "high-ris k

client" and that the client inflated profits by more than $100 million . However, during the same

time frame, Andersen was relentlessly marketing its consulting services to the client, resultin g

in consulting fees more than double the size of the audit fees . Even when Waste Management

refused to fix the improper accounting practices recommended by Andersen in prior years ,

Andersen caved in and continued to sign off on the company's annual audits . This went on fo r

the next three years. According to the SEC, those decisions were backed at the highest levels o f

-59- Andersen's Chicago office, including Andersen's Practice Director, the firm's Managin g

Partner and the Audit Division Head for the firm's National office in Chicago . In addition to the SEC penalty, according to media reports, Waste Management and Andersen paid $22 0 million to settle class action lawsuits brought by shareholders .

(b) Sunbeam. In 5/01, the SEC filed an injunctive action against Andersen partner Phillip E. Harlow, the former engagement partner on the Sunbeam account, fo r authorizing the issuance of unqualified audit opinions on Sunbeam's 96 and 97 financial statements, even though he was aware of many of the company's accounting improprieties an d disclosure failures . In 01, Andersen paid $110 million to settle shareholder lawsuits i n connection with Sunbeam's restatement of six quarters of financial results . Indeed, the SEC stated that Sunbeam's purported turnaround was little more than accounting gimmicks , accomplished through the creation of inappropriate "cookie jar" reserves . In this case, as in

Enron, Andersen's document destruction was a common theme . In fact, an Andersen partne r testified that months after the restatements were announced and after shareholder lawsuits had been filed, the firm ordered its Fort Lauderdale employees to dispose of any work papers or correspondence that did not agree with the final documentation of the Sunbeam restatement .

(c) Baptist Foundation of Arizona. In a suit filed by the Arizona Attorney

General, Andersen had recently agreed to pay investors $217 million to settle a suit i n connection with the 99 failure of The Baptist Foundation of Arizona ("Foundation"), where an ongoing Ponzi scheme wiped out $590 million of investors' savings, many of them retirees .

Three key individuals associated with the Foundation have pleaded guilty to felony charges , five others have been indicted, and Arizona authorities are in the process of revoking th e licenses of three Andersen auditors . Jay Steven Ozer, one of the senior partners on Andersen' s audits of the Foundation, audited Charles Keating's Lincoln Savings & Loan, described below .

-60- Ozer has recently agreed to give up his Arizona accounting license . The Foundation used accounting artifices that were strikingly similar to Enron's . For example, the Foundation used off-balance-sheet entities to hide significant losses in its real estate investments . Unbeknownst to investors, the Foundation sold the real estate at artificially inflated prices to a company calle d

ALO in exchange for a mere IOU instead of cash . In a theme common to many Enron specia l purpose entities , unknown to investors , ALO was a related-party entity created, financed and controlled by the Foundation. Particularly egregious was the fact that outside CPAs and professionals continued to warn Andersen for two years that they highly suspected fraudulent accounting at the Foundation, yet Andersen completely ignored them. An accountant for the

Foundation testified that more than two years before the bankruptcy she met with Andersen and openly explained the nature of the Foundation and ALO relationship . Subsequently, a Texas

Baptist group became suspicious, called Andersen, spoke with partners and told them about th e suspected fraudulent accounting at the Foundation . Additionally, Dee Griebel, a sole practitioner CPA, figured the fraud out in an afternoon by conducting a simple search of ALO' s public records, revealing that ALO had a negative net worth of approximately $106 million an d could not possibly make good on the debt to the Foundation . Griebel then called Andersen' s

Chicago headquarters and the Phoenix office twice, stating, "`You must withdraw you r unqualified opinion immediately . The company's effectively broke . Call me."' Neither the

Chicago or Phoenix Andersen office ever called her back . From the first warning until the

Foundation's failure, Andersen issued two more unqualified opinions, allowing the Foundatio n to take in another $200 million of investor savings .

(d) Colonial Realty Company . In the mid 90s, the State of Connecticut revoked Andersen's license to practice after investigating Andersen's conduct in its audits surrounding the collapse of Colonial Realty Company, a national real estate syndication firm .

-61- Central to the Colonial Realty fraud was a Ponzi scheme that involved deliberate and grossl y

exaggerated valuation of Colonial Realty properties . Andersen furnished unqualified opinion s

supporting Colonial Realty's extravagant valuations and claims, and assisted in preparin g

private placement memoranda in connection with the public offerings that resulted in investor s

sustaining substantial losses . As with Enron, after conducting an extensive investigation,

Connecticut's Attorney General concluded that Andersen employees destroyed incriminatin g

documents under the auspices of complying with Andersen's document retention policy.

(e) Lincoln Savings/ACC . Andersen was also associated with this infamou s

fraud perpetrated by Charles Keating . In 84 and 85, Andersen improperly issued "clean" o r

unqualified audit opinions on the ACC/Lincoln financial statements . Those opinions were

included in ACC/Lincoln SEC filings and helped Keating promote an illusion of prosperity tha t

was used to market notes to investors . Thus, Andersen participated in the Charles Keatin g

fraud that bilked investors out of over $500 million . In 92, Andersen paid $30 million to settl e

the securities fraud action . Andersen of course, did not learn a lesson from this experience . In

fact, partner Jay Ozer, a member of the Andersen audit team on Lincoln/ACC, went on to be a

key Andersen auditor on the aforementioned Baptist Foundation of Arizona scandal .

66. These cases demonstrate that for years Andersen has demonstrated a callous , reckless disregard for its duty to investors and the public trust . Andersen's conduct throughout this period displays an uncaring, calculated cost/benefit approach to ignoring fraud and imprope r accounting in its audit engagements .

JURISDICTION AND VENUE

67. The claims asserted in this complaint arise under and pursuant to §§10(b) an d

20(a) of the 1934 Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule lOb-5 promulgated thereunder by the SEC [17 C .F.R. §240.10b-5] .

-62- 68. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C . §§1331 and 1337, and §27 of the 1934 Act [15 U .S .C. §78aa].

69. Venue is proper in this district pursuant to §27 of the 1934 Act and 28 U.S.C.

§ 1391(b). Many of the acts and practices complained of herein occurred in substantial part i n this district .

70. In connection with the acts alleged in this complaint, defendants, directly o r indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets .

BACKGROUND TO THE CLASS PERIO D

71 . In 3/97, Halliburton issued its 96 Annual Report - the Cheney executive team' s first full year of control of Halliburton - which contained a letter from Cheney, stating :

I am pleased with the overall progress of Halliburton in 1996 .

While we aligned Brown & Root Energy Services with the new Energy Group, we placed the remaining Brown & Root businesses into the Engineering and Construction Group, which now consists of Brown & Root Engineering and Construction and Brown & Root Government Services . We initiated a restructuring program of Brown & Root similar to the one we successfully implemented at Halliburton Energy Services several years ago that proved effective in streamlining operations . The restructuring is continuing and I expect to see positive results from it in 1997 .

72. The 96 Annual Report contained a section entitled "Questions and Answers Wit h

Dick Cheney," which stated:

Q: What are your expectations for the restructured Engineering and Construction Group ?

A: Streamlining of the Engineering and Construction Group .. . puts us in a more competitive position.. .. I am confident that our Engineering and Construction Group will show substantial improvement in terms of revenue growth and profitability .

-63- 73 . On 1/22/98, Halliburton reported its 4thQ 97 and full year 97 results - strong net income and EPS growth:

Halliburton Company today reports 1997 fourth quarter net income of $148 .4 million ($ .56 per share diluted), an increase of 38 percent compared to the 1996 fourth quarter's earnings of $107 .6 million ($.43 per share diluted) . The strong earnings growth was driven by substantially higher levels of profitability at both of Halliburton's business segments ....

For the full year of 1997, Halliburton's net income increased 51 percent to $454.4 million ($1 .75 per share diluted) compared to 1996, while revenues increased 19 percent above 1996 results to $8 .8 billion.

The Energy Services Group business segment's operating income for the 1997 fourth quarter was $226 .7 million, 42 percent higher than the year ago period.

The Engineering and Construction Group segment's operating income doubled to $43 .2 million, compared to the 1996 fourth quarter . The segment's operating income and margins are continuing to benefit from restructuring and other cost efficiency initiatives which have been implemented during the past year.

Dick Cheney . . . said, "Halliburton made excellent financial performance progress in 1997, and the company was also able to substantially improve its future outlook and competitive position through the execution of several significant strategic programs during the year ."

"Some of the significant programs achieved in 1997 included the successful consolidation and restructuring of the Engineering and Construction Group business segment . . . ."

Cheney concluded, "Halliburton will utilize its financial and strategic successes of 1997 as the foundation for driving continued growth and progress in 1998. I am optimistic about the coming year ...."

74. On 2/26/98, Halliburton announced the acquisition of a major competitor ,

Dresser. This was the largest and most important acquisition in Halliburton 's history, valued at $7.7 billion . Halliburton's release stated :

-64- Dick Cheney . . . said, "Halliburton and Dresser are an outstanding business and cultural fit . This is a win-win combination for both companies' shareholders ."

David J. Lesar . .. said, "We know each other's business well and have agreed on the organizational structure, which will facilitate a quick, smooth integration.... [W]e expect the transaction to be accretive to earnings per share in the first full year ... ."

75. On 2/26/98, Halliburton held a conference call for analysts, money managers an d others to discuss the Dresser acquisition . Cheney and Lesar participated. During the call, Lesar

stated with respect to the acquisition that "we believe ... there is a minimum of a net $250 million plus to the bottom line with the combination ."

76. In 4/98, Halliburton issued its 97 Annual Report to Shareholders reporting

Halliburton's 97 EPS of $1.79, a large increase over its 96 EPS of $1 .30 and 95 EPS of $1 .00.

The 97 Halliburton Annual Report included a letter signed by Cheney which stated:

[Halliburton's] future is bright... . we successfully completed the restructuring of our engineering and construction business and realized a strong turnaround within the segment .

Halliburton and Dresser are an outstanding business and cultural fit . This is a win-win combination for both companies' shareholders .

77. Elsewhere, Halliburton's 97 Annual Report discussed Halliburton's business :

At the end of 1997 Halliburton wrapped up a great year of growth and financial success. Halliburton is a financially strong, high-performance company with six business units working together as a cohesive, synergistic team . The company has reorganized, realigned, and streamlined its operations in recent years to substantially improve operating efficiencies . . . . In 1997, we continued to consolidate our organizational structure and our internal processes for maximum operating efficiency.

In discussing Halliburton's construction operations, the 97 Annual Report stated :

The company believes the keys to increasing its revenue and improving profit margins . .. will be ... acceptance of more ...,fixed price contracts ....

-65- 78. With regard to Halliburton's "Significant Accounting Policies," the 97 Annua l

Report stated:

Revenues and Recognition .... All known or anticipated losses on contracts are provided for currently . Claims for additional compensation are recognized during the period such claims are resolved.

Halliburton's 95 and 96 Annual Reports had contained the same representations .

79. The Halliburton 97 Annual Report stressed Halliburton's commitment to lega l compliance and ethical behavior throughout its business operations, stating :

CODE OF BUSINESS CONDUCT

The Code of Business Conduct of Halliburton Company consists of policies relating to the ethical and legal standards of conduct to be followed by employees and agents of the company in the conduct of its business . The Code of Business Conduct applies to all company employees and agents and all company activities throughout the world, except where specifically indicated.

Because Halliburton's international operations were a large part of its construction business where the risk of bribes and other payments in violation of the U .S. Foreign Corrupt Practice s

Act are especially acute, and the consequences of paying bribes to foreign officials or violatin g the U.S. Foreign Corrupt Practices Act can be very negative for any business, thes e representations of worldwide honest and ethical business practices were especially important .

80. Yet unknown to the investing public, defendants recklessly disregarded or ignore d that Halliburton was acquiring a tremendous potential liability due to numerous pending an d prospective asbestos lawsuits against Dresser and its former subsidiary, Harbison-Walker . As a result, Halliburton overpaid for Dresser and subsequently failed to sufficiently write down the value of the assets acquired in the Dresser acquisition, thereby overstating the Company' s reported assets and income throughout the Class Period .

81 . Asbestos litigation, which had bankrupted almost two dozen companies by 1998 , was a red flag issue in any due diligence investigation of Dresser . A former employee of Dresser

-66- at the time of the merger stated that he and Dresser's then-CFO, George Juetten ("Juetten"), bot h spoke openly with Halliburton's risk management director about Dresser's potential exposure to asbestos liability. Yet appropriate provisions for this huge liability were not made .

82. In 1992, Dresser spun-off Harbison-Walker into a separate company, with th e agreement that the new entity would assume asbestos claims filed after the spin-off date and indemnify and defend Dresser against those claim (the "Spin-off Agreement") . Notwithstandin g this agreement, Dresser, as a co-defendant in each asbestos suit brought against Harbison-

Walker, remained liable if the new Harbison-Walker collapsed financially and was unable t o honor the Spin-off Agreement .

83 . A month before the scheduled 6/25/98 special meetings for the companies ' respective shareholders to vote on the merger, Dresser received a letter dated 5/20/98 fro m

Harbison-Walker' s parent at the time, Global Industrial Technologies ("Global"), disclaiming, inter alia, certain liabilities for asbestos claims under the Spin-off Agreement and demanding full coverage rights against Dresser's insurers and reinsurers . In light of the contentions made b y

Global, Dresser's asbestos liability exposure was greatly expanded . Moreover, the Global letter signaled to defendants that Harbison-Walker was facing considerable financial strain from th e mounting asbestos claims against it and Dresser.

84. The dispute between Dresser and Global was first disclosed by Halliburton in it s

1998 Form 10-K filed with the SEC on 3/23/99 ("1998 10-K"), nearly a year after the merge r was approved by Halliburton and Dresser shareholders . The 1998 10-K described the assertions by Global as being "without merit" and went on to state that the asbestos claims pending agains t

Dresser at the end of 98 would "be resolved without material effect on Halliburton's financia l position or results of operations." However, regardless of the merits of Global's assertions, i t was clear to defendants that Halliburton would be forced to shoulder the responsibility for the

-67- u~ • •

asbestos claims filed against Harbison-Walker and Dresser if Harbison-Walker was financiall y

unable to honor the Spin-off Agreement . This risk was never fully disclosed to the investin g

public; nor was it properly accounted for during the Class Period .

85. Dresser's Treasurer through 98 ("Treasurer"), who also headed Dresser's ris k

management department, stated that Halliburton had several conversations with Dresser both

before and after the merger was completed about Dresser's exposure to asbestos liability .

Treasurer stated that he personally spoke with Halliburton's risk management director and

described Dresser's possible asbestos liability exposure from Harbison-Walker . Treasurer also

attended a meeting before the merger with Halliburton's risk management director and Juetten ,

who was the "point man" on Dresser's asbestos problems, at which meeting Juetten was ver y

open with Halliburton's risk management director about Dresser's asbestos liability exposure .

Treasurer believes the information concerning asbestos was shared with Halliburton before the

merger was announced in 2/98 .

86. Treasurer was also familiar with the Global Letter. Treasurer stated that durin g

98, defendant Bradford and Global's Chairman had many conversations, in addition t o

correspondence, concerning the issues raised in the Global Letter . Defendant Bradford also had

several discussions with Juetten about Dresser's asbestos liability exposure . In 5/98, Treasurer

was in Juetten's office when Bradford came to Juetten with the Global Letter . Treasurer stated

that Bradford was very concerned about the issues raised by the Global Letter and remarked tha t

he thought the Harbison-Walker issues had been resolved - indicating that he now knew they

had not been .

87. Halliburton's 97 Annual Report also contained the following section, signed b y

Cheney and Morris, accepting responsibility for the appropriateness of Halliburton's accountin g

practices, policies and the accuracy of its financial reports :

-68- Responsibility For Financial Reportin g

Halliburton Company is responsible for the preparation and integrity of its published financial statements . The financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, as such, include amounts based on judgments and estimates made by management . The Company also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements.

The Company maintains a system of internal control over financial reporting, which is intended to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation of financial statements. The system includes a documented organizational structure and division of responsibility, established policies and procedures, including a code of conduct to foster a strong ethical climate , which are communicated throughout the Company, and the careful selection, training and development of our people. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Board of Directors, and corrective actions are taken to address control deficiencies ... as they are identified .

The Company addressed its internal control system in relation to criteria for effective internal control over financial reporting described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that assessment, the Company believes that, as of December 31, 1997, its system of internal control over financial reporting met those criteria.

88 . In late 97 or early 98, in order to boost Halliburton's reported results ,

Halliburton's top executives secretly changed the way Halliburton was accounting fo r

Unapproved Claims, counting them as revenue/profit even though the customer had not agreed to pay for them. On 4/22/98, Halliburton reported lstQ 98 net income of $117 .8 million/$.44 per share, a 42% increase over lstQ 97 results (net income $83 million/$ .32 per share) . The release stated:

Strong financial performance by the Energy Group business segment positively impacted the company's consolidated revenues and net income .

-69- The Energy Group's . . . 1998 first quarter operating income increased to $185 million, 58 percent higher than last year's first quarter . The strong operating income increase improved the Energy Group's operating margin to 11 .6 percent in the 1998 first quarter, compared to 10.5 percent last year . The Energy Group's financial results benefited from strong revenue growth by the Halliburton Energy Services and Brown & Root Energy Services business units during the 1998 first quarter.

Dick Cheney said, ... "Our Engineering and Construction business is positioned for improved performance as the year progresses . The total . . . backlog at March 31, 1998 was $7 .0 billion, an increase of 20 percent compared to a year ago, which will contribute favorably to future financial results .

"In summary, the management team at Halliburton believes the opportunities for the future are excellent...."

89. In early 5/98, Halliburton filed its lstQ 98 10-Q with the SEC signed by Morri s and Muchmore, which included the same financial results as contained in the 4/22/98 release. It stated:

Operating Income

Consolidated operating income increased 47% to $204.0 million for the three months ended March 31, 1998 from $ 138 .7 million for the three months ended March 31, 1997....

Energy Group operating income increased 58% to $185 .0 million in the first quarter of 1998 compared with $117 .2 million in the same quarter of the prior year. The operating income margin for the first quarter of 1998 was 11 .6% compared with 10 .5% for the first quarter of 1997 . The increase in operating income was largely due to . .. improved margins on completion products .. ..

Engineering and Construction Group operating income decreased 2% . . . . The decrease in operating income [was] ... partially offset by improved margins on engineering and construction services contracts.

It also stated:

In the opinion of the Company, the financial statements include all adjustments necessary to present fairly the Company's financial position as of March 31, 1998, and the results of its operations and cash flows for the three months ended March 31, 1998 and 1997 .

-70- 90. On 7/22/98, Halliburton reported its 2ndQ 98 results (net income of $136 .5 million/$.51 per share), up 34% compared to the 2ndQ 97 . The release stated :

Halliburton Company reports 1998 second quarter net income of $136 .5 million ($ .51 per share diluted), an increase of 34 percent compared to $101 .9 million ($.40 per share diluted) earned in the 1997 second quarter . Strong profitability improvements were experienced by both ofthe company's business segments ....

For the six month period ending June 30, 1998, net income increased 38 percent to $254.3 million ($.95 per share diluted) . . . .

The Energy Group 's 1998 second quarter operating income increased 24 percent to $198.3 million compared to the prior year period. . . . [T]he segment's operating margin improved to 11 .6 percent for the 1998 second quarter compared to 11 .0 percent in the 1997 quarter.

The Engineering and Construction Group business segment's 1998 second quarter operating income increased 66 percent to $49 .9 million compared to the 1997 quarter ... . The 1998 second quarter operating margin for the segment improved to 6 .5 percent compared to last year's 3 .9 percent... .

Dick Cheney . . . said, "Halliburton continues to make good financial progress despite uncertainty over future oil demand and the slowing of some of our customers ' exploration and production activities during the quarter .. . . Prospects for a continuation for future growth in the company 's engineering and construction related activities are enhanced by a total backlog of $7.3 billion at the end of the 1998 second quarter .. ..

91 . In mid-8/98, Halliburton filed its 2ndQ 98 10-Q signed by Morris and Muchmore .

It contained the same financial information about Halliburton as the 7/98 release:

Consolidated operating income increased 31% to $238 .4 million in the second quarter of 1998 compared with $182.0 million in the same quarter of the prior year. . . .

Energy Group operating income increased 24% to $198 .3 million in the second quarter of 1998 compared with $160.1 million in the same quarter of the prior year. The operating margin for the second quarter of 1998 was 11 .6% compared to the prior year second quarter operating margin of 11 .0%....

Engineering and Construction Group operating income increased 66% to $49.9 million in the second quarter of 1998 compared to $30 .0 million in the

-71- .. second quarter of the prior year. Operating margins were 6 .5% in the second quarter of 1998 compared to 3 .9% in the prior year second quarter.

It also stated:

In the opinion of the Company, the financial statements include all adjustments necessary to present fairly the Company's financial position as of June 30, 1998, and the results of its operations for the three and six months ended June 30, 1998 and 1997 and its cash flows for the six months then ended .

CLASS PERIOD STATEMENTS

92. On 9/29/98, the start of the Class Period, the pre-Class Period statements set fort h

above were alive, uncorrected and reflected in the market price of Halliburton's stock. The

statements made between 3/97-8/98 were false and misleading . The statements were

affirmatively false . They were also misleading in failing to disclose the following facts whic h

were then existing, known to or recklessly disregarded by defendants to be false, and necessar y

to be disclosed to make the statements made not misleading, including the following:

(a) Due to intense competitive pressures brought about by lowered capita l

spending budgets by oil exploration companies, Halliburton's construction operations wer e

being forced to make dangerously low bids providing for only razor-thin margins, whil e

accepting fixed-price terms on huge contracts, making it very likely that due to the inevitabl e

Unapproved Claims which occur on any large construction contract, Halliburton would likely

suffer losses on those contracts .

(b) Halliburton did not have in place adequate contract performance

monitoring, cost control and accounting systems that would enable it to effectively monitor th e

progress being made toward contract completion, the actual costs being incurred or the curren t

state of performance of large contracts and also lacked an adequate system of internal financial

and accounting controls to permit the proper monitoring, control of and accounting for costs o n

construction projects . -72- (c) Halliburton had secretly changed the way it was accounting fo r

Unapproved Claims on construction contracts and was now recognizing them as revenue whe n the claims were asserted, even though the customer had not yet agreed to pay the Unapprove d

Claims and more and more customers were refusing to pay millions of dollars of existin g

Unapproved Claims .

(d) Halliburton was recording millions of dollars of Unapproved Claims a s revenue, even though its top executives knew that collection of those Unapproved Claims wa s not probable and they were not capable of accurately estimating what amount could ultimatel y be collected under any circumstances .

(e) Halliburton's construction operations had not been effectivel y reorganized and restructured during 97-98 as claimed; in fact, in the field these operations wer e disorganized and lacked adequately skilled personnel and the procedures necessary to perform fixed-price contracts of the size and scope being undertaken by Halliburton, which greatl y increased the probability of performance delays, cost overruns, Unapproved Claims and thu s losses on those contracts.

(f) Halliburton's financial results for the lstQ and 2ndQ of 98 were false , having been manipulated and artificially inflated higher due to the fraudulent and illici t accounting practices detailed in 11226-321 of this Complaint.

(g) Halliburton's Code of Business Conduct and Ethics was not, in fact, being enforced or followed in the Company's international operations and, in order to obtai n and retain the Bonny Island, Nigeria LNG contract and extensions thereof, the consortium o f which Halliburton was the dominant member had made and was making substantial payoffs and bribes, including payments to Nigerian officials to get the contract and its extension and payoffs to top executives of Halliburton's Kellogg unit to reward them for participating in this risky an d

-73- illegal activity, which payments were being funneled through Swiss bank accounts controlle d

by a London lawyer .

(h) It was not true that Halliburton had switched to fixed-price contract s

because they would create greater profits for Halliburton or because Halliburton had a

competitive advantage in such contracts . In truth, the switch to fixed-price contracts was drive n

by intensifying competition whereby Halliburton and its competitors were fighting to obtain a

shrinking number of contracts available from oil exploration companies which were curtailin g

their capital expenditures ; thus, the fixed-price contracts were, in fact, forced upon Halliburto n

by competitive pressures and undertaken by Halliburton without sufficient controls, procedures ,

monitoring systems and personnel to perform such contracts profitably .

93. On 9/29/98, Halliburton issued a release announcing the completion of th e

Dresser acquisition. It stated:

Dick Cheney . . . said, "The merger . . . improves our position as the leader in providing integrated project management services . .. . The combination of M.W. Kellogg's engineering expertise with Brown & Root's project management and construction strengths enhances the competitive position of the new Kellogg Brown & Root organization .... The merger will both lower Halliburton's cost structure and increase its operating income from added revenues. We expect that net synergistic benefits will add at least $250 million pretax to earnings on an annualized basis ."

As a result of the merger, Bill Bradford, Dresser's former CEO/Chairman, became Chairman of

Halliburton with Cheney and Lesar acting as CEO and EVP/CFO, respectively .

94. On 9/29/98, Cheney and Bradford were interviewed on CNBC by Mari a

Bartiromo, regarding the Dresser acquisition. They stated:

Cheney: ... [T]his'll be . .. accretive right away, if you look at the combination of the two companies. Clearly we expect to achieve very significant savings from putting the two companies together, in excess of $114 billion . And we think the combination will be especially effective, as we go through this down time in the market . We'll be able to get a lot of costs out of the operations and become more efficient .

-74- [A]s we go through the process of combining our two companies into the new Halliburton, we will be able, by virtue of reducing costs, to increase earnings per share ....

Bradford: .. . [O]ur focus really will be on earnings growth .. . as Dick has mentioned, there are very significant synergies; something on the order of $114 billion that we intend to get to very, very quickly, within the next 60 to 90 days.

95 . The statements made on 9/29/98 were false and misleading . The statements were affirmatively false. They were also misleading in failing to disclose the following facts whic h were then existing, known to or recklessly disregarded by defendants to be false, and necessar y to be disclosed to make the statements made not misleading, including the following:

(a) Halliburton had acquired Dresser without doing due diligence int o

Dresser's business, operations, financial condition and potential liabilities, in part because

Cheney demanded that the acquisition be undertaken and completed in an unreasonabl y

expedited fashion and because he did not want to create a paper trail documenting what he an d

other Halliburton executives knew were liabilities of potentially hundreds of millions of dollars

for existing and anticipated asbestos suits/claims against entities for which Dresser was legall y

responsible, a significant amount of which would likely not be covered by insurance.

(b) The acquisition of Dresser was not a "win" for Halliburton's

shareholders. In fact, it represented an enormous risk due to Dresser's concealed potentia l

asbestos liabilities and because, contrary to the representations that the two companies were a

good cultural and business fit and that there were plans in place to achieve a smooth, quic k

transition and successful integration of the operations of both companies, there were no

transition plans in place and the Dresser executives and managers were known to b e

conservative, system and process oriented managers with a very conservative approach t o

percentage-of-completion/contract accounting while the Halliburton executives and managers -75- .. were just the opposite - virtually guaranteeing a cultural clash and lack of successful integratio n

of operations .

(c) Because of the existence of Dresser's very substantial potential asbesto s

liabilities and due to the known difficulties of attempting to blend the management of the two

companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter.

96 . On 10/29/98, Halliburton issued a release reporting its 3rdQ 98 results. It stated:

Halliburton Company announces that the company earned $195 million ($ .44 per diluted share) in the 1998 third quarter, compared to $218 million ($ .50 per diluted share) in the 1997 third quarter ....

The worldwide rotary rig count declined by 21 percent in the 1998 third quarter, compared to a year ago. Lower crude oil and natural gas prices during 1998 have reduced customers' cash flows and influenced them to pull back on exploration, development and production spending . . . . Despite weaker market conditions, the . . . construction activities of Brown & Root Energy Services registered higher revenuesfor the quarter.

The Energy Services Group's 1998 third quarter operating income was $263 million, off eight percent from the 1997 quarter ....

The Engineering and Construction Group business segment's [o]perating income was $54 million in the quarter ....

Bradford . . . commented, "Completion of the merger with Dresser positions Halliburton as the premier company providing both oilfield and engineering and construction services to the upstream and downstream petroleum industry . The company is now uniquely positioned in the energy industry . . . ."

. . . Cheney . .. said, "While market conditions now challenge all petroleum industry participants, I am very optimistic about the outlook for Halliburton in the year ahead and the longer term. The completion of the merger with Dresser is most timely. The merger with Dresser is expected to be accretive to Halliburton 's earnings per share . Action plans now being implemented should enable the company to achieve annualized pretax benefits of $250 million by the end of the first year of combined operations. Also, the merger and -76- restructuring will generate additional advantages by strengthening and improving Halliburton's balance sheet ...."

97 . In mid-11/98, Halliburton filed its 3rdQ 98 10-Q, signed by Morris an d

Muchmore, which contained the same financial information as contained in the 10/29/98 pres s release. It also stated:

In the opinion of the Company, the condensed consolidated financial statements include all adjustments necessary to present fairly the Company's financial position as of September 30, 1998, and the results of its operations for the three and nine months ended September 30, 1998 and 1997 and its cash flows for the nine months then ended .

The 3rdQ 98 10-Q also stated:

Consolidated operating income excluding special charges decreased 6% to $367 .6 million in the third quarter of 1998 compared with $390 .5 million in the same quarter of the prior year . . . .

Energy Services Group operating income decreased 8% to $262 .7 million in the third quarter of 1998 compared with $287 .0 million in the same quarter of the prior year. .. . The operating margin for the third quarter of 1998 was 12 .1% compared to the prior year third quarter operating margin of 12 .9%....

Engineering and Construction Group operating income increased slightly to $54.0 million in the third quarter of 1998 compared to $53 .2 million in the third quarter of the prior year. Operating margins were 3 .9% in the third quarter of 1998 compared to 4 .2% in the prior year third quarter .

98. The 3rdQ 98 10-Q included a discussion of Halliburton's potential financia l exposure for asbestos suits/claims . It stated:

Asbestosis Litigation . . . . [M]anagement continues to believe that provisions recorded are adequate to cover the estimated loss from asbestosis litigation .

99. On 1/25/99, Halliburton reported its 4thQ 98 and full year 98 results :

Halliburton Company today announces that the company earned $90 million ($ .20 per diluted share) in the 1998 fourth quarter, compared to $257 million ($ .58 per diluted share) in the 1997 fourth quarter . . . .

For the 1998 full year, Halliburton's net income before special charges was $731 million ($1 .67 per diluted share), down seven percent from 1998, while revenues increased seven percent to $17 .4 billion.

-77- The Energy Services Group's operating income was $121 million in the 1998 fourth quarter, a decline of 62 percent from the year earlier.

Dick Cheney . . . said, ".. . I remain optimistic about the long term outlook for . . . Halliburton . . . ."

100. In connection with reporting its year-end 98 results, Halliburton disclosed it ha d taken a $60 million charge in the 4thQ 98 for Unapproved Claims customers would not agree to pay. Halliburton told analysts the charge-off was not due to premature recognition o f

Unapproved Claims as revenue, but rather to client refusals to pay for the Unapproved Claims, purportedly a change of attitude. Halliburton told analysts that as a result it had changed its procedures and in the future it would not accept or perform change orders unless the customer agreed upfront to pay for the extra work, i.e., Unapproved Claims . These statements indicated to analysts that Halliburton was still following its stated policy of recognizing Unapproved

Claims as revenue only after the customer agreed to pay for such claims . In fact, Halliburto n was continuing to perform millions of dollars of Unapproved Claims just hoping customer s would later pay for them.

101 . On 2/9/99, Cheney and Morris made a presentation to analysts and mone y managers at the 12th Annual PaineWebber Energy Conference . On 2/10/99, PaineWebber reported these remarks :

• Halliburton presented at the 12th annual PaineWebber Energy Conference yesterday.

• The company indicated that ... it is pleased with the progress of both the cost rationalization and revenue synergy generation elements of the consolidation process .

• CEO Dick Cheney and CFO Gary Morris also reiterated their confidence in the integrity (i.e., margins) of the downstream backlog, which stood at over $11 billion at the end of the December quarter . ...

-78- • The company also expanded on the circumstances of the $60 million provision it recorded in Q4 :98 at Brown & Root Energy Services (offshore engineering and construction), which was driven by customers becoming unwilling to compensate BRES for changes in project scope . . . . HAL has adjusted to the change in customer philosophy by requiring assurances of payment for changes in work scope "along the way" instead of at the end of the project, which was the typical practice because it expedited project execution. We believe this ... explains management confidence in downstream margins going forward.

102. On 2/17/99, Prudential Securities issued a report on Halliburton which reflecte d the Cheney/Morris 2/9/99 presentation, as well as follow-up conversations with them:

$60 Million Provision for BRES Was Not Expected, Although Understandable

We should note that the $60 million provision recognized by BRES covers additional costs that HAL incurred due to change orders that typically occur in large engineering and construction jobs . The provision is not, as some parties have speculated, due to aggressive revenue booking or errors in cost estimation and bidding by Halliburton .

[T]he $60 million provision relates not to BRES's performance but to the mood of its clients.

103 . On 3/1/99, Donaldson, Lufkin & Jenrette ("DLJ") issued a report on Halliburton , rating Hallibu rton stock DLJ's "Top Pick." This report was based on DLJ analyst Arvind

Sanger's conversations with Cheney, Lesar or Morris . The report stated :

Halliburton is one of the best positioned oilfield service companies to create value even in a difficult oil price and spending environment . There are several key reasons why HAL is well positioned to outperform over the next 12 months :

• Significant cost cuts will cushion margins - Cost savings from the merger and the downturn in activity should yield over $500 million by the end of 1999 . .. .

Halliburton 's merger with Dresser Industries was a brilliant strategic move for the company . . . . The merger ... expands Halliburton's position as the leading engineering and construction company .. . . Halliburton is one of our Top Picks and is our best investment idea for 1999 . . . . -79- NM ~~ • !

• Leading engineering and construction company in the world - The combination of Dresser's M.W. Kellogg subsidiary and Halliburton's Brown & Root subsidiary creates one of the largest and best positioned E&C companies with a worldwide presence . ...

Margins should also continue to benefit from the company's move away from cost-plus business to more lump-sum contracts .

104. The statements made between 10/29/98-3/1/99 were false and misleading . The

statements were affirmatively false . They were also misleading in failing to disclose the

following facts which were then existing, known to or recklessly disregarded by defendants to b e

false, and necessary to be disclosed to make the statements made not misleading, including th e

following:

(a) Due to intense competitive pressures brought about by lowered capita l

spending budgets by oil exploration companies , Halliburton's construction operations wer e

being forced to make dangerously low bids providing for only razor-thin margins, whil e

accepting fixed-price terms on huge contracts, making it very likely that due to the inevitabl e

Unapproved Claims which occur on any large construction contract, Halliburton would likely

suffer losses on those contracts.

(b) Halliburton did not have in place adequate contract performanc e

monitoring, cost control and accounting systems that would enable it to effectively monitor th e

progress being made toward contract completion, the actual costs being incurred or the curren t

state of performance of large contracts and also lacked an adequate system of internal financia l

and accounting controls to permit the proper monitoring, control of and accounting for costs o n

construction projects.

(c) Halliburton had secretly changed the way it was accounting fo r

Unapproved Claims on construction contracts and was now recognizing them as revenue when -80- I the claims were asserted, even though the customer had not yet agreed to pay the Unapprove d

Claims and more and more customers were refusing to pay millions of dollars of existing

Unapproved Claims .

(d) Halliburton was recording millions of dollars of Unapproved Claims a s

revenue, even though its top executives knew that collection of those Unapproved Claims wa s

not probable and they were not capable of accurately estimating what amount could ultimately

be collected under any circumstances .

(e) Halliburton had not changed the way it was dealing with or its

procedures for customer change work orders/Unapproved Claims and was not securing advanc e

agreement to pay for such work as it had claimed, but rather, was continuing its traditional

process of accepting and performing change orders as demanded by customers or required b y

the progress of the contract work, without any actual agreement to pay, merely hoping to late r

collect on those Unapproved Claims .

(f) It was not true that Halliburton had switched to fixed-price contract s

because they would create greater profits for Halliburton or because Halliburton had a

competitive advantage in such contracts . In truth, the switch to fixed-price contracts was drive n

by intensifying competition whereby Halliburton and its competitors were fighting to obtain a

shrinking number of contracts available from oil exploration companies which were curtailing

their capital expenditures ; thus, the fixed-price contracts were, in fact, forced upon Halliburto n

by competitive pressures and undertaken by Halliburton without sufficient controls, procedures ,

monitoring systems and personnel to perform such contracts profitably .

(g) Halliburton's construction operations had not been effectivel y

reorganized and restructured during 97-98 as claimed ; in fact, in the field these operations wer e

disorganized and lacked adequately skilled personnel and the procedures necessary to perform

-81- fixed-price contracts of the size and scope being undertaken by Halliburton, which greatl y increased the probability of performance delays, cost overruns, Unapproved Claims and thu s losses on those contracts.

(h) Halliburton's financial results for the 3rdQ 98 were false, having bee n manipulated and artificially inflated higher due to the fraudulent and illicit accounting practice s detailed in 8226-321 of this Complaint .

(i) Halliburton had acquired Dresser without doing due diligence int o

Dresser's business, operations, financial condition and potential liabilities, in part because

Cheney demanded that the acquisition be undertaken and completed in an unreasonabl y expedited fashion and because he did not want to create a paper trail documenting what he an d other Halliburton executives knew were liabilities of potentially hundreds of millions of dollars for existing and anticipated asbestos suits/claims against entities for which Dresser was legall y responsible, a significant amount of which would likely not be covered by insurance .

(j) The acquisition of Dresser was not a "win" for Halliburton' s shareholders. In fact, it represented an enormous risk due to Dresser's concealed potential asbestos liabilities and because, contrary to the representations that the two companies were a good cultural and business fit and there were plans in place to achieve a smooth, quic k transition and successful integration of the operations of both companies, there were n o transition plans in place and the Dresser executives and managers were known to b e conservative, system and process oriented managers with a very conservative approach t o percentage-of-completion/contract accounting, while the Halliburton executives and manager s were just the opposite . As a result, a cultural clash was occurring resulting in inefficiencies an d an inability to integrate operations .

-82- p . v . S

(k) In fact, the construction operations of Dresser were not bein g

successfully integrated into the construction operations of Halliburton, as the managers an d

executives of the two companies had very divergent approaches to business and accounting an d

constantly fought with one another, resulting in distracting turf battles, operating inefficiencie s

and duplicative layers of management - all resulting in an inability to integrate the tw o

operations and thus in excessive costs .

(1) Halliburton, in fact, had not adequately reserved or accounted for its

accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities fo r

asbestos claims and suits were unquantifiably large, but certainly exceeded the actual reserve b y

a huge multiple .

(m) Halliburton's reserve for its accrued asbestos liabilities had not bee n

objectively measured or determined or subjected to any expert review or consultation and thu s

represented nothing more than a self-interested management's claim, which management kne w

was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y

representation that management believed that Halliburton's asbestos claims and suits would be

resolved without any material impact on Halliburton's financial condition or results o f

operations. Management did not believe this representation or statement of opinion when i t

was made and knew that it was highly likely that the ultimate resolution of the asbestos claim s

involving Halliburton would, in fact, materially adversely impact Halliburton's balance sheet

and results of operations as, in fact, it did .

(n) Because of the existence of Dresser's very substantial potential asbesto s

liabilities and due to the known difficulties of attempting to blend the management of the two

companies and integrate their construction operations, it was not true that the acquisition o f

-83- Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

(o) As a result of the foregoing undisclosed problems and practices, the

defendants actually knew that their statements regarding Halliburton's future business prospect s

and performance and their forecasts of future financial performance were false when made an d

would not be achieved.

105 . On 3/11/99, Halliburton issued a release headlined and stating :

Halliburton 's Kellogg Brown & Root Joint Venture Will Execute Major LNG Expansion in Nigeria

. . . Nigeria LNG Limited has awarded a turn-key engineering and construction contract for a major expansion of its Liquified Natural Gas complex at Bonny Island to a joint venture . . . [including] Halliburton . . . .

"We are proud to continue our work with NLNG to expand the world class facility we are building in Nigeria," said Dave Lesar, president of Halliburton Co.

"This win extends Kellogg Brown & Root's track record in the LNG market and demonstrates our ability to team with our partners in bringing our world-class engineering, construction, and project execution skills to complex projects," added A .J. (Jack) Stanley, president of Kellogg Brown & Root.

106. In 3/99, Halliburton issued its 98 Annual Report, which contained its previousl y released 98 financial results . It also contained a letter signed by Cheney and Bradford, whic h

stated:

1998 was a historic year for Halliburton, highlighted by the merger between Halliburton Company and Dresser Industries . Because of the combined company's expanded capabilities and financial resources, we can more ably compete in the markets we serve, particularly in the energy services and engineering construction industries.

The Energy Services ... group's ... operating income fell 5% to $971 million. The group was especially hard hit by the downturn in upstream oilfield activities, particularly in the fourth quarter .

-84- • •

The Engineering and Construction Group's . . . operating income climbed 8% to $237 million .

107 . The 98 Annual Report also contained the following graphs showing the performance of the ES operations :

$10 $1,200 14% $85 $90 s $1,000 L9 $971 12% sfi $65 10% $800 $696 56 8% $600 % $4 6 $400 4% $2 $200 2%

$0 so 0% 1996 1997 1998 1996 1997 199 8 1996 1997 1998 Revenues Operating Income Operating Margin ($ Billions) ($ Millions)

108 . Halliburton's 98 Annual Report also stated:

Kellogg Brown & Root (KBR) combines two of the most widely recognized names in the engineering and construction industry - The M.W. Kellogg Company and Halliburton's Brown & Root. The merger of these two industry leaders is particularly effective because it brings together Kellogg's leadership in the technology-based engineering and design with Brown & Root's particular strength in all facets of construction and project management .

109. Elsewhere, Halliburton's 98 Annual Report stated :

Engineering and Construction Group operating income for 1998 of $237.2 million increased 8% over 1997 and 77% over 1996 . Operating margins were 4.3% in 1998 compared with 4 .4% for 1997 and 2 .8% for 1996. Operating income in 1998 includes a favorable settlement of a claim on a Middle Eastern construction project .. . . Improvement in operating income in 1997 over 1996 was 85 realized through overhead reductions [and] a focus on higher margin business lines . . . .

110. This section of the Annual Report also contained the following graphs highlighting the performance of the E&C Group :

$250 $237 5% 44% 43% $6 $5 5 $219 0 ■ $4 7 ~ $200 4 %

$150 Wil 3%

$100 2% $2

$50 1%

$0 $0 0% 1996 1997 1998 1996 1997 1998 1996 1997 1999 Revenues Operatng Income Operating Margi n ($ Billions) ($ Millions)

111 . Halliburton's 98 Annual Report contained it 98 financial statements . With respect to Halliburton's "Significant Accounting Policies," the 98 Annual Report stated :

Revenues and Income Recognition . . . . Revenues from engineering and construction contracts are reported on the percentage of completion method of accounting . ... All known or anticipated losses on contracts are provided for currently.

112. Halliburton's 98 Annual Report contained the following information about its ES

and E&C businesses :

Revenue (millions of dollars) 1998 1997 1996 Energy Services Group $9,009 .5 $8,504.7 $6,515.4 Engineering & Construction $5,494.8 $4,992.8 $4,720.7 Group

-86- • •

Operating Income * (millions of dollars) 1998 1997 1996 Energy Services Group $ 971 .0 $1,019.4 $ 698 .0 Engineering & Construction $ 237 .2 $ 219.0 $ 134 .0 Group

* Before Special Charges * * *

Energy Services Group operating income in 1998 was $971 .0 million, a decrease of 5% from 1997 operating income of $1,019 .4 million and an increase of 39% over 1996 operating income of $698 .0 million. Operating margins were 10.8% in 1998 compared with 12.0% in 1997 and 10.7% in 1996. . . .

Engineering and Construction Group operating income for 1998 of $237 .2 million increased 8% over 1997 and 77% over 1996 . Operating margins were 4 .3% in 1998 compared with 4.4% for 1997 and 2 .8% for 1996 .

113 . Halliburton's 98 financial statements also including a discussion regardin g

Halliburton's financial exposure to asbestos suits/claims showing an accrued liability of just $1 2 million and stating :

[M]anagement believes that the pending asbestos claims will be resolved without material effect on Halliburton's financial position or results of operations .

114. The 98 Annual Report also stated, over the signature of Cheney and Morris, that:

RESPONSIBILITY FOR FINANCIAL REPORTIN G

Halliburton Company is responsible for the preparation and integrity of its published financial statements . The financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, as such, include amounts based on judgments and estimates made by management . The Company also prepared the other information included in the annual report and is responsible for its accuracy and consistency with the financial statements.

* * *

The Company maintains a system of internal control over financial reporting, which is intended to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation of financial statements . The system includes a documented organizational structure and division of responsibility, established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout the Company , and the careful selection, training and development of our people . -87- Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Board of Directors . Corrective actions are taken to address control deficiencies ... as they are identified.

The Company assessed its internal control system in relation to criteria for effective internal control over financial reporting described in "Internal Control- Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that assessment, the Company believes that, as of December 31, 1998, its system of internal control over financial reporting met those criteria.

115. The statements made during 3/99 were false and misleading . The statements were affirmatively false . They were also misleading in failing to disclose the following facts whic h were then existing, known to or recklessly disregarded by defendants to be false, and necessar y to be disclosed to make the statements made not misleading, including the following:

(a) Due to intense competitive pressures brought about by lowered capita l

spending budgets by oil exploration companies, Halliburton's construction operations wer e

being forced to make dangerously low bids providing for only razor-thin margins, whil e

accepting fixed-price terms on huge contracts , making it very likely that due to the inevitable

Unapproved Claims which occur on any large construction contract, Halliburton would likely

suffer losses on those contracts.

(b) Halliburton did not have in place adequate contract performance

monitoring, cost control and accounting systems that would enable it to effectively monitor th e

progress being made toward contract completion, the actual costs being incurred or the curren t

state of performance of large contracts and also lacked an adequate system of internal financia l

and accounting controls to permit the proper monitoring, control of and accounting for costs o n

construction projects.

-88- (c) Halliburton had secretly changed the way it was accounting fo r

Unapproved Claims on construction contracts and was now recognizing them as revenue whe n the claims were asserted, even though the customer had not yet agreed to pay the Unapprove d

Claims and more and more customers were refusing to pay millions of dollars of existin g

Unapproved Claims .

(d) Halliburton was recording millions of dollars of Unapproved Claims a s revenue, even though its top executives knew that collection of those Unapproved Claims wa s not probable and they were not capable of accurately estimating what amount could ultimately be collected under any circumstances .

(e) Halliburton had not changed the way it was dealing with or its procedures for customer change work orders/Unapproved Claims and was not securing advanc e agreement to pay for such work as it had claimed, but rather, was continuing its traditiona l process of accepting and performing change orders as demanded by customers or required b y the progress of the contract work, without any actual agreement to pay, merely hoping to late r collect on those Unapproved Claims .

(f) It was not true that Halliburton had switched to fixed-price contract s because they would create greater profits for Halliburton or because Halliburton had a competitive advantage in such contracts . In truth, the switch to fixed-price contracts was drive n by intensifying competition whereby Halliburton and its competitors were fighting to obtain a shrinking number of contracts available from oil exploration companies which were curtailin g their capital expenditures; thus, the fixed-price contracts were, in fact, forced upon Halliburto n by competitive pressures and undertaken by Halliburton without sufficient controls, procedures , monitoring systems and personnel to perform such contracts profitably .

-89- .. (g) Hallibu rton' s construction operations had not been effectively

reorganized and restructured during 97-98 as claimed ; in fact, in the field these operations wer e

disorganized and lacked adequately skilled personnel and the procedures necessary to perform

fixed-price contracts of the size and scope being undertaken by Halliburton, which greatl y

increased the probability of performance delays, cost overruns, Unapproved Claims and thu s

losses on those contracts.

(h) Halliburton's financial results for the 4thQ 98 and fiscal year 98 wer e

false, having been manipulated and artificially inflated higher due to the fraudulent and illici t

accounting practices detailed in 8226-321 of this Complaint.

(i) Halliburton's Code of Business Conduct and Ethics was not, in fact ,

being enforced or followed in the Company's international operations, and in order to obtai n

and retain the Bonny Island, Nigeria LNG contract and extension thereof, the consortium of

which Halliburton was the dominant member had made and was making substantial payoffs and

bribes, including payments to Nigerian officials to get the contract and its extension and payoffs

to top executives of Halliburton's Kellogg unit to reward them for participating in this risky an d

illegal activity, which payments were being funneled through Swiss bank accounts controlle d

by a London lawyer.

(j) Halliburton had acquired Dresser without doing due diligence int o

Dresser's business, operations, financial condition and potential liabilities, in part because

Cheney demanded that the acquisition be undertaken and completed in an unreasonabl y

expedited fashion and because he did not want to create a paper trail documenting what he an d

other Halliburton executives knew were liabilities of potentially hundreds of millions of dollar s

for existing and anticipated asbestos suits/claims against entities for which Dresser was legall y

responsible, a significant amount of which would likely not be covered by insurance.

-90- (k) The Dresser acquisition represented an enormous risk due to Dresser' s concealed potential asbestos liabilities and because, contrary to the representations that the two companies were a good cultural and business fit and there were plans in place to achieve a smooth, quick transition and successful integration of the operations of both companies, there were no transition plans in place and the Dresser executives and managers were known to be conservative, system and process oriented managers with a very conservative approach t o percentage-of-completion/contract accounting, while the Halliburton executives and manager s were just the opposite, resulting in a cultural clash which was resulting in inefficiencies an d lack of success in the integration efforts.

(1) In fact, the construction operations of Dresser were not bein g successfully integrated into the construction operations of Halliburton . The managers and executives of the two companies had very divergent approaches to business and accounting an d constantly fought with one another resulting in distracting turf battles, operating inefficiencies and duplicative layers of management - all resulting in an inability to integrate the two operations and thus in excessive costs.

(m) Halliburton, in fact, had not adequately reserved or accounted for it s accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities for asbestos claims and suits were unquantifiably large, but certainly exceeded the $12 millio n reserve by a huge multiple.

(n) Halliburton's reserve for its accrued asbestos liabilities had not bee n objectively measured or determined or subjected to any expert review or consultation and thu s represented nothing more than a self-interested management's claim, which management kne w was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y representation that management believed that Halliburton's asbestos claims and suits would b e

-91- resolved without any material impact on Halliburton's financial condition or results o f

operations. Management did not believe this representation or statement of opinion when i t

was made and knew that it was highly likely that the ultimate resolution of the asbestos claims

involving Halliburton would, in fact, materially adversely impact Halliburton's balance shee t

and results of operations as, in fact, it did .

(o) Because of the existence of Dresser's very substantial potential asbesto s

liabilities and due to the known difficulties of attempting to blend the management of the two

companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

(p) As a result of the foregoing undisclosed problems and practices, th e

defendants actually knew that their statements regarding Halliburton's future business prospect s

and performance and their forecasts of future financial performance were false when made an d

would not be achieved.

116. On 4/26/99, Halliburton issued a release reporting its 1 stQ 99 results . The release stated:

Halliburton Company today announces that the company earned $81 million ($ .18 per diluted share) in the 1999 first quarter . . . .

. .. [L]ower earnings for the company in the 1999 first quarter are attributable to petroleum industry customers' sharp reduction of spending in response to very low crude oil and natural gas prices in the latter part of 1998 and the 1999 first quarter.

The Energy Services Group business segment's revenues were down 23 percent to $1,753 million in the 1999 first quarter, as compared to the 1998 quarter, while activity levels as measured by the worldwide rotary rig count declined by 35 percent over the same time period .

-92- The Engineering and Construction Group business segment's revenues were $1,058 million, up 12 percent compared to the 1998 first quarter. Both of the segment's business units, Kellogg Brown & Root and Brown and Root Services, increased revenues more than 10 percent . Operating income for the segment in the 1999 first quarter was $58 million, a decline of two percent from last year's quarter, and operating margins were 3 .8 percent in the 1999 first quarter compared to 4 .4 percent a year ago .

While these results reflected adverse industry conditions, Cheney and Lesar stressed to analysts that the results were better than expected - supposedly due to their superior skillful managemen t of Halliburton and the superiority of Halliburton's business model and operations .

117. On 4/27/99, DLJ issued a report on Halliburton, which reflected what Cheney ,

Lesar and Morris had told analysts on a 4/26/99 conference call and confirmed to DLJ analyst

Sanger in follow-up conversations:

• . .. Brown & Root Energy Services (BRES) had another disappointing quarter with revenues down 18% and barely profitable . . . . However, prospects are better in the future with better terms on recent contracts . . . .

• E&C results continue to be strong, running counter to industry trends : ... operating income down only 2% . . . better than expected . . .. This business is likely to do well over the next several quarters in contrast to the problems at most other E&C companies.

BRES. BRES revenues were down 18% from last year which was better than expected.... In addition, HAL has changed its contract terms to better account for change orders which should help margins going forward .

118. On 5/14/99, Halliburton filed its lstQ 99 10-Q, signed by Morris and Muchmore , which reported the same financial results as in the 4/26/99 release. The 10-Q also stated:

In the opinion of the Company, the condensed consolidated financial statements include all adjustments necessary to present fairly the Company's financial position as of March 31, 1999, and the results of its operations and cash flows for the three months ended March 31, 1999 and 1998 .

The 10-Q also discussed Halliburton's exposure to asbestos suits/claims, showing an accrue d

liability of only $11 million and stating :

-93- •

Asbestosis Litigation . . . . The Company continues to believe that provisions recorded are adequate to cover the estimated loss from asbestosis litigation.

119. With respect to Halliburton's results from operations, Halliburton's lstQ 99 10- Q stated:

First Quarter of 1999 Compared with the First Quarter of 1998

REVENUES (Millions of dollars) 1 st Q 1999 1998 Energy Services Group $1,753 $2,285 Engineering and Construction Group $1,508 $1,34 7

OPERATING INCOME (millions of 1 stQ dollars) 1999 1998 Energy Services Group $ 57 $ 283 Engineering and Construction Group $ 58 $ 59

120. The statements made from 4/26/99-5/14/9 9 were false and misleading . The statements were affirmatively false . They were also mi ;leading in failing to disclose the following facts which were then existing, known to or recklessly disregarded by defendants to b e false, and necessary to be disclosed to make the statements made not misleading, including the following:

(a) Due to intense competitive pressures brought about by lowered capita l

spending budgets by oil exploration companies, Halliburton's construction operations were

being forced to make dangerously low bids providing for only razor-thin margins, whil e

accepting fixed-price terms on huge contracts, making it very likely that due to the inevitabl e

Unapproved Claims which occur on any large construction contract, Halliburton would likely

suffer losses on those contracts.

(b) Halliburton did not have in place adequate contract performance

monitoring, cost control and accounting systems that would enable it to effectively monitor the -94- progress being made toward contract completion, the actual costs being incurred or the curren t state of performance of large contracts and also lacked an adequate system of internal financia l and accounting controls to permit the proper monitoring, control of and accounting for costs o n construction projects.

(c) Halliburton had secretly changed the way it was accounting fo r

Unapproved Claims on construction contracts and was now recognizing them as revenue whe n the claims were asserted, even though the customer had not yet agreed to pay the Unapprove d

Claims and more and more customers were refusing to pay millions of dollars of existin g

Unapproved Claims .

(d) Halliburton was recording millions of dollars of Unapproved Claims a s revenue, even though its top executives knew that collection of those Unapproved Claims wa s not probable and they were not capable of accurately estimating what amount could ultimatel y be collected under any circumstances .

(e) Halliburton had not changed the way it was dealing with or procedures for customer change work orders/Unapproved Claims and was not securing advance agreemen t to pay for such work as it had claimed, but rather, was continuing its traditional process of accepting and performing change orders as demanded by customers or required by the progres s of the contract work, without any actual agreement to pay, merely hoping to later collect on those Unapproved Claims.

(f) It was not true that Halliburton had switched to fixed-price contract s because they would create greater profits for Halliburton or because Halliburton had a competitive advantage in such contracts . In truth, the switch to fixed-price contracts was drive n by intensifying competition whereby Halliburton and its competitors were fighting to obtain a shrinking number of contracts available from oil exploration companies which were curtailing

-95- their capital expenditures ; thus, the fixed-price contracts were, in fact, forced upon Halliburto n by competitive pressures and undertaken by Halliburton without sufficient controls, procedures , monitoring systems and personnel to perform such contracts profitably .

(g) Halliburton's construction operations had not been effectivel y reorganized and restructured during 97-98 as claimed ; in fact, in the field these operations wer e disorganized and lacked adequately skilled personnel and the procedures necessary to perform fixed-price contracts of the size and scope being undertaken by Halliburton which greatl y increased the probability of performance delays, cost overruns, Unapproved Claims and thu s losses on those contracts.

(h) Halliburton's financial results for the 1stQ 99 were false, having bee n manipulated and artificially inflated higher due to the fraudulent and illicit accounting practice s detailed in 11226-321 of this Complaint.

(i) Halliburton had acquired Dresser without doing due diligence into

Dresser's business, operations, financial condition and potential liabilities, in part because

Cheney demanded that the acquisition be undertaken and completed in an unreasonabl y expedited fashion and because he did not want to create a paper trail documenting what he an d other Halliburton executives knew were liabilities of potentially hundreds of millions of dollars for existing and anticipated asbestos suits/claims against entities for which Dresser was legall y responsible, a significant amount of which would likely not be covered by insurance.

(j) The Dresser acquisition represented an enormous risk due to Dresser' s concealed potential asbestos liabilities and because, contrary to the representations that the tw o companies were a good cultural and business fit and there were plans in place to achieve a smooth, quick transition and successful integration of the operations of both companies, there were no transition plans in place and the Dresser executives and managers were known to be

-96- conservative, system and process oriented managers with a very conservative approach t o percentage-of-completion/contract accounting, while the Halliburton executives and manager s were just the opposite, resulting in a cultural clash, causing inefficiencies and lack of success i n integration efforts.

(k) In fact, the construction operations of Dresser were not successfull y integrated into the construction operations of Halliburton. The managers and executives of th e two companies had very divergent approaches to business and accounting and constantly fought with one another, resulting in distracting turf battles, operating inefficiencies and duplicative layers of management - all resulting in an inability to integrate the two operations and thus i n excessive costs .

(1) Halliburton, in fact, had not adequately reserved or accounted for its accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities fo r asbestos claims and suits were unquantifiably large, but certainly exceeded Halliburton' s reserve of less than $13 million by a huge multiple .

(m) Halliburton's reserve for its accrued asbestos liabilities had not bee n objectively measured or determined or subjected to any expert review or consultation and thus represented nothing more than a self-interested management's claim, which management kne w was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y representation that management believed that Halliburton's asbestos claims and suits would be resolved without any material impact on Halliburton's financial condition or results o f operations. Management did not believe this representation or statement of opinion when i t was made and knew that it was highly likely that the ultimate resolution of the asbestos claim s involving Halliburton would, in fact, materially adversely impact Halliburton's balance sheet and results of operations as, in fact, it did .

-97- S •

(n) Because of the existence of Dresser's very substantial potential asbesto s

liabilities and due to the known difficulties of attempting to blend the management of the tw o

companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

(o) As a result of the foregoing undisclosed problems and practices, th e

defendants actually knew that their statements regarding Halliburton's future business prospect s

and performance and their forecasts of future financial performance were false when made an d

would not be achieved.

121 . On 7/22/99, Halliburton reported its 2ndQ 99 results. According to the release:

Halliburton Company reported today that the company's 1999 second quarter net income was $83 million ($.19 per share diluted) compared to $243 million ($.55 per share diluted) earned in the 1998 second quarter .

Although these results continued to reflect adverse industry conditions, again the results wer e better than expected, which Cheney and Lesar told analysts was due to their superio r management of Halliburton .

Financial results of each of Halliburton's three business segments ... were negatively impacted by sharply lower worldwide levels of capital . . . expenditures by the company's petroleum industry customers .

Energy Services Group's operating income declined to $49 million in the 1999 second quarter, down from $304 million a year earlier .

Operating income from the Engineering and Construction Group in the 1999 second quarter was $64 million compared to $74 million in the 1998 quarter. . . .

Dick Cheney . . . said, "The 1999 second quarter was a tremendous challenge for Halliburton's industry conditions reached historic lows . However, the benefits of our aggressive cost reduction program and restructuring -98- U n •

•

activities allowed us to remain profitable during this most difficult period [W]e remain optimistic .... "

122. On 7/23/99, Dain Rauscher Wessels issued a report on Halliburton, based on what

Cheney, Lesar and/or Morris had said during a 7/22/99 conference call for analysts and money

managers and in follow-up conversations with Dain Rauscher analyst James Wicklund . The

report stated:

Halliburton reported better-than-expected earnings for the quarter from both a reported and continued operations perspective, and management stated that sequential quarterly results should continue to improve with significant improvement in 2000.

The merger results from the Halliburton-Dresser merger are on or ahead of schedule.... Management [now] expects that annualized merger cost savings are approximately $500 million .

123. On 7/30/99, Robinson-Humphrey issued a report on Halliburton, based on what

Cheney, Lesar and/or Morris said during the 7/22/99 conference call with analysts and money

managers and in follow-up conversations with Robinson-Humphrey analyst Thomas Escott . The

report stated:

Chairman Dick Cheney stated at a late June Energy Conference that he expected earnings to trough in mid-1999 and to post a "significant increase" in 2000.

2000 Expected to Lead to Climbing EPS

We expect 2000 will show improving business for Halliburton .. .. We expect HAL's operating margin will expand from 5 .1% in 1999 to 7 .9% in 2000.

124. On 8/13/99, Halliburton filed its 2ndQ 99 10-Q with the SEC, signed by Morri s

and Muchmore, which stated :

In our opinion, the condensed consolidated financial statements present fairly our financial position as of June 30, 1999, and the results of our operations for the three and six months ended June 30, 1999 and 1998 and our cash flows for the six months then ended .

-99- • 0

125 . With respect to Halliburton's financial exposure to asbestos suits/claims, th e

2ndQ 99 10-Q showed an accrued liability of only $8 million and stated:

[W]e continue to believe that provisions recorded are adequate to cover the estimated loss from asbestosis litigation .

126. The 2ndQ 99 10-Q discussed Halliburton's results from operations :

Three Months Six Months Ended June 30, Ended June 30,

Millions of dollars 1999 1998 1999 1998 Revenues Energy Services Group $1,681 $2,381 $3,434 $4,666 Engineering and Construction $1,372 $1,438 $2,880 $2,785 Group

Operating income Energy Services Group $ 49 $ 304 $ 106 $ 587 Engineering and Construction $ 64 $ 74 $ 122 $ 13 3 Group

127. On 9/13/99, Cheney, Lesar and/or Morris made a presentation to the Dain

Rauscher Wessels Energy Conference attended by analysts and money managers . On 9/14/99, a

Dain Rauscher Wessels analyst reported what the Halliburton officials said at the presentation :

• Management originally targeted cost savings and related synergies from the Dresser merger totaling $250 million per annum, but following further headcount reductions and significant facility consolidations, the company is now projecting annual benefits of $500 million .

128. The statements made from 7/22/99-9/13/99 were false and misleading . The statements were affirmatively false. They were also misleading in failing to disclose the following facts which were then existing, known to or recklessly disregarded by defendants to b e false, and necessary to be disclosed to make the statements made not misleading, including the following:

(a) Due to intense competitive pressures brought about by lowered capita l

spending budgets by oil exploration companies, Halliburton's construction operations were -100- being forced to make dangerously low bids providing for only razor-thin margins, while accepting fixed-price terms on huge contracts , making it very likely that due to the inevitable

Unapproved Claims which occur on any large construction contract, Halliburton would likely suffer losses on those contracts.

(b) Halliburton did not have in place adequate contract performance monitoring, cost control and accounting systems that would enable it to effectively monitor th e progress being made toward contract completion, the actual costs being incurred or the curren t state of performance of large contracts and also lacked an adequate system of internal financial and accounting controls to permit the proper monitoring, control of and accounting for costs o n construction projects .

(c) Halliburton had secretly changed the way it was accounting fo r

Unapproved Claims on construction contracts and was now recognizing them as revenue whe n the claims were asserted, even though the customer had not yet agreed to pay the Unapprove d

Claims and more and more customers were refusing to pay millions of dollars of existin g

Unapproved Claims .

(d) Halliburton was recording millions of dollars of Unapproved Claims a s revenue, even though its top executives knew that collection of those Unapproved Claims wa s not probable and they were not capable of accurately estimating what amount could ultimatel y be collected under any circumstances .

(e) Halliburton's construction operations had not been effectively reorganized and restructured during 97-98 as claimed; in fact, in the field these operations wer e disorganized and lacked adequately skilled personnel and the procedures necessary to perform fixed-price contracts of the size and scope being undertaken by Halliburton, which greatl y

- 101 - a • 0

increased the probability of performance delays, cost overruns, Unapproved Claims and thu s

losses on those contracts.

(f) Halliburton's financial results for the 2ndQ 99 were false, having bee n

manipulated and artificially inflated higher due to the fraudulent and illicit accounting practice s

detailed in 8226-321 of this Complaint.

(g) Halliburton's Code of Business Conduct and Ethics was not, in fact ,

being enforced or followed in the Company's international operations, and in order to obtai n

and retain the Bonny Island, Nigeria LNG contract and extension thereof, the consortium of

which Halliburton was the dominant member had made and was making substantial payoffs and

bribes, including payments to Nigerian officials to get the contract and its extension and payoffs

to top executives of Halliburton's Kellogg unit to reward them for participating in this risky an d

illegal activity, which payments were being funneled through Swiss bank accounts controlled

by a London lawyer .

(h) The Dresser acquisition was a serious mistake for Halliburton . In fact, it

represented an enormous risk due to Dresser's concealed potential asbestos liabilities and

because, contrary to the representations that the two companies were a good cultural an d

business fit and that there were plans in place to achieve a smooth, quick transition an d

successful integration of the operations of both companies, there were no transition plans in

place and the Dresser executives and managers were known to be conservative, system and

process oriented managers with a very conservative approach to percentage-of-

completion/contract accounting, while the Halliburton executives and managers were just th e

opposite, resulting in a cultural clash that was producing inefficiencies and preventing effectiv e

integration of operations .

-102- (i) In fact, the construction operations of Dresser were not successfull y integrated into the construction operations of Halliburton, The managers and executives of the two companies had very divergent approaches to business and accounting and constantly fought with one another resulting in distracting turf battles, operating inefficiencies and duplicativ e layers of management - all resulting in an inability to integrate the two operations and thus i n excessive costs.

(j) Halliburton, in fact, had not adequately reserved or accounted for it s accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities for asbestos claims and suits were unquantifiably large, but certainly exceeded the stated reserve o f

$8 million by a huge multiple .

(k) Halliburton's reserve for its accrued asbestos liabilities had not been objectively measured or determined or subjected to any expert review or consultation and thu s represented nothing more than a self-interested management's claim, which management kne w was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y representation that management believed that Halliburton's asbestos claims and suits would be resolved without any material impact on Halliburton's financial condition or results o f operations. Management did not believe this representation or statement of opinion when i t was made and knew that it was highly likely that the ultimate resolution of the asbestos claim s involving Halliburton would, in fact, materially adversely impact Halliburton's balance sheet and results of operations as, in fact, it did .

(1) Because of the existence of Dresser's very substantial potential asbesto s liabilities and due to the known difficulties of attempting to blend the management of the two companies and integrate their construction operations, it was not true that the acquisition o f

- 103 - • •

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

(m) As a result of the foregoing undisclosed problems and practices, the

defendants actually knew that their statements regarding Halliburton's future business prospect s

and performance and their forecasts of future financial performance were false when made an d

would not be achieved.

129. On 10/21/99, Halliburton reported its 3rdQ 99 results :

Halliburton Company reports today that the company's 1999 third quarter net income was $58 million ($ .13 per share diluted) ... . Reduced worldwide spending by energy industry customers, which accounted for approximately 85 percent of Halliburton's 1998 revenues, was the principal factor in reduced . . . income.

130. On 11/15/99, Halliburton filed its 3rdQ 99 10-Q with the SEC, reviewed an d approved by Cheney and Lesar and signed by Morris and Muchmore, which reported the sam e financial information as contained in the 10/21/99 release . The 10-Q stated :

In our opinion, the condensed consolidated financial statements present fairly our financial position as of September 30, 1999, and the results of our operations for the three and nine months ended September 30, 1999 and 1998 and our cash flows for the nine months then ended .

The 3rdQ 99 10-Q also reported :

Three Months Six Months Ended September 30, Ended September 30, Millions of dollars 1999 1998 1999 1998 Revenues : Energy Services Group $1,700 $2,163 $5,134 $6,829 Engineering and Construction $1,273 $1,380 $4,153 $4,165 Group

Operating income: Energy Services Group $ 56 $ 263 $ 162 $ 850 Engineering and Construction $ 41 $ 54 $ 163 $ 187 Group

-104- 131 . The 3rdQ 99 10-Q showed an accrued liability for Halliburton's asbesto s liabilities of only $13 million, and stated :

Asbestosis Litigation. . . . [W]e continue to believe that provisions recorded are adequate to cover the estimated loss from asbestosis litigation .

132. On 1/27/00, Halliburton issued a release reporting its 4thQ 99 and full yea r results :

Halliburton Company today announces 1999 fourth quarter net income of $235 million ($.53 per share diluted) ....

For the full year, Halliburton's . . . [n]et income was $265 million ($ .60 per share diluted) in 1999 . . . . This compares to $731 million ($1 .67 per share diluted) before special charges in 1998 .

The Energy Services Group's fourth quarter 1999 operating income of $60 million increased seven percent sequentially ....

The Engineering and Construction Group's ... [o]perating income . .. was $40 million for the quarter .. . .

"Halliburton's . .. extensive worldwide operational infrastructure ... position[s] it well for 2000 and beyond," said Dick Cheney .

133. On 1/27/00, Halliburton announced it expected to win the largest offshore engineering procurement, installation and construction ("EPIC") contract ever awarded a singl e contractor - a $2.5 billion project with Barracuda and Caratinga Developments in Brazil t o construct 51 deep-water offshore oil wells :

Halliburton Reaches Conclusion on Pricing, Execution Plan and Delivery Schedule for $2.5 Billion Barracuda and Caratinga Developments Offshore Brazil.

... Halliburton has reached an advanced stage towards a conclusion with Barracuda & Caratinga Development Corporation (BCDC) for the development of both the Barracuda and the Caratinga offshore fields in Brazil . The discussions have resulted in a satisfactory price for BCDC and an agreed execution plan and delivery schedule.

- 105 - "We believe this will be the largest offshore EPIC project ever awarded to a single contractor," said Dave Lesar, president and chief operating officer, Halliburton Company .

134. On 1/28/00, Morgan Stanley issued a report on Halliburton, based on wha t

Cheney, Lesar and/or Morris had stated on a 1/27/00 conference call and in follow-o n conversations with Morgan Stanley analyst, John Lovoi . The report stated :

In last night's conference call, senior management stated that, while the near-term earnings performance of its backlog driven segments would likely remain sluggish for the next two to three quarter, earnings from these segments were poised to accelerate sharply at the end of this year or the beginning of 2001 .. . .

And the backlog is turning. Yesterday morning the company announced that two large Brazilian initiatives were nearing contract signing . . . . The company's backlog currently stands at about $9 .5 billion....

Cost Saving are Real

Regarding the cost savings issue, management continues to stress that costs have been permanently reduced in-line with prior guidance, and the company's revenue potential cycle-over-cycle has not changed . .. .

135 . In early 4/00, Halliburton issued its 99 Annual Report, which reported net incom e of $438 million/$.99 per share. The report contained a letter from Cheney which stated :

The merger with Dresser Industries is now behind us. Integrating the operations of the two companies ... [has] been an important part of our transition to the future .. .The potential rewards to our shareholders are vast.

I am optimistic that the year 2000 will provide a positive transition leading to higher future earnings for the company .

136. The 99 Annual Report discussed Halliburton's construction businesses, stating :

The group's engineering excellence and construction experience make it possible to take on end-to-end projects of any size in the world ....

As one of the largest and most fully integrated engineering and construction firms in the world, KBR brings ... the ability to take on massive - 106 - • •

international lump-sum projects that are beyond the range of smaller companies .

This year KBR began a major expansion of Nigeria's LNG complex at Bonny Island. The original $2.5 billion project is one of the largest and most complex facilities ever built .

137 . Halliburton's financial statements in the 99 Annual Report stated:

Revenues and income recognition. . .. All known or anticipated losses on contracts are providedfor currently. Claims and change order which are in the process of being negotiated with customers, for extra work or changes in the scope of work are included in revenue when collection is deemed probable .

138 . Halliburton's 99 Annual Report discussed its operations :

OPERATING INCOME 1999 1998 1997 [Millions of dollars ] Energy Services Group $ 222 $ 971 $1,019 Engineering and Construction $ 203 $ 237 $ 219 Group

139 . With respect to Halliburton's financial exposure for asbestos suits/claims, the 9 9

Annual Report reported only a $25 million accrued liability for such claims and stated :

[W]e believe that the pending asbestos claims will be resolved without material effect on our financial position or results of operations .

140. Halliburton's 99 Annual Report also contained a section entitled "Responsibility for Financial Reporting," signed by Cheney and Morris, which stated :

We are responsible for the preparation and integrity of our published financial statements . The financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States and, accordingly, include amounts based on judgments and estimates made by our management . We also prepared the other information included in the annual report and are responsible for its accuracy and consistency with the financial statements.

We maintain a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our financial statements . The system includes: - 107 - 4 • a documented organizational structure and division of responsibility;

• established policies and procedures , including a code of conduct to foster a strong ethical climate which is communicated throughout the company; and

• the careful selection, training and development of our people .

Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Board of Directors . Corrective actions are taken to address control deficiencies ... as they are identified.

We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in "Internal Control- Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that assessment, we believe that, as of December 31, 1999, our system of internal control over financial reporting met those criteria.

141. The statements made from 10/21/99-4/00 were false and misleading . The

statements were affirmatively false. They were also misleading in failing to disclose the

following facts which were then existing, known to or recklessly disregarded by defendants to b e

false, and necessary to be disclosed to make the statements made not misleading, including the

following:

(a) Due to intense competitive pressures brought about by lowered capita l

spending budgets by oil exploration companies, Halliburton's construction operations wer e

being forced to make dangerously low bids providing for only razor-thin margins, while

accepting fixed-price terms on huge contracts, making it very likely that due to the inevitabl e

Unapproved Claims which occur on any large construction contract, Halliburton would likely

suffer losses on those contracts.

(b) Halliburton did not have in place adequate contract performance

monitoring, cost control and accounting systems that would enable it to effectively monitor th e

- 108 - 0 0

progress being made toward contract completion, the actual costs being incurred or the curren t state of performance of large contracts and also lacked an adequate system of internal financia l and accounting controls to permit the proper monitoring, control of and accounting for costs o n construction projects.

(c) Halliburton had secretly changed the way it was accounting fo r

Unapproved Claims on construction contracts and was now recognizing them as revenue whe n the claims were asserted, even though the customer had not yet agreed to pay the Unapprove d

Claims and more and more customers were refusing to pay millions of dollars of existin g

Unapproved Claims .

(d) Halliburton was recording millions of dollars of Unapproved Claims a s revenue, even though its top executives knew that collection of those Unapproved Claims wa s not probable and they were not capable of accurately estimating what amount could ultimatel y be collected under any circumstances .

(e) Halliburton knew from the outset that it was likely to suffer a significan t loss on the Barracuda/Caratinga contract because, in order to obtain this huge fixed-price/lump- sum contract, Halliburton had been forced to submit a "low-ball" bid with a dangerously thi n projected profit margin, which was all but certain to be wiped out by the significant change orders/Unapproved Claims that would be unavoidable in a project of this size and whic h

Halliburton knew the customer (Petrobras) would refuse to pay for, as this customer ha d refused to pay millions in Unapproved Claims on an earlier contract completed in 98, whic h was part of the reason Halliburton had to take a $60 million charge for uncollectibl e

Unapproved Claims at year-end 98 .

(f) Halliburton's construction operations had not been effectivel y reorganized and restructured during 97-98 as claimed ; in fact, in the field these operations were

-109- y w S S

disorganized and lacked adequately skilled personnel and the procedures necessary to perform

fixed-price contracts of the size and scope being undertaken by Halliburton, which greatl y

increased the probability of performance delays, cost overruns, Unapproved Claims and thu s

losses on those contracts.

(g) Halliburton's financial results for the 3rdQ and 4thQ 99 and fiscal year

99 were false, having been manipulated and artificially inflated higher due to the fraudulent an d

illicit accounting practices detailed in 11226-321 of this Complaint .

(h) Halliburton's Code of Business Conduct and Ethics was not, in fact ,

being enforced or followed in the Company's international operations, and in order to obtai n

and retain the Bonny Island, Nigeria LNG contract and extension thereof, the consortium of

which Halliburton was the dominant member had made and was making substantial payoffs and

bribes, including payments to Nigerian officials to get the contract and its extension and payoffs

to top executives of Halliburton's Kellogg unit to reward them for participating in this risky an d

illegal activity, which payments were being funneled through Swiss bank accounts controlle d

by a London lawyer.

(i) Halliburton had acquired Dresser without doing any due diligence int o

Dresser's business, operations, financial condition and potential liabilities, in part because

Cheney demanded that the acquisition be undertaken and completed in an unreasonabl y

expedited fashion and because he did not want to create a paper trail documenting what he an d

other Halliburton executives knew were liabilities of potentially hundreds of millions of dollars

for existing and anticipated asbestos suits/claims against entities for which Dresser was legall y

responsible, a significant amount of which would likely not be covered by insurance .

(j) It was not true that Halliburton had switched to fixed-price contract s

because they would create greater profits for Halliburton or because Halliburton had a

-110- I competitive advantage in such contracts . In truth, the switch to fixed-price contracts was drive n

by intensifying competition whereby Halliburton and its competitors were fighting to obtain a

shrinking number of contracts available from oil exploration companies which were curtailin g

their capital expenditures; thus, the fixed-price contracts were, in fact, forced upon Halliburto n

by competitive pressures and undertaken by Halliburton without sufficient controls, procedures ,

monitoring systems and personnel to perform such contracts profitably .

(k) The award of the Barracuda/Caratinga contract was not a result of, nor

did it demonstrate, Halliburton's unique ability to manage and execute large offshore fixed-

price construction contracts, but rather, it reflected Halliburton's willingness to submit a low-

ball bid with razor-thin margins to get a fixed-price contract with a customer that it knew had a

track record of refusing to pay for the inevitable Unapproved Claims and cost overruns tha t

would inevitably occur on a $2 .5 billion contract .

(1) The Dresser acquisition was a huge mistake for Halliburton . In fact, it

represented an enormous risk due to Dresser's concealed potential asbestos liabilities and

because, contrary to the representations that the two companies were a good cultural an d

business fit and there were plans in place to achieve a smooth, quick transition and successfu l

integration of the operations of both companies, there were no transition plans in place and th e

Dresser executives and managers were known to be conservative, system and process oriente d

managers with a very conservative approach to percentage-of-completion/contract accounting ,

while the Halliburton executives and managers were just the opposite, resulting in a cultura l

clash that caused operating inefficiencies and prevented effective integration of operations .

(m) In fact, the construction operations of Dresser were not successfull y

integrated into the construction operations of Halliburton. The managers and executives of th e

two companies had very divergent approaches to business and accounting and constantly fought

-111- with one another, resulting in distracting turf battles, operating inefficiencies and duplicative layers of management - all resulting in an inability to integrate the two operations and thus i n excessive costs.

(n) Halliburton, in fact, had not adequately reserved or accounted for it s accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities for asbestos claims and suits were unquantifiably large, but certainly exceeded the stated reserve s of $13-$25 million by a huge multiple .

(o) Halliburton's reserve for its accrued asbestos liabilities had not bee n objectively measured or determined or subjected to any expert review or consultation and thus represented nothing more than a self-interested management's claim, which management kne w was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y representation that management believed that Halliburton's asbestos claims and suits would be resolved without any material impact on Halliburton's financial condition or results of operations. Management did not believe this representation or statement of opinion when i t was made and knew that it was highly likely that the ultimate resolution of the asbestos claims involving Halliburton would, in fact, materially adversely impact Halliburton's balance sheet and results of operations as, in fact, it did .

(p) Because of the existence of Dresser's very substantial potential asbesto s liabilities and due to the known difficulties of attempting to blend the management of the two companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t improvements either in the first year after the merger or thereafter .

- 112 - 1 142. On 4/26/00, Halliburton reported its 1 stQ 00 results - net income of $264 million ,

or $.59 per share. On 4/26/00, Halliburton held a conference call for analysts and money

managers. Cheney, Lesar and Morris participated. The following was stated :

Cheney: . . . We see our stock as one of the best investment opportunities in the oil service industry . . . . [IJn the short-term, [Halliburton's construction operations] will continue to generate good profits as they work off existing projects. Now is a great time to be a Halliburton shareholder . . . .

Lesar: . .. I've mentioned a couple of large projects that have not been put into backlog yet that would have a significantly positive impact on it, one will be Barracuda/Caratinga. When we finally sign that up, which I indicated would probably be in the second quarter some time, that will add $2 .5 billion to our backlog at that point in time .

143. On 5/15/00, Halliburton filed its lstQ 00 10-Q with the SEC, reviewed and

approved by Cheney and Lesar and signed by Morris and Muchmore . The 10-Q contained the

same financial information as in Halliburton's 4/26/00 release . Regarding Halliburton' s

involvement in asbestos litigation , the 10-Q reported an accrued liability of only $25 million and

stated:

[W]e believe that the pending asbestos claims will be resolved without material effect on our financial position or results of operations .

The 1 stQ 00 10-Q also reported:

In our opinion, the condensed consolidated financial statements present fairly our financial position as of March 31, 2000, and the results of our operations for the three months ended March 31, 2000 and 1999 and our cash flows for the three months then ended . The results of operations for the three months ended Mary 31, 2000 and 1999 may not be indicative of results for the full years.

144. On 7/5/00, Halliburton issued a release regarding the Barracuda /Caratinga project:

Halliburton Company Signed $2.5 Billion Contract for Development of Barracuda and Caratinga Oil Fields Offshore Brazil

... Halliburton ... announced today that [it had] signed contracts to proceed with the development of both the Barracuda and Caratinga offshore oil fields in Brazil. The contracts are valued at more than $2 .5 billion . . ..

- 113- The principal agreement is a lump-sum engineering, procurement and construction (EPC) contract . . . .

"The Barracuda and Caratinga awards represent an important recognition of Halliburton's capability in the technically challenging development of deepwater oil and gas resources," said Dave Lesar, president and chief operating officer, Halliburton Company .

145 . On 7/25/00, Cheney announced he was leaving Halliburton to run for Vic e

President on the Republican Party ticket . Lesar succeeded him as Chairman and CEO . On

7/26/00, Halliburton issued a release reporting better-than-expected 2ndQ 00 results - net income of $75 million/$ .17 per share. The release stated :

Halliburton Company reported today that the company's 2000 second quarter net income was $75 million ($0.17 per share diluted) compared to $83 million ($0 .19 per share diluted) in the 1999 second quarter .

2000 Second Quarter Segment Result s

The Energy Services Group's operating income of $107 million in the 2000 second quarter increased 118 percent over the 1999 second quarter and 73 percent sequentially. . . .

. .. Operating income from the Engineering and Construction Group in the 2000 second quarter was $36 million . .. .

Dick Cheney, Halliburton's chairman of the board and chief executive officer, said, "I'm pleased with the strong financial performance of our oil field services related businesses in the 2000 second quarter ...."

146. On 7/26/00 Halliburton held a conference call for investors , analysts and mone y managers to discuss its recent financial results, business conditions and future prospects . During the call, Cheney and Lesar stated :

Cheney: . .. I have got every confidence that Halliburton has a very bright future ahead of it. I think we have done a good deal over the last several years to strengthen the company ....

-114- Lesar: ... Clearly, Halliburton is well positioned .... If you look at our engineering and construction group, we continue to have good quality backlog in those businesses .... That backlog continues to provide us profitable work while we look out at the new projects .. . [W]e signed up the Barracuda/Caratinga project . . . .

Morris : ... We have got a lot of big numbers to talk about today ... let me just highlight a few of those big numbers . Halliburton Company's operating income up 50% ....

[D]uring June we finalized negotiations to develop the Barracuda and Caratinga oil fields in deep water Brazil for Petrobras and, on July 5th we signed the contract. This contract is a turn-key fixed-price EOC contract. .. . This contract is a major win for Halliburton and clearly demonstrates the numerous integrated offshore capabilities and technologies that we have been developing . . . . [T]he indications are positive for BRES's future, revenues and profits from the Barracuda project will begin to be recognized in the late, in the fourth quarter and will contribute to continued momentum in 2001 .

147 . Halliburton' s better-than -expected results, the strong performance of its ES operations and the upbeat conference call were a perfect "send off' for Cheney. As he returned to politics, he appeared to be a successful corporate executive, now re-entering "public service ."

These better-than-expected results also produced a frenzy of praise and upgrades among analyst s covering Halliburton, which drove Halliburton's stock dramatically higher, from a low of $41 .18 on 7/24/00 to over $48.31 on 8/2/00 (seven trading days later), over $52 on 8/9/00 (five trading days after that) and on to Halliburton's Class Period high of $55.18 on 9/6/00, just weeks afte r

Cheney's successful send-off to return to politics .

148. On 7/26/00, Jefferies & Company issued a report on Halliburton, written b y

Kellstrom, based on Hallibu rton's 7/26/00 conference call and follow-up conversations with

Lesar or Morris. The report stated :

• Second quarter numbers ahead of expectations . Yesterday, Halliburton reported first quarter earnings of $0 .17 per share, which was ... better than our expectation of $0 .15 per share, and modestly better than consensus expectations of $0.16 per share. Halliburton also hosted a conference call with investors and the tone of the call was quite positive. - 115 - ` • Dick Cheney has resigned ... to accept George W. Bush's invitation to become his Vice Presidential running mate.... The Company will not alter operating strategies in any way based on the changeover .

• Also, Halliburton remains optimistic on the outlook in 2001 for Offshore Construction activity, particularly deepwater . . . . Halliburton and Petrobras signed contracts on July 5th, worth $2 .5 billion for the development of both the Barracuda and Caratinga deepwater projects in Brazil.... This is a turnkey, fixed price EPC contract in which BRES and HES will deliver two Floating Production Storage and Offloading Vessels (FPSOs), a subsea gathering system, and the oilfield services on over 40 wells tied into the subsea gathering system . The contract will primarily benefit Halliburton in 2001 . ...

149. On 7/27/00, Morgan Stanley issued a report on Halliburton written by Lovoi ,

based on Halliburton's 7/26/00 conference call and follow-up conversations with Lesar o r

Morris. The report stated :

• Halliburton Surprises

HAL reported $0 .17 vs. $0. 14. Operating profits were 20% ahead of our expectations.

• HES was the driver

The company's largest and most important segment delivered $20 million more than we had expected .

HAL Exceeds Second Quarter Expectations

HAL reported second quarter 2000 earnings of $0.17/share, exceeding our $0.14/share expectation. A majority of the outperformance, which approximated $30 million at the operating profit line, was attributable to better than expected performance within the company's Energy Services segment .

Margins for this unit were 7 .7%, about 120 basis points ahead of expectations .

In summary, our 2000 and 2001 earnings expectations are essentially unchanged at $0.82/share and $1 .86/share, respectively . We have introduced our 2002 expectation of $2.44/share .... -116- 150. On 7/27/00, PaineWebber issued a report on Halliburton written by Stone, base d on Halliburton's 7/26/00 conference call and follow-up conversations with Lesar or Morris . The report stated:

Halliburton: Reports Better Than Expected EPS of $0.12 From Operation s

• Halliburton 2Q:00 EPS of $0 .12 from operations was stronger than our estimate of $0.10 due to better revenues and margins in the Energy Services Group, particularly Halliburton Energy Services (HES) .

Better Than Expected Results

Halliburton reported better than expected EPS from continuing operations for the second quarter. EPS was $0.12 versus our expectations of $0.10 and Street consensus of $0 .10. All of the strength in the quarter came from the Halliburton Energy Services (HES) . . . .

We are raising ourforecasts for HES profits in the second half and in 2001 due to higher margin assumptions resulting from stronger pricing and better incrementalprofitability than previously forecast .

151 . On 7/27/00, Salomon Smith Barney issued a report on Halliburton written by

Kieburtz, based on Halliburton's 7/26/00 conference call and follow-up conversations with Lesa r or Morris. The report stated:

HAL: Strong Energy Services Margins Spur Positive Surpris e

• Halliburton reported second quarter EPS of $0 .17 versus $0.11 in the first quarter and our $0.16 estimate. . . .

• The Energy Services Group was the source of the earnings growth, driven by strong revenues and margins from Halliburton Energy Services ....

The strong sequential earnings growth came entirely from the Energy Services Group . . . .

Notable events during the second qua rter include the awarding of the $2.5 billion Barracuda and Caratinga (B&C) field development contract offshore Brazil, of -117- which $1 .6 billion has been booked as backlog .... We expect revenues from the B&C project to begin impacting Halliburton late in the fourth quarter, with a strong contribution in 2001 .

152. On 7/27/00, Deutsche Banc Alex . Brown issued a report on Halliburton written b y

Maat, based on Halliburton's 7/26/00 conference call and follow-up conversations with Lesar o r

Morris. The report stated :

Upgraded to BUY ... 2000/2001 Estimates Raise d

• We have raised our rating on Halliburton to BUY . .. . We also have increased our EPS estimates for 2000 (to $0 .57 from $0.51) and 2001 (to $1 .80 from $1 .70) .. ..

• The 2Q00 results were characterized by significantly higher-than- estimated earnings at Energy Services Group (43% higher than estimated) . . . . Simply put, 2Q00 earnings were an impressive progress report on the company's likely powerful cyclical recovery over the next few years .

• We expect Halliburton's EPS to more than triple in 2000-2001 . . . .

We believe that the 1998 merger with Dresser has greatly enhanced Halliburton's earnings power . . . .

Rating Upgraded to Buy . .. .

We have raised our rating on Halliburton Company to BUY .... Among the reasons for our BUY rating are the following :

1 . Quarterly earnings have impressively turned the corner, in our opinion.... We believe that Halliburton is now poised to report eight or more consecutive sequential quarterly EPS increases as a result of sharply improving oil services earnings . In all, we estimate that Halliburton 's EPS will roughly triple in 1999-2001 ... as its Energy Services Group operating income increases an estimated 123% in 2000 and 145 % in 2001.

- 118 - 153. On 8/10/00, Halliburton filed its 2ndQ 00 10-Q with the SEC, approved by Lesar and signed by Morris and Muchmore . The 10-Q contained the same financial information as tha t contained in the 7/26/00 2ndQ 00 earnings release . It represented:

In our opinion, the condensed consolidated financial statements present fairly our financial position as of September 30, 2000, the results of our operations for the three and nine months ended September 30, 2000 and 1999, and our cash flows for the nine months then ended .

With respect to Halliburton's involvement in asbestos litigation, the 10-Q stated that Halliburto n had a net asbestos liability of only $24 million, a decline of $1 million from the prior quarter, and stated, "we believe that the pending asbestos claims will be resolved without material effect o n our financial position or results of operations ."

154. The 9/1/00 issue of Offshore contained an interview with Lesar, then

Halliburton's new Chairman/CEO . The interview included the following :

Offshore: What recent project would you say best defines the Halliburton of the future?

Lesar: I think the Barracuda/Caratinga project ... is a potential model demonstrating the capabilities of the entire Halliburton Group . . . . Halliburton offered the best price and shortest time to first oil. More customers around the world are looking for this type of turnkey solution, and Halliburton is positioned to provide these services ....

. . . The direction now seems to be toward a fixed price for projects . . . . Halliburton has the advantage here . . . .

On 9/6/00, Halliburton stock reached its Class Period high of $55 .18 per share.

155 . The statements made from 4/26/00-9/1/00 were false and misleading . The statements were affirmatively false. They were also misleading in failing to disclose the following facts which were then existing, known to or recklessly disregarded by defendants to b e false, and necessary to be disclosed to make the statements made not misleading, including the following:

-119- (a) Due to intense competitive pressures brought about by lowered capita l spending budgets by oil exploration companies, Hafliburton's construction operations wer e being forced to make dangerously low bids providing for only razor-thin margins, whil e accepting fixed-price terms on huge contracts, making it very likely that due to the inevitabl e

Unapproved Claims which occur on any large construction contract, Halliburton would likel y suffer losses on those contracts.

(b) Halliburton did not have in place adequate contract performanc e monitoring, cost control and accounting systems that would enable it to effectively monitor th e progress being made toward contract completion, the actual costs being incurred or the curren t state of performance of large contracts and also lacked an adequate system of internal financia l and accounting controls to permit the proper monitoring, control of and accounting for costs on construction projects.

(c) Halliburton was continuing to record millions of dollars of Unapproved

Claims as revenue, even though its top executives knew that collection of those Unapprove d

Claims was not probable and they were not capable of accurately estimating what amount coul d ultimately be collected under any circumstances .

(d) Halliburton had not changed the way it was dealing with or procedure s for customer change work orders/Unapproved Claims and was not securing advance agreement to pay for such work as it had claimed, but rather, was continuing its traditional process of accepting and performing change orders as demanded by customers or required by the progres s of the contract work, without any actual agreement to pay, merely hoping to later collect on those Unapproved Claims.

(e) Halliburton knew from the outset that it was likely to suffer a significan t loss on the Barracuda/Caratinga contract because, in order to obtain this huge fixed-price/lump-

-120- sum contract, Halliburton had been forced to submit a "low-ball" bid with a dangerously thi n projected profit margin, which was all but certain to be wiped out by significant change orders/Unapproved Claims that would be unavoidable in a project of this size and whic h

Halliburton knew the customer (Petrobras) would refuse to pay for, as this customer ha d refused to pay millions in Unapproved Claims on an earlier contract completed in 98, which was part of the reason Halliburton had to take a $60 million charge for uncollectibl e

Unapproved Claims at year-end 98 .

(f) Halliburton's construction operations had not been effectivel y reorganized and restructured during 97-98 as claimed ; in fact, in the field these operations wer e disorganized and lacked adequately skilled personnel and the procedures necessary to perform fixed-price contracts of the size and scope being undertaken by Halliburton, which greatl y increased the probability of performance delays, cost overruns, Unapproved Claims and thu s losses on those contracts.

(g) Halliburton's financial results for the 1 stQ and 2ndQ of 00 were false , having been manipulated and artificially inflated higher due to the fraudulent and illici t accounting practices detailed in 11226-321 of this Complaint.

(h) Halliburton's Code of Business Conduct and Ethics was not, in fact , being enforced or followed in the Company's international operations, and in order to obtai n and retain the Bonny Island, Nigeria LNG contract and extension thereof, the consortium of which Halliburton was the dominant member had made and was making substantial payoffs and bribes, including payments to Nigerian officials to get the contract and its extension and payoffs to top executives of Halliburton's Kellogg unit to reward them for participating in this risky an d illegal activity, which payments were being funneled through Swiss bank accounts controlled by a London lawyer .

- 121 - pN ~Y S

(i) The award of the Barracuda/Caratinga contract was not a result of, nor

did it demonstrate, Halliburton's unique ability to manage and execute large offshore fixed-

price construction contracts, but rather, it reflected Halliburton's willingness to submit a low-

ball bid with razor-thin margins to get a fixed-price contract with a customer that it knew had a

track record of refusing to pay for the inevitable Unapproved Claims and cost overruns tha t

would inevitably occur on a $2.5 billion contract .

(j) The construction operations of Dresser had not been successfully

integrated into the construction operations of Halliburton. The managers and executives of th e

two companies had very divergent approaches to business and accounting and constantly fought

with one another, resulting in distracting turf battles, operating inefficiencies and duplicative

layers of management - all resulting in an inability to integrate the two operations and thus i n

excessive costs.

(k) Halliburton, in fact, had not adequately reserved or accounted for it s

accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities for

asbestos claims and suits were unquantifiably large, but certainly exceeded the stated reserve o f

$24-$25 million by a huge multiple.

(1) Halliburton's reserve for its accrued asbestos liabilities had not bee n

objectively measured or determined or subjected to any expert review or consultation and thu s

represented nothing more than a self-interested management's claim, which management kne w

was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y

representation that management believed that Halliburton's asbestos claims and suits would be

resolved without any material impact on Halliburton's financial condition or results o f

operations. Management did not believe this representation or statement of opinion when i t

was made and knew that it was highly likely that the ultimate resolution of the asbestos claims

-122- If " . . • •

involving Halliburton would, in fact, materially adversely impact Halliburton's balance sheet

and results of operations as, in fact, it did .

(m) Because of the existence of Dresser's very substantial potential asbesto s

liabilities and due to the known difficulties of attempting to blend the management of the two

companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

(n) As a result of the foregoing undisclosed problems and practices, the

defendants actually knew that their statements regarding Halliburton's future business prospect s

and performance and their forecasts of future financial performance were false when made and

would not be achieved .

156. As a result of their knowledge of these accumulating negative condition s

adversely impacting Halliburton's businesses and operations, during 5/00 through 8/00, Cheney

and several of Halliburton's other top executives bailed out of their Halliburton stock. In the

aggregate during these three months, as Halliburton's stock soared higher based on th e

surprisingly high profits Halliburton reported and increased profitable growth it forecast ,

Halliburton's insiders sold off over 1 .1 million of their Halliburton shares at as high as $53 .93

per share, pocketing $61 million in illegal insider trading proceeds . During this time period ,

Cheney sold 760,000 shares for $40 million - over 80% of his Halliburton stock holdings .

Bradford, Halliburton's Chairman, sold 137,375 shares for $7 .1 million - over 32% of hi s

Halliburton stock holdings . Vaughn, Halliburton's Vice Chairman, sold 150,500 shares for $7 . 6

million. All of these sales were completely voluntary, including those of Cheney. To the extent

these sellers exercised options to acquire the stock they sold, those options were in no danger o f

expiring any time soon . Cheney himself was under no obligation, legal or otherwise, to dives t

- 123 - 4 ,. A 0 0

himself of his Halliburton holdings, even if he were to be selected for and run for Vice President.

In fact, later on Lesar was quoted as stating : "The future Vice President Cheney did not have to

sell at that time, did not have to sell his stock or his options, but he insisted ...."

157. Once Cheney departed Halliburton, Lesar assumed day-to-day operationa l

command as Chairman/CEO . Lesar knew that several of the excesses and manipulations of the

Cheney era which had been engaged in to cover up the accumulating problems at Halliburton

and to thus boost Cheney's image as a successful business executive had reached suc h

proportions that they could not be continued much longer . Lesar knew that the attempte d

integration of Dresser's construction operations into Halliburton's construction operations ha d

utterly failed, resulting in constant managerial conflict, operating inefficiencies and excessiv e

costs. He also knew that Halliburton had recognized as revenue, i .e., profit, between $120-$15 0

million in Unapproved Claims which could never be collected, let alone accurately estimated ,

and, that as a result, Halliburton had actually suffered losses on a number of large fixed-

price/lump-sum contracts . However, Lesar also knew that since he had represented to investors

when Cheney left the Company in July that Halliburton's business was performing better tha n

expected, reporting better-than-expected operating income and that no change in busines s

strategy would occur after Cheney left, if he suddenly disclosed to the markets these kinds of

horrible operating problems and previously hidden losses in Halliburton's most important line o f

business, i.e., construction, investors would savage Halliburton's stock, resulting in a precipitous

price decline, which would attract the attention of lawyers representing investors, as well as th e

regulators of our nation's securities markets. Thus, in early 10/00, barely two months after

Cheney had left Halliburton, Lesar began to selectively meet with certain analysts to leak to the m

that he was contemplating substantial restructuring and reorganization of Halliburton' s

- 124 - construction operations, which, of course, the experienced analysts realized would result in larg e one-time write-offs for restructuring charges .

158. For instance, in early 10/00, Lesar met with Salomon Smith Barney analys t

Kieburtz, who had followed Halliburton for some period of time and who Lesar knew well. On

10/6/00, Salomon Smith Barney issued a report on Halliburton after Kieburtz met privately with

Lesar. The report stated :

In a recent one-on-one meeting with Halliburton's new CEO, Dave Lesar, we focused on what changes were envisioned for the company under the ne w management . . . .

Operating Priorities

There have not been any significant management or organizational changes at Halliburton since the first quarter, however there may be some in the near future. Lesar believes the company may operate more efficiently with one less layer of management both from a cost perspective and from an accountability perspective ....

Downstream Business

The downstream businesses at Halliburton have not recovered as quickly as had been anticipated turning what had been an earnings positive during the oilfield downturn into a drag during this recovery cycle . More importantly, management is now asking whether the vaunted earnings stability that comes from the balance of upstream and downstream is rewarded in the stock market . Recent history suggests the answer is no ....

Clearly no decisions have been made but the questions are being asked . Lesar did indicate several downstream business segments are key to Halliburton's future business, because of their linkage to the reservoir and the strength of their competitive position. . . . [T]here is greater uncertainty about the value to Halliburton of the construction activities at KBR .. ..

Midstream Business

The Brown & Root Energy Services (BRES) division presents a more complex issue. . . . [T]he division has been a notable under performer . ... [S]ome longer term strategic questions remain for this segment .

- 125 - N 4 „ , • S

Thus, Lesar was raising serious questions as to the viability of two of the most important parts o f

Halliburton's business, especially Brown & Root Energy Services ("BRES"), which was th e

major unit of ES that was supposedly performing so wonderfully and beyond expectations just a

few weeks earlier when Cheney left the Company . Due to the "leak" of this information t o

Salomon Smith Barney (and to a few other favored analysts), there was increased sellin g

pressure on Halliburton's stock, causing Halliburton's stock price to decline from a high of $5 1

per share in early 10/00 to as low as $40 .50 on 10/23/00, a 20% decline.

159. On 10/24/00, Halliburton reported its 3rdQ 00 results . In a conference call after

the earnings release, Lesar shocked most analysts and many in the investment community b y

revealing that, due to serious operational problems, management inefficiencies and excessive

costs in its construction operations , Halliburton 's construction businesses (which had bee n

previously represented to have been successfully restructured and into which Dresser's

construction operations (Kellogg) had supposedly been successfully integrated) had to be

massively restructured. Lesar said that Halliburton's supposedly successfully restructured /

integrated construction businesses now had to pursue a "new strategy" to "cut costs and

strengthen that business." Halliburton had to "recombine" all of its "engineering and

construction businesses." Lesar also told analysts that due to these problems, Halliburton's 0 0

and 01 net income and EPS would be adversely impacted and indicated that Halliburton would

have to take write-offs/charge-offs as part of this restructuring of the largest and most importan t

part of Halliburton's business . However, Salomon Smith Barney analyst Kieburtz was not

surprised. In a report he issued after the 10/24/00 conference call he stated: "This confirms the

message we heard from management several weeks ago during our company visit ."

160. When the shocked and surprised analysts pressed Halliburton as to whether ther e

were any similar negative surprises or revelations coming with respect to Halliburton's potentia l

- 126 - asbestos liability, Lesar and Morris assured them there were no changes in that area and that

Halliburton would provide comprehensive information on its asbestos liability exposure in it s

3rdQ 00 10-Q to be filed shortly thereafter .

161 . Despite the early 10/00 leakage of part of the negative information disclosed o n

10/24/00, many analysts and investors were caught flat-footed by the 10/24/00 revelations, a s

Halliburton had repeatedly assured investors that its construction operations had bee n successfully restructured, that Dresser's construction operations had been successfully integrate d into Halliburton's construction businesses and, though Halliburton's construction businesses ha d been hurt in the recent past due to weak oil prices and low capital spending by oi l explorers/producers, that those businesses were well-organized, well-managed and poised fo r successful, profitable growth in light of more recent oil price hikes and renewed capita l spending, telling analysts to raise their 00 and 01 EPS forecasts for Halliburton . The comments in the securities analyst reports written after 10/25/00 set forth below show the dramatic negative impact of the revelations of the 10/24/00 conference call :

CIBC World Markets (10/25/00):

• The shock in the conference call was management's statement that, given the outlook for customer spending in the shallow water marine construction market and the downstream E&C business, it is not sure that Halliburton has the critical mass to generate consistent and predictable profitability and profit growth from these sectors .... Therefore, it will look to a significant restructuring of these businesses with an eye to achieving this goal during 2001 .

• Management also addressed Halliburton's potential exposure to asbestos claims. They stated that in their 3Q00 10-Q filing they will update their prior disclosure. The update will reflect nominal changes to their financial exposure. They believe this is an issue that is not growing for them, in contrast to other companies.

- 127 - M „ N a • •

Dain Rauscher Wessels (10/25/00) :

The big surprise of the conference call was the announced restructuring of the Engineering and Construction Group (ECG) .

Recently, there have been increased concerns about Halliburton's exposure to asbestos liabilities related to construction projects by KBR and Dresser Industries.... While management admits the size of the settlements has increased, they do not believe it will have any adverse material impact . However, given the recent massive settlement associated with asbestos litigation, we believe investor's concerns regarding these liabilities could hamper the stock's performance until the ultimate outcome becomes more clear .

The company announced that it is restructuring the E&C business in an effort to minimize costs in the near-term ... . It is unclear whether the company can successfully reorganize its E&C business, particularly given the difficulty it has experienced since the Dresser acquisition .

Southwest Securities (10/25/00) :

We are downgrading shares of Halliburton Company ... due to the followin g

• On the earnings conference call on October 24, 2000, the company indicated its intention to restructure part of its engineering and construction business (BRES, KBR, and BRS) ....

• . . . This led to a 2001 EPS estimate reduction from $1.57 to $1.27.

Planned Restructuring of Engineering & Construction Business : ... ~alliburton has decided to restructure its various engineering and construction companies . The planned restructuring also considers the divestiture of some segments without recovery visibility . . . .

Halliburton also cited its bearish outlook for E&C group next year. Based on this revised outlook, we have reduced our 2001 revenue and operating margin projections for the E&C group from $5.2 billion and 5.5% to $3.0 billion and 3%. The led to a 2001 EPS estimate reduction from $1 .57 to $1 .27.

Morgan Stanley (10/25/00) :

The real story at Halliburton is not the company's current or near-term earnings profile, but rather, the significant restructuring of its three major Engineering & Construction (E&C) businesses that is now underway . In -128- summary, senior management, as headed by new CEO Dave Lesar, is in the process of completing a comprehensive strategic assessment of the company's entire E&C business segment.

Earnings Outlook Remains Uncertain

The profit contribution from the company's three E&C segments will likely decline meaningfully in 2001 versus 2000, considerably more than we have previously forecasted. This is especially troubling .. ..

In such a scenario, the company would probably earn roughly $1 .50/share, versus our prior outlook of $1 .86/share.

PaineWebber (10/25/00) :

• The diminishing performance of the E&C businesses leads us to sharply curtail our earnings expectations for these businesses in 4Q:00 and 2001 .

• More importantly, HAL management is undertaking an aggressive restructuring of its E&C businesses by recombining Brown & Root Energy Services with Kellogg Brown & Root and Brown & Root Services in an attempt to reduce costs and perhaps improve the long-term competitiveness of this business .

E&C OPERATIONS WEAKENIN G

. . . BRES is struggling to make money with any consistency and it now appears that the segment will only be breakeven in the fourth quarter. Management indicates that BRES will also be no better than breakeven for 2001, which is well below our previous forecast .

While KBR reported higher operating earnings in the quarter than we had forecast, the outlook is nearly as bleak for this division as it is for BRES . . . . KBR is not building backlog and replacing its revenues, therefore the visibility of earnings is diminishing.

CUTTING ESTIMATES FOR 4Q :00 AND 2001

. . . [T]he company's earnings outlook is diminishing . This is particularly disappointing since the earnings outlook at nearly all of its peers is improving at this point in time in the cycle . We are reducing our 4Q:00 EPS estimate to $0.20 from $0.22 and our 2001 estimate drops more sharply to $1.06 from $1.31 .

- 129 - 0 , . . 0 0

162. Halliburton's stock price declined sharply during the first three weeks of 10/0 0

due to the leakage of some of the adverse information more fully revealed on 10/24/00 regardin g

the serious problems within and losses of Halliburton's construction operations, causing a majo r

sell-off in Halliburton stock, which collapsed from a high of $42 .68 on 10/24/00 before th e

revelations, to a low of $34 .18 on 10/25/00 after, in reaction to these revelations of previousl y

undisclosed and concealed information, on 25 .3 million share volume - a huge amount o f

volume and well beyond Halliburton's average trading volume of 2-3 million shares per day -

the largest single day stock volume in Halliburton's history as a public company up until this

point in time ! However, Halliburton's stock continued to trade at artificially inflated levels due

to continuing manipulations and concealments and falsification of Halliburton's financia l

statements, as detailed herein .

163. On 11/9/00, Halliburton filed its 3rdQ 00 10-Q with the SEC, signed by Morri s

and Muchmore . As promised, this 10-Q addressed Halliburton's financial exposure to asbesto s

suits/claims . With regard to Halliburton's financial risk and exposure resulting from asbesto s

litigation and claims , the 3rdQ 00 10-Q reported an accrued liability of just $26 million, an

increase of just $2 million from the prior quarter, and again represented : "[W]e believe that the

pending asbestos claims will be resolved without material effect on our financial position o r

results of operations." The 3rdQ 00 10-Q also represented :

In our opinion, the condensed consolidated financial statements present fairly our financial position as of September 30, 2000, the results of our operations for the three and nine months ended September 30, 2000 and 1999, and our cash flows for the nine months then ended .

This representation was especially significant since other companies with asbestos liability

exposure had recently encountered adverse developments, including higher settlements an d

charges. Since Halliburton's important construction businesses were having problems, it wa s

-130- very important to convince analysts that Halliburton was not going to have major problems wit h

its asbestos liabilities .

164. Analysts were very reassured by Halliburton's 3rdQ 00 10-Q's representation s

regarding Halliburton's financial exposure to asbestos suits/claims . For instance, on 11/13/00 ,

Jefferies & Company issued a report on Halliburton which stated :

HAL Files Third Quarter 10-Q ; Asbestos Liabilities Remain in Check

We maintain our Buy rating on Halliburton Company . . . . Halliburton Company filed the Company's third quarter 2000 10-Q last week . This is the first opportunity that investors will have to review the updated disclosure on the Company's asbestos liabilities .... [W]e still believe that Asbestos Liabilities are not a material issue for the Company . . . .

From Halliburton's third quarter 10-Q and updated disclosure, we can establish the following points on this Company's current Asbestos liabilities :

• Halliburton's total accrued liability for asbestos increased by $7 million in the third quarter to $82 million, and the Company's asbestos liability net of estimated insurance recoveries increased by $2 million in the third quarter to $26 million . Halliburton has accrued for all future anticipated payouts related to asbestos liabilities to date .

165 . On 12/21/00, Halliburton confirmed that the operational difficulties , inefficiencies, excessive costs and cost overruns in its construction operations would require huge write-offs to recognize previously undisclosed losses on major fixed price constructio n contracts. According to an article in the 12/22/00 Houston Chronicle :

Halliburton Co. will split into two business units . ...

Halliburton ... said the restructuring will result in a $120 million after-tax charge in the fourth quarter.

About $25 million of the charge will be related to the cost of eliminating a number of senior management positions plus the cost of leaving several facilities no longer required . The remaining charges will be related primarily to cost overruns on specific matters, the company said.

- 131 - M + M F • •

Problems afflicting the engineering and construction business include a shrinking customer base, difficult relationships with certain customers and a fiercely competitive environment in which some companies are struggling to survive, the company said .

"While claims will be made for a large portion of the additional costs, management does not believe that all the claims will be recovered," the company said in a statement. "In addition, negotiations with customers regarding cost increases on seven other projects have not resulted in resolution of certain claims as originally anticipated. "

166. According to a 12/21/00 report by Salomon Smith Barney :

The charges are surprisingly large . Included in the $120 million after tax charge is $25 million for severance and facilities closure . The remainder is project related, related to cost overruns on two large projects and disputes on seven other projects that have not been settled. This amount is roughly equivalent to the full-year 2000 operating profit from the two segments.

167 . According to a 12/22/00 report by CIBC World Markets:

[W]e were surprised by management's earnings warning on the 3Q conference call. There were concerns that HAL might not have the critical mass to generate consistent and predictable profitability in the E&C business . Labor disturbances in Venezuela and West Africa caused significant costs to be incurred on several large fixed fee E&C contracts. HAL has submitted claims on these costs to clients, but HAL does not believe that all the costs will be recovered. Additionally, relationships with some customers have deteriorated and the cost increase claims on seven other projects have not resolved as expected.

168. The statements made during 11/00 were false and misleading . The statement s

were affirmatively false . They were also misleading in failing to disclose the following fact s

which were then existing, known to or recklessly disregarded by defendants to be false, an d

necessary to be disclosed to make the statements made not misleading, including the following :

(a) Halliburton did not have in place adequate contract performanc e

monitoring, cost control and accounting systems that would enable it to effectively monitor th e

progress being made toward contract completion, the actual costs being incurred or the curren t

state of performance of large contracts and also lacked an adequate system of internal financial

- 132 - p „ „ •

and accounting controls to permit the proper monitoring, control of and accounting for costs o n

construction projects .

(b) Halliburton was continuing to record millions of dollars of Unapproved

Claims as revenue, even though its top executives knew that collection of those Unapprove d

Claims was not probable and they were not capable of accurately estimating what amount coul d

ultimately be collected under any circumstances .

(c) Halliburton had not changed the way it was dealing with or its

procedures for customer change work orders/Unapproved Claims and was not securing advance

agreement to pay for such work as it had claimed, but rather, was continuing its traditiona l

process of accepting and performing change orders as demanded by customers or required b y

the progress of the contract work, without any actual agreement to pay, merely hoping to late r

collect on those Unapproved Claims .

(d) Halliburton knew from the outset that it was likely to suffer a significan t

loss on the Barracuda/Caratinga contract because, in order to obtain this huge fixed-price/lump-

sum contract, Halliburton had been forced to submit a "low-ball" bid with a dangerously thi n

projected profit margin, which was all but certain to be wiped out by the significant chang e

orders/Unapproved Claims that would be unavoidable in a project of this size and whic h

Halliburton knew the customer (Petrobras) would refuse to pay for, as this customer ha d

refused to pay millions in Unapproved Claims on an earlier contract completed in 98, whic h

was part of the reason Halliburton had to take a $60 million charge for uncollectibl e

Unapproved Claims at year-end 98 .

(e) The award of the Barracuda/Caratinga contract was not a result of, nor

did it demonstrate, Halliburton's unique ability to manage and execute large offshore fixed-

price construction contracts, but rather, it reflected Halliburton's willingness to submit a low-

- 133 - N p p rc • .

ball bid with razor-thin margins to get a fixed-price contract with a customer that it knew had a

track record of refusing to pay for the inevitable Unapproved Claims and cost overruns tha t

would inevitably occur on a $2 .5 billion contract.

(f) Halliburton's financial results for the 3rdQ 00 were false, having bee n

manipulated and artificially inflated higher due to the fraudulent and illicit accounting practice s

detailed in 8226-321 of this Complaint.

(g) Halliburton's Code of Business Conduct and Ethics was not, in fact ,

being enforced or followed in the Company's international operations, and in order to obtai n

and retain the Bonny Island, Nigeria LNG contract and extension thereof, the consortium of

which Halliburton was the dominant member had made and was making substantial payoffs an d

bribes, including payments to Nigerian officials to get the contract and its extension and payoffs

to top executives of Halliburton's Kellogg unit to reward them for participating in this risky an d

illegal activity, which payments were being funneled through Swiss bank accounts controlle d

by a London lawyer.

(h) The Dresser acquisition was a major mistake for Halliburton . In fact, it

represented an enormous risk due to Dresser's concealed potential asbestos liabilities and

because, contrary to the representations that the two companies were a good cultural an d

business fit and there were plans in place to achieve a smooth, quick transition and successfu l

integration of the operations of both companies, there were no transition plans in place and the

Dresser executives and managers were known to be conservative, system and process oriented

managers with a very conservative approach to percentage-of-completion/contract accounting ,

while the Halliburton executives and managers were just the opposite - virtually guaranteeing a

cultural clash .

-134- (i) Halliburton, in fact, had not adequately reserved or accounted for it s

accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities fo r

asbestos claims and suits were unquantifiably large, but certainly exceeded the stated reserve o f

$26 million by a huge multiple.

(j) Halliburton's reserve for its accrued asbestos liabilities had not bee n

objectively measured or determined or subjected to any expert review or consultation and thu s

represented nothing more than a self-interested management's claim, which management kne w

was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y

representation that management believed that Halliburton's asbestos claims and suits would be

resolved without any material impact on Halliburton's financial condition or results o f

operations. Management did not believe this representation or statement of opinion when i t

was made and knew that it was highly likely that the ultimate resolution of the asbestos claims

involving Halliburton would, in fact, materially adversely impact Halliburton's balance sheet

and results of operations as, in fact, it did .

(k) Because of the existence of Dresser's very substantial potential asbesto s

liabilities and due to the known difficulties of attempting to blend the management of the two

companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

169 . Once the partial disclosures of 10/00 had occurred and now that Cheney was gon e and Lesar was in charge of the Company and some of the excesses and financial manipulation s of the Cheney era had been disclosed, Lesar, Morris and Muchmore needed to find a way t o boost Halliburton's stock price to demonstrate their own managerial success and also to restor e the value of the stock options they held, which had been sharply reduced by the 10/00 decline i n

- 135 - N~ xx S S

Halliburton's stock upon the partial disclosure of the problems with and losses in Halliburton' s

construction businesses detailed herein.5 So, beginning in 1/01, through a series of positive

statements, they drove the price of Halliburton stock back up, to as high as $49 .20 by 5/21/01 .

170. On 1/30/01, Halliburton issued a release regarding its 4thQ 00 results, increasing

the $120 million loss charge announced on 12/21/00 by $73 million to $193 million with $157

million being attributed to project losses. As a result, Halliburton suffered a 4thQ 00 loss of $21

million. The release also stated:

Dave Lesar, Halliburton's chairman of the board, president and chief executive officer, said, ". . . As previously announced, we have begun taking action to realign our engineering and construction businesses under a single management team. This new team is committed to building a profitable engineering and construction business that can operate in today's global environment ."

The 2000 fourth quarter pre-tax charge related to the engineering and construction businesses was $193 million, with $36 million related to severance and restructuring and $157 million for project losses. . . . As a result of these charges, continuing operations posted a net loss of $21 million ($0 .05 per diluted shares).

171 . On 1/31/01, Salomon Smith Barney issued a report on Halliburton written b y

Kieburtz, based on a 1/30/01 Halliburton conference call and follow-up conversations with Lesa r

or Morris. The report stated :

5 During 98 and 99, Lesar, Morris and Muchmore had been awarded the following options :

Name Year Options Granted Exercise Price ($/share) Lesar 1998 65,000 $28 .1 3 1999 260,100 $39 .50 Morris 1998 25,000 $28.1 3 1999 45,000 $39 .50 Muchmore 1998 6,900 $28.1 3 1999 10,500 $39 .50

- 136 - [Results] include the effect of $193 million of pretax charges ($118 million after tax) taken to restructure the EC segment . The essence of the restructuring has been to recombine the E& C activities of BRES, KBR and BRS under one management team . The charges include $36 million for severance and related expenses, and $157 million of accruals for cost overruns on several lump sum projects . . . . The BRES division (currently part of ES) accounts for $59 million of the charges and the EC segment accounts for the remaining $134 million . . . .

Detailed earnings guidance for 2001 was provided on the conference call . Particularly notable was the confidence that operating profit for the Halliburton Energy Services (HES) division (the largest part of ES) would double from the 2000 level. This is somewhat more robust growth than we had been projecting .

172 . On 1/31/01, Jefferies & Co . issued a report on Halliburton written by Kellstrom , based on the 1/30/01 Halliburton conference call and follow-up conversations with Lesar o r

Morris . The report stated:

In the fourth quarter, HAL began to aggressively restructure its E&C operations which involved combining all of the Engineering and Construction activities into one division under the Kellogg Brown & Root (KBR) operations.... The Company has made a significant amount of progress executing this program and is confident that the initiative will be completed by the end of the first quarter of 2001 . The new management team put into place in this segment has been working hard to achieve HAL's objective for the group to create an enterprise which produces predictable and consistent earnings with sustainable growth going forward.

Revenues for Brown & Root Energy Services (BRES) increased 16% sequentially. The increased sales were driven by timing on select EPC contracts such as the Barracuda Caratinga and to improving activity in the subsea segment.... In the deepwater segment, BRES continued to pick up momentum on the Barracuda and Caratinga projects. HAL expects this contract to contribute significantly to results in 2001 .

Asbestos liability still a minor concern . . . . [M]anagement reiterated that the prospective asbestos liabilities had not changed materially from the third quarter and should have minimal adverse impact on the company going forward.

173. In early 4/01, Halliburton issued its 00 Annual Report to Shareholders . The 00

Annual Report contained a letter from Lesar , the new Halliburton Chairman/CEO. It stated:

-137- Halliburton initiated significant changes during 2000 as we restructured the company to profit from growing opportunities in the worldwide energy industry.

[I]n order to make our E&C organization flatter and simpler, I combined all our engineering and construction operations into one company .

[W]e've proven our ability to compete by winning the engineering, procurement and construction (EPC) contract for the $2.5 billion Barracuda/Caratinga offshore project in Brazil.

174. The 00 Halliburton Annual Report also stated:

By far the biggest and most important deepwater development in the world today is the $2.5 billion Petrobras Baracuda/Caratinga project offshore Brazil . This EPIC contract is believed to be the largest ever awarded to a single contractor . .. .

. . . Halliburton is lending its project management and project finance expertise as the EPIC contractor . . . .

Barracuda/Caratinga .. . serves as a demonstration of Halliburton's end-to- end project management and execution capability in deep water .

175 . Elsewhere, Halliburton's 00 Annual Report stated :

KBR has built, either alone or in joint ventures, the majority of the world's LNG complexes . It is currently working on large-scale projects at Bonny Island, Nigeria. . . . In this area, KBR's breadth of experience and roster of specialists put it in an excellent position to continue capturing a major share of future LNG engineering and construction business .

176. Halliburton's 00 Annual Report contained a section entitled "Responsibility fo r

Financial Reporting," which was signed by Lesar and Morris and stated:

We are responsible for the preparation and integrity of our published financial statements . The financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, include amounts based on judgements and estimates made by our management. We also prepared the other information included in the annual report and are responsible for its accuracy and consistency with the financial statements.

- 138 - We maintain a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our financial statements . The system includes :

• a documented organizational structure and division of responsibility;

• established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout the company; and

• the careful selection, training and development of our people .

Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Board of Directors . Corrective actions are taken to address control deficiencies . . . as they are identified.

We have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in "Internal Control- Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that assessment, we believe that, as of December 31, 2000, our system of internal control over financial reporting met those criteria.

177 . With respect to Halliburton's financial exposure to asbestos claims and suits, the

00 Annual Report disclosed an accrued liability of just $29 million, up only $4 million from $2 5 million at year-end 99 and up just $3 million from 9/30/00, and stated:

[W]e believe that the pending asbestos claims will be resolved without material effect on our financial position or results of operations .

178 . On 4/25/01, Halliburton reported very strong lstQ 01 results :

Halliburton Company First Quarter Earnings Increase 219 Percent - Energy Services Group Operating Income Quadruples

... Halliburton . .. reported today that 2001 first quarter net income was $109 million ($0.25 per diluted share) . Net income from continuing operations was $86 million, an increase of 219 percent over the prior year quarter .

.. . Operating income of $198 million for the quarter represents an increase of 144 percent compared to the 2000 first quarter operating income of $81 million....

- 139 - Dave Lesar, Halliburton's chairman of the board, president and chief executive officer, said "We had an outstanding quarter. The Energy Services Group continues to provide both earnings and revenue growth, and we are encouraged with the progress resulting from the restructuring of our engineering and construction business ...."

2001 First Quarter Segment Results * * *

Operating income for the Energy Services Group segment was $200 million, which improved over 300 percent from the first quarter 2000 . Operating margins were 9 .8 percent compared to 3 .4 percent a year earlier. . . . The segment also benefited from ... the ramp up of the Barracuda-Caratinga deepwater project in Brazil.

Addressing the company's results, Dave Lesar said, " . .. We are also encouraged by the improved profitability of our other product service lines within the Energy Services Group as well as the increased profitability we are beginning to see in some international areas .

179. On 4/25/01, Halliburton held a conference call for analysts, money managers an d

Halliburton stockholders . During this call Lesar stated :

Lesar: . . . We have just come through with what I think is a very good, strong first quarter for Halliburton . .. . I am very pleased to report to you today that our earnings for the first quarter were $0 .25 per share. ... Our first quarter results from the Energy Services Group reflects this very positive environment .... Halliburton Energy Services, we saw a 21% year over year increase in revenues from outside North America and a 29% incremental margin and was [sic] increased international revenues... . A few highlights from the ESG for the quarter include a 43% year over year growth in revenues for the group, operating income, which quadrupled year over year for the Energy Services Group, the highest we have seen since we have the merger with Dresser .

180. On 4/25/01, Salomon Smith Barney issued a report on Halliburton written b y

Kieburtz, based on the 4/25/01 Halliburton conference call and follow-up conversations with

Lesar or Morris. The report stated :

[M]anagement gave significantly stronger guidance for the remainder of the year based on improved visibility on international demand and pricing . The greatest visibility is in Latin America where contracts are in place . . . .

-140- We are raising our estimates to reflect the greater visibility . . . .

181 . On 4/26/01, Morgan Stanley issued a report on Halliburton written by Slorer , based on the 4/25/01 Halliburton conference call and follow-up conversations with Lesar o r

Morris. The report stated :

• We believe Halliburton has "turned the corner.". . .

• Increasing EPS estimates for 2001 and 2002

Following yesterday's earnings conference call, we have increased confidence that Halliburton (HAL) has turned the corner. Based on what we heard on the call, we have increased our 2001 EPS estimate from $1 .23 to $1 .33 and have also boosted our 2002 EPS estimate from $1 .92 to $2.17.

182 . On 4/26/01, CIBC World Markets issued a report on Halliburton, written by

Brooks, based on the 4/25/01 Halliburton conference call and follow-up conversations wit h

Lesar or Morris. The report stated:

• . . . Business trends and outlook comments by management support our thesis of a recovery of international activity becoming the principal driver of HAL's earnings in 2H01 and thereafter... .

• .. . HES' international component had 29% incremental margins on a 21% revenue gain. It is this performance that gives management its confidence about strong 2H01 results.

• HAL guided 2Q01 EPS estimates to $0.30-$0.32 and full-year 2001 estimates to $1 .30+.

• Results in 2Q01 will be driven by the impact of . .. the ramp up in business in Brazil.

183 . On 5/11/01, Halliburton filed its lstQ 01 10-Q, reviewed and approved by Lesa r and signed by Morris and Muchmore . It reported the same financial information contained i n

Halliburton's 4/25/01 release. With respect to Halliburton's financial exposure to asbesto s

suits/claims, the lstQ 01 10-Q reported an accrued liability of $30 million - just a $5 millio n

- 141 - increase over the prior year and a $1 million increase over the year-end 00 level, and again assured

that the open asbestos claims asserted against us will be resolved without a material adverse effect on our financial position or results of operations .

The 1 stQ 01 10-Q also stated :

In our opinion, the condensed consolidated financial statements present fairly our financial position as of March 31, 2001, the results of our operations for the three months ended March 31, 2001 and 2000 and our cash flows for the three months then ended. The results of operations for the three months ended March 31, 2001 and 2000 may not be indicative of results for the full year .

184. On 5/25/01, Robinson-Humphrey issued a report on Halliburton written by Escott , which was based on conversations with Lesar or Morris :

Well-Positioned Late Cycle Play

• With nearly 70% of revenues generated overseas, we believe the company has significant earnings leverage resulting from the recent increase in international activity while we expect continued strong results from North American natural gas related pressure pumping activity .

• We forecast significant improvement on Engineering & Construction projects later this year, as the demand for these later cycle services picks up and benefits of the segment's restructuring begin to pay off .

• Following our March quarter conference call, management significantly raised EPS guidance from the $1 .20 consensus estimate to $1.30 plus.

185 . The statements made between 1/01-5/01 were false and misleading . The statements were affirmatively false . They were also misleading in failing to disclose the following facts which were then existing, known to or recklessly disregarded by defendants to b e false, and necessary to be disclosed to make the statements made not misleading, including the following:

(a) Halliburton did not have in place adequate contract performanc e

monitoring, cost control and accounting systems that would enable it to effectively monitor the -142- progress being made toward contract completion, the actual costs being incurred or the curren t state of performance of large contracts and also lacked an adequate system of internal financial and accounting controls to permit the proper monitoring, control of and accounting for costs o n construction projects.

(b) Halliburton knew from the outset that it was likely to suffer a significan t loss on the Barracuda/Caratinga contract because, in order to obtain this huge fixed-price/lump- sum contract, Halliburton had been forced to submit a "low-ball" bid with a dangerously thi n projected profit margin, which was all but certain to be wiped out by the significant chang e orders/Unapproved Claims that would be unavoidable in a project of this size and whic h

Halliburton knew the customer (Petrobras) would refuse to pay for, as this customer ha d refused to pay millions in Unapproved Claims on an earlier contract completed in 98, whic h was part of the reason Halliburton had to take a $60 million charge for uncollectibl e

Unapproved Claims at year-end 98 .

(c) The award of the Barracuda/Caratinga contract was not a result of, no r did it demonstrate, Halliburton's unique ability to manage and execute large offshore fixed- price construction contracts, but rather, it reflected Halliburton's willingness to submit a low- ball bid with razor-thin margins to get a fixed-price contract with a customer that it knew had a track record of refusing to pay for the inevitable Unapproved Claims and cost overruns tha t would inevitably occur on a $2 .5 billion contract.

(d) Halliburton was still recording millions of dollars of Unapproved Claim s as revenue, even though its top executives knew that collection of those Unapproved Claim s was not probable and they were not capable of accurately estimating what amount coul d ultimately be collected under any circumstances .

- 143 - (e) Halliburton had not changed the way it was dealing with or it s procedures for customer change work orders/Unapproved Claims and was not securing advanc e agreement to pay for such work as it claimed, but rather, was continuing its traditional proces s of accepting and performing change orders as demanded by customers or required by th e progress of the contract work, without any actual agreement to pay, merely hoping to late r collect on those Unapproved Claims .

(f) Halliburton's financial results for the 4thQ 00, 00 and lstQ 01 were false , having been manipulated and artificially inflated higher due to the fraudulent and illici t accounting practices detailed in 19[226-321 of this Complaint.

(g) Halliburton's Code of Business Conduct and Ethics was not, in fact , being enforced or followed in the Company's international operations, and in order to obtai n and retain the Bonny Island, Nigeria LNG contract and extension thereof, the consortium of which Halliburton was the dominant member had made and was making substantial payoffs an d bribes, including payments to Nigerian officials to get the contract and its extension and payoffs to top executives of Halliburton's Kellogg unit to reward them for participating in this risky an d illegal activity, which payments were being funneled through Swiss bank accounts controlle d by a London lawyer .

(h) Halliburton, in fact, had not adequately reserved or accounted for its accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities fo r asbestos claims and suits were unquantifiably large, but certainly exceeded the stated reserve o f

$29-$30 million by a huge multiple .

(i) Halliburton's reserve for its accrued asbestos liabilities had not bee n objectively measured or determined or subjected to any expert review or consultation and thu s represented nothing more than a self-interested management's claim, which management kne w

-144- was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for any

representation that management believed that Halliburton's asbestos claims and suits would be

resolved without any material impact on Halliburton's financial condition or results o f

operations. Management did not believe this representation or statement of opinion when i t

was made and knew that it was highly likely that the ultimate resolution of the asbestos claim s

involving Halliburton would, in fact, materially adversely impact Halliburton's balance sheet

and results of operations as, in fact, it did .

(j) Because of the existence of Dresser's very substantial potential asbestos

liabilities and due to the known difficulties of attempting to blend the management of the two

companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

(k) As a result of the foregoing undisclosed problems and practices, th e

defendants actually knew that their statements regarding Halliburton's future business prospect s

and performance and their forecasts of future financial performance were false when made an d

would not be achieved.

186 . Halliburton's positive 00 Annual Report and its very strong 1 stQ 01 results an d conference call had a very positive impact on Halliburton's stock, which rallied from a low o f

$33 .50 in early 4/01 to a high of $42 .13 on 4/26/01 following the release of Halliburton's 1stQ

01 results and to $49 .25 on 5/21/01 . As Halliburton's stock soared higher from its lows after the partial revelations of 10/00, Halliburton's insiders resumed their insider trading, selling of f

113,823 shares between 4/3/01-5/21/01 at as high as $48 .79 per share, pocketing an additiona l

$4.6 million in illegal insider trading proceeds .

- 145 - M w n M

187. On 6/28/01, Halliburton, for the first time, disclosed that a former Dresse r

subsidiary had asked for asbestos claims management and financial assistance fro m

Halliburton . Halliburton stated:

Halliburton Company today announced that Harbison-Walker Refractories Company ("Harbison"), formerly owned by a Halliburton subsidiary, Dresser Industries, Inc. ("Dresser"), has requested that Dresser provide Harbison with claims management and financial assistance for asbestos claims Harbison assumed when it was spun -off from Dresser in 1992 .

Many of these Harbison claims are asserted in lawsuits that also name Dresser as a defendant and Harbison is, in effect, co-insured with Dresser under a substantial insurance program that covers these claims and other asbestos claims against Dresser . Consequently, Dresser has a substantial interest in their resolution and the most effective use of this insurance .

In discussions with analysts, Halliburton's insiders downplayed the significance of thi s

announcement, insisting that Halliburton's potential asbestos liabilities remained insignifican t

and did not pose a material risk to Halliburton and indicated that in a "worst case scenario" this

could increase Halliburton's accrued liability for asbestos suits/claims to $60 million .

188 . Notwithstanding Halliburton's assurances, analysts immediately realized that thi s

announcement cast doubt on Halliburton's prior assurances of minimal asbestos litigation

exposure, which it represented it had adequately reserved for . For instance :

Salomon Smith Barney (6/29/01 )

• Halliburton estimates that the maximum potential liability, net of insurance, that could arise out of HW is $60 million .

• We do not believe that Halliburton's asbestos exposure, including HW, presents a material risk .. ..

Opinion

Halliburton recently announced that one of its former subsidiaries, Harbison-Walker Refractories Company (HW), has requested that Dresser Industries (a subsidiary of Halliburton since the merger) provide it with claims management and financial assistance for asbestos claims that it assumed liability for when it was spun-off from Dresser in 1992 .... - 146 - N N 11 d

. . . Halliburton estimates that the maximum potential liability, net of insurance, that could arise out of HW is $60 million .

Deutsche Banc (6/29/0 1

Halliburton Increases Asbestos Reserve . Reiterate Buy, but Renewed Concerns Could Impact Valuation

HAL announced yesterday that it is considering accruing an additional $50 to $60 million after-tax to cover some asbestos liabilities of a company that had been spun off from one of its predecessor companies in 1992 . ...

. . . While insignificant by itself, it does remind people of HAL's asbestos liabilities . .. .

Morgan Stanley (6/29/01 )

• HAL MAY SET UP A RESERVE OF $50-60 MM RELATED TO THE HARBISON CLAIMS . We believe that this would be a "rainy day" reserve for a worst case scenario, presumably involving insolvency on the part ofHarbison.

• WE CONTINUE TO BELIEVE ASBESTOS IS A VIRTUAL NON- ISSUE FOR HAL .

Should it agree to render assistance to Harbison, HAL currently believes it would set up an after-tax reserve of $50-60 million . . . . We believe such a reserve could be characterized as a "rainy day fund" to cover a worst case scenario , which, in our opinion, would include insolvency on the part of Harbison.

We continue to believe that asbestos liability is a virtual non-issue for Halliburton .. .. [W]e do not currently believe it constitutes a significant risk to Halliburton's financial position or future results .

189. Following Halliburton's partial disclosure of 6/28/01, Halliburton's stock

declined from $40.52 on 6/27/01 to $36 .11 on 7/2/01, then to $34.30 on 7/6/01, then down to

$31 .50 on 7/18/01 . However, because Halliburton did not make full, complete and truthfu l

disclosure regarding its asbestos litigation and continued to falsify its financial results as detaile d

in 8226-321, Halliburton's stock continued to trade at artificially inflated levels through th e

balance of the Class Period .

- 147 - h a u S

•

190. The statements made in 6/01 were false and misleading . The statements were

affirmatively false. They were also misleading in failing to disclose the following facts whic h

were then existing, known to or recklessly disregarded by defendants to be false, and necessar y

to be disclosed to make the statements made not misleading, including the following :

(a) Halliburton had acquired Dresser without doing due diligence int o

Dresser's business, operations, financial condition and potential liabilities, in part becaus e

Cheney demanded that the acquisition be undertaken and completed in an unreasonabl y

expedited fashion and because he did not want to create a paper trail documenting what he an d

other Halliburton executives knew were liabilities of potentially hundreds of millions of dollars

for existing and anticipated asbestos suits/claims against entities for which Dresser was legall y

responsible, a significant amount of which would likely not be covered by insurance .

(b) Halliburton, in fact, had not adequately reserved or accounted for it s

accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities for

asbestos claims and suits were unquantifiably large, but certainly exceeded the stated reserve o f

$60 million by a huge multiple .

(c) Halliburton's reserve for its accrued asbestos liabilities had not bee n

objectively measured or determined or subjected to any expert review or consultation and thu s

represented nothing more than a self-interested management's claim, which management kne w

was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y

representation that management believed that Halliburton's asbestos claims and suits would b e

resolved without any material impact on Halliburton's financial condition or results o f

operations . Management did not believe this representation or statement of opinion when i t

was made and knew that it was highly likely that the ultimate resolution of the asbestos claims

-148- involving Halliburton would, in fact, materially adversely impact Halliburton's balance sheet

and results of operations as, in fact, it did .

(d) Because of the existence of Dresser's very substantial potential asbesto s

liabilities and due to the known difficulties of attempting to blend the management of the two

companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t

improvements either in the first year after the merger or thereafter .

191 . On 7/25/01, Halliburton issued a release repo rting very strong 2ndQ 01 results :

Halliburton Company Second Quarter Revenues and Earnings Continue to Soar

. .. Halliburton Company reported today that 2001 second quarter net income was $382 million ($0 .89 per diluted share) . Net income from continuing operations was $143 million ($0.33 per diluted share), an increase of 175 percent compared to the prior year quarter.

. .. Operating income of $272 million for the quarter represents an increase of 116 percent compared to the 2000 second quarter operating income of $126 million. The company 's strong growth was driven by continued strong performance in the Energy Services Group .

Dave Lesar, Halliburton's chairman of the board, president and chief executive officer, said, "This was an excellent quarter for Halliburton . The Energy Services Group benefited from high levels of activity .... We are particularly pleased with increasing revenues and earnings internationally . "

192 . On 7/25/01, Halliburton held a conference call for analysts and money managers, conducted by Lesar and Morris :

Lesar: .. . Halliburton has just completed another strong quarter, ... let me give you the headlines first.... [W]e had sequential revenue growth at Halliburton Energy Services of 12% and year-over-year revenue growth of 40%. Halliburton Energy Services' operating income increased 38% sequentially and 172% year-over-year. Our incremental margins were 39% sequentially and 34% year-over-year at Halliburton Energy Services . The continuing strong U .S . performance at HES is really now being complimented even more by the growth in international revenue and operating margins .... [T]his all resulted in Halliburton's Energy Services' operating margins exceeding 15% for the quarter, up 8% from a year ago and 12% in the first quarter of 2001 . So, we continue to see - 149 - constant and steady built in operating margins . In July, we expect to have the first $100 million operating income month in the history of Halliburton Energy Services and, as I'll indicate later, we remain very bullish on the balance of the year. . . . As we've previously reported in a press release on June 28, in a response to a request from Harbison-Walker for assistance to fund settlements of asbestos claims that Harbison had assumed at the time they were spun-off from Dresser Industries, we went in and took a look at the situation .... Based on our analysis of Harbison's claims at this point in time and our concern that they may not be able to perform under their obligations, however, we thought it was prudent to accrue $60 million after-tax against the gain on the discontinued operations which, we believe, in our best judgment, is the potential exposure we have for this asbestos litigation .. .. I want to say that I do believe that the consensus estimates for the third quarter for Halliburton are too low and I will be giving some upward guidance on the third quarter at the end of this call. . . .

Morris: . . . Looking first at the total company results - our revenues improved 16% year-over-year and 6% sequentially .... Total operating income increased $146 million or 116% year-over-year and increased $74 million, or 37% sequentially. Our diluted earnings per share were 89 cents. . . . Driving this improvement is the ramping up of the Barracuda/Caratinga Project in Brazil . . . .

Lesar: . . . I think our business ... offshore Brazil . . . in the deep water area is all in pretty good shape. . . . Latin America, Brazil . . . are very strong for us .

193 . On 7/26/01, CIBC World Markets issued a report on Halliburton written by

Brooks, which was based on the 7/25/01 conference call and conversations with Lesar or Morris :

• Upside EPS surprise followed by upside 3Q01 EPS guidance! Halliburton Company reported earnings from continuing operations of $0.33 vs . last year's $0 .17. This was above the prior company guidance of $0.30-$0.32 and the consensus estimate . HAL guided 3Q01 EPS estimates to $0 .42-$0.43, well above the consensus of $0 .36 and equal to our 4Q01 EPS estimate. We are raising our 2001 EPS estimate to $1 .41 from $1 .33, dropping $0.05 in discontinued earnings in our prior estimate . Our above-consensus 2002 EPS estimate is unchanged at $2 .00. We reiterate our Buy rating . . . .

• Strong results both here and abroad boost management confidence during its conference call. Management discussed the revenue growth and incremental performance of its various business lines, both domestically and internationally . Bottom line: everything is beginning to click.. ..

-150- ~w u ! •

• . . . Management was downright bullish about the recovery in that division, which has been an area of focus, disappointment and restructuring for the past two years. It appears the long winter of management's discontent may be ending .

194 . On 7/26/01, UBS Warburg issued a report on Halliburton written by Stone, which

was based on the 7/25/01 conference call and conversations with Lesar or Morris:

Halliburton: Reports Strong Quarter ; Guides Higher for Third Quarter

• Halliburton reported EPS of $0 .33 from continuing operations for 1Q:01, which was above our estimate and the consensus of $0 .30 and well above the first quarter earnings of $0 .20 and the year-ago earnings of $0 .12.

• Management showed its confidence by guiding Street estimates higher for the third quarter of 2001, to a range of $0.42-0.43 per share. . . .

• Based on management's guidance we are raising our ea rnings estimates for Halliburton to $0 .42 in 3Q:01 and to $1 .40 from $1 .30 in 2001 .

• The company touched on its asbestos situation and once again indicated that it believed that it has the situation under control and that the financial impact should not be material to the financial health of the company . These comments also came out in a private meeting that we had with HAL's CEO several weeks ago . In that meeting, Mr. Lesar indicated that HAL maintains a significant amount of insurance that should that should cover the majority of any future claims or increases in settlement rates .

195 . On 8/9/01, Halliburton filed its 2ndQ 01 10-Q with the SEC, which was reviewe d

and approved by Lesar and signed by Morris and Muchmore . The 10-Q repeated Halliburton' s

earlier reported 2ndQ 01 financial results and also stated with respect to Halliburton's financial

exposure to asbestos litigation claims and suits that Halliburton had an accrued liability of $124

million and that

the known open asbestos claims asserted against us will be resolved without a material adverse effect on our financial position or results of operations .

-151- 11 N r

The 10-Q also stated :

In our opinion, the condensed consolidated financial statements present fairly our financial position as of June 30, 2001, the results of our operations for the three and six months ended June 30, 2001 and 2000 and our cash flows for the six months then ended.

196. During 7/01 to 8/01, as Halliburton's stock price continued to erode due t o

additional concerns in the investment community about Halliburton's potential asbestos litigatio n

liability, Lesar and Foshee hired a public relations campaign to reassure investors and stem the

decline in the price of the stock .

197. On 8/22/01, Salomon Smith Barney issued a comprehensive report on Halliburto n

written by Kieburtz after he had extensive discussions with Lesar, Foshee or Muchmore . The

report stated:

Asbestos liability concerns appear overblown .

Based on our analysis of the available information concerning Halliburton's asbestos exposure, concerns appear to be overblown .

Energy Services Grou p

Halliburton Energy Services

[T]he large integrated projects (Barracuda/Caratinga and Terra Nova) are still part of ESG but are managed by KBR project managers .

The value of offering an integrated capability is illustrated by the recent Barracuda/Caratinga field development contract awarded to Halliburton by Petrobras for offshore construction work . At more than $2 billion, it is the largest contract Halliburton has ever won . Halliburton believes this will be the future model for marginalfield development, with one or two such contracts awarded per year.

198. The intentional nature of the asbestos-related misrepresentations is highlighted by

the events of 9/01-12/01 . On 9/4/01, Platt's carried a story headlined and stating :

-152- Halliburton sees asbestos claims as "manageable" - CEO

. .. Asbestos claims against Halliburton are insured with a "substantial amount of coverage ," David Lesar, chairman, president and CEO of the company, told a Lehman Brothers investment conference in New York Tuesday . Lesar said Halliburton "takes our exposure seriously," but that it sees asbestos claims against the company as a "manageable problem."

. . . Doug Foshee, the newly appointed CFO at Halliburton , told the conference that the company 's insurance coverage should protect Halliburton against 90% of the claims against it.

199. On 9/12/01, defendants learned that a jury had returned a $130 million verdic t against the Company and co-defendants in favor of five asbestos plaintiffs - stunning confirmation that Halliburton's prior reassurances and representations regarding its asbesto s liability exposure were completely false . However, Halliburton did not publicly disclose thi s verdict or correct those false reassurances regarding Halliburton's asbestos liability exposure .

200. For instance, on 10/4/01, Foshee spoke at a Deutsche Banc Alex . Brown seminar for analysts and specifically discussed the asbestos situation, but did not disclose the recent hug e verdict. On 10/5/01, Deutsche Banc Alex . Brown issued a report on Halliburton written by

Sanger, reporting on Foshee's statements and rating the stock a "Strong Buy" :

HAL's new CFO, Doug Foshee, spoke on Thursday at the Deutsche Banc Alex. Brown Fall Energy Symposium and, while highlighting a number of issues, the presentation focused on better delineating and clarifying HAL's asbestos liabilities. We believe that the market is significantly over-discounting this risk . . . . We therefore continue to rate HAL a Buy .

201 . On 10/23/01, Halliburton reported "record" 3rdQ 01 results via a releas e headlined and stating :

Halliburton Posts Record Profits

. .. Halliburton Company reported today 2001 third quarter net income of $179 million ($0 .42 per diluted share) .... [T]he highest earnings since the merger with Dresser was completed in 1998.

. .. Operating income of $342 million for the quarter represents an increase of 38 percent compared to the 2000 third quarter operating income of $24 8

- 153 - million. . . . Both the Energy Services Group and Engineering and Construction Group contributed to these improved results.

"Both our business segments delivered outstanding results," commented Dave Lesar, Halliburton's chairman of the board, president and chief executive officers. "Our performance in the quarter highlights the earnings capacity of this dynamic organization.... [T/he longer-term fundamentals are strong. Our global presence and market leading products and services position us extremely well to perform under all market conditions ."

202. On 10/23/01, Halliburton held a conference call for analysts and mone y managers, conducted by Lesar and Foshee, Halliburton's new CFO :

Lesar: . . . I am very pleased to report today that we met our commitment to you and earned 42 cents per share, which is a record for the Halliburton/Dresser combined organization . Highlights for the quarter include, for the first time, ever, Halliburton Energy Services ' operating income averaged over $100 million per month in the third quarter. Our incremental margins were 74% sequentially and 40% year-over-year for Halliburton Energy Services. In addition, HES's operating margins reached 17% for the quarter, up 2 percentage points from 15% on a sequential basis and up from 9% in the year ago third quarter ....

Foshee : . . . I'm pleased to have such a great quarter to report as my first with Halliburton. . . . With regard to asbestos, we've said consistently that we take this issue very seriously but that we believe we're adequately reserved and adequately insured.. . . Halliburton Energy Services' revenues .. . increased $129 million, year-over-year, in large part due to the Barracuda/Caratinga project in Brazil, which was in start-up mode during the third quarter of last year . . . . Operating income for the segment increased 41 % year-over-year to $321 million in 2001 .

Question: . . . [Clan you talk about what kind of experience you're having as you start to go through the Harbison-Walker situation? Noted that claims were down, can you give us a sense of, you know, where the settlements stand right now and what's happening with some of the other settlements that were pending ?

Foshee: . . . There really is not any, anything new to report on Harbison-Walker other than the fact that that new claims, during the quarter naming Dresser as a defendant, were only 1,300 . Beyond that, we just don't have enough information yet to start to put detailed numbers together ... on things like the total settlement cost.

Lesar: But, I think it's fair to say . .. that there have been no adverse developments at all with respect to the Harbison -Walker situation .... -154- •

[O]ur settlement rate continues to be at historical levels . . . . And ... we keep getting paid by our insurers for those that we do settle. And I think those are three early positive data points that people need to start putting into their thinking . .. .

Thus, despite pointed questions as to Halliburton's asbestos liability exposure and any recen t

developments relating thereto, Foshee and Lesar concealed the recent huge verdict and actually

said the asbestos situation was "positive."

203. On 10/24/01, Morgan Stanley issued a report on Halliburton written by Slorer , which stated :

Third Quarter 2001 Earnings Summar y

• Delivering on top of $0.39-$0.41 guidanc e

HAL exceeded its own guidance from the 2Q01 conference call and matched consensus of $0.42.

Claims slowing down on the asbestos front

. . . We regard Halliburton 's asbestos exposure as more of a nuisance factor than a real risk to shareholder value .

204. On 10/24/01, Jefferies & Co . issued a report on Halliburton written by Sen, whic h

stated:

3Q01 Earnings Revie w

Halliburton reported 3Q01 earnings of $0.42 per share, in line with expectations....

Update On Asbestos

... [NJet asbestos liability reserves now stand at $125 million . Management provided further assurances that current reserves are adequate to cover projected asbestos liabilities .

205. On 10/24/01, CIBC World Markets issued a report on Halliburton written b y

Brooks, which stated :

- 155 - ~~ p • !

• Asbestos claims fear may be overblown . In the conference call, HAL management did an excellent job of laying out the latest information about the company's asbestos claims exposure .. .. [T]he bottom line seems to be that HAL has minimal exposure . . . .

However, a few analysts did find out about the large Texas verdict . But, when they aske d

Halliburton about it, Halliburton downplayed its significance . On 11/9/01, Salomon Smith

Barney issued a report on Halliburton written by Kieburtz, which stated :

International Markets Yield Earnings Visibility

• Halliburton reported third quarter EPS of $0 .42, versus $0.18 last year, matching our estimate and establishing a new quarterly record .

• The E&C backlog is rising, driven by the liquefied natural gas market ; this yields visibility of multiyear growth . The Energy Services outlook is positive . . . .

Asbestos Development

In a change of procedure, Halliburton disclosed that a Mississippi jury had awarded $150 million in compensatory damages to six plaintiffs in an asbestos suit. . ..

The release of this information by the company warrants a review and update of the information pertaining to the asbestos at Halliburton that we published in our August 22 report on the company . . . . There is a risk that the company's new effort to be more proactive with disclosure on the subject will be confused with a deteriorating situation .

Concerns on the second point were raised in August by the news, not disclosed by Halliburton, that an Orange County, Texas, jury had awarded $65 million in compensatory and punitive damages to five plaintiffs . Legal advisors generally prefer to say less than more, and large jury awards had been made against the company in the past that were subsequently set aside or substantially reduced. The decision to proactively release the information in the Mississippi case is partly case-specific and partly in reaction to the defensive posture forced on the company by disclosing the Orange County situation .

At this juncture, we believe the evolving debate on disclosure policy, in part stimulated by new members of the management and communications tea m

- 156 - (rather than a fundamentally deteriorating situation on asbestos) is driving the changes in disclosure.

Our conclusion therefore, remains that the market has fully discounted a very conservative (i.e., large) estimation of asbestos liability in the stock price .

206. On 11/8/01, Halliburton filed its 3rdQ 01 10-Q, which was reviewed an d approved by Lesar and signed by Foshee and Muchmore . With respect to Halliburton's financia l exposure to asbestos claims/suits, the 10-Q reported an accrued liability of $125 million an d

stated:

[W]e believe that open asbestos claims will be resolved without a material adverse effect on our financial position or the results of operations .

Elsewhere, the 10-Q stated:

Consolidated operating income of $342 million was 38% higher in the third quarter of 2001 compared to the third quarter of 2000 . In the third quarter of 2000, we incurred some nonrecurring items, which included the $88 million pretax gain on the sale of marine vessels, and $9 million of expense related to the previous chairman's early retirement . Excluding these items, operating income more than doubled .

Energy Services Group's operating income for the third quarter of 2001 increased 41% over the third quarter of 2000 . Excluding the gain on the sale of marine vessels of $88 million in the third quarter of 2000, operating income increased 129% over the third quarter of 2000 . Operating income from our oilfield services product service line increased by 135% due to higher activity levels during the quarter resulting in greater utilization of equipment and personnel and improved pricing in the United States . Operating income increased across all product service lines . . . .

The 10-Q also stated:

In our opinion, the condensed consolidated financial statements present fairly our financial position as of September 30, 2001, the results of our operations for the three and nine months ended September 30, 2001 and 2000 and our cash flows for the nine months then ended .

207. The statements made from 7/25/01-11/8/01 were false and misleading . The

statements were affirmatively false . They were also misleading in failing to disclose the

following facts which were then existing, known to or recklessly disregarded by defendants to b e - 157 - Ali ° ,i . S

false, and necessary to be disclosed to make the statements made not misleading, including the

following:

(a) Halliburton did not have in place adequate contract performanc e

monitoring, cost control and accounting systems that would enable it to effectively monitor th e

progress being made toward contract completion, the actual costs being incurred or the curren t

state of performance of large contracts and also lacked an adequate system of internal financial

and accounting controls to permit the proper monitoring, control of and accounting for costs o n

construction projects.

(b) Halliburton was continuing to record millions of dollars of Unapproved

Claims as revenue, even though its top executives knew that collection of those Unapprove d

Claims was not probable and they were not capable of accurately estimating what amount coul d

ultimately be collected under any circumstances .

(c) Halliburton had not changed the way it was dealing with or its

procedures for customer change work orders/Unapproved Claims and was not securing advanc e

agreement to pay for such work as it had claimed, but rather, was continuing its traditiona l

process of accepting and performing change orders as demanded by customers or required by

the progress of the contract work, without any actual agreement to pay, merely hoping to late r

collect on those Unapproved Claims .

(d) Hallibu rton knew from the outset that it was likely to suffer a significant

loss on the Barracuda/Caratinga contract because, in order to obtain this huge fixed-price/lump-

sum contract, Halliburton had been forced to submit a "low-ball" bid with a dangerously thi n

projected profit margin, which was all but certain to be wiped out by the significant chang e

orders/Unapproved Claims that would be unavoidable in a project of this size and whic h

Halliburton knew the customer (Petrobras) would refuse to pay for, as this customer ha d

- 158 - refused to pay millions in Unapproved Claims on an earlier contract completed in 98, which was part of the reason Halliburton had to take a $60 million charge for uncollectibl e

Unapproved Claims at year-end 98 .

(e) The award of the Barracuda/Caratinga contract was not a result of, nor did it demonstrate, Halliburton's unique ability to manage and execute large offshore fixed- price construction contracts, but rather, it reflected Halliburton's willingness to submit a low- ball bid with razor-thin margins to get a fixed-price contract with a customer that it knew had a track record of refusing to pay for the inevitable Unapproved Claims and cost overruns tha t would inevitably occur on a $2 .5 billion contract .

(f) Halliburton' s financial results for the 2ndQ and 3rdQ 01 were false, having been manipulated and artificially inflated higher due to the fraudulent and illici t

accounting practices detailed in 8226-321 of this Complaint .

(g) The construction operations of Dresser had not been successfull y integrated into the construction operations of Halliburton. The managers and executives of th e two companies had very divergent approaches to business and accounting and constantly fought

with one another, resulting in distracting turf battles, operating inefficiencies and duplicativ e

layers of management - all resulting in an inability to integrate the two operations and thus i n

excessive costs .

(h) Halliburton had acquired Dresser without doing any due diligence int o

Dresser's business, operations, financial condition and potential liabilities, in part because

Cheney demanded that the acquisition be undertaken and completed in an unreasonabl y

expedited fashion and because he did not want to create a paper trail documenting what he an d

other Halliburton executives knew were liabilities of potentially hundreds of millions of dollars

-159- for existing and anticipated asbestos suits/claims against entities for which Dresser was legall y responsible, a significant amount of which would likely not be covered by insurance.

(i) Halliburton, in fact, had not adequately reserved or accounted for it s accrued asbestos liabilities as represented - in truth, Halliburton's potential liabilities fo r asbestos claims and suits were unquantifiably large, but certainly exceeded the stated reserve o f

$124-$125 million by a huge multiple .

(j) Halliburton's reserve for its accrued asbestos liabilities had not bee n objectively measured or determined or subjected to any expert review or consultation and thu s represented nothing more than a self-interested management's claim, which management kne w was grossly inadequate. Given the foregoing, there was absolutely no basis in fact for an y representation that management believed that Halliburton's asbestos claims and suits would be resolved without any material impact on Halliburton's financial condition or results o f operations. Management did not believe this representation or statement of opinion when i t was made and knew that it was highly likely that the ultimate resolution of the asbestos claim s involving Halliburton would, in fact, materially adversely impact Halliburton's balance shee t and results of operations as, in fact, it did .

(k) Because of the existence of Dresser's very substantial potential asbesto s liabilities and due to the known difficulties of attempting to blend the management of the two companies and integrate their construction operations, it was not true that the acquisition o f

Dresser would strengthen Halliburton's balance sheet or lead to bottom-line profi t improvements either in the first year after the merger or thereafter.

(1) As a result of the foregoing undisclosed problems and practices, the defendants actually knew that their statements regarding Halliburton's future business prospect s

-160- 0 __ 11 . ,

0

and performance and their forecasts of future financial performance were false when made and

would not be achieved.

208. During the first few days of 12/01, Halliburton reported in SEC filings certai n

recent large asbestos verdicts against it, but made no other public comment . Then, on 12/7/01 ,

Halliburton issued a release detailing all the recent asbestos verdicts against it, which made i t

clear that Halliburton's existing $125 million accrued liability for its asbestos exposure wa s

grossly inadequate and that the Company's prior reassurances regarding the financial impact o f

its exposure to asbestos liabilities were false . Investors instantly realized that the Company had

been affirmatively misleading them by its continued assurances regarding the Company' s

asbestos exposure . Thus, Halliburton shares collapsed from $21 to as low as $10.94 on

12/7/01 - a 50% drop - on astonishingly huge volume of 76.8 million shares, its largest one-

day stock volume ever ! TheStreet.com reported: "Halliburton Buried as Investors Stop

Believing" : "Halliburton's shares dove to nine-year lows Friday as investors lost faith in th e

company's claims . . . . "

209 . Moody's Investor Service immediately downgraded Halliburton's debt ratin g

outlook to "negative" due to the negative financial implications of these revelations . A few days

later, Moody's formally downgraded Halliburton's debt rating . Shortly thereafter, Standard &

Poor's cut its rating of Halliburton's debt and commercial paper for the same reason . Analysts

also downgraded the stock. For instance, on 12/7/01, Salomon Smith Barney issued a report on

Halliburton:

HAL: Downgrading on Mounting Asbestos Liabilities

Summary

• We are downgrading Halliburton . . . due to mounting asbestos liabilities . . . .

- 161 - 210. On 12/7/01, Jefferies & Co. issued a report on Halliburton written by Sen, which

stated:

Halliburton : Update On Asbestos Litigation ; Stay Cautious

• This morning Halliburton indicated that a Baltimore jury has awarded $30 million in damages against its Dresser subsidiary. This follows two recent significant adverse verdicts against the company .

• These are surprising developments following management's rather positive asbestos update during its 3Q01 conference call on October 23 ...

• We now believe that HAL's asbestos-related net liabilities could be significantly higher than currently estimated (estimated at $125 million by the company).

Clearly, these are surprising developments following management's rather positive asbestos update during its 3Q01 conference call on October 23.. . . [W]e now believe that the net asbestos liability reserves of $125 at the end of 3Q01 (gross liability $704) probably needs to be increased .

211 . On 12/10/01, Deutsche Banc Alex . Brown issued a report on Halliburton written by Sanger, which stated :

We lowered HAL from a Strong Buy to a Market Performance on Friday because of the tremendous uncertainty surrounding the asbestos liability situation .

212. As investors digested the implications of the revelations of Halliburton ' s greatly

increased financial liabilities for asbestos suits/claims, Halliburton's stock fell to as low as $8 .60

on 1/4/02, its lowest price in more than 15 years! According to Cedric Burgher, Halliburton' s

director of investor relations:

"Unfortunately, the stock is not trading on the basis of its oil operations . .. the specter of asbestos lawsuits is hanging over it . We're really just trying to understand how these issues will play out," he said .

-162- r f - i ® •

Post-Class Period Events

213 . Events subsequent to the revelations of 12/7/01, which end the Class Period, have

confirmed the existence and serious nature of the undisclosed adverse information during th e

Class Period, as well as the Halliburton executives' manipulation of Halliburton's financia l

reports and statements to cover up those problems .

214 . In 3/02, Halliburton forced out four executives, including the head of its ES uni t

and Morris, who had been Halliburton's CFO during most of the Class Period before bein g

"kicked upstairs" to EVP during 01 . Then, in 5/02 , The New York Times published an expose on

Halliburton's accounting manipulations exposing how it turned losses from cost overruns an d

unpaid change order claims into profits after secretly changing the way it accounted fo r

Unapproved Claims . This resulted in the SEC being forced to undertake an investigation ,

notwithstanding that Cheney was, by then, the Vice President of the United States . When this

article appeared, Foshee (Halliburton's CFO) said, "he was certain that the accounting chang e

was approved by ... David Lesar." Later, Lesar said, "Cheney was aware Halliburton was

counting projected cost- overrun payments as revenue. `The Vice President was aware of who

owed us money and he helped us collect it."' According to Paul Brown, Chairman of the

Accounting Department at the Stern School of Business at New York University, the change wa s

"clearly a way of pumping up revenues and receivables ." "If it looks like they were just

fabricating the numbers, that verges on fraud ," said J. Edward Ketz, Professor of Accounting at

Penn State University. Nevertheless, Halliburton vehemently denied any impropriety and

insisted the amounts involved were immaterial and that its disclosure and accounting practice s

were correct.

215. After an extensive investigation , in 8/04, the SEC filed suit against Halliburton,

alleging extensive accounting violations in connection with Halliburton's constructio n

- 163 - businesses and instituted Cease and Desist proceedings and issued a Cease and Desist Order , which included findings that Halliburton's two top financial officers had, in fact, violated th e reporting and disclosure requirements of the federal securities laws by failing to disclose

Halliburton had changed the manner in which it was accounting for cost overruns and chang e order claims, thus improperly inflating its ES unit's operating income (and Halliburton's net income) for several quarters during 98 and 99, resulting in Halliburton being fined $7 .5 million, in part because Halliburton refused to cooperate with the SEC during its investigation .

216 . As to Halliburton's heralded shift into "fixed-price/lump-sum" projects, whic h supposedly gave it a competitive advantage and would increase its profits and Halliburton's vas t experience, expertise and management and execution capabilities in offshore EPC contracts lik e

Barracuda/Caratinga, just a few months after the end of the Class Period, Halliburton abandoned acceptance of fixed-price contracts and exited the fired -price offshore EPC business .

According to Lesar in 7/02:

[T]he decision to exit the offshore EPC business . . . was done after careful consideration that we would no longer pursue lump sum engineering procurement and commissioning contracts, EPC contracts, for the offshore oil and gas business....

Our bottom line is we're no longer going to accept that lump sum risk . . . . [T]he potential rewards [are] unacceptable . . . .

217 . In Halliburton's 02 Annual Report, Halliburton stated:

There have been fundamental business changes, with the Engineering & Construction Group .. . deciding it will no longer pursue lump-sum engineering, procurement, installation and commissioning (EPIC) projects for the offshore oil and gas industry until and unless the current business model improves to allow for reasonable profits at reasonable risks.

218. During 01, the Barracuda/Caratinga $2.5 billion lump-sum/fixed-price contract, which Halliburton trumpeted as an example of its expertise and ability to successfully manag e

and execute giant oil service/construction contracts and which Halliburton consistentl y

-164- represented was proceeding successfully and driving the ES Group's and Halliburton's better-

than-expected financial performance during 01, was, in fact, a disaster - the largest contrac t

catastrophe in Halliburton's history - increasingly behind schedule and awash in cost overrun s that would result in over $760 million in losses - the largest loss Halliburton ever suffered on a

single contract.

219. In 7/02, just a few months after the Class Period ended, Hallibu rton first

announced an initial $119 million loss on Barracuda/Caratinga due to unpaid Unapproved

Claims. In 2/03, Halliburton admitted that the "project continues to experience significant cos t increases and time delays" and that Halliburton had incurred another $81 million in Unapprove d

Claims. In 4/03, Halliburton admitted to further "scheduling delays," "higher cost trends" an d

"actual and committed costs exceeding estimated costs," resulting in an additional $55 million loss on the project. 6/03 brought an additional $104 million loss on Barracuda/Caratinga . By this point in time, with the project only 75% complete, Halliburton had suffered a $345 million loss on Barracuda/Caratinga, including an increased 2ndQ 03 loss of $173 million . Early 04 brought an additional $62 million loss . 7/04 brought another $200 million loss on the project , which Halliburton, with remarkable understatement, described as "disappointing," indicating it had "enhanced our project management and increased our effort to complete this difficult project."

220. Thus, this project, which Halliburton represented during the Class Period wa s

proceeding successfully and contributing to increased ES operating profits and thus Halliburton' s

net income/EPS, has, to date, lost $762 million (or $1 .08 per share) - and there are likely to b e

further losses before the project is completed . While Halliburton told investors during the Clas s

Period that fixed-price/lump sum contracts gave it a competitive advantage and would increas e

Halliburton's profits, in fact, Halliburton lacked the construction project management an d

- 165 - oversight capabilities and systems and internal cost and accounting controls to successfull y undertake and perform large fixed-price contracts like Barracuda/Caratinga . And, in fact,

Halliburton knew that it would never collect any cost overruns/change order claims on

Barracuda/Caratinga because in a prior fixed-price contract with Petrobras, its customer on the

Barracuda/Caratinga contract, Petrobras had absolutely refused to pay millions of dollars o f

Unapproved Claims, resulting in Halliburton taking a $60 million charge at year-end 98 . This

Barracuda/Caratinga fiasco contributed in no small part to Halliburton's admission in 7/02 that it was abandoning fixed-price/lump sum EPC contracts .

221 . During most of the Class Period, Halliburton maintained only a minimal accrue d liability for asbestos claims of $8-$30 million and consistently represented that these asbesto s provisions were adequate and that "we believe that the pending asbestos claims will be resolve d without a material effect on our financial position or the results of operations." Even when

Halliburton revealed in 6/01 that a former subsidiary of Dresser had requested that Halliburton provide it with claims management and financial assistance regarding the asbestos claims/suits being asserted against it, Halliburton told analysts that this development exposed Halliburton to

"worst case" asbestos liability costs of $60 million . Even when it increased its asbestos accrue d liabilities in the Fall of 01 to $124-$125 million, it continued to assure investors that th e

"asbestos claims will be resolved without a material adverse effect on our financial position o r results of operations" and that, due to Halliburton' s "substantial amount of coverage," the asbestos claims were a "manageable problem." But, in early 12/01, Halliburton, in two SE C filings and a 12/7/01 release, disclosed that it had suffered huge verdicts in asbestos cases , demonstrating to investors that Halliburton's prior representations regarding its exposure t o asbestos litigations and claims, including its representation that known claims against it would b e resolved without any material adverse impact on its financial condition or results fro m

- 166 - operations, were false and that its previously reported accrued liabilities for those suits/claim s had been grossly inadequate. Halliburton' s stock instantly collapsed from a high of $22.04 on

12/6/01 to as low as $10 .94 on 12/7/01, on gigantic volume of 76,890,000 shares - a 50% drop - the largest one-day percentage price decline on the largest one-day volume in Halliburton' s history as a public company. By 1/4/02, Halliburton's stock had fallen to as low as $8 .60 per share.

222. In 7/02, just months after the stunning revelations of early 12/01, Halliburto n admitted that its asbestos liabilities were at least $2.2 billion, less some amount of hoped-for but uncertain insurance recoveries, resulting in Halliburton taking hundreds of millions of dollars o f charge-offs/losses. A few months later, Halliburton revealed it had agreed to pay $4 billion to settle the asbestos suits/claims against it, resulting in another $781 million charge and causing an additional 4thQ 02 loss of $129 million ($0.33 per share), and warned that further multi- hundred million dollar losses were likely . In fact, Halliburton's recoveries from insurance companies have been hundreds of millions of dollars less than hoped for. As a result,

Halliburton recorded another huge $615 million charge ($1 .40 per share) in the 2ndQ 04, which, combined with continuing huge losses of $200 million ($ .46 per share) on the

Barracuda/Caratinga project, resulted in Halliburton suffering a large $663 million ($1 .51 per

share) 2ndQ 04 loss . Most recently, in Halliburton's 3rdQ 04, it has taken yet another $23 0 million charge for its asbestos liabilities . It is quite clear that Halliburton's acquisition o f

Dresser did not strengthen Halliburton's balance sheet and did not boost Halliburton's botto m

line by $250-$500 million per year .

223 . During the Class Period, Halliburton frequently mentioned the Bonny Island ,

Nigeria LNG contract that it, as part of the TSKJ consortium, was performing, stressing that thi s

contract showed Halliburton's ability to successfully compete for large overseas LN G

- 167 - construction contracts - a very important market . The Bonny Island, Nigeria LNG contract was originally signed by a Dresser subsidiary (Kellogg) in 95 . However, after the Dresser acquisition, in 5/99, the TSKJ consortium (and Halliburton) received a new huge follow-o n contract to expand the facility. Halliburton's agent in getting this huge contract was Jeffre y

Tessler, a London-based sole practitioner attorney. The day-to-day oversight and management of this contract was under Albert "Jack" Stanley, the CEO of Halliburton's KBR subsidiary, an d

William Chaudan, a high-ranking KBR executive . Chaudan also left the Company and became a consultant.

224 . In 5/03, Halliburton admitted to improper payments of $2 .4 million to a Nigerian official in connection with the LNG contract, which payments it admitted "clearly violated our

Code of Business Conduct and internal control procedures." It later was revealed that

Halliburton's consortium had made $180 million in illegal payments to obtain and retain th e

Nigerian LNG contracts. Some $5 million of this money ended up in a Swiss bank account belonging to Stanley, while $1 million ended up in Chaudan's Swiss bank account - payoffs t o reward them for their participation in these illegal practices - payments Halliburton had admitte d violated its Code of Business Conduct. However, most of the money went into and throug h

Swiss bank accounts maintained in the name of Tri-Star Investments - an entity owned b y

Jeffrey Tessler, who practices out of a storefront office, has no associates or partners, but is well- known for his connection to top government officials in Nigeria and has worked with Halliburto n for over 10 years. Tessler has been to Nigeria only once in 20 years, yet was paid $180 millio n as a fee by TSKJ consortium for "consulting services," although they have never bee n documented. Lesar has admitted that "criticism on an issue such as this one is expected" and that these payments and the conduct of Stanley and Chaudan violated Halliburton 's "code of business conduct." Halliburton has also admitted that there are internal corporate documents

- 168 - discussing paying bribes to public officials in Nigeria in connection with the LNG contract . So far, French investigators have traced $30 million of these illicit funds to a "close associate" o f the former President (dictator) of Nigeria, General Sani Abacha - a country noted for its corrup t business practices, coming in second in Transparency International's 2003 survey of mos t corrupt countries.

225 . As a result of this fiasco, a Nigerian parliamentary repo rt has recommended tha t

Halliburton be suspended from receiving any more Nigerian contracts . Halliburton is also now subject to a formal SEC investigation into these matters and a DOJ inquiry as well . French criminal authorities are also investigating the matter . Halliburton has stated that there can be n o assurance that U.S. officials will not conclude these payments violated the U .S. Foreign Corrupt

Practices Act.

HALLIBURTON'S ACCOUNTING MANIPULATIONS AND FALSIFICATIONS

Accounting Principles, Rules, Policies and Practices

226. During the Class Period, Halliburton was suffering from serious business an d operational problems, including performance delays, cost overruns and increasing amounts o f unpaid Unapproved Claims on several large fixed-price construction contracts, including its

Barracuda/Caratinga contract in Brazil, as well as asbestos liabilities far beyond levels it ha d reserved for. In order to cover up and conceal these problems, Halliburton's top officer s engaged in a series of accounting manipulations and falsifications and other misrepresentations , which are detailed below .

227 . GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. Regulation S-X (17 C .F.R. §210.4-01(a)(1)) states that financial statements file d

- 169 - « M b •

with the SEC which are not prepared in compliance with GAAP are presumed to be misleadin g

and inaccurate, despite footnote or other disclosure .

228. Halliburton accounted for its long-term construction contracts under th e

percentage-of-completion method which requires that project losses be recognized when

estimates or other information available indicate a contract will result in a loss . Halliburton' s

failure to do so was contrary to the percentage-of-completion income-recognition method as

prescribed by GAAP and contrary to what Hallibu rton represented it did in describing its own

accounting policies .

229. GAAP, as set forth in American Institute of Certified Public Accountant s

("AICPA") Statement of Position ("SOP") 81-1, Accounting for Performance of Construction-

Type and Certain Production-Type Contracts, describes the computation of earnings based o n

the use of percentage-of-completion accounting. An important element of SOP 81-1 involves a

situation, such as that experienced by Halliburton, where, after a contract is commenced, curren t

estimates of the costs to complete the contract indicate that the contract as a whole will generat e

a loss. SOP 81-1 .85 states:

When the current estimates of total contract revenue and contract cost indicate a loss, a provision for the entire loss on the contract should be made . Provisions for losses should be made in the period in which they become evident .

Cost Overrun/Unapproved Claims Construction Accounting Fraud ; the 98-00 Construction Accounting Fraud

230. SOP 81-1 also sets forth the conditions which must exist for contractors t o

recognize income for amounts the contractor seeks to collect which are not included in th e

contract. Where a contractor seeks to recover unapproved claims it may record them o r

recognize them as revenue only where collection is objectively probable . SOP 81-1 .65 states :

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers or others for customer-caused delays, errors in specifications an d

-170- designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs . Recognition of amounts of additional contract revenue relating to claims is appropriate only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated . Those two requirements are satisfied by the existence of all the following conditions :

a. The contract or other evidence provides a legal basis for the claim ; or a legal opinion has been obtained, stating that under the circumstances there is a reasonable basis to support the claim.

b. Additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor's performance .

c. Costs associated with the claim are identifiable or otherwise determinable and are more reasonable in view of the work performed.

d. The evidence supporting the claim is objective and verifiable, not based on management's "feel" for the situation or on unsupported representations.

231 . Prior to mid-97, Halliburton's construction operations conducted business unde r two types of contracts : "fixed-fee"/"lump-sum" and "cost-plus ." Cost-plus contracts provide d for reimbursement to Halliburton of all reasonable costs, plus payment of an agreed-upon profit .

Under fixed fee/lump sum contracts, Halliburton performed for a fixed agreed-upon fee intended by the parties to encompass all reasonable costs foreseeable at the time of the contract's execution. Halliburton's profit on a fixed-fee contract equaled the margin by which the fee exceeded its costs; if those costs exceeded the fee, Halliburton would incur a loss on the contract .

Fixed-fee contracts offer, therefore, an opportunity to make larger profits - assuming Halliburto n

could control its costs ; conversely, fixed-fee contracts expose Halliburton to greater risk of losse s

in the event that it could not control costs or incurs unforeseen costs . Under either type o f

contract, Halliburton would incur costs that were not envisioned when the contract was executed ;

however, under a cost-plus contract, the contractor usually recouped from the customer thos e

unforeseen costs .

-171- • •

232. Due to increasingly competitive conditions , during 96-98 , the petroleum engineering and construction industry was moving more and more to fixed-price contracts, a s customers insisted on these types of contracts. During 97, to meet these competitive pressures , and in a major change of business strategy forced upon Halliburton and implemented by Cheney and Lesar, Halliburton accepted and commenced work on several large-scale fixed-fee/lump-su m

EPC projects that were much greater in scope and complexity than the Company's previous fixed-fee contracts. Due to these increasingly competitive pressures, Halliburton was also forced to submit "low-ball" bids on these contracts, which envisioned razor-thin profit margins - an d then only under the best of conditions - requiring near perfect contract performance, whic h virtually never occurs in a large, complex contract . The earliest of these projects involved the construction of a gas production plant in the Middle East . Halliburton's customer was a joint venture between a national oil company and a multi-national oil company . Other projects involved the construction of pipelines in South America . The Middle East gas production plan t contract called for completion of the project by mid-99, at a cost of approximately $169 million .

By the 4thQ 97, the estimated cost overruns had placed the project in an approximate $20 millio n loss position, as a result of which Halliburton was required to record a $20 million loss in the

4thQ 97. The $20 million loss gave rise to a corresponding $20 million reduction in

Halliburton's 4thQ 97 operating income . These cost overruns resulted from a lack of adequat e construction contract performance monitoring systems and inadequate internal financial an d accounting controls, as well as a lack of management personnel to perform these large fixed- price contracts. Halliburton, at that time, was estimating large cost overruns on several EP C contracts throughout 98 and 99, which, if recognized and reported, would have had a ver y adverse impact on the ES Group's operating income and thus Halliburton's reported net incom e and EPS and expose the mistakes Cheney and Lesar had made in changing Halliburton's

-172- business strategy to accept these high-risk, low-margin, fixed-price contracts, despit e

Halliburton's inadequate contract performance monitoring systems and internal financial an d accounting controls which virtually assured significant losses would occur on these contracts .

Halliburton Secretly Changed Its Accounting for Cost Overrun/Change Order Claims, Concealing the Change for Six Quarters

233 . For at least five consecutive years, dating back to 93, Halliburton represented i n its publicly issued financial statements , including those filed with the SEC , that "[c]laims for additional compensation are recognized during the period such claims are resolved," while all anticipated losses on contracts "are provided for currently ." This statement of practice , regarding the Company's recognition of revenue from Unapproved Claims and anticipate d losses, never varied during that period . Pursuant to the practice, before an Unapproved Clai m was resolved, the Company recorded losses caused by project cost overruns or unpai d

Unapproved Claims . According to the Company's stated accounting practice, only after the claim was resolved with an agreement to pay would the Company recognize revenue on the claim as an offset against the project's cost overruns .

234. During late 97 or early 98, as Halliburton's ES and E&C Group were encountering increasing customer resistance to paying millions of dollars of Unapproved Claims on certain older contracts and were encountering performance delays, cost overruns an d

Unapproved Claims on certain of its newer, larger fixed-price contracts, Cheney, Lesar, Morri s and Muchmore agreed to have Halliburton secretly change its accounting practice by offsettin g cost overruns on these contracts with hoped-for recoveries on claims that had not been resolved with customers, thus concealing cost overruns and unpaid Unapproved Claims, i.e., losses, by not recognizing them . Although permitted under GAAP in very limited circumstances, i.e. ,

when potential recovery on the cost overrun or change claim can be shown to be documente d and collection can be shown to be objectively probable and the amount can be accurately

- 173 - estimated, this practice was a very important departure from Halliburton's longstanding stated

practice of recognizing revenue only from "resolved," i.e., "approved," claims. Secretly, under

this new practice, the Company began offsetting increasingly large project cost overruns wit h revenue from Unapproved Claims, even in instances where the Company could not documen t that the claims were probable of collection or reliably estimate the amount of recovery pursuan t to SOP 81-1 .65 .6 As a result of the secret change in accounting practice and imprope r recognition as revenue of claims that were not probable of collection, cost overruns and resultin g losses on several EPC contracts were reduced or eliminated . By reducing or eliminating these contract losses, Halliburton manipulated its reported net income and EPS higher . In short, losses were turned into profits by this accounting artifice .7

235. According to one confidential source (a member of Halliburton's corporat e finance team from 89 to 02), a high-level accounting policy change such as that made b y

6 In changing its accounting practice, Halliburton relied on 165 of SOP 81-1 . Paragraph 65 applies to "claims" in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers. Under 165, the recognition of amounts of additional contract revenue relating to claims is appropriate only if it is probable that the claim will result in additional contract revenue, i.e., is probable of collection, and if the amount can be reliably estimated.

' At year-end 98, Halliburton took a $60 million charge for uncollected Unapproved Claims on older contracts . A 12/28/98 Halliburton press release stated : "[C]ustomers have restricted their capital spending and they have recently placed extraordinary pressure on the project claims resolution process and are now rejecting some of the company's claims for additional cost incurred by the company . .. . These pressures have become more acute in the 1998 fourth quarter ." Ironically, during the year that these millions of dollars of Unapproved Claims could not be collected, Halliburton 's top executives secretly changed Halliburton's accounting practices . Halliburton, however, did assure investors the $60 million write-off of Unapproved Claims would not be repeated as it had changed its practices with respect to change orders and would not accept them unless the customer agreed "up front" to pay them . This was a lie . No such change had occurred. Halliburton was continuing to perform such work, i.e., Unapproved Claims, without assurance of payment, but it now was recognizing them as revenue/profit, even though its actual experience was that customers were increasingly refusing to pay for such Unapproved Claims.

-174- Halliburton regarding its accounting for Unapproved Claims could only have been enacted an d approved at the highest levels by the executive committee (which at the time consisted of Lesar ,

Cheney, the Controller/Principal Accounting Officer (Muchmore) and "especially" the Chie f

Financial Officer (Morris)) .

236. Halliburton failed to disclose until 3/00, when the Company filed its 99 Form 10-

K, that the Unapproved Claims on its EPC contracts were, in fact, being recognized as revenu e before the customer had agreed to pay them and were thus a component of the Company' s earnings. However, even in 3/00, Halliburton did not disclose and continued to conceal that eve n though it did not meet the strict probability of collection and estimation requirements to record such Unapproved Claims as revenue/income, it was, in fact, now recognizing millions of dollar s of revenue represented by uncollectible and inestimable Unapproved Claims! Prior to the 3/00 filing of Halliburton's 99 10-K - a period spanning six quarters - none of Halliburton's SEC filings or other releases or reports to shareholders disclosed the change in the Company' s accounting practice or the impact of that change on the Company's reported financials .' After the publication of Halliburton's 00 Annual Report, the Company continued to improperly recor d and report claim revenue/income through the balance of the Class Period, including hundreds o f millions of dollars of Unapproved Claims written off in the Fall of 00 and thereafter, an d hundreds of millions of dollars of Unapproved Claims related to the Barracuda/Caratinga contract - especially during 01 - which were later written off and resulted in th e

8 In Halliburton' s 98 Form 10-K, the Company removed the claims recognition statement that had appeared in earlier Hallibu rton Forms 10-K. Halliburton did not explain in the filing, or in any other form of public statement , the reason for or significance of its removal . Moreover, Halliburton did not, in its 98 Form 10-K, replace the removed accounting statement with an affirmative statement disclosing the Company ' s new accounting practice , as required by GAAP.

-175- Barracuda/Caratinga contract alone suffering a loss of over $760 million - the largest contract catastrophe in Halliburton's history .

The Amounts Attributable to Halliburton's Undisclosed Change in Accounting Were Material to the Company's Income as Reported in its 98, 99, 00 and 01 SEC Filings

237 . Halliburton's recording in 98, 99, 00 and 01 of Unapproved Claims o n

Halliburton's EPC contracts resulted in a material increase in the income the Company reported in its financial statements, including those included in its Forms 10-Q for the 2ndQ and 3rdQ o f

98, its Forms 10-Q for the 1 stQ, 2ndQ and 3rdQ of 99, its Forms 10-Q for the 1 stQ and 2ndQ of

00, its Forms 10-Q for the 1stQ, 2ndQ and 3rdQ of 01 and in the Company's 98 and 99 Form 10-

Ks. That impact in 98-99 is set forth in the table below . Cheney, Muchmore, Lesar and Morris each reviewed and approved these financial statements and SEC filings :

Year Filin Reported Pre- Reported Pre-Tax $ % Tax Income Income w/o Difference Difference Unapproved Claim Revenue

1998 2ndQ Form 10-Q $228.7 M $183.3 M $45 .4 M 24.8% 3rdQ Form 10-Q ($609.5 M) ($646.2 M) $36.7 M 5 .7 % Form 10-K $278.8 M $190.9 M $87.9 M 46.1 % 1999 1 st Q Form 10-Q $149 M $129 .8 M $19.2 M 14.8 % 2ndQ Form 10-Q $146 M $135 .8 M $10.2 M 7 .5 % 3rdQ Form 10-Q $103 M $92.3 M $10.7 M 11 .6%

The impact of the Unapproved Claims revenue on the operating income of the key ES Group was even more significant :

Year Filing ES Reported ES Reported $ Operating Operating Income Difference Difference Income Without Unapproved Claim Revenue

1998 2ndQ Form 10-Q $198 .3 M $152.9 M $45 .4 M 29.7% 3rdQ Form 10-Q $262.7 M $226.0 M $36 .7 M 16.2% 4thQ Earnings $120.9 M $115.1 M $5 .8 M 5.0%

-176- 0 0

Year Filing ES Reported ES Reported $ % Operating Operating Income Difference Difference Income Without Unapproved Claim Revenue

Release Form 10-K $971 .0 M $883 .1 M $87.9 M 10.0% 1999 1 stQ Form 10-Q $57.0 M $37.8 M $19.2 M 50.8 % 2ndQ Form 10-Q $49.0 M $38 .8 M $10.2 M 26.2% 3rdQ Form 10-Q $56.0 M $45 .3 M $10.7 M 23 .6 %

238 . Even after Halliburton included disclosures for the firs t time about the change in its accounting for Unapproved Claims revenue, it continued to conceal important informatio n about its accounting for Unapproved Claims such that its financial statements continued to b e materially misleading . In 3/00, when Halliburton included in its 99 Form 10-K disclosure for the first time about the change it had made in accounting for Unapproved Claims, the Compan y represented that in 98 it had accrued $89 million in Unapproved Claims and that in 99 it ha d accrued $98 million in Unapproved Claims . However, the Company in its 99 Form 10- K concealed that the Company had accrued $34 million in Unapproved Claims in connection wit h joint venture projects . As the SEC found, "The omission flattened the ascending curve of unapproved claims recognized by the Company: instead of reporting $132 million in unapprove d claims in 1998 the Company reported $98 million - a $9 million, as opposed to $43 millio n increase over the 1998 figure ." Moreover, the Company continued to report Unapproved Claim s revenue in subsequent quarters which caused its ES unit's operating income to be increased by a t least $8 million in the 2ndQ 00 and by at least $20 million in the 3rdQ 00. The Company did not disclose that these amounts did not meet the strict criteria of SOP 81-1 for recognition .

Moreover, the Company did not disclose its significant violation of GAAP during 98 and 99 as i t continued to report its financial statements for 00 and 01 . Nor did the Company disclose the

- 177 - significant impact on operating income this improper accounting and disclosure practice ha d

caused.

239. Knowing The New York Times was working on a story intended to expose the

accounting fraud at Halliburton's ES Group during 98-00, in 3/02, Halliburton forced out fou r

executives, including the head of its ES Group and Morris, who had been Halliburton's CF O

during most of the Class Period before being "kicked upstairs" to EVP in 01 . Then, in 5/02, The

New York Times published an expose on Halliburton's accounting manipulations exposing how i t

turned losses from cost overruns and unpaid change order claims into profits after secretl y

changing the way it accounted for Unapproved Claims . This resulted in the SEC being forced to

undertake an investigation, notwithstanding the fact that Cheney was then the Vice President of

the United States. When this article appeared, Foshee (Halliburton's CFO) said, "he was certain that the accounting change was approved by ... David Lesar." Later, Lesar said, "Cheney was aware Halliburton was counting projected cost-overrun payments as revenue. `The Vice

President was aware of who owed us money and he helped us collect it ."' According to Paul

Brown, Chairman of the Accounting Department at the Stern School of Business at New Yor k

University, the change was "clearly a way of pumping up revenues and receivables ." "If it looks like they were just fabricating the numbers, that verges on fraud ," said J. Edward Ketz,

Professor of Accounting at Penn State University.

240. On 7/24/02, Robert Bryce, an Austin-based journalist who covers the accountin g

industry, commented on the inadequacy of this disclosure while appearing on "The News Hou r

with Jim Lehrer ." Bryce stated:

The issue with their accounting involves some cost overruns or discrepancies or disagreements rather between Halliburton and some of its clients . And rather than waiting until the discrepancies or the disagreements over those costs were resolved, Halliburton went ahead and booked those revenues as though . . . as receivables. In other words, they counted those revenues on their financial

- 178 - statements immediately. That's very similar to the type of accounting that Enron used. It's called mark-to-market accounting.

Well, it's important because in 98 the world oil industry was in a world of hurt . . . oil prices were depressed. Drilling activity was very low . And Halliburton had also just completed a merger with Dresser Industries. So the company was eager to show any revenue that it could and by using mark to market on this one small segment of their business, they were able to add $90 million or $89 million in 98 . And then in 99, it was $98 million . And then in 2000, it was $113 million.. .. [I]t ... counted significantly in terms of their profit statement.

241 . In the same program, Vincent Love, a certified public accountant and fraud

examiner, stated : "Well, there certainly was a failure to disclose in 1998 . And I think it was a material failure to disclose .. .." Love also stated:

I think I just want to go back to the beginning . In 1997, in the notes to the financial statements, they disclosed that these claims and disputed change orders were not recorded in revenue until the settlement was final . In 1998, they dropped out that line, and they didn't disclose that . . . . That was what was wrong here. They did not disclose what had happened in 1998 . And the amount was material when you looked at the bottom line in 98 and what else was going on .

242. Nevertheless, Halliburton vehemently denied any impropriety, insisting the

amounts involved were immaterial and that its disclosure and accounting practices were correct .

However, later the SEC found that Halliburton had violated the reporting requirements of th e

federal securities laws by these accounting manipulations .

Halliburton's Misleading Disclosures Regarding Its 2ndQ and 3rdQ 98 Results

243 . The references to Halliburton' s operating and net income and the 97-98 income

comparisons contained in Halliburton's 2ndQ and 3rdQ 98 Forms 10-Q, earnings releases, an d

analyst teleconferences, were materially misleading . The references were misleading for two

reasons : First, for at least five consecutive years, Halliburton publicly presented in its financial

statements and SEC filings a statement of claims recognition practice that never varied i n

content: "Claims for additional compensation are recognized during the period such claims ar e

- 179 - resolved." Despite changing the accounting practice in mid-98, the Company did not disclose the change in that quarter . In fact, it was not until after the passage of six quarters that

Halliburton disclosed the change in its 99 Form 10-K, filed in 3/00.9 Second, Halliburton' s statement of its historical claims recognition practice was not expunged from the mix of publi c information because Halliburton incorporated the statement by reference in its Forms 10-Q for 0 the 2ndQ and 3rdQ of 98 .1

244. Thus, the only representation concerning Halliburton's claims recognition practice in the public domain during the 2ndQ and 3rdQ of 98 was that the Company recognized claims "during the period such claims are resolved ." This statement of accounting practice, out- of-date with respect to E&C Group's EPC contracts, was incorporated by reference in, an d rendered materially misleading by, the public information Halliburton issued regarding it s income in the 2ndQ and 3rdQ 98 10-Qs, including information in its Forms 10-Q, earning s releases and analysts' teleconferences .

245 . One of Cheney's and the Individual Defendants' chief responsibilities was to ensure the accuracy of Halliburton' s financial statements and the SEC reports, which they reviewed and approved prior to filing . In addition, these individuals, with the assistance of

Halliburton finance personnel under their supervision, prepared Halliburton's quarterly earning s

9 Accounting Principles Board Opinion No . 20 ("APB No . 20"), Accounting Changes, prescribes that if a company changes its accounting principles, the company should disclose the nature of, and the justification for, the change and its effect upon income in the financial statements for the period in which the change is made . The justification for the change should explain clearly why the newly adopted accounting principle is preferable . The phrase "accounting principle" includes not only accounting principles and practices, but also the methods of applying them.

10 Halliburton incorporated by reference its discontinued claims recognition practice in Note 1, entitled "Management Representations," included in the financial statements appended to is 2ndQ and 3rdQ 98 Forms 10-Q .

-180- 11 1r k u

0 0

releases, together with the scripts that were used by Halliburton's senior officers in the

Company's quarterly analysts' teleconferences - that they each attended and participated in.

The 2ndQ 98 Form 10-Q

246. Halliburton's Form 10-Q for the 2ndQ 98 did not disclose that the offset of cos t

overruns by Unapproved Claims resulted in income to the Company in the 2ndQ that was 24 .7 %

greater than without the offset . In addition, the income statement in the filing reflected a 34 %

97-98 quarter-to-quarter increase in Halliburton's net income ; without improper recognition o f

Unapproved Claims, the quarter-to-quarter increase would have been only 6 .7%. The Compan y

also stated in the filing's MD&A "Results of Operations" that ES Group's (the division

encompassing BRES) operating income in 98 was 24% greater than in 97 . Without improper

recognition of Unapproved Claims, ES Group' s operating income would have actually decrease d

4.5%.

The 2ndQ 98 Earnings Releas e

247 . Halliburton's 2ndQ 98 earnings release omitted the same information. The

Company's 2ndQ 98 earnings release, issued 7/22/98, was entitled : "Halliburton 1998 Secon d

Quarter Net Income Up 34 Percent ." Without Unapproved Claims, Halliburton 's net income

increased only 6.7%. Halliburton also stated in the release : "The Energy Group's 1998 secon d

quarter operating income increased 24 percent to $198 .3 million compared to the prior yea r

period." The release did not disclose that without Unapproved Claims the ES Group's operatin g

income actually decreased 4 .5% . Finally, the Company stated in the release , "For the six-month

period ending June 30, 1998 , net income increased 38% to $254.3 million." The release did not

disclose that without Unapproved Claims, net income over the six-month period would have

increased only 22 .4% in 98, as compared to 97, not 38%. The Company also stated in its secon d

quarter earnings release :

- 181 - Halliburton Company reports 1998 second quarter net income of $136 .5 million ($.51 per share diluted), an increase of 34 percent compared to $101 .9 million ($.40 per share diluted) earned in the 1997 second quarter .

The earnings release contained no clarification that without Unapproved Claims Halliburton' s

EPS would have been $ .41, not $ .51, which was the analysts' consensus EPS estimate based o n

Halliburton's forecasts to them .

The 2ndQ 98 Analysts' Teleconference

248. The Company's statements in the 2ndQ analysts' teleconference conducted on

7/22/98, and based on a prepared script, also omitted material information regarding Unapprove d

Claims as an offset against cost overruns . The Company stated that its net income "was up 34% " as compared to the 2ndQ 97 . Without Unapproved Claims, Halliburton's net income in th e quarter increased only 6 .7% . The Company also included in the teleconference that the E S

Group's 2ndQ 98 operating income increased 24% to $198 .3 million, compared to the 2ndQ 97 .

Investors were not told that without Unapproved Claims, the ES Group's operating income would have actually decreased 4 .5%, as compared to the 2ndQ 97. Finally, the Company said , again based on the script, that the Company's EPS for the quarter was $.5 1 . Halliburton failed t o disclose that without unapproved claims Hallibu rton's EPS would have been only $.41 .

249. The Company also reported in the teleconference BRES operating results . The

Company stated that BRES's operating income had increased 40% over the 2ndQ 97 . There was no disclosure that without Unapproved Claims, BRES's operating income would have actuall y decreased approximately 148% . Moreover, Halliburton failed to clarify that the 5 .5% operating income margin for BRES would have been -2% without Unapproved Claims .

The 3rdQ 98 Form 10-Q

250. Halliburton's Form 10-Q for the 3rdQ 98 did not disclose that the offset of cost overruns by Unapproved Claims resulted in income to the Company in the 3rdQ 5 .7% greater

-182- than without the offset. In addition, the Company included in the MD&A section of the filing ,

entitled "Results of Operations," a statement that "Energy Services Group's operating incom e

decreased 8% to $262 .7 million in the third quarter of 1998 compared with $287 million in th e

same quarter of the prior year ." There was no disclosure in the Form 10-Q that without the

Unapproved Claims, the ES Group's operating income would have actually decreased 21% i n

3rdQ 98, as compared to its operating income in the 3rdQ 97 .

The 3rdQ 98 Earnings Release

251 . The 3rdQ earnings release omitted the same information . In the Company's 3rd Q

98 earnings release, issued 10/29/98, the Company stated: "The Energy Group's 1998 third quarter operating income was $263 million, off eight percent from the 1997 quarter ." The release contained no clarification that without Unapproved Claims, ES Group's operating incom e would have decreased 21% to $226 million . The Company also stated in the release :

"Halliburton Company announces that the company earned $195 million ($ .44 per diluted share) in the 1998 third quarter, compared to $218 million ($ .50 per diluted share) in the 1997 thir d quarter, before recognition of special charges ." The Company did not disclose in the release that without Unapproved Claims, Halliburton would have earned only $172 million - a difference o f

13 .3% . Finally, the earnings release contained no clarification that, without Unapproved Claims ,

Halliburton's EPS for the quarter would have been $ .39, not $ .44, which was the analysts ' consensus estimate, based on Halliburton's forecasts to them .

The 3rdQ 98 Analysts' Teleconference

252. The Company's statements in the 3rdQ 98 analysts' teleconference , conducted on

10/29/98, and again based on the prepared script, also omitted material information regarding th e

Unapproved Claims component of Halliburton's earnings . Halliburton stated : "From an operating income standpoint for the Energy Services Group, operating income declined 9% to

- 183 - $263 million for the quarter ." Investors were not told that without Unapproved Claims, the ES

Group's operating income would have declined 21% . Halliburton reported : "[Halliburton's] earnings per share were $.44." The Company failed to clarify that without Unapproved Claim s

Halliburton's EPS would have been only $.39 .

253 . Halliburton also stated at the teleconference :

"[R]evenues for this group [BRES] are up 33% . We continue to be very, very pleased with the direction and growth of this aspect of our business even in a down market. And I think it [BRES] continues to be one of the real hidden stars within the Halliburton portfolio of businesses that we have."

The Company failed to disclose that Unapproved Claims, which offset cost overruns, were a positive component of Halliburton's earnings . The script continues :

"For [BRES], operating income increased 17% over the prior year. Margins are now starting to get back into the territory that we thought they would toward the end of the year with its [BRES'] margins for the third quarter being 8 .6%"

There was no clarification that, without Unapproved Claims, BRES's operating income would have actually decreased approximately 54% (from $52 .7 million to $24 million), not increased

17% (from $52 .7 million to $60 million) . Moreover, without improper recognition o f

Unapproved Claims, BRES's operating margins would have been only 3 .6%.

Halliburton's Ultimate Disclosure of Its Accounting Change Was Misleading

254. In the 99 Form 10-K Halliburton filed with the SEC on 3/14/00, Halliburto n disclosed for the first time the change it made, six quarters earlier, in its accounting fo r

Unapproved Claims . In the filing, the Company stated that, in 98, the Company accrued $8 9

million in Unapproved Claims, and in 99, $98 million in Unapproved Claims . The Company did

not disclose in the 99 Form 10-K, however, $34 million of Unapproved Claims that the

Company recognized in 99 in connection with joint venture projects . The omission flattened the

ascending curve of Unapproved Claims recognized by the Company: instead of reporting $13 2

- 184 - .- 0 •

million in Unapproved Claims in 99, the Company reported $98 million - a $9 million increase ,

as opposed to a $43 million increase, over the 98 figure . In addition, the Form 10-K was false

and misleading because many of the Unapproved Claims accrued by Halliburton did not qualif y

for recognition, i.e., recovery was not objectively probable . Also, Halliburton was continuing t o

improperly record and recognize millions of dollars of such Unapproved Claims as revenue .

255 . For at least five consecutive years, Halliburton publicly presented in its SEC

filings a statement of claims recognition practice that never varied in content : "Claims for

additional compensation are recognized during the period such claims are resolved ." Despite

making a significant change to its practice in mid-98 with respect to the BRES EPC contracts ,

the Company (1) eliminated its historical statement of practice without explanation in 98, and (2 )

did not disclose the change until the passage of six quarters . There was no way for the investin g

public, or for analysts following Halliburton, to discern the fact that, over the relevant six-quarte r

period, the Company had offset cost overruns through the application of SOP 81-1 .65, and that

the offsets materially increased Halliburton's reported income . A reasonable investor o r

potential investor, would have wanted to know this information in making a decision regardin g

an investment in Halliburton.

256. In addition, the Company's incomplete disclosure of the amount of Unapprove d

Claims it recognized in 99 was materially misleading . The omitted amount, $34 million, was

material. The omission flattened the ascending curve of Unapproved Claim amounts : instead of

reporting the actual $ 132 million in Unapproved Claims it used in 99, the Company reporte d

only $98 million - a $9 million, as opposed to a $43 million increase, over the 98 figure .

257. Subsequent to the 3rdQ 99, Halliburton continued to record Unapproved Claim s

as income and as assets despite the uncollectibility of these amounts, causing its consolidate d

operating income and the ES unit's operating income to be overstated.

-185- .J,, a • •

258 . In the 4thQ 99, Halliburton had a balance of $98 million in Unapproved Claims

which it had previously recorded into income for which it failed to record adequate reserves .

Later in the 2ndQ 00, Halliburton increased the balance in Unapproved Claims by $8 million .

As a result, Halliburton reported operating income of $126 million instead of the $118 million i t

actually earned absent the additional Unapproved Claims accrual . Similarly, the ES unit' s

operating income was reported to be $107 million instead of the $99 million actually earned .

259. In the 3rdQ 00, Halliburton falsely reported operating income of $248 millio n

instead of the $228 million it actually earned absent the unjustified accrual of $20 million i n

Unapproved Claims . ES operating income for the 3rdQ 00 was reported to be $233 million bu t

was actually $213 million, an overstatement of 9% .

Halliburton's Failure to Reserve for Losses from Asbestos Claim s

260. As a further part of the scheme to manipulate and falsify Halliburton's 98-0 1

financial results, defendants deliberately understated Halliburton's liabilities for then-existin g

asbestos claims and suits for which it faced liability . GAAP, as set forth in SFAS No. 5,

Accounting For Contingencies, requires that a loss be recognized for certain loss contingencie s

when it is probable the loss has been incurred and the amount can be reasonably estimated .

SFAS No. 5,18, states :

An estimated loss from a loss contingency (as defined in paragraph 1) shall be accrued by a charge to income if both of the following conditions are met :

a. Information available prior to the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.

b. The amount of loss can be reasonably estimated .

(Footnote omitted.) An example of a loss contingency includes pending or threatened litigation .

See SFAS No. 5, ¶4e, and 1133-39 . - 186 - !1 N~ •

261 . During the Class Period, Halliburton failed to make adequate and timely reserves

for losses associated with asbestos claims Halliburton incurred when it acquired Dresser in 9/98 .

Harbison-Walker

262. Halliburton failed to include more than 125,000 post spin-off Harbison-Walker

claims in its open claims and in the amount used to calculate its reserve until Harbison -Walker

filed bankruptcy in 01 . This caused Halliburton's reserve for asbestos-related liability losses to

be understated by hundreds of millions (if not billions) of dollars during the Class Period .

263. As part of the 7/92 spin-off of Global, Dresser agreed with Global that Global

would be responsible for claims filed against Dresser for asbestos claims for Dresser's Harbison-

Walker division after 7/31/92. However, notwithstanding this agreement, Dresser continued to

have liability to tort claimants for post-spin-off claims because Global's agreement to indemnify

Dresser for these claims was only as good as Global's financial ability to provide indemnity t o

Dresser. Moreover, Dresser agreed that Global would have access to substantial amounts o f

Dresser's insurance coverage . In 98, as a result of potential insurance coverage disputes between

and among Dresser , Harbison-Walker and certain insurers , including Lloyd's of London,

Dresser, Harbison-Walker and Global entered into an agreement with the London insurer s

entitled "Coverage-In-Place." The "Coverage- in-Place" agreement conferred upon Harbison-

Walker the right, authority and discretion to manage, handle, defend, settle and pay for al l

asbestos-related claims, including the right to appoint defense counsel and to direct and supervis e

defense counsel and also authorized Harbison-Walker to expend funds necessary to defend

asbestos-related claims. Also in 11/00, Harbison-Walker and Dresser entered into a settlemen t

agreement due to certain disputes as to the management, handling, defense, settlement an d

payment of insurance coverage for asbestos suits against Harbison-Walker and Dresser .

Through a series of disputes in 99-00, Global sought to hold Dresser (which by then was part o f

- 187 - Halliburton) responsible for post-spin-off claims arising from Dresser's negligence . The parties eventually agreed that Global would be obligated to assume responsibility for post-spin-off claims and it would cooperate in resolving Dresser's remaining refractory claims . On the other hand, Dresser (Halliburton) and Global (Harbison-Walker) agreed that Harbison-Walker coul d access Dresser's historical insurance coverage for the asbestos-related liabilities which it assumed.

264. Because Halliburton (Dresser) was sharing insurance with Harbison-Walker ,

Halliburton had an interest in how Harbison-Walker's asbestos claims were being resolved . To the extent Harbison-Walker exhausted insurance that might otherwise be available to protec t

Halliburton (Dresser) or to the extent Dresser was also named as a party to the lawsuit and for any reason Harbison-Walker was unable to pay for the claims, Halliburton would be on the hoo k for these claims . Notwithstanding this contingent liability, Halliburton did not include any par t of the large number of claims that were accruing at Harbison-Walker in its calculation of it s anticipated losses from the asbestos claims. As a result, the number of outstanding claim s unresolved for Halliburton was understated in each one of its 10-Qs and 10-Ks up until the 4th Q

01, when Halliburton finally included an additional 125,000 claims in its total of unresolve d claims. Ultimately in the 2ndQ 01, after it became public that Harbison-Walker was requesting financial assistance from Halliburton to deal with asbestos claims, Harbison-Walker's financial problems could no longer be ignored. Halliburton increased its gross reserve for open claims by

8 .3 times from $84 million to $699 million. Most of this gross reserve was represented to be offset by insurance which would cover it, resulting in the net reserve for claims being increased from $30 million to $124 million. While this was a large increase, this increase understated by billions of dollars the outstanding claims that Halliburton had responsibility for and

- 188 - r' r+ r

understated the amount it would be required to pay after insurance recoveries by hundreds of

millions of dollars !

265 . Just one year later in the 2ndQ 02, Halliburton increased the gross asbestos claim s

payable reserve to $2.196 billion. The after- insurance liability reserve was increased to $602

million . However, the true situation was even worse than this increase indicated . In the 4thQ

02, the gross reserve was increased to $3 .557 billion and the net reserve was increased to $1 .366

billion. The following quarter the net reserve was increased to $2 .048 billion. Most recently, on

1/3/05, Halliburton announced it had finally resolved the asbestos liabilities . A settlement calls

for Halliburton to set up a $4.8 billion trust to pay asbestos and silica claimants by the end of

1/05. The trust will be funded with $2 .78 billion of cash, 59.5 million shares of common stoc k

and a $54 million note .

266. Although Halliburton's outstanding claims did increase during the Class Period

(primarily due to the belated inclusion of Harbison-Walker claims described herein), the post-

Class Period increase in the Company's liability reserve was much more dramatic than the

increase in claims, as shown in the following chart :

700,000

$2,000,000,000 600,000

500,000 E $1,500,000,000 U rn 400,000

J $1,000 ,000,000 0 300,000 a d a a E z 200,00 0 $500,000,000

100,00 0

ao \ \oo \O \oo oo $ oo^ o` ^o` Doti Doti Doti ,oti ,a~ oo~ 005 moo

F• Outstanding Claims -Net Liability for Asbestos Claims

-189- 267. Halliburton's net reserve for asbestos liability was grossly inadequate throughou t

98-01 . The miniscule 98-00 reserve of $8-$29 million was a gross distortion of Halliburton' s true asbestos liability exposure at that time . Halliburton should have disclosed that, in fact, it s asbestos liability was unquantifiable - indeterminate, or accrued a reserve of at least $30 0 million. Given the financial instability at Harbison-Walker by the Summer of 01, the increase d number of outstanding claims that exposed Halliburton to liability and the enormous amount o f liability faced for these outstanding claims, by 9/30/01 at the latest, Halliburton's net reserv e should have been a minimum of $500 million rather than the $125 million reported. At the very least, if Halliburton could not reasonably estimate the amount of this enormous liability, it shoul d have disclosed this fact and the likelihood that the outstanding claims would be much higher than its previous estimates . See SFAS No. 5, 110. By the end of the Class Period, Halliburton' s outstanding liability with respect to these asbestos claims exceeded $1 billion, yet its reserve for these claims did not change . By 12/31/01, Halliburton's outstanding claims exceeded 200,000 .

The Company understated its liability, in part, by understating the enormous exposure it face d and, in part, by overstating the insurance that it expected to recover against those claims .

Highlands Insurance Receivable Manipulation

268 . During the Class Period, Halliburton improperly accrued receivables due from th e

Highlands Insurance Company (" Highlands") to offset its asbestos liability, which receivable s were not probable of collection and were, essentially, a gain contingency . Highlands was formerly a subsidiary of Halliburton. Pursuant to SFAS No . 5, 117, gain contingencies are not properly recorded under GAAP. In fact, it was Highlands' position that when Halliburton spu n

Highlands off to its shareholders in early 96, Halliburton assumed liability for all asbestos claim s filed against Halliburton after the spin-off . Notwithstanding this position, which was supported by the agreement, Halliburton continued to carry receivables on its books with respect t o

-190- insurance claims it hoped that Highlands would pay . Even when Highlands filed its lawsuit

against Halliburton in Delaware alleging that it did not owe Halliburton this money, Halliburto n

did not take a write-down of this contingent receivable . This caused Halliburton's financial

statements to include overstated assets by some $40 million and to be presented in violation o f

GAAP, which requires that receivables should be written off when it is probable that th e receivables or a portion thereof will not be collected . SFAS No. 5, 1122 and 23 .

269 . In 3/01, the Delaware Chancery Court ruled that Highlands was not obligated to provide insurance coverage for asbestos claims filed against KBR because the agreement s entered into by Highlands and Halliburton at the time of this spin-off had terminated the policies previously written by Highlands that would otherwise cover such claims . Notwithstanding thi s

adverse ruling, Halliburton continued to carry the receivables on its books and offset its reserv e for asbestos claims payables by the amount of this $40 million receivable . The purported reason for not writing this off was that the Company intended to appeal the Delaware Chancery Court' s ruling and expected to prevail . Ultimately, in 02, the Company lost its appeal and belatedly too k

a write-down to reflect the non-collectibility of these receivables .

Barracuda/Caratinga Project Accountin g

270. As a further part of the scheme to manipulate and falsify Halliburton's financial results during the Class Period, defendants misaccounted for Halliburton's Barracuda/Carating a construction contact by improperly recognizing revenue/profit on that contract and hiding th e

huge losses actually being suffered on that large contract . The $193 million write-off at year-end

00 (including $155 million in Unapproved Claims) gave the illusion that Halliburton ha d

"cleaned up" its accounting for its fixed-price contracts when, in fact, it had not . While thes e

write-offs did wipe out some of the false profits reported on fixed-price contracts during th e

Cheney era, in order to continue to artificially inflate Halliburton's reported operating and ne t

- 191 - • income and EPS during 01 and as an ongoing part of the scheme to defraud, Lesar, Morris an d

Muchmore going forward caused Halliburton to continue to improperly conceal hundreds o f millions of dollars of losses - while improperly recognizing millions of dollars of revenue on th e largest contract Halliburton had ever undertaken - Barracuda/Caratinga.

271 . Halliburton continued to falsify its results, from at least as early as the lstQ 01, by recognizing millions of dollars in earnings in each quarter from its work on the Barracuda /

Caratinga project and failing to record losses defendants knew the Company was incurring and would incur on the project, causing its financial statements to be materially overstated and to b e presented in violation of GAAP.

272. In its 00 Form 10-K filed with the SEC in 3/01, Halliburton also represented th e following about its accounting policy with respect to construction contracts :

Revenues from engineering and construction contracts are reported on the percentage of completion method of accounting using measurements of progress towards completion appropriate for the work performed. All known or anticipated losses on contracts are provided for currently. Claims and change orders which are in the process of being negotiated with customers, for extra work or changes in the scope of work are included in revenue when collection is deemed probable.

This was completely false as to the Barracuda/Caratinga project .

273 . In 10/99, Halliburton's BRES was selected as a preferred bidder for th e

Barracuda/Caratinga project. On 7/5/00, Halliburton announced that it had signed a $2 .6 billion contract for the development of the Barracuda/Caratinga oil fields offshore of Brazil . The work would be performed by BRES (Halliburton ES) with Petrobras, the Brazilian national oi l company, which served as construction manager and owner ' s representative on the project. The work was to commence in 7/00, and was to be a three-year project . In fact, from the outset, this was a very risky and dubious contract for several reasons :

-192- M • •

(a) This was the largest construction contract ever awarded to a singl e

company for this type of oil field development in Latin America . There was no precedent fo r

adequately bidding on this type of contract .

(b) This contract was unprecedented for Halliburton as well and wa s

intended to showcase Halliburton's ability to succeed with a one-stop-shop model (drilling th e

wells, overseeing construction, building the floating, production, storage and off-loadin g

("FPSO") vessels, servicing the wells, maintenance and security) . This concept originated

under Cheney but was championed by Lesar and was not practiced by any other company in th e

industry. Lesar was adamant that Halliburton get this contract so it could show its shareholders ,

analysts and the investment community what its capabilities were. Lesar was so anxious to ge t

the contract that he directed that Halliburton agree to a "lowball" bid, with extremely lo w

margins - which meant a profit could be achieved only with near perfect contract performance ,

an unlikely event under any set of circumstances and impossible given Halliburton's track

record with large fixed-price contracts during 98-00 !

(c) Because Halliburton was the sole contractor for these several

components, any problems with delays, overruns, changes, errors or other issues would be it s

alone - 100% - to bear.

(d) For political reasons, Petrobras required that much of the work b e

subcontracted to local workers/contractors . In fact, Petrobras required that at least one of th e

FPSO hulls be constructed in Brazil . This was problematic because there was only on e

shipyard in Brazil available for this type of work (in Rio de Janeiro) and this shipyard had never

performed such a project. Halliburton business unit managers were "very nervous" abou t

having any of this work done in Brazil. The Brazilian shipyard was not only inexperienced, bu t

- 193 - y „ W d •

was also very low on work . The industry knows that when a shipyard is low on work, "if you

have the only ship in there, it's never coming out until they get more work ."

(e) Halliburton was obligated to have a minimum of 40% of the value of the

FPSO vessels work performed in Brazil .

(f) The contract was entered into during a time of extremely competitiv e

bidding. A downturn in the energy industry began in 98, which led many of Halliburton' s

customers to severely curtail many large engineering and construction contracts . This led to a

lack of opportunities for new contracts . This downturn continued into 00, the time when th e

Barracuda/Caratinga contract was signed . It truly was a buyer's market and the contract term s

were very unfavorable to Halliburton .

(g) The contract had severe liquidated damages provisions that Halliburton

would incur if the contract or portions thereof were not completed on time . The penalty clauses

were such that for each day of delay for each of many performance phases, Halliburton woul d

be responsible for penalties of approximately $1 million .

(h) Petrobras itself was a subcontractor for some of the drilling of the Santos

basin wells. Because Petrobras was also the customer, it would be difficult for Halliburton to

put much pressure on Petrobras to help Halliburton recoup its costs .

(i) Thus, Halliburton began the contract at a serious commercia l

disadvantage and had no margin for error or for performance problems .

(j) Halliburton knew Petrobras would not agree to pay any substantia l

amount of Unapproved Claims on the Barracuda/Caratinga contract as, on a prior ES contract,

Petrobras had absolutely refused to pay Halliburton's Unapproved Claims, resulting in

Halliburton taking a very large, multi-million dollar loss on that contract at year-end 98 .

-194- 274. Because Lesar was so intent on getting the contract, Halliburton agreed to razor- thin margins of only 5%-8% on the contract, creating a huge risk for Halliburton . Given the penalty provisions, the thin profit margins, the lack of control Halliburton had over parts of th e project, the inevitable change orders on a contract of that size and Halliburton's prior contrac t experience with Petrobras, it was almost certain the project would be unprofitable. One former

Halliburton Project Financing/Development employee says Lesar recognized the likelihood fo r large losses but felt it was vital to establish Halliburton's one-stop-shop model as the leader i n the industry for Lesar's vision for the future .

275. As stated above, Halliburton's top insiders were well aware that there wa s virtually no chance that Halliburton's customer on the Barracuda/Caratinga contract (Petrobras ) would honor any significant change order or Unapproved Claim for payment . Not only had

Petrobras vehemently insisted on a fixed price contract for Barracuda/Caratinga, it had also insisted on a prior fixed price contract with Halliburton performed in the late 90s. Petrobras refused to pay million of dollars of Unapproved Claims requiring Halliburton to take a larg e

$60 million charge at year-end 98! Ultra-tough customer plus ultra-tough contract equals recip e for disaster.

276. Not surprisingly, given Halliburton's deficient internal financial and accounting systems and defective contract performance controls and monitoring procedures and lack o f adequate personnel to supervise and perform such contracts, the Barracuda/Caratinga projec t immediately began to have problems as change orders were required by the customer for which additional compensation was not agreed. The amount of claims and change orders which

Halliburton included in its accounts receivable jumped $20 million in the quarter in which the work commenced on the Barracuda/Caratinga contract from $106 million to $126 million a t

9/30/00. By 6/30/01, the amount jumped to $151 million . Moreover, the project was behind

- 195 - schedule . In late 01, the contract was so late that Halliburton had contractual obligations to pay $77 million in liquidated damages ! The contract, which originally was to be completed in

late 03 and early 04, will not be completed until mid-to-late 05, if then . By 6/30/02, after nearly two years of the three-year contract had expired, the project was only 43% complete.

277. Despite these problems, Halliburton failed to accrue anticipated losses on th e contract as required by GAAP (SOP 81 - 1 .85: "When the current estimates of total contrac t revenue and contract cost indicate a loss, a provision for the entire loss on the contract should be made."). Halliburton did not even record a loss on the liquidated damages obligation it ha d incurred under the contract. Rather, Halliburton continued to recognize hundreds of millions of dollars of revenue and operating income . For the nine months ended 9/30/01, Halliburton attributed the bulk of a $400 million increase in ES revenue to "a large multi year project in

Brazil," i.e., Barracuda/Caratinga.

278. Ultimately, Halliburton could not conceal the ever-increasing losses on

Barracuda/Caratinga and began to record and reveal losses on the project, first with a $11 9 million loss in the 2ndQ 02. This was followed by $55 million and $173 million in losse s recorded in the 1 stQ and 2ndQ 03 . Then, in the lstQ and 2ndQ 04, Halliburton recorded a n

additional $97 million and $310 million, respectively, in losses associated with

Barracuda/Caratinga. The contract was revised in 4/04, which involved Halliburton returning a portion of the $300 million in advancement payments . The 4/04 contract revision was further revised in 10/04 with the release of all claims by Halliburton and Petrobras, includin g

Halliburton's unapproved claims . The 10/04 revision was finalized on 12/8/04 . The enormity o f

the problems on the contract, the extreme delay in completing the contract and the huge amoun t

of losses recorded (some $762 million) all demonstrate that Halliburton improperly recorde d

revenue and failed to make timely accruals of losses at least as early as the 1 stQ 01 .

- 196 - n y 4 M • •

279. Despite the probable losses from this project, Halliburton improperly recognize d

nearly $265 million in the lstQ and 2ndQ 01 and recorded millions of dollars in operating

income from that contract. The Company also failed to record tens of millions of dollars in

losses on the contract in 1st half of 01 . In the 3rdQ 01, Halliburton recorded another $120 +

million in revenue from this contract and millions in operating income, despite the indication s

described above that it was probable the contract would not only generate a loss, but a large loss .

HALLIBURTON'S INADEQUATE INTERNAL FINANCIAL AND ACCOUNTING AND CONRACT PERFORMANC E CONTROLS LED TO OTHER CONSTRUCTION ACCOUNTING MANIPULATIONS AND FALSIFICATION S

280. Halliburton's internal financial, accounting and contract performance control an d

monitoring deficiencies were so severe that they permitted Halliburton's failure to record losse s

on construction contracts (including Barracuda/Caratinga) and permitted Halliburton to conceal a

major change in accounting. These control deficiencies also contributed to accounting

manipulations in Halliburton's construction accounting on many projects .

Failure to Properly Accrue Construction Project Expenses

281 . KBR was Halliburton's engineering, construction, fabrication and projec t

management subsidiary and reported as the "Engineering and Construction Group" beginning i n

01 .

282. Among witnesses interviewed, plaintiff's investigation included interviews" wit h

five accountants currently or formerly employed by the Company . Plaintiff cannot identify thes e

persons at this time in order to avoid reprisal by defendants . Plaintiff was able to achieve the

cooperation of these witnesses despite a Company-wide e-mail, sent in early 03 and followed up

" This section of this Complaint is based upon the investigation conducted by the law firm of Scott + Scott on behalf of the AMS Fund .

- 197 - • • with employee meetings, that prohibited employees from speaking with anyone outside of the

Company regarding project accounting issues, i.e., the "code of silence" to cover up. These witnesses are identified as follows:

(a) Confidential Witness 1 ("CW V) - KBR Project Accountant from 8/01 to

3/03 .

(b) Confidential Witness 2 ("CW2") - KBR Senior Accountant from 8/89 t o

6/02 .

(c) Confidential Witness 3 ("CW3") - Shared Services Manager, Halliburto n

Shared Services Accounting Group, from 4/98 to 11/01 .

(d) Confidential Witness 4 ("CW4") - Consolidated Halliburton Group

Accountant, from 01 to 02 .

(e) Confidential Witness 5 ("CW5") - Halliburton cost accountant -

Securities DBS, from 01 to 02 .

283. According to the witnesses, at the beginning of a given project, a "Project Plan " was created based upon contract price and schedule for completion for a given construction o r engineering project . This plan projected monthly costs based on a percentage of complete d performance and an unexpected profit margin . CW1 and CW2 stated that KBR business uni t

Finance Directors, through the process described above, were directed to consistently ensure tha t all projects were operating "within plan ." If a project was "overrunning," the Finance Director s were to direct the Project Accountant to make specific changes to the profit and loss statement

("P&L") to bring it "within plan" before that P&L was "released" into KBR's accountin g information system.

284. The KBR-wide nature of this practice was underlined by the statements of CW 1 regarding her exposure to and discussions with dozens of fellow Project Accountants from acros s

- 198 - KBR during several months during which she spent the majority of her time in the Company' s

"Accounting Vault" (an accounting records repository) on Clinton Drive in Houston, Texas.

285. CW1 explained that she spent these months at the Accounting Vault with a grou p largely composed of other KBR Project Accountants working on the same type of task, lookin g at the same types of records, and lunching together at the cafeteria .

286. CW 1's conversations with fellow KBR Project Accountants indicated that all th e

Project Accountants had been directed by their respective Finance Directors to make monthl y project P&Ls show profits, i.e., be within plan, in specific ways directed by the Financ e

Directors, whenever they were losing money . Moreover, these fellow KBR Project Accountant s echoed the witness's own experiences in noting that, in fact, most of their projects were losing money. The changes to the monthly P&Ls ordered by the Finance Directors included th e following:

(a) Reductions in cost accruals . Accruals are expenses incurred during a

given month but not paid during that month. For example, if annual payment x is required t o

rent a given piece of equipment, use of the equipment for a month should cause an expense o f

x/12 to accrue, even if no actual payment was made in the month. In preparing monthly P&Ls ,

Project Accountants initially estimated accruals for KBR projects on a reasonable basis .

However, when projects were "overrunning," Finance Directors ordered arbitrary reductions i n

these accruals to boost the profitability of the project.

(b) Negative cost accruals. If further reduction in accruals was not possible,

Finance Directors would also order negative cost accruals (normally an oxymoron), where a

Project Accountant would enter a negative number as a cost accrual . Thereby, Finance

Directors could make even paid expenses disappear .

-199- • •

(c) Revenue accruals . According to CW5, Halliburton would hold the book s

open past quarter-end in order to meet sales goals or if goals had been achieved, sales would b e

"held" to be used in future quarters .

287 . None of these manipulations could ever be corrected through a reconciliation a t the end of a given project , or on the Company level (due to what CW2 described as KBR's

"decentralized" approach to financial reporting by individual business units) . Under KBR's system, these monthly project P&Ls, once they were "released," were set in stone as soon as they flowed into KBR's financial results and Halliburton's financial reports .

288 . According to the personal experience of CW1 (as well as her review o f documents from across KBR and her extensive discussions with Project Accountants from acros s

KBR) the total amount of reduced cost accruals, negative cost accruals, and positive revenu e accruals ordered by Finance Directors throughout KBR was based on "whatever it took to make

[the project] come back to plan ," i.e., profitability .

289. According to the personal experience of CW1 and her discussions with Project

Accountants from across KBR, it was well understood by virtually all of them that the ultimat e reason for these efforts on the part of their superiors was defendants' desire to meet Halliburton' s revenue and net income forecasts made to Wall Street .

290. According to CW1, the understatement of losses on projects was deliberatel y made by financial management at Halliburton . The financial management, as a practice, issued directives to project accountants to manipulate cost data on certain project P&Ls . At the end of every month, every KBR business group was required to produce a P&L for each project .

During this process, Finance Directors for the groups reviewed initial versions of the project

P&Ls and then would direct that arbitrary changes be made to the P&Ls to bring the projects

within plan. It was common for actual costs to exceed budgeted costs at some point during the

-200- performance on a contract . The most common way that project losses were eliminated wa s through journal entries which took the form of recording a negative cost accrual. Many times these negative cost accruals were the same amount as the excess costs or the amount by whic h the actual costs exceeded budgeted costs . These negative cost accruals were usually don e through a journal entry called a "Firm JV," an entry which would create false profits and hid e losses on Halliburton's books. Expenses would be credited and accrued liabilities or account s payable would be debited. In this way Halliburton could avoid recording any losses on thes e contracts - at least until the time the contract was completed .

291 . According to CW1, another practice involved improper revenue accruals .

Revenue, when it was below plan, would frequently be inflated through the use of reversin g journal entries ("reversing JVs"), which would be recorded one month and then after th e financials were put out it would automatically reverse itself the next month . These reversing JVs would book revenue that would actually be earned in the following month or quarter and woul d be recorded early. The next month this entry would reverse itself out so that the total revenue at the end of the project was still according to the plan and the contract .

292 . A third type of manipulation in projects described by CW 1 involved cross- charges or shifting costs and profits between projects to even out losses and to hide overruns.

CW 1 had one situation where she was directed to ship $900,000 of revenue for one profitabl e project to a project that was running a $900,000 loss so that both projects would appear to be operating within plan budgets and no loss would need to be recorded . Another way to hide these losses was to simply charge excess costs from an overrun project to one that was running a hig h level of profit. Sometimes excess costs on customer projects were charged to inter-compan y projects so that it could be spread out among profitable projects .

- 201 - 293. CW 1 also described how the Company manipulated expenses and account s payable to conceal losses . This involved a simple effort to not record invoices from vendors in a timely fashion, or at least until a quarter had ended . This would understate accounts payable and would also understate expenses and cause the Company to not record required losses . The Firm

JVs, described above, also affected accounts payable. Halliburton maintained an account #500 on its chart of accounts which was used for accruals . This account #500 on Halliburton's chart of accounts would be rolled up into the balance for accounts payable . Negative cost accrual s were posted to the project level #500 accounts so that when accountants were directed to enter a negative cost accrual at the project level, it would go into this accounts payable account . During periods where there were significant costs overruns, this use of account #500 caused account s payable to be significantly understated. As noted above, this manipulation also caused earning s to be overstated.

294. Finally, CW1 stated that it was evident that her business unit was losing money .

She estimated that the business unit was losing money in inverse proportion to the amount that i t appeared to be making in the manipulated P&Ls of the business unit's various projects. She noted that there were constant complaints from the business unit's vendors regarding payment , i.e., non-payment, for their bills. Some waited over six months to get paid, and delays of 3- 4 months were standard procedure . According to the witness, as of early 2002 (shortly after the end of the Class Period) Halliburton was on "credit hold" with 50 transportation vendors alone .

295 . According to CW1, when KBR accountants disputed any of these practices, the y were fired or transferred . For example, one accountant (who took issue with managemen t regarding the arbitrary reduction of expenses experiencing cost overruns) was transferred t o

China for two years . Similarly, a project accountant who took issue with false billing at KBR

- 202 - was summarily terminated, as described below . Another project accountant who refused to assis t in illegally submitting false visa applications for Halliburton was also terminated .

296. The hundreds of monthly P&Ls for Individual KBR projects collectively comprised the financial results for KBR as a whole for a given month . Over a three-month period, these monthly P&Ls, in combination with the results of the ES division and corporate- level expenses, in turn comprised the quarterly results of Halliburton . To the extent that the

KBR monthly P&Ls were inflated, the net income reported in the corresponding Halliburton 10-

Qs and 10-Ks was inflated as well.

297 . According to CW1, CW2 and CW3 , these manipulations were facilitated by the fact that KBR used a decades-old accounting information system throughout the Class Period .

Using this antiquated accounting information system, the month-end process of preparing th e

P&L was uniform across KBR and involved the manual creation and entry of data . After the project accountant provided a preliminary P&L to the Finance Director of that business unit, th e

Finance Director reviewed the P&L and, based on policy directives from the executive in charg e of KBR, directed, orally, by email, or via an authorized assistant, that the Project Accountant manually make specific changes to the P&L (e .g., "Reduce this accrual to x (amount), " or, "Pos t a firm JV (journal voucher) for a negative cost accrual at x") . The Project Accountant then made the revisions and resubmitted the P&L to the Finance Director, who, if it met his approval, then authorized the "release" of the P&L into KBR's accounting information system .

298. While modern accounting systems such as the SAP accounting system ("SAP"), like that used by Halliburton's ES division, are designed to capture all financial data in on e place, limit the "visibility" of individual users and their ability to manipulate data, and requir e that all entries and data ultimately "match" or reconcile, according to CW3, in early 01 executiv e management of the Company internally informed business unit managers that they would

- 203 - 0 abandon efforts to convert KBR's accounting to SAP . In SAP and other modern accounting systems, accruals are automatically generated, not manually entered . Had SAP been used i n

KBR, all invoices would have been generated centrally, all bills would have been paid centrally and invoices and payments would have been reconciled with the financial statements .

299. In contrast to SAP, CW1, CW2 and CW3 stated that the accounting systems an d procedures at KBR required that monthly project P&Ls be accepted at face value . There was no attribution of specific invoices, payments, checks, and deposits to specific P&Ls, much less lin e items on the P&Ls (as would be required by any modern accounting system) . There was no reconciliation to a centralized account because individual KBR business units generated invoice s separately, and they recorded accounts receivable and accounts payable separately .

300. CW1 directly witnessed an audit of projects for which she prepared the monthl y

P&Ls. She stated that the extent of the testing performed by the auditors was to request certain of the already massaged monthly P&Ls to verify that they reconciled with the unit's balanc e sheet. Prior to the audit, CW 1 was asked to meet with the Finance Director of the business uni t and he specifically instructed her not to volunteer cost data from the mainframe or to facilitat e any testing of the monthly P&Ls .

Creating Artificial Construction Project Revenue by False Invoices

301 . One method of manipulating earnings was simply the issuance of sham invoices , or over-billing with no expectation of actually getting paid . Another was Halliburton's change in accounting policy during the Class Period to allow it to recognize Unapproved Claims on construction projects as immediate revenues, even though these were Unapproved Claims i t never expected to collect and never subsequently collected .

302 . CW 1 stated that KBR often significantly overcharged customers when a pa rticular project was falling out of plan . If the customers actually paid, then so much the better . If they

- 204 - did not, the revenues and accounts receivable remained on the books indefinitely and the Project

Accountant (who also took care of collections) was directed not to attempt to collect on th e invoice.

303. In addition to the KBR-wide practice of over-billing, sometimes with n o expectation of getting paid but merely to increase reported revenues, according to CW 1 an d

CW2, accountants at the business unit were also directed not to add to reserves for doubtfu l accounts, an action required under GAAP whenever one has information that an invoice i s unlikely to be paid . A reserve for doubtful accounts is a contra account of accounts receivable .

Increasing the reserve reduces accounts receivable and income . Thus, the orders to not add to reserves for doubtful accounts again had the effect of artificially increasing income .

304. Another example further illustrates the pervasiveness of this over-billing and th e knowing complicity of high-level Halliburton executives both in the practice and in uncovering i t up. A program manager for several KBR "time and materials" projects discovered that

Halliburton clients were between them being billed for a total of 80-90 hours per week for hi s time, despite the fact that he worked only 40 hours per week . When the program manage r disputed this, he was flown to Halliburton's headquarters for a "dispute resolution" session . He was met at the airport, taken to Halliburton's employee dispute resolution office, given a chec k for $20,000 and fired. The reason for the $20,000 pay-off was that Halliburton had gotten

"caught" by the program manager's discovery and his superiors needed to purchase his silence .

305. In some cases, the clients to which KBR sent false invoices were entities create d and controlled by Halliburton . Witnesses spoke of "MMM," a Mexican company formed by

Halliburton. Invoices sent to MMM were treated as third-party revenues and maintained indefinitely as accounts receivable in KBR's books . However, the witnesses explained, thes e invoices were never paid because MMM was "actually Halliburton ."

- 205 - • 0

Raiding Dresser 's Conservatively Established Reserve Accounts

306. Prior to being acquired by Halliburton, Dresser's Kellogg construction unit had been known in the industry for conservative accounting and a history of never reversing a profi t on a project. After the Dresser merger was completed, according to two former Dresse r executives, defendants began to raid various reserve accounts (such as reserves for doubtfu l accounts receivable and reserves for cost overruns on engineering and construction projects) tha t

Dresser had previously maintained as part of its conservative approach to running an d accounting for business. This enraged the former Dresser executives .

307. The common-sense concept underlying reserve accounts is that when on e becomes aware that an invoice has a good chance of being uncollectible, one should reserve for it. When one knows that a lump-sum project is generating unexpected costs, one should reserv e for these extra costs . Financial reporting should be reliable in that it represents what it purport s to represent. FASB Statement of Concepts No. 2, 19[58-59 . Financial reporting should b e complete, leaving nothing out that may be necessary to insure that it validly represents the actua l knowledge of the authors . FASB Statement of Concepts No. 2,179 . Most importantly, financial reporting, in the face of uncertainty, should be conservative. FASB Statement of Concepts No .

2,19[95, 97.

308 . As stated above, balance sheet accountants at the business unit, KBR an d

Halliburton level were directed not to add to reserves for doubtful accounts, an action require d under GAAP whenever one has information that an invoice is unlikely to be paid . (A reserve for doubtful accounts is a contra account of accounts receivable . Increasing the reserve reduce s accounts receivable and earnings.) According to a balance sheet accountant , as of shortly after the end of the Class Period, Halliburton accounts receivable aged over 180 days totale d approximately $180 million . This accountant was specifically instructed not to increase

-206- Halliburton's "miniscule" reserve for doubtful accounts despite this staggering amount .

Similarly, a KBR Project Accountant reported that her business unit's accounts receivable age d over 180 days totaled $20 million, and yet the unit's reserve for doubtful accounts was a

"ridiculously low" $700,000 .

309. However, defendants went beyond these manipulations . Defendants dramaticall y reduced Dresser's reserves following the merger in order to extract one-time gains in inflate d reported profits . These high-level accounting manipulations on the part of the Individua l

Defendants were clear violations of GAAP. Dresser's management had clearly considered th e reserves necessary and appropriate, and then were disgusted to witness those reserve account s being arbitrarily raided by the defendants to unrealistically low levels . These were blatant violations of GAAP, violations that rendered all resulting financial statements presumptivel y misleading and inaccurate under 17 C.F.R. §210.4-01(a)(1) .

310. By secretly reducing Dresser 's reserves for doubtful accounts and project overruns to unrealistically low levels, defendants were able to further inflate Halliburton' s revenues, just as they inflated revenues by booking, as revenue, false invoices and "unbille d receivables" that, in fact, did not exist.

311 . Because there were no additional expenses related to these "found" revenues, th e revenue increases from decreasing reserve accounts flowed 100% directly to income . This manipulation of the merged Company's reserves was not based on the Company's pas t experience with project expenses or accounts receivables - a best estimate of probable outcome s

- or any change of circumstances to justify a change in the reserves. Instead, defendants illegally manipulated the merged Company's reserves to mask the Company' s actual business performance and financial condition by artificially boosting reported revenues and net income .

- 207 - A,rc S 0

312. In this case, all of the Individual Defendants were CPAs in direct control of bot h

Halliburton's accounting policies and practices and the content of its reports to investor s

regarding Halliburton' s financial performance . They prepared, approved and/or signed the

Company's financial statements and related disclosures , its filings with the SEC and its press

releases. They also prepared and/or made statements to investors and analysts in conversations ,

conference calls and meetings.

313. This case is very unusual in that each of the Individual Defendants is a CPA and

therefore would have special knowledge regarding both accounting practices and internal

financial and accounting controls - matters central to the alleged fraud in this case . And because

of their long association with Hallibu rton or its outside auditing firm, Arthur Andersen, they, of

course, had intimate familiarity with Halliburton's business operations, projects, accounting

practices, and policies and internal controls .

314. The Individual Defendants with unlimited access to the Company's accountin g

systems and controls, as well as its business and financial books and records, had detaile d

knowledge of the Company's actual business performance, financial condition and results an d

prospects. Thus, these Individual Defendants had access to adverse undisclosed informatio n

about the actual status of Halliburton's large fixed-price contract projects, the actual level of

revenues that the Company would likely collect on those projects, the escalating level o f

Unapproved Claims the projects were generating, and the actual level of the Company' s

exposure to asbestos liability and knew that the operating and net incomes of the Company an d

its ES and E&C units under GAAP and principles of fair presentation were much less than bein g

publicly reported. The Individual Defendants knew (or recklessly disregarded) that these

adverse facts rendered the omissions and affirmative representations that they each made ,

prepared, signed and/or approved materially false and misleading , and in violation of GAAP and

- 208 - ~y S •

the federal securities laws, as particularized in this Complaint . By virtue of their positions,

authority and duties in the Company, as described above, the Individual Defendants' knowing o r

severely reckless state of mind with respect to these omissions and affirmativ e

misrepresentations is attributable to defendant Halliburton .

315 . The named defendants were, during the Class Period, president/COO-

CEO/Chairman, EVP/CFO, and Controller/Principal Accounting Officer . These Individual

Defendants were the four top officers of Halliburton, charged with overseeing and managing its

business operations, overseeing its system of internal accounting and financial controls, correctl y

accounting for its business operations and assuring the accuracy of its SEC filings and othe r

disclosures to investors . These four individuals managed and operated Halliburton's business a s

a very close-knit team, communicating and/or meeting with each other on virtually a daily basi s

to focus on the major problems facing Halliburton's business - the very items which allegedl y

were not disclosed - and attempting to manage and solve them .

316. Accounting manipulations of the type allegedly engaged in here, i.e., secretly

changing the way Halliburton accounted for Unapproved Claims and improperly recognizing a s

revenue over $150 million of Unapproved Claims which were not probable of collection o r

capable of accurate estimation, could not have happened without acquiescence and therefor e

knowledge of these top officers . In fact, at one point or another during the Class Period, Lesar

and Morris signed representations in Halliburton's annual repo rts accepting responsibility for the

accuracy of Halliburton's financial statements and the adequacy of its internal controls, whil e

Lesar reviewed and approved and Morris and Muchmore signed most, if not all, of Halliburton' s

SEC filings.

317. In fact, with regard to some of the key accounting allegations, i.e., that

Halliburton secretly changed the way it was accounting for Unapproved Claims and recognize d

- 209 - millions of dollars of unpaid Unapproved Claims without disclosure thereof, Foshee has bee n publicly quoted as stating that he was "certain" Lesar knew of that change and approved it an d

Lesar has been publicly quoted as saying that Cheney "was aware" of the change and tha t

Halliburton "was treating cost overruns as revenue," and, in fact, actively engaged in attemptin g to collect Unapproved Claims from customers .

318 . Undertaking the largest acquisition in a company's history, i.e., Halliburton' s acquisition of Dresser, is simply not an event that can occur without the intimate involvement of the very top executives and financial officials of a company . The integration of an acquired company is the sine qua non of a successful acquisition and something that is attended to directly by the top officers of the acquiring company, as they know analysts and investors will demand t o know the status of the integration efforts, whether they are succeeding and whether the hoped-for synergies/savings are being achieved .- Since the attempted integration of Dresser's constructio n operations into Halliburton's was a disastrous failure, it is not possible that the COO/President-

CEO/Chairman, CFO and Principal Accounting Officer of the Company did not know of those problems.

319. Another example is the Barracuda/Caratinga project . This was the larges t construction project in Halliburton's history . It was undertaken on a fixed-price/lump-sum basis.

These contract terms were approved personally by the top officers of Halliburton and th e performance of that contract and the accounting for it were their direct responsibility . The largest contract in the Company's history is in the process of creating the largest loss - $76 2 million to date - in the Company's history. If the top officers of the Company do not know about a problem of that magnitude, since they are charged with the responsibility of attemptin g to solve it, then they are grossly reckless and have absolutely no business making any publi c representations regarding the state of performance of that contract, or its financial impact on

- 210 - Halliburton. And, with respect to the $180 million in improper payments made to obtain th e

Bonny Island, Nigeria LNG contract, payments of that size and scope - which clearly violate, b y

Halliburton's own admission, its Code of Business Conduct and Ethics, as well as its interna l controls - cannot happen without at least the acquiescence of the CFO and Controller of a company. The construction business was Halliburton's most important segment and the frau d involving this business was at the core of Halliburton's operations . The threat of the asbestos liability to the Company was huge and, given the number of possible claimants, could dwar f

Halliburton's insurance and reserves for this liability . The amount of reserves for this liability would clearly be a matter requiring the attention of Halliburton's top management .

320. At bottom, matters involved in this case - the method of accounting for th e collection of Unapproved Claims in the largest and most important part of Halliburton' s businesses, i.e., its construction operations, the success and liabilities associated with the larges t acquisition in Halliburton's history and the performance of the largest single contract i n

Halliburton's history - are simply not matters relegated to lower-level managers - these are th e very matters which the top executives of the Company are involved in on a day-to-day basis and with which they must be intimately familiar. And, if they are not, then there is absolutely no factual basis for the affirmative and positive representations they chose to make about th e

successful restructuring of Halliburton's construction business, the success of the Dresser merge r

and the integration of its construction businesses into Halliburton's, the successful economi c performance of Halliburton's ES operations and their strong contribution to Halliburton' s

reported net income/EPS, and the success of and contribution to operating income being made b y

the Barracuda/Caratinga contract .

321 . In addition to their top executive positions, which perforce required their intimate

involvement in the matters central to this suit, the insider trading by Halliburton's top executive s

- 211 - is indicative of their knowledge of the problems alleged herein . The timing and magnitude o f these sales is highly supportive of an inference of knowledge on the part of Halliburton's to p executives of the adverse conditions and problems existing inside Halliburton and the accountin g manipulations engaged in to conceal them . As the graphs presented in other sections of thi s

Complaint demonstrate, these sales were unusual in timing and amount, both individually and in the aggregate. Halliburton's top executives sold no, or a relatively small number of, shares in th e two years prior to the beginning of the Class Period . Yet, during the Class Period, as their affirmative misrepresentations pushed Halliburton's stock higher and put their stock options "in the money," they unloaded millions of shares of stock . And they were clever and effective i n timing their sales. Almost all of their sales occurred at market peak prices during the Clas s

Period. In other words, when the stock declined due to market factors or partial revelations o f adverse facts, the insiders stopped selling . But when the stock was more highly inflated at othe r times during the Class Period, they sold . Their market trading was clearly designed to maximiz e their personal profits. If, in fact, Halliburton's insiders believed what they were saying about the current period success and future anticipated success of Halliburton's stock, why would the y have sold off 61 % of their holdings? If what they said was true, their stock options, which were in no danger of expiring, would have been even more valuable as Halliburton's forecasted future successes came to be. Thus, their sales were completely inconsistent with their public representations about Halliburton's business, but completely consistent with and supportive o f the allegations made herein of their knowledge of the adverse conditions and problems insid e

Halliburton's business and the accounting manipulations they were engaging in to cover the m up.

- 212 - • S

HALLIBURTON EXECUTIVES' 97-01 INSIDER TRADING, SALARIES AND BONUSE S

322. During the Class Period, the defendants had both the motive and opportunity t o commit fraud. Several of Halliburton's top insiders took advantage of their knowledge of the material non-public negative information concerning Halliburton's business, financials and future prospects by selling of 1,344,064 shares of their Halliburton stock for $68,262,758 i n illegal insider trading proceeds . These sales are set forth below :

Name Date Shares Price Proceeds Jerry H. Blurton 4/30/1999 12,000 $43.380 $520,560 VP/Treasurer 4/30/1999 2,00 $43.500 $87,000 1996 -2004 5/31/2000 12,000 $50.970 $611,640 8/30/2000 12,000 $53.440 $641,280 5/21/2001 5,300 $48.780 $258,534 5/21/2001 1,292 $48.790 $63,037 44,592 $2,182,05 1

William E. Bradford 5/15/2000 11,525 $52.000 $599,300 Chairman of the Board 5/15/2000 11,525 $52.000 $599,300 1998 -2000 5/15/2000 9,018 $52.000 $468,936 5/15/2000 7,490 $52.000 $389,480 5/15/2000 2,507 $52 .000 $130,364 5/17/2000 69,750 $52.000 $3,627,000 5/17/2000 25,200 $52.130 $1,313,676 5/17/2000 360 $52 .060 $18,742 137,375 $7,146,798

Richard B . Cheney 5/31/2000 100,000 $50.970 $5,097,000 CEO 8/21/2000 300,000 $52 .280 $15,684,000 1995 -2000 8/22/2000 95,000 $52 .990 $5,034,050 8/23/2000 65,000 $53 .930 $3,505,450 8/23/2000 25,000 $53 .930 $1,348,250 8/28/2000 175,000 $53 .640 $9,387,000 760,000 $40,055,750

Lester L. Coleman 2/4/1999 10,001 $30.000 $300,030 EVP/General Counsel 5/28/1999 5,000 $41 .310 $206,550 1998 -2002 5/28/1999 5,000 $41 .380 $206,900 5/18/2000 28,000 $50.000 $1,400,000 5/14/2001 20,000 $43 .070 $861,400 5/16/2001 14,000 $45 .000 $630,000 82,001 $3,604,880

- 213 - • 0

Name Date Shares Price Proceeds John W. Kennedy 5/17/2000 5,500 $50 .880 $279,840 EVP Global Business 5/17/2000 1,020 $50.810 $51,826 Development 6,520 $331,66 6 2000 - 2002

David J. Lesar 5/3/1999 14,666 $44.000 $645,304 Chairman of the Board/CEO 5/3/1999 5,334 $44.000 $234,696 2000 - Present 5/31/2000 15,000 $50.970 $764,550 President and COO 35,000 $1,644,550 1995 - 2000

James L. Martin 8/10/2000 40,000 $51 .940 $2,077,600 Director 2/14/2001 7,345 $43 .250 $317,671 1998 - Present 5/10/2001 24,000 $42.600 $1,022,400 71,345 $3,417,67 1

Gary V. Morris 8/31/2000 7,500 $53,500 $401,250 EVP/CFO 1997 - 2002

Donald C . Vaughn 5/8/2000 30,425 $48 .380 $1,471,962 Vice Chairman 5/8/2000 5,650 $48 .380 $273,347 1998 - 2001 5/8/2000 2,150 $48 .380 $104,017 5/8/2000 4,475 $48 .380 $216,501 5/8/2000 3,250 $48 .380 $157,235 5/8/2000 2,300 $48 .380 $111,274 5/8/2000 2,250 $48 .380 $108,855 8/14/2000 100,000 $52.160 $5,216,000 4/3/2001 3,900 $32.740 $127,686 4/5/2001 4,000 $33 .410 $133,640 4/23/2001 20,000 $38.020 $760,400 4/24/2001 10,000 $37.320 $373,200 4/24/2001 6,331 $37.510 $237,476 4/24/2001 5000 $37.310 $186,550 199,731 $9,478,142

Totals: 1,344,064 $68,262,758

323 . The 97-01 salaries and bonuses of Hallibu rton's top executives are set forth below:

Name 1997 1998 1999 2000 2001 Total

Richard B . Salary $1,100,000 $1,183,257 $1,283,000 $806,332 $4,372,589 Cheney Bonus $1,980,000 $1,154,704 $1,451,398 $4,586,102

- 214 - Y~ X • 0

Name 1997 1998 1999 2000 2001 Total David J . Salary $500,000 $693,255 $823,000 $958,333 $1,100,000 $4,074,58 8 Lesar Bonus $650,000 $534,955 $2,012,709 $2,200,000 $5,397,664

Lester L. Salary $390,000 $412,506 $450,000 $475,008 $475,008 $2,202,522 Coleman Bonus $390,000 $225,000 $498,800 $475,008 $1,588,808

Gary V. Salary $291,670 $337,500 $450,000 $475,008 $550,000 $2,104,178 Morris Bonus $291,670 $225,000 $498,800 $550,000 $1,565,470

Donald C. Salary $614,417 $741,000 $741,000 $2,096,41 7 Vaughn Bonus $1,085,000 $800,500 $1,167,178 $3,052,678

William E. Salary $1,001,000 $1,154,000 $2,155,000 Bradford Bonus $1,672,708 $1,235,375 $2,908,083

NO SAFE HARBOR

324. The statutory safe harbor provided for forward -looking statements under ce rtain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

Many of the specific statements pleaded in this complaint were not identified as "forward-

looking statements" when made . To the extent there were identified forward-looking statement s

made, they were not presented as specific meaningful cautionary statements identifying

important factors that could cause actual results to differ materially from those in the purportedl y

forward-looking statements . The Safe Harbor warnings in Halliburton's SEC filings wer e

boilerplate and did not materially change during the Class Period, even though the economic an d

business conditions in which Halliburton operated and the risk facing its business did.

Alternatively, to the extent that the statutory Safe Harbor does apply to any forward-lookin g

statements pleaded in this Complaint, defendants are liable for those false forward-lookin g

statements because at the time each of those forward-looking statements was made, the particula r

speaker knew that the particular forward-looking statement was false, and/or the forward-lookin g

statement was authorized and/or approved by an executive officer of Halliburton who knew tha t

those statements were false when made . The Safe Harbor does not apply to Halliburton' s

financial statements .

- 215 - CLASS ACTION ALLEGATIONS

325 . This is a class action on behalf of purchasers of Halliburton common stock during the Class Period, excluding defendants (the "Class") . Excluded from the Class are officers and directors of the Company, as well as their families and the families of the defendants . Class members are so numerous that joinder of them is impracticable .

326. Common questions of law and fact predominate and include whether defendants :

(i) violated the 1934 Act ; (ii) omitted and/or misrepresented material facts ; (iii) knew or recklessly disregarded that their statements were false ; and (iv) artificially inflated the price o f

Halliburton common stock and the extent of and appropriate measure of damages .

327. Plaintiffs' claims are typical of those of the Class . Prosecution of individual actions would create a risk of inconsistent adjudications. Plaintiffs will adequately protect the interests of the Class . A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

COUNT I

Violation of §10(b) of the 1934 Act and Rule 10b-5 Promulgated Thereunder Against All Defendant s

328. Plaintiffs repeat and reallege each and every allegation contained in 111-327.

329. During the Class Period, defendants carried out a plan, scheme and course o f conduct which was intended to and, throughout the Class Period, did deceive the investin g public, including plaintiffs and other Class members, as alleged in this complaint and cause d plaintiffs and other members of the Class to purchase Halliburton stock at artificially inflated prices . In furtherance of this unlawful scheme and course of conduct, defendants, and each o f

them, took the actions set forth in this Complaint .

330. Defendants (a) employed devices, schemes, and artifices to defraud ; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make th e

-216- 0 statements made not misleading ; and (c) engaged in acts, practices, and a course of busines s which operated as a fraud and deceit upon the purchasers of the Company's common stock in a n effort to maintain artificially high market prices for Halliburton stock in violation of § 10(b) o f the 1934 Act and Rule 1Ob-5 . All defendants are sued as primary participants in the wrongful and illegal conduct and fraudulent scheme and course of business charged in this complaint .

331 . These defendants employed devices, schemes and artifices to defraud. While in possession of material adverse non-public information, they engaged in acts, practices, and a scheme as alleged herein in an effort to assure investors of Halliburton's business and financial success and prospects for continued substantial growth . This included the making of, or the participation in the making of, untrue statements of material fact and concealing facts necessar y in order to make the statements made, in the light of the circumstances under which they were made, not misleading. This conduct artificially inflated the price of Halliburton stock and operated as a fraud and deceit upon the purchasers of Halliburton stock during the Class Period , proximately causing them economic loss and damage as, through a series of disclosure s beginning in 9/00-10/00, the price misrepresentations and other fraudulent conduct of defendant s became apparent and the artificial inflation in Halliburton's stock price came out of the stoc k price as it collapsed to as low as $8 .60 per share - a statistically significant, company-specifi c stock price decline not due to general stock market movements, changed economic conditions , changed investor expectations or company-specific negative events or information unrelated t o the alleged misrepresentations and other fraudulent conduct .

332. The defendants had actual knowledge of the misrepresentations and omissions o f

material facts set forth in this Complaint, or acted with reckless disregard of the truth in that the y

failed to ascertain and to disclose such facts, even though such facts were available to them .

- 217 - C

333 . As a result of the dissemination of the materially false and misleading informatio n and failure to disclose material facts, as set forth above, the market price of Halliburton stoc k was artificially inflated during the Class Period . Relying directly or indirectly on the false an d misleading statements made by defendants or upon the integrity of the market in Halliburto n stock, plaintiffs and the other members of the Class purchased Halliburton stock during the Clas s

Period at artificially high prices and were damaged thereby .

334. At the time of defendants ' misrepresentations and omissions, plaintiffs and othe r members of the Class were ignorant of their falsity . Had plaintiffs and the other members of th e

Class and the market known the truth which was not disclosed by defendants, plaintiffs and othe r members of the Class would not have purchased their Halliburton stock, or, if they had acquire d such stock during the Class Period, they would not have done so at the artificially inflated prices which they paid.

335. As a direct and proximate result of defendants ' wrongful conduct , plaintiffs and the other members of the Class suffered damages in connection with their respective purchase s and sales of the Company's stock during the Class Period .

COUNT II

Violation of §20(a) of the 1934 Act Against All Defendants

336. Plaintiffs repeat and reallege each and every allegation contained in 111-335 .

337 . The Individual Defendants acted as controlling persons of Halliburton within th e meaning of §20(a) of the 1934 Act as alleged in this complaint . By virtue of their accounting expertise, their high-level accounting positions, and their ownership and contractual rights , participation in and/or awareness of the Company's operations, accounting policies and methods , and/or intimate knowledge of the false financial statements filed by the Company with the SE C and disseminated to the investing public, the Individual Defendants had the power to influence

- 218 - and control and did influence and control, directly or indirectly, the decision-making of th e

Company, including the content and dissemination of the various statements which plaintiff s contend 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 othe r statements alleged by plaintiffs to be misleading prior to and/or shortly after these statement s were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.

338. In particular, each of these defendants had direct and supervisory involvement i n the day-to-day operations, and in the accounting policies and practices of the Company and , therefore, each is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged in this Complaint, and exercised th e same. The Company controlled the Individual Defendants and all of its employees .

339. As set forth above, Halliburton and the defendants each violated § 10(b) and Rule lOb-5 by their acts and omissions as alleged in this Complaint . By virtue of their positions as controlling persons, the defendants are liable pursu ant to §20(a) of the 1934 Act. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and other members of the Clas s suffered damages in connection with their purchases of the Company's stock during the Clas s

Period.

PRAYER

WHEREFORE, plaintiffs pray for relief and judgment, as follows :

A. Determining that this action is a proper class action, certifying plaintiffs as clas s representatives under Rule 23 of the Federal Rules of Civil Procedure and designating thi s

Complaint as the operable complaint for class purposes ;

- 219 - 0

B . Awarding compensatory damages in favor of plaintiffs and the other Class members against all defendants, jointly and severally, for all damages sustained as a result of defendants ' wrongdoing, in an amount to be proven at trial, including interest thereon ;

C. Awarding extraordinary , equitable and/or injunctive relief as permitted by law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and any appropriate state law remedies to assure that the Class has an effective remedy;

D. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in thi s action, including counsel fees and expert fees ; and

E. Awarding such other and further relief as the Court may deem just and proper .

JURY TRIAL DEMANDE D

Plaintiffs hereby demand a trial by jury .

DATED: May, 2005 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP WILLIAM S . LERACH ANDREW J. BROWN

A l w o~s7uviSSwt C ~ it L &L WILLIAM S . LERACH

401 B Street, Suite 1600 San Diego, CA 92101 Telephone : 619/231-1058 619/231-7423 (fax) SCOTT + SCOTT, LLC DAVID R. SCOTT NEIL ROTHSTEIN

"54 (a DAVI R. SCOTT

108 Norwich Avenue Colchester, CT 06415 Telephone : 860/537-3818 860/537-4432 (fax)

SCOTT + SCOTT, LLC ARTHUR L. SHINGLER III 401 B Street, Suite 307 San Diego, CA 92101 Telephone : 619/233-4565 619/233-0508 (fax)

Co-Lead Counsel for Plaintiffs

KILGORE & KILGORE THEODORE C. ANDERSON 3109 Carlisle Dallas, TX 75204 Telephone: 214/969-9099 214/953-0583 (Fax)

Local Counsel for Plaintiffs

PROVOST & UMPHREY LAW FIRM, LLP JOE KENDALL STATE BAR NO . 11260700 WILLIE C . BRISCOE STATE BAR NO . 24001788 3232 McKinney Avenue, Suite 700 Dallas, TX 75204 Telephone: 214/744-3000 214/744-3015 (fax) 0 UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXA S HOUSTON DIVISIO N

SECURITIES AND EXCHANGE COMMISSION ,

Plaintiff,

V. COMPLAINT

HALLIBURTON COMPANY And ROBERT CHARLES MUCHMORE, JR . ,

Defendants .

Plaintiff Securities and Exchange Commission alleges as follows :

SUMMARY

1 . This case concerns Halliburton Company's ("Halliburton" or the "company") failure to properly disclose to the investing public certain significant changes in its accounting practices, and the effects of these changes on Halliburton's financial presentation .

2 . Beginning in the second quarter of 1998, Halliburton changed its accountin g practices to recognize as income "unapproved claims" (as hereafter defined) in connection with certain large construction contracts . Previously, the company recorded income from claims only after the claim was resolved between Halliburton and the customer . The change resulted in enhanced bottom-line financial performance for Halliburton . For example, by including the unapproved claims component, its audited pre-tax income for

1998 was 46% greater than it would have been without the inclusion of unapproved claims. Although the Commission is not alleging that the amounts as reported failed to comply with Generally Accepted Accounting Practices ("GAAP"), the Commission i s

22 2 EXHIBIT A r-1 1 . M ' •

alleging that, by failing to disclose this material change in its accounting until March 2000 ,

the company misled investors and violated federal securities laws .

3. Robert Charles Muchmore, Jr ., was Halliburton's controller when the chang e

in Halliburton's claims recognition practice was initiated . Muchmore, whose principal

duties included Halliburton's financial reporting, failed, over a two-year period, to tak e

appropriate action to cause Halliburton to disclose this change .

4 . In the interest of protecting the public against misleadingly incomplet e

financial disclosures by public companies, the Commission brings this action seeking civil

money penalties of $7 .5 million against Halliburton and $50,000 against Muchmore . As

part of a global settlement, the defendants also have agreed to consent, without admitting

or denying the findings therein, to entry of a cease-and-desist order by the Commission .

JURISDICTION AND VENU E

5. This Court has jurisdiction over this action pursuant to Section 22(a) of th e

Securities Act of 1933 ("Securities Act") [15 U .S.C. § 77v(a)] and Section 27 of the

Securities Exchange Act of 1934 ("Exchange Act") [15 U .S .C. § 78aa].

6. Defendants have , directly and indirectly, made use of the means o r

instrumentalities of interstate commerce and/or the mails in connection with th e

transactions described in this Complaint .

7. Venue lies in this Court pursuant to Section 22(a) of the Securities Act [1 5

U .S.C . § 77v(a)] and Section 27 of the Exchange Act [15 U .S.C. § 78aa] because

Halliburton is headquartered in Houston, Texas, and certain of the acts and transaction s

described herein took place in Houston .

SEC v. Halliburton Co., et al. 2 COMPLAINT 223 •

DEFENDANTS

8. Halliburton is a Delaware corporation and its securities are registered wit h the Commission under Section 12(b) of the Exchange Act and trade on the New York

Stock Exchange . From at least 1997 to 1999 (the "relevant period") Halliburton had two primary reporting segments, the Energy Services Group and the Engineering and

Construction Group . The Energy Services Group provides exploration and logistical solutions for the exploration, development and production of oil and gas . Brown and Root

Energy Services ("BRES") was a business unit of the Energy Services Group . The

Engineering and Construction Group ("E&C") provides a wide range of industrial construction services to energy, industrial and government customers .

9 . Muchmore , age 50, is a resident of Houston, Texas. During the relevant period, Muchmore was the controller of Halliburton . As controller, Muchmore's principa l duties included Halliburton's accounting and financial reporting . Although no longe r

Halliburton's controller, Muchmore remains a Halliburton employee .

FACTS

Halliburton's E&C Business

10. Prior to mid-1997, the business unit (BRES) and reporting segment (E&C ) generally conducted business under two types of contracts: "cost-plus" or "fixed-fee ."

Cost-plus contracts provide for reimbursement to the contractor of all reasonable costs, plus an agreed-upon profit payable to the contractor. Under fixed-fee contracts, contractors perform for a fixed, agreed-upon fee intended by the parties to encompass all reasonable costs foreseen at the time of the contract's execution . The contractor's profit equals the margin by which the fee exceeds the contractor's costs; if those costs exceed

SEC v. Halliburton Co., et al. 3 COMPLAINT 224 the fee, the contractor incurs a loss on the contract . Fixed-fee contracts offer, therefore, an opportunity to make larger profits - assuming the contractor can control its costs ; conversely, fixed-fee contracts expose the contractor to greater risk of losses in the event that the contractor cannot control costs or incurs unforeseen costs . Under either type of contract, the contractor may incur costs that were not envisioned when the contract was executed ; however, under a cost-plus contract, the contractor is more likely to recoup from the customer those unforeseen costs .

11 . In mid-1997, BRES commenced several large-scale fixed-fee Engineering,

Procurement and Construction ("EPC") projects that, according to the company, were greater in scope and complexity than the company's previous fixed-fee contracts . The earliest of these projects involved the construction of a gas production plant in the Middle

East; the company's customer was a joint venture between a national oil company and a multinational oil company. The contract called for completion of the project by mid-1999, at a cost of approximately $169 million .

12. By the fourth quarter of 1997, BRES' estimated cost overruns placed th e project in an approximate $20 million loss position, as a result of which Halliburton

recorded $20 million of losses in the fourth quarter of 1997. The $20 million loss gave rise

to a corresponding $20 million reduction in Halliburton's fourth quarter 1997 operating

income. BRES continued to estimate cost overruns on certain EPC contracts throughou t

1998 and 1999 .

Halliburton Changes Its Accounting for Cost Overrun s

13. For at least five consecutive years, dating back to 1993, Halliburto n

disclosed in its Forms 10-K filed with the Commission that "claims for additiona l

SEC v. Halliburton Co ., et al. 4 COMPLAINT 2 2 5 . • •

compensation are recognized during the period such claims are resolved." This statement

of practice never varied during that period . Pursuant to the practice, before the claim was

resolved, the company generally recorded losses caused by project cost overruns ; only

after the claim was resolved would the company recognize the claim as an offset against a

project's cost overruns .

14. In the second quarter of 1998, the company changed its accounting practic e

by offsetting cost overruns on the BRES EPC contracts with estimated recoveries on

claims that had not been resolved with customers . Although permitted under GAAP in

appropriate circumstances, this practice was a departure from Halliburton's longstanding

stated practice of recognizing income only from "resolved" (i .e., "approved") claims. Under

this new practice, the company began offsetting project cost overruns with revenue from

unapproved claims in instances in which the company believed that the claims were

probable of collection, and reliably estimable "unapproved claims ." As a result of the

change in accounting practice, cost overruns and resulting losses on several EPC

contracts in the BRES business unit were reduced or eliminated . By reducing o r

eliminating the losses, Halliburton increased its income .

15. The company's change in its claims recognition practice resulted in a

material increase in Halliburton's publicly disclosed income, as set forth in its second and

third quarter 1998 Forms 10-Q, its 1998 Form 10-K, and its first, second and third quarter

1999 Forms 10-Q; the change also resulted in materially more favorable publicly-disclosed

1997-1998 quarter-to-quarter income comparisons.

16. Halliburton failed to inform investors, until March 2000, when the compan y

filed its 1999 Form 10-K, that the unapproved claims on the BRES EPC contracts were a

SEC v. Halliburton Co ., et al. 5 COMPLAINT 226 • •

component of the company's earnings. In the interim six quarters none of Halliburton's

periodic Commission filings disclosed the change in the company's claims recognition

practice or the impact of that change on the company's financial presentation .

Additionally, in Halliburton's 1998 Form 10-K, the company removed the claims recognition statement that had appeared in earlier Halliburton Forms 10-K . Halliburton did not explain in the filing, or in any other form of public statement, the reason for its removal .

Moreover, Halliburton did not, in its 1998 Form 10-K, replace the removed accounting statement with an affirmative statement disclosing the company's new accounting practice .

The Accounting Change Increased Halliburton's Incom e

17. Halliburton's recording in 1998 and 1999 of unapproved claims on the BRE S

EPC contracts resulted in a material increase in the income the company reported in its

Forms 10-Q for the second and third quarters of 1998, its Forms 10-Q for the first, second and third quarters of 1999, and in the company's 1998 Form 10-K . That impact is set forth in the table, below:

Impact on Pre-tax Income (in millions)

Reporte d Pre-Tax Incom e Reported Without Component of Pre-Tax Unapproved Clai m Year_ Filing Income Revenue $ Difference % Difference- 1998 Form 10-Q [Q2] $228.70 $183.30 $45.40 24.8% Form 10-Q [Q3] ($609.50) ($646.20) $36.70 5.7% Form 10-K $278.80 $190.90 $87.90 46.1 % 1999 Form 10-Q [Q1] $149.00 $129.80 $19.20 14.8% Form 10-Q [Q2] $146.00 $135.80 $10.20 7.5% Form 10-Q [Q3] $103.00 $92.30 $10.70 11 .6%

SEC v. Halliburton Co., et al. 6 COMPLAINT 227 n„ «, • •

Halliburton Did Not Disclose the Accounting Chang e

18 . The references to Halliburton's income, and the 1997-1998 incom e

comparisons contained in Halliburton's second and third quarter 1998 Forms 10-Q,

earnings releases, and analyst teleconferences, were materially misleading . The

references were misleading for two reasons: First, for at least five consecutive years,

Halliburton publicly presented in its Commission filings a statement of claims recognition

practice that never varied in content : "Claims for additional compensation are recognized

during the period such claims are resolved ." Despite changing the accounting practice in

mid-1998, the company did not disclose the change in that quarter . In fact, it was not until

the passage of six quarters that Halliburton disclosed the change in its 1999 Form 10-K,

filed in March 2000. Second, Halliburton's statement of its historical claims recognition

practice was not expunged from the mix of public information, because Halliburto n

incorporated the statement by reference in its Forms 10-Q for the second and third

quarters of 1998 .

19. Thus, the only statement of Halliburton's claims recognition practice in th e

public domain during the second and third quarters of 1998 was that the company

recognizes claims "during the period such claims are resolved ." This statement of

accounting practice, out-of-date with respect to the BRES EPC contracts, was

incorporated by reference in, and rendered materially misleading, the public information

Halliburton issued regarding its income in the second and third quarters of 1998, including

information in its second and third quarter 1998 Forms 10-Q, earnings releases and

analysts' teleconferences .

SEC v. Halliburton Co., et al. 7 COMPLAINT 228 •

20 . One of defendant Muchmore's chief responsibilities was to ensure th e accuracy of the Forms 10-Q, which he reviewed and signed . In addition, Muchmore, with the assistance of Halliburton finance personnel under his supervision, prepared

Halliburton's quarterly earnings releases, together with the scripts that were used by several Halliburton senior officers in the company's quarterly analysts' teleconferences - that Muchmore attended .

Misleading Statements and Omission s

The Second Quarter of 1998 Form 10- Q

21 . Halliburton's Form 10-Q for the second quarter of 1998, filed on June 30 ,

1998, did not disclose that the offset of cost overruns by unapproved claims resulted in income to the company in the second quarter 24 .8% greater than without the offset. In addition, the Income Statement in the filing reflected a 34% 1997-1998 quarter-to-quarter increase in Halliburton's net income ; without taking into account unapproved claims, the quarter-to-quarter increase would have been only 6 .7% . The company also stated in the filing's "Results of Operations" discussion that Energy Services Group (the division encompassing BRES) experienced a 24%, 1997-1998 quarter-to-quarter increase in operating income . The filing contained no clarification that, without unapproved claims,

Energy Services Group's operating income would have actually decreased 4 .5%.

The Second Quarter of 1998 Earnings Release

22 . The second quarter earnings release omitted the same information . The company's second quarter 1998 earnings release, issued July 22, 1998, is entitled :

"Halliburton 1998 Second Quarter Net Income Up 34 Percent ." As previously mentioned , without unapproved claims , Halliburton 's net income increased only 6.7%. The company

SEC v. Halliburton Co ., et al. 8 COMPLAINT 229 also stated in the release : "The Energy [Services] Group's 1998 second quarter operating income increased 24 percent to $198.3 million compared to the prior year period ." The release contained no clarification that, without unapproved claims, the Energy Group's operating income actually decreased 4.5%.

23. Halliburton also stated in the release that "for the six-month period ending

June 30, 1998, net income increased 38% to $254 .3 million." The release contained no clarification that without unapproved claims, net income over the six-month period woul d have increased only 22 .4% in 1998, as compared to 1997, not 38% .

24 . The company also stated in its second quarter earnings release tha t

"Halliburton Company report[ed] 1998 second quarter net income of $136 .5 million ($ .51 per share diluted), an increase of 34 percent compared to $101 .9 million ($ .40 per share diluted) earned in the 1997 second quarter ." The earnings release contained no clarification that, without unapproved claims, Halliburton's earnings-per-share would have been $.41, not $ .51, which was the analysts' consensus earnings-per-share estimate .

The Second Quarter of 1998 Analyst Teleconference

25 . The company's statements in the second quarter analyst teleconferenc e conducted on July 22, 1998, and based on a prepared script, also omitted material information regarding unapproved claims as an offset against cost overruns . The company stated that its net income "was up 34%" as compared to the second quarter of

1997. But without unapproved claims, Halliburton's net income in the quarter increased only 6.7%.

26. The company also indicated in the teleconference that the Energy Group' s second quarter 1998 operating income increased 24% to $198 .3 million, compared to th e

SEC v. Halliburton Co ., et al. 9 COMPLAINT 230 second quarter of 1997. Investors were not told that without unapproved claims, th e

Energy Group's operating income would have actually decreased 4 .5%, as compared to the second quarter of 1997 .

27. Halliburton further claimed, again based on the script, that the company' s earnings-per-share for the quarter was $ .51 . The company failed to clarify that without unapproved claims , Halliburton 's earnings-per-share would have been only $.41 .

28. The company also reported in the teleconference BRES' operating results .

The company stated that BRES' operating income had increased 40% over the second quarter of 1997. There was no clarification that without unapproved claims, BRES' operating income would have actually decreased approximately 148% . Moreover, the company failed to clarify that the 5 .5% operating income margin for BRES would have been -2% without unapproved claims .

The Third Quarter of 1998 Form 10- Q

29 . Halliburton's Form 10-Q for the third quarter of 1998, filed on September 30 ,

1998, did not disclose that the offset of cost overruns by unapproved claims resulted in income to the company in the third quarter 5 .7% greater than without the offset . In addition, the company included in the Management Discussion &Analysis section of the filing, entitled "Results of Operations," a statement that "Energy Services Group's operating income decreased 8% to $262 .7 million in the third quarter of 1998 compared with $287 million in the same quarter of the prior year ." There was no clarification in the

Form 10-Q that without the unapproved claims, the Energy Services Group's operating income would have actually decreased 21 % in 1998, compared to the third quarter of

1997.

SEC v. Halliburton Co., et al. 1 0 COMPLAINT 231 ': ' 4 N ' • 0

The Third Quarter of 1998 Earnings Release

30. The third quarter earnings release omitted the same information . In the

company's third quarter 1998 earnings release, issued on October 29, 1998, the company

states: "The Energy Services Group's 1998 third quarter operating income was $263

million, off eight percent from the 1997 quarter." The release contained no clarification that

without unapproved claims, Energy Services Group's operating income would have

decreased 21 % to $226 million .

31 . The company also stated in the release : "Halliburton Company announce s

that the company earned $195 million ($ .44 per diluted share) in the 1998 third quarter,

compared to $218 million ($ .50 per diluted share) in the 1997 third quarter, before

recognition of special charges ." The company did not mention in the release that without

unapproved claims, Halliburton would have earned only $172 million - a difference of

13 .3% . And the earnings release contained no clarification that, without unapproved

claims, Halliburton's earnings-per-share for the quarter would have been $ .39, not $ .44,

which was the analysts' consensus estimate .

The Third Quarter of 1998 Analyst Teleconference

32 . The company's statements in the third quarter analyst teleconference ,

conducted on October 29, 1998, and again based on the prepared script, also omitted

material information regarding the unapproved claims component of Halliburton's

earnings. The company states: "from an operating income standpoint for the Energy

Services Group, operating income declined 9% to $263 million for the quarter." Investors

were not told that without unapproved claims, the Energy Services Group's operating

income would have declined 21 % .

SEC v. Halliburton Co ., et a(. 1 1 COMPLAINT 232 33 . The company also reported "our [Halliburton's] earnings per share wer e

$ .44." The company failed to clarify that, without unapproved claims, Halliburton' s earnings-per-share would have been only $ .39.

34 . The company further stated at the teleconference that "revenues for thi s group [BRES] are up 33% . We continue to be very, very pleased with the direction and growth of this aspect of our business even in a down market . And I think it [BRES] continues to be one of the real hidden stars within the Halliburton portfolio of businesses that we have." The company did not mention that unapproved claims, which offset cost overruns, were a positive component of Halliburton's earnings .

35 . The script further claimed "for [BRES], operating income increased 17 % over the prior year. Margins are now starting to get back into the territory that we thought they would toward the end of the year with its [BRES] margins for the third quarter being

8.6% ." There was no clarification that, without unapproved claims, BRES' operating income would have actually decreased approximately 54% (from $52 .7 million to $24 million), not increased 17% (from $52 .7 million to $60 million) . Moreover, without unapproved claims, BRES' operating margins would have been only 3 .6% .

Halliburton's Ultimate Disclosure Was Misleadin g

36 . Ultimately, in the 1999 Form 10-K Halliburton filed with the Commission o n

March 14, 2000, Halliburton disclosed for the first time the change it had made, six quarters earlier, in its accounting for unapproved claims . In the filing, the company stated that, in 1998, the company accrued $89 million in unapproved claims, and in 1999, $98 million in unapproved claims.

SEC v. Halliburton Co., et al. 12 233 COMPLAINT 37. The company did not disclose in the 1999 Form 10-K $34 million of

unapproved claims that the company recognized in 1999 in connection with joint venture

projects . This omission flattened the ascending curve of unapproved claims recognized by

the company and instead of reporting $132 million in unapproved claims in 1999, the

company reported $98 million - a $9 million, as opposed to $43 million increase over the

1998 figure.

FIRST CLAI M

Violations of Section 17(a)(2) of the Securities Ac t

(Against Halliburton )

38. Paragraphs 1 through 37 are realleged and incorporated by reference .

39. Defendant Halliburton, in connection with the offer and sale of securities ,

obtained money or property by means of an untrue statement of a material fact or omitte d to state a material fact necessary in order to make the statements made, in light of th e circumstances under which they were made, not misleading .

40. Defendant Halliburton committed the acts alleged herein negligently.

41 . By reason of the foregoing, defendant Halliburton violated Section 17(a)(2 ) of the Securities Act [15 U.S .C . § 77q(a)(2)] .

SECOND CLAI M

Violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 Thereunde r

(Against Halliburton )

42. Paragraphs 1 through 37 are realleged and incorporated by reference .

43. Defendant Halliburton, in the manner set forth above, failed to file with th e

Commission, in accordance with rules and regulations the Commission has prescribed,

SEC v. Halliburton Co., et al. 1 3 COMPLAINT 234 •

information and documents required by the Commission to keep reasonably current the

information and documents required to be included in or filed with an application or

registration statement filed pursuant to Section 12 of the Exchange Act and annual reports

and quarterly reports as the Commission has prescribed, and to include in such reports all

material information as necessary to make the required statements, in light of the

circumstances, not misleading .

44 . By reason of the foregoing, Halliburton violated Section 13(a) of the

Exchange Act [15 U .S.C. § 78m (a)] and Rules 12b-20, 13a-1 and 13a-13 thereunder . [1 7

C.F.R. §§ 240.12b-20, 240.13a-1 and 240 .13a-13] .

THIRD CLAI M

Aiding and Abetting Halliburton's Violations of Section 17(a)(2) of the Securities Ac t

(Against Muchmore )

45. Paragraphs 1 through 37 are realleged and incorporated by reference .

46. Based on the conduct alleged herein, Halliburton negligently violated

Section 17(a)(2) of the Securities Act [15 U .S.C. § 77q (a)(2)].

47. Defendant Muchmore, acting alone or in concert with others, in the manne r

set forth above, knowingly provided substantial assistance to Halliburton in connection wit h

its violations of Section 17(a)(2) as alleged herein.

48. By reason of the foregoing, Muchmore aided and abetted Halliburton' s

violations of Section 17 (a)(2) of the Securities Act [15 U .S.C. § 77q(a)(2)].

SEC v. Halliburton Co ., et a!. 1 4 COMPLAINT 235 M! M n, •

•

FOURTH CLAIM

Aiding and Abetting Halliburton's Violations of Section 13(a) of theExchange Act and Rules 12b-20, 13a-1 and 13a-13 Thereunde r

(Against Muchmore)

49. Paragraphs 1 through 37 are realleged and incorporated by reference .

50. Based on the conduct alleged herein, Halliburton violated Section 13(a) of

the Exchange Act [15 U.S .C . § 78m(a)] and Rules 12b-20, 13a-1 and 13a -13 thereunder.

[17 C.F.R. §§ 240 .12b-20, 240. 13a-1 and 240 .13a-13] .

51 . Defendant Muchmore, acting alone or in concert with others, in the manne r

set forth above, knowingly provided substantial assistance to Halliburton, as an issuer of a

security registered pursuant to Section 12 of the Exchange Act, in its failing to file with the

Commission, in accordance with rules and regulations the Commission has prescribed,

information and documents required by the Commission to keep reasonably current the

information and documents required to be included in or filed with an application o r

registration statement filed pursuant to Section 12 of the Exchange Act and annual report s

and quarterly reports as the Commission has prescribed .

52. By reason of the foregoing, Muchmore aided and abetted Halliburton' s

violations of Section 13(a) of the Exchange Act [15 U .S .C . § 78m(a)] and Rules 12b-20,

13a-1 and 13a-13 thereunder [17 C.F.R. §§ 240 .12b-20, 240.13a-1 and 240.13a-131.

PRAYER FOR RELIEF

The Commission respectfully requests that the Court :

Find that the defendants committed the alleged violations .

SEC v. Halliburton Co., et al. 15 COMPLAINT 236 - • S

Enter a final judgment ordering defendant Halliburton to pay a civil mone y

penalty in the amount of $7,500,000 pursuant to Section 21(d)(3) of the Exchange Ac t

[15 U .S .C. § 78u(d)(3)] and Section 20(d) of the Securities Act [15 U .S.C. § 77t(d)] .

Enter a final judgment ordering defendant Muchmore to pay a civil money penalt y

in the amount of $50,000 pursuant to Section 21 (d)(3) of the Exchange Act [15 U .S .C. §

78u(d)(3)] and Section 20(d) of the Securities Act [15 U .S .C. § 77t(d)] .

Respectfully submitted ,

STEPHEN J . KOROTASH (Attorney in charge) Oklahoma Bar No . 5102 SDTX No. 24607 J . KEVIN EDMUNDSON Texas Bar No. 24044020 SDTX No. 24109 TIMOTHY P . DAVIS Texas Bar No. 00798134 SDTX No. 3806 1

Attorneys for Plaintiff Securities and Exchange Commission Burnett Plaza, Suite 1900 801 Cherry Street, Unit #18 Fort Worth, TX 76102-6882 (817) 978-6490 (817) 978-4927 (fax) E-Mail: korotashs @sec.gov

Of Counsel : SPENCER C. BARASCH District Of Columbia Bar No . 388886

SEC v. Halliburton Co., et at, 1 6 COMPLAINT 237 t. , I 1 0 0 Halliburion Company, and Robertarles Muchmore, Jr http: .sec.gov/litigation/admin/33-8452.htrr

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U .S . Securities and Exchange Commissio n

UNITED STATES OF AMERICA Before th e SECURITIES AND EXCHANGE COMMISSIO N

SECURITIES ACT OF 193 3 Release No . 8452 / August 3, 2004 SECURITIES EXCHANGE ACT OF 1934 Release No . 50137 / August 3, 2004 ACCOUNTING AND AUDITING ENFORCEMEN T Release No . 2072 / August 3, 2004 Admin . Proc . File No . 3-11574

ORDER INSTITUTING CEASE-AND-DESIST In the Matter of PROCEEDINGS PURSUAN T TO SECTION 8A OF THE Halliburton Company, and SECURITIES ACT OF 1933 Robert Charles Muchmore, AND SECTION 21C OF THE Jr . , SECURITIES EXCHANGE Respondents . ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDE R

I .

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 (the "Securities Act") and Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act") against Halliburton Company ("Halliburton" or "the company") and Robert Charles Muchmore, Jr. ("Muchmore") (collectively, "Respondents") .

II .

in anticipation of the institution of these pr oceedings, Haiiiburton an d Muchmore have submitted Offers of Settlement (collectively, "Offers") that the Commission has determined to accept . Solely for the purpo 13 8 EXHIBIT B "'"Hallil%rton Company, and Robe0arles Muchmore, Jr... htt*ww.sec .gov/litigation/admin/33-8452 .htr

of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings contained herein, except that Halliburton and Muchmore admit the Commission's jurisdiction over them and over the subject matter of these proceedings, Halliburton and Muchmore consent to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order, as set forth below .

III . FINDING S

On the basis of this Order and Respondents' Offers, the Commission finds that : 1

A . Respondent s

Halliburton is a Delaware corporation headquartered in Houston, Texas . Halliburton's shares are registered with the Commission under Section 12(b) of the Exchange Act and trade on the New York Stock Exchange . During the relevant period Halliburton had two primary reporting segments, the Energy Services Group and the Engineering and Construction Group ("E&C") . The Energy Services Group provides exploration and logistical solutions for the exploration, development and production of oil and gas . Brown and Root Energy Services ("BRES") was a business unit of the Energy Services Group . E&C provides a wide range of industrial construction services to energy, industrial and government customers .

Muchmore, age 50, is a resident of Houston, Texas . During the relevant period, Muchmore was the controller of Halliburton . As controller, Muchmore's principal duties included responsibility for Halliburton's accounting and financial reporting . Although no longer Halliburton's controller, Muchmore remains a Halliburton employee.

B . Facts

1 . The Evolution of Halliburton's Engineering and Construction Business

Prior to mid-1997, the business unit, BRES, and reporting segment, E&C, generally conducted business under two types of contracts : "fixed fee" and "cost-plus ." Cost plus contracts provide for reimbursement to the contractor of all reasonable costs, plus an agreed upon profit payable to the contractor. Under fixed fee contracts, contractors perform for a fixed, agreed-upon fee intended by the parties to encompass all reasonable costs foreseen at the time of the contract's execution . The contractor's profit equals the margin by which the fee exceeds the contractor's costs ; if those costs exceed the fee, the contractor incurs a loss on the contract . Fixed fee- 239 " Hallibtitton Company, and RobeiWarles Muchmore, Jr... htt*ww.sec.gov/litigation/admin/33-8452.hti

contracts offer, therefore, an opportunity to make larger profits - assuming the contractor can control its costs ; conversely, fixed fee contracts expose the contractor to greater risk of losses in the event that the contractor cannot control costs or incurs unforeseen costs . Under either type of contract, the contractor may incur costs that were not envisioned when the contract was executed ; however, under a cost plus contract, the contractor is more likely to recoup from the customer those unforeseen costs .

In mid-1997, BRES commenced several large scale fixed fee Engineering, Procurement and Construction ("EPC") projects that, according to the company, were greater in scope and complexity than the company's previous fixed-fee contracts . The earliest of these projects involved the construction of a gas production plant in the Middle East; the company's customer was a joint venture between a national oil company and a multinational oil company .? The contract called for completion of the project by mid 1999, at a cost of approximately $169 million . By the fourth quarter of 1997, BRES' estimated cost overruns had placed the project in an approximate $20 million loss position, as a result of which Halliburton recorded $20 million of losses in the fourth quarter of 1997 . The $20 million loss gave rise to a corresponding $20 million reduction in Halliburton's fourth quarter 1997 operating income . BRES continued to estimate cost overruns on certain EPC contracts throughout 1998 and 1999 .

2. Halliburton Changed its Accounting for Cost Reimbursement Claims, but Failed to Disclose the Change over a Six-Quarter Perio d

For at least five consecutive years, dating back to 1993, Halliburton disclosed in its Forms 10-K filed with the Commission that "claims for additional compensation are recognized during the period such claims are resolved ." This statement of practice, regarding the company's recognition of revenue from claims for costs, never varied during that period . Pursuant to the practice, before the claim was resolved, the company generally recorded losses caused by project cost overruns ; only after the claim was resolved would the company recognize the claim as an offset against the project's cost overruns .

Commencing in the second quarter of 1998, shortly after BRES commenced its EPC projects, the company changed its accounting practice, by offsetting cost overruns on the BRES EPC contracts with estimated recoveries on claims that had not been resolved with customers. Although permitted under GAAP in appropriate circumstances, this practice was a departure from Halliburton's longstanding stated practice of recognizing income only from "resolved" (i .e., "approved") claims . Under this new practice, the company began offsetting project cost overruns with revenue from unapproved claims in instances in which the company believed that the claims were probable of collection, and reliably estimable, pursuant to SOP 81-1 ( .65)("unapproved claims") .3 As a result of the change in accounting practice, cost overruns and resulting losses on several EP C 240 ":°Hallibiirton Company, and Robe;*arles Muchmore , Jr... http ww.sec.gov/litigation/admin/33-8452 .htr

contracts in'the BRES business unit were reduced or eliminated . By reducing or eliminating the losses, Halliburton increased its income .4

The company's change in its claims recognition practice resulted in a material increase in Halliburton's publicly disclosed income, as set forth in its second and third quarter 1998 Forms 10-Q, its 1998 Form 10-K, and its first, second and third quarter 1999 Forms 10-Q ; the change also resulted in materially more favorable publicly disclosed 1997-1998 quarter to quarter income comparisons . Although the accounting change is permitted under GAAP in appropriate circumstances, Halliburton failed to inform investors, until March 2000, when the company filed its 1999 Form 10-K/A, that the unapproved claims on the BRES EPC contracts were a component of the company's earnings . In the interim - spanning six quarters - none of Halliburton's periodic Commission filings disclosed the change in the company's claims recognition practice or the impact of that change on the company's financial presentation .5

3 . The Amounts Attributable to Halliburton's Undisclosed Change in Accounting were Material to the Company's Income as Reported in its 1998 and 1999 Commission Filings

Halliburton's recording in 1998 and 1999 of unapproved claims on the BRES EPC contracts resulted in a material increase in the income the company reported in its Forms 10-Q for the second and third quarters of 1998, its Forms 10-Q for the first, second and third quarters of 1999, and in the company's 1998 Form 10-K .6 That impact is set forth in the table, below . Respondent Muchmore signed all of the filings as Halliburton's controller .

Impact on Pre-tax Income ( in millions ) Repo rted Pre-Tax Income - Withou t Reported Component of Pre-Tax Unapproved $ 0/0 Year Filing Income Claim Revenue Difference Differenc e 1998 Form $228 .70 $183 .30 $45.40 24 .8 % 10-Q [Q2] Form ($609.50) ($646.20) $36.70 5 .7% 10-Q [Q3 ] Form $278 .80 $190 .90 $87 .90 46 .1 % 10-K 1999

-- 24 1

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Form $149 .00 $129 .80 $19 .20 14 .8% 10-Q [Q1 ] Form $146 .00 $135.80 $10 .20 7 .5 % 10-Q [Q2] Form $103 .00 $92 .30 $10.70 11 .6% 10- Q [Q3]

4 . Halliburton's Public Disclosures regarding its Income in the Second and Third Quarters of 1998 Omitted Information regarding the Unapproved Claims Component of Income and were, therefore, Materially Misleadin g

The references to Halliburton's income, and the 1997-1998 income comparisons contained in Halliburton's second and third quarter 1998 Forms 10-Q, earnings releases, and analyst teleconferences, were materially misleading . The references were misleading for two reasons : First, for at least five consecutive years, Halliburton publicly presented in its Commission filings a statement of claims recognition practice that never varied in content : "Claims for additional compensation are recognized during the period such claims are resolved ." Despite changing the accounting practice in mid-1998, the company did not disclose the change in that quarter . In fact, it was not until the passage of six quarters that Halliburton disclosed the change in its 1999 Form 10-K, filed in March 2000 .E Second, Halliburton's statement of its historical claims recognition practice was not expunged from the mix of public information, because Halliburton incorporated the statement by reference in its Forms 10-Q for the second and third quarters of 1998 .8

Thus, the only statement of Halliburton's claims recognition practice in the public domain during the second and third quarters of 1998 was that the company recognizes claims "during the period such claims are resolved ." This statement of accounting practice, out-of-date with respect to the BRES EPC contracts, was incorporated by reference in, and rendered materially misleading, the public information Halliburton issued regarding its income in the second and third quarters of 1998, including information in its second and third quarter 1998 Forms 10-Q, earnings releases and analysts' teleconferences .

One of Muchmore's chief responsibilities was to ensure the accuracy of the Forms 10-Q, which he reviewed and signed . In addition, Muchmore, with the assistance of Halliburton finance personnel under his supervision, prepared Halliburton's quarterly earnings releases, together with the scripts that were used by several Halliburton senior officers in the company's quarterly analysts' teleconferences - that Muchmore attended . 24 2

_r11 , , / , - " . S - . . . "ITallibtlfton Company , and Robertirles Muchmore, Jr... http:ow.sec.gov/litigation/admin/33-8452.htm

a . The Second Quarter of 199 8

i . Form 10- Q

Halliburton's Form 10-Q for the second quarter of 1998 did not disclose that the offset of cost overruns by unapproved claims resulted in income to the company in the second quarter 24 .7% greater than without the offset . In addition, the Income Statement in the filing reflected a 34% 1997-1998 quarter-to-quarter increase in Halliburton's net income ; without taking into account unapproved claims, the quarter-to-quarter increase would have been only 6 .7% . The company also stated in the filing's MD&A "Results of Operations" that Energy Services Group's (the division encompassing BRES) operating income in 1998 was 24% greater than in 1997 . Without taking into account unapproved claims, Energy Services Group's operating income would have actually decreased 4 .5% .

ii . Earnings Releas e

The second quarter earnings release omitted the same information . The company's second quarter 1998 earnings release, issued July 22, 1998, is entitled : "Halliburton 1998 Second Quarter Net Income Up 34 Percent." As previously mentioned, without unapproved claims, Halliburton's net income increased only 6 .7% . The company also stated in the release : "The Energy Group's 1998 second quarter operating income increased 24 percent to $198 .3 million compared to the prior year period ." The release contained no clarification that, without unapproved claims, the Energy Group's operating income actually decreased 4 .5% . Finally, the company stated in the release, "For the six-month period ending June 30, 1998, net income increased 38% to $254 .3 million ." The release contained no clarification that without unapproved claims, net income over the six-month period would have increased only 22 .4% in 1998, as compared to 1997, not 38% .

The company also stated in its second quarter earnings release : "Halliburton Company reports 1998 second quarter net income of $136 .5 million ($ .51 per share diluted), an increase of 34 percent compared to $101 .9 million ($ .40 per share diluted) earned in the 1997 second quarter ." The earnings release contained no clarification that, without unapproved claims, Halliburton's EPS would have been $ .41, not $ .51, which was the analysts' consensus EPS estimate.

iii . Analysts' Teleconference

The company's statements in the second quarter analyst teleconference conducted on July 22, 1998, and based on a prepared script, also omitted material information regarding unapproved claims as an offset against cost overruns . The company stated that its net income "was up 34%" as compared to the second quarter of 1997 . As previously mentioned, without unapproved claims, Halliburton's net income in the quarter increased only 6 .7% . The company also 243 FTallibtlhton Company, and Robertirles Muchmore, Jr... http :*W.sec.gov/litigation/admin/33-8452 .htm

indicated in the teleconference that the Energy Group's second quarter 1998 operating income increased 24% to $198 .3 million, compared to the second quarter of 1997 . Investors were not told that withou t unapproved claims, the Energy Group's operating income would have actually decreased 4 .5%, as compared to the second quarter of 1997 . Finally, the company said, again based on the script, that th e company's EPS for the quarter was $ .51 . The company failed to clarify that without unapproved claims, Halliburton's EPS would have been only $ .41 .

The company also reported in the teleconference BRES' operating results. The company stated that BRES' operating income had increased 40% over the second quarter of 1997 . There was no clarification that without unapproved claims, BRES' operating income would have actually decreased approximately 148% . Moreover, the company failed to clarify that the 5 .5% operating income margin for BRES would have been -2% without unapproved claims .

b . The Third Quarter of 1998

i . Form 10- Q

Halliburton's Form 10-Q for the third quarter of 1998 did not disclose that the offset of cost overruns by unapproved claims resulted in income to the company in the third quarter 5 .7% greater than without the offset. In addition, the company included in the MD&A section of the filing, entitled "Results of Operations," a statement that "Energy Services Group's operating income decreased 8% to $262 .7 million in the third quarter of 1998 compared with $287 million in the same quarter of the prior year ." There was no clarification in the Form 10-Q that without the unapproved claims, the Energy Services Group's operating income would have actually decreased 21% in 1998, as compared to its operating income in the third quarter of 1997 .

ii . Earnings Releas e

The third quarter earnings release omitted the same information . In the company's third quarter 1998 earnings release, issued on October 29, 1998, the company stated : "The Energy Services Group's 1998 third quarter operating income was $263 million, off eight percent from the 1997 quarter." The release contained no clarification that without unapproved claims, Energy Services Group's operating income would have decreased 21% to $226 million . The company also stated in the release : "Halliburton Company announces that the company earned $195 million ($ .44 per diluted share) in the 1998 third quarter, compared to $218 million ($ .50 per diluted share) in the 1997 third quarter, before recognition of special charges ." The company did not mention in the release that without unapproved claims, Halliburton would have earned only $172 million - a difference of 13 .3% . Finally, the earnings release contained no clarification that, without unapproved claims, Halliburton's EPS for the quarter would have been $ .39, not $ .44, which was the analysts' consensus estimate . 24 4

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iii . Analysts' Teleconference

The company's statements in the third quarter analyst teleconference, conducted on October 29, 1998, and again based on the prepared script, also omitted material information regarding the unapproved claims component of Halliburton's earnings . The company stated : "From an operating income standpoint for the Energy Services Group, operating income declined 9% to $263 million for the quarter ." Investors were not told that without unapproved claims, the Energy Services Group's operating income would have declined 21% . The company reported : "Our [Halliburton's] earnings per share were $ .44 . The company failed to clarify that, without unapproved claims, Halliburton's EPS would have been only $ .39 .

The company also stated at the teleconference : "[R]evenues for this group [BRES] are up 33% . We continue to be very, very pleased with the direction and growth of this aspect of our business even in a down market . And I think it [BRES] continues to be one of the real hidden stars within the Halliburton portfolio of businesses that we have ." The company omitted mention that unapproved claims, which offset cost overruns, were a positive component of Halliburton's earnings . The script continues : "For [BRES], operating income increased 17% over the prior year . Margins are now starting to get back into the territory that we thought they would toward the end of the year with its [BRES'] margins for the third quarter being 8 .6% ." There was no clarification that, without unapproved claims, BRES' operating income would have actually decreased approximately 54% (from $52 .7 million to $24 million), not increased 17% (from $52 .7 million to $60 million) . Moreover, without unapproved claims, BRES' operating margins would have been only 3 .6% .

5 . Halliburton's Ultimate Disclosure of its Accounting Change was Misleadin g

In the 1999 Form 10-K Halliburton filed with the Commission on March 14, 2000, Halliburton disclosed for the first time the change it made, six quarters earlier, in its accounting for unapproved claims . In the filing, the company stated that, in 1998, the company accrued $89 million in unapproved claims, and in 1999, $98 million in unapproved claims. The company did not disclose in the 1999 Form 10-K, however, $34 million of unapproved claims that the company recognized in 1999 in connection with joint venture projects . The omission flattened the ascending curve of unapproved claims recognized by the company : instead of reporting $132 million in unapproved claims in 1999, the company reported $98 million - a $9 million, as opposed to $43 million increase over the 1998 figure .

IV. LEGAL DISCUSSIO N

A. Halliburton ' s Violations of Section 17(a)(2) of the 24 5

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Securities Act

Section 17(a)(2) of the Securities Act prohibits making untrue statements of fact and misleading omissions of facts in the offer or sale of a security .9 To constitute a violation of Section 17(a)(2), the alleged untrue statements or omitted facts must be material . Information is deemed material upon a showing of a substantial likelihood that the misrepresented or omitted facts would have assumed significance in the investment deliberations of a reasonable investor. Basic, Inc . v . Levinson, 485 U .S . 224 (1988) . Establishing violations of Section 17(a)(2) does not require a showing of scienter. Aaron v . SEC, 446 U .S . 680 (1980) .

Halliburton violated Section 17(a)(2) of the Securities Act in connection with its second and third quarter 1998 Forms 10-Q, earnings releases, and analysts' teleconferences . For at least five consecutive years, Halliburton publicly presented in its Commission filings a statement of claims recognition practice that never varied in content: "Claims for additional compensation are recognized during the period such claims are resolved ." Despite making a significant change to its practice in mid-1998 with respect to the BRES EPC contracts, the company (1) eliminated its historical statement of practice without explanation in 1998 and (2) did not disclose the change until the passage of six quarters . There was no way for the investing public, or for analysts following Halliburton, to discern the fact that, over the relevant six-quarter period, the company had offset cost overruns through the application of SOP 81-1 ( .65), and that the offsets materially increased Halliburton's reported income . A reasonable investor, or potential investor, would have wanted to know this information in making a decision regarding an investment in Halliburton .

In fact, Halliburton incorporated by reference in its second and third quarter 1998 Forms 10-Q the discontinued claims recognition practice set forth in its 1997 Form 10-K/A . The representation resulting from the incorporated reference - that Halliburton was still following its stated unapproved claims recognition practice - was materially misleading . A reasonable investor would have erroneously inferred that the income figures and 1997-1998 quarter-to-quarter income comparisons contained in the filings and earnings releases, and discussed at the analysts' teleconferences, were in no way impacted by unapproved claims . In fact, they were materially impacted by such claims .

In addition, the company's incomplete disclosure of the amount of unapproved claims it recognized in 1999 was materially misleading . The omitted amount, $34 million, was material . The omission flattened the ascending curve of unapproved claim amounts : instead of reporting the actual $132 million in unapproved claims it used in 1999, the company reported only $98 million - a $9 million, as opposed to $43 million increase over the 1998 figure . 24 6

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B . Halliburton's Reporting Violations : Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder

Section 13(a) of the Exchange Act requires issuers such as Halliburton to file periodic reports with the Commission containing such information as the Commission prescribes by rule . Exchange Act Rule 13a-1 requires issuers to file annual reports, and Exchange Act Rule 13a-13 requires issuers to file quarterly reports . Under Exchange Act Rule 12b-20, the reports must contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made are not, under the circumstances, materially misleading) The obligation to file reports includes the requirement that the reports be true and correct . United States v . Bilzerian, 926 F .2d 1285, 1298 (2d Cir.), cert . denied, 502 U .S . 813 (1991) . The reporting provisions are violated if false and misleading reports are filed . SEC v . Falstaff Brewing Corp ., 629 F .2d 62, 67 (D.C . Cir. 1980) . Scienter is not an element of a Section 13(a) violation . SEC v . Savoy Indus ., Inc., 587 F.2d 1149,1167 (D .C. Cir . 1978) .

Halliburton violated these provisions by failing to disclose in periodic reports it filed with the Commission its change in claims accounting . Specifically, Halliburton omitted the disclosure in its Forms 10-Q for the second and third quarters of 1998, and first, second and third quarters of 1999, and in the company's 1998 Form 10-K . Moreover, for the reasons stated in the preceding section, Halliburton's second and third quarter 1998 Forms 10-Q were materially misleading . Consequently, the company violated Exchange Act Rule 12b-20, in addition to Section 13(a) and Rules 13a-1 and 13a-13 . Finally, the company's 1999 Form 10-K was materially misleading, due to the company's material omission of any reference to the $34 million of unapproved claims it recognized in 1999, in connection with joint venture projects .

C . Muchmore Caused Halliburton's Violation s

By preparing and signing Halliburton's Forms 10-Q for the relevant quarters, and the 1998 and 1999 Forms 10-K, by assisting in the preparation and review of the relevant quarterly earnings releases and analysts' teleconference scripts, and by attending the analysts' teleconferences, Muchmore caused Halliburton's violations . Muchmore should have known that his failure to cause the company to disclose in timely fashion the change in its claims accounting would result in the public dissemination of materially misleading information and violations of the federal securities laws . Consequently, Muchmore caused Halliburton's violations of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder . V. 24 7

I n nr 11 Halliburton Company, and Robert •rles Muchmore, Jr . . . http :*.sec.gov/litigation /admin/33-8452.htm

The Commission finds that Halliburton violated, and that Muchmore caused Halliburton's violations of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder .

VI.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in the Respondents' Offers .il

Accordingly, it is hereby ORDERED that :

A . Respondent Halliburton cease and desist from committing or causing any violation and any future violation of Section 17(a)(2) of the Securities Act, and Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder ; and that

B. Respondent Muchmore cease and desist from committing or causing any violation and any future violation of Section 17(a)(2) of the Securities Act, and from causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder .

By the Commission .

Jonathan G . Katz Secretary

Endnotes

1 The findings herein are made pursuant to Respondents' Offers and are not binding on any other person or entity in these or any other proceedings .

2 The other projects involved the construction of pipelines in South America .

3 In changing its accounting practice, Halliburton relied on Paragraph 65 of the American Institute of Certified Public Accountants' Statement of Position 81-1 ("SOP 81-1") . Paragraph 65 applies to "claims" in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers. Under Paragraph 65, the recognition of amounts of additional contract revenue relating to claims is appropriate only if it is probable that the claim will result in additional contract revenue (i .e., 8 2 'rNallibiirion Company, an d Robe*rles Muchmore, Jr... http:a.sec.gov/litigation/admin/33-8452 .htir.

is probable of collection), and if the amount can be reliably estimated .

These two requirements are satisfied by the existence of all the following conditions : (a) the contract or other evidence provides a legal basis for the claim ; (b) additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor's performance ; (c) costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed ; and (d) the evidence supporting the claim is objective and verifiable, not based on management's "feel" for the situation or on unsupported representations . Paragraph 65 also contains the admonition, "The amounts recorded, if material, should be disclosed in the notes to the financial statements . "

4 The Commission does not find in this Order that Halliburton's application of Paragraph 65 of SOP 81-1, or that the amounts reported throughout the relevant period, were not in accordance with GAAP.

s In Halliburton's 1998 Form 10-K, the company removed the claims recognition statement that had appeared in earlier Halliburton Forms 10-K. Halliburton did not explain in the filing, or in any other form of public statement, the reason for its removal . Moreover, Halliburton did not, in its 1998 Form 10-K, replace the removed accounting statement with an affirmative statement disclosing the company's new accounting practice .

6 The change in accounting had a negligible effect on Halliburton's revenues, typically less than 1% in each of the relevant quarters .

Accounting Principles Board Opinion #20 ("APB # 20"), "Accounting Changes," prescribes that if a company changes its accounting principles, the company should disclose the nature of, and the justification for, the change and its effect upon income in the financial statements for the period in which the change is made . The justification for the change should explain clearly why the newly adopted accounting principle is preferable . The phrase "accounting principle" includes not only accounting principles and practices, but also the methods of applying them .

Halliburton incorporated by reference its discontinued claims recognition practice in Note 1, entitled "Management Representations," included in the financial statements appended to its second quarter and third quarter 1998 Forms 10-Q .

' Because Halliburton offered and sold quantities of its securities in a registered offering during 1998, Halliburton's materially misleading omissions were committed in offers and sales of securities, in violation of Section 17(a)(2) . Specifically, Halliburton conducted a debt security offering pursuant to a Section 424B3 prospectus ("prospectus"), filed on September 30, 1998 . The prospectus incorporates by reference Halliburton's 1997 Form 10-K, and Halliburton's Forms 10-Q for the 24 9

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second and third quarters of 1998 . 1 0 In addition to the provisions of APB #20 set forth in note 7, supra, APB #20 also prescribes that the effect on income resulting from a material change in estimate be disclosed . Moreover, Paragraph 65 of SOP 81-1 expressly provides that the amounts recorded pursuant to the paragraph should be disclosed, if material, in the notes to the financial statements . Halliburton failed to conform to these provisions .

li In connection with a settled parallel civil action filed by the Commission, Halliburton has agreed to pay a $7.5 million civil penalty . The penalty, in part, reflects the Commission's view that there were unacceptable lapses in the company's conduct during the course of the investigation, which had the effect of delaying the production of information and documentation necessary to the staff's expeditious completion of its investigation .

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250 A . T, 0 0

DECLARATION OF SERVICE BY [FEDERAL EXPRESS or UPS] DELIVERY

I, the undersigned, declare :

1 . That declarant is and was, at all times herein mentioned, a citizen of the United

States and a resident of the County of San Diego, over the age of 18 years, and not a party to or

interested party in the within action; that declarant's business address is 401 B Street, Suite 1600 ,

San Diego, California 92101 .

2 . That on May 9, 2005 declarant will cause to be served by UPS, next day delivery ,

the THIRD CONSOLIDATED AMENDED COMPLAINT FOR VIOLATION OF THE

SECURITIES EXCHANGE ACT OF 1934 to the parties listed on the attached Service List .

I declare under penalty of perjury that the foregoing is true and correct . Executed this 6th

day of May, 2005, at San Diego , California.

KIRSTEN BADGLEY

X51 - 1 - n , a .r 0 S HALLIBURTON 05 Service List - 5/6/2005 (05-0010) Page 1 of 3 Counsel For Defendant(s ) Robb Voyles Rod Phela n Baker Botts L.L.P . Samara L . Kline 1500 San Jacinto Center Baker Botts L .L .P. 98 San Jacinto Blvd . 2001 Ross Avenue, Suite 60 0 Austin, TX 78701-4039 Dallas, TX 75201-298 0 512/322-2500 214/953-6500 512/322-2501 (Fax) 214/953-6503 (Fax )

Marcos G . Ronquillo Robert E . Davis Jose L. Gonzalez Hughes & Luce, L.L.P . Godwin Gruber, LLP 1717 Main Street, Suite 2800 Renaissance Tower Dallas, TX 75201 1201 Elm Street, Suite 1700 214/939-5500 Dallas, TX 95270 214/939-5849 (Fax ) 214/939-440 0 214/760-7332 (Fax )

Ronald W. Stevens Timothy R . McCormick Kirkpatrick & Lockhart Nicholson Graham LLP Thompson & Knight, P .C . 10100 Santa Monica, 7th Floor 1700 Pacific Avenue, Suite 3300 Los Angeles, CA 90067 Dallas, TX 75201-4693 310/552-5000 214/969-1700 310/552-5001 (Fax) 214/969-1751 (Fax )

Counsel For Plaintiff(s ) J . Lawrence Irving John G . Emerson, Jr. Butz Dunn Desantis & Bingham Emerson Poynter LLP 101 West Broadway, Suite 1700 830 Apollo Lan e San Diego, CA 92101-8289 Houston, TX 77058 619/233-4777 281/488-8854 619/231-0341 (Fax) 281/488-8867 (Fax)

252 ni i s

HALLIBURTON 05 Service List - 5/6/2005 (05-0010) Page 2 of 3 William B. Federman Theodore C. Anderson, III Federman & Sherwood Kilgore & Kilgore PLLC 2926 Maple Avenue , Suite 200 3109 Carlisle Dallas, TX 75201 Dallas, TX 75204 214/696-1000 214/969-9099 214/740-0112 (Fax) 214/292-8578 (Fax )

William S . Lerach Ex Kano S . Sams I I G . Paul Howes Lerach Coughlin Stoia Geller Rudman & Andrew J . Brown Robbins LL P Lerach Coughlin Stoia Geller Rudman & 100 Pine Street, Suite 2600 Robbins LLP San Francisco , CA 94111-5238 401 B Street, Suite 1600 415/288-4545 San Diego, CA 92101-4297 415/288-4534 (Fax ) 619/231-1058 619/231-7423 (Fax )

Joe Kendall Richard J . Schiffrin Willie C . Briscoe Marc I . Willner Provost Umphrey Law Firm, LLP Schiffrin & Barroway, LLP 3232 McKinney Avenue, Suite 700 280 King of Prussia Road Dallas , TX 75204 Radnor, PA 1908 7 214/744-3000 610/667-7706 214/744-3015 (Fax) 610/667-7056 (Fax)

Arthur L . Shingler III Jules Brody Scott + Scott, LLC Aaron Brody 401 B Street, Suite 307 Tzivia Brody San Diego, CA 92101 Stull, Stull & Brody 619/233-4565 6 East 45th Street, 4th Floor 619/233-0508 (Fax) New York, NY 10017 212/687-7230 212/490-2022 (Fax)

253 bw S HALLIBURTON 05 Service List - 5/6/2005 (05-0010) Page 3 of 3 Craig Walker Fred T. Isquith Walker Law LLP Gregory M . Nespol e 3196 High Ridge Road Wolf Haldenstein Adler Freeman & Herz, LL P Stamford, CT 06903 270 Madison Avenu e 917/880-7986 New York, NY 1001 6 203/968-1005 (Fax) 212/545-4600 212/545-4653 (Fax)

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