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UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK ------X In re: KEYSPAN CORPORATION CV 2001-5852 (ARR) (MDG) SECURITIES LITIGATION ------X
AMENDED CLASS ACTION COMPLAINT
1. Lead Plaintiffs Donald Kassan and Peter E. Hubbard (“Lead Plaintiffs”), for their amended complaint against defendants, allege the following based upon the investigation of counsel, which included, inter alia, a review of U.S. Securities and Exchange Commission
(“SEC”) filings, press releases and other public statements issued by KeySpan Corporation
(“KeySpan” or the “Company”), securities analysts' reports and advisories by or about the
Company, media and third party reports about the Company, and a review of the case file and certain discovery in the litigation styled KeySpan Services Inc. et al. v. LeRoy Kay et al., Docket
No. MON-C-95-01, pending in the Chancery Court Division of the Superior Court of New
Jersey, Monmouth County (the “Monmouth County litigation”). Lead Plaintiffs in good faith believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.
2. This amendment addresses the deficiencies found by the Court in its Opinion and
Order dated March 18, 2003. Plaintiffs expressly reserve their right to appeal said Order.
INTRODUCTION
3. This is a federal class action under the Securities Exchange Act of 1934 (the
“Exchange Act” or “1934 Act”) on behalf of purchasers of KeySpan securities between March
24, 2000, and July 17, 2001 inclusive (the “Class Period”). As more fully set forth herein, the defendants have admitted that financial and operational improprieties had not been disclosed. Case 1:01-cv-05852-ARR-MDG Document 64 Filed 04/07/2003 Page 2 of 97
Moreover, the SEC is conducting a formal investigation into insider trading and the truthfulness of disclosures by KeySpan and its directors.
4. In fiscal year 1999, KeySpan stock lost almost 24% of its market value. This decline reflected the uncertainty and turbulence of deregulation in the energy sector and, equally, the misfortunes deriving from KeySpan’s merger with the Long Island Lighting Co. (“LILCO”).
Since its merger with LILCO on May 29, 1998, KeySpan’s market value dropped a whopping
40%, its stock declining from $33.8125 per share on June 1, 1998, the first day of trading after the merger, to $20.3125 per share on March 1, 2000, an all time low, shortly before the commencement of the Class Period. The turbulence responsible for this diminution in
KeySpan’s value, however, consolidated defendant Robert Catell’s control over the Company’s leadership.
5. Indeed, symptomatic of the difficulties plaguing KeySpan during the pre-Class
Period time frame, on August 18, 1999, KeySpan was rated only "hold" by analyst William Hyler at CIBC World Markets Inc.
6. On December 18, 1999, in an article entitled "KeySpan to make Acquisitions, Sign
New Customers to Boost Stock," Bloomberg News summarized the events plaguing KeySpan's stock price, and reported on the Company's efforts to rehabilitate itself and Wall Street's assessment of the rehabilitation. According to the article, CEO Robert Catell sought to reverse the Company's misfortunes by joining the merger trend sweeping the U.S. utility industry and agreeing to buy Eastern Enterprises (“Eastern”), owner of Boston's natural gas utility, for $2.5 billion. In addressing Catell's conviction "to prove KeySpan can rebound from a rocky 1998 merger with LILCO," the article continued:
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“KeySpan has very good prospects, but it needs to show it can consistently cut costs and increase earnings more than its peers,” said Gregory Phelps, a fund manager at John Hancock Advisors Inc., which owns about 300,000 KeySpan shares.
One of Catell's immediate goals is to boost KeySpan's stock price, which has fallen 24 percent this year and 31 percent since the LILCO merger. In 1998, the company had a loss of $196 million after charges and payment of preferred dividends, on revenue of $1.7 billion. Its shares fell 5/16 to 23 1/8 in trading Friday on the New York Stock Exchange.
* * *
The past two years haven't been easy. KeySpan combined with LILCO in May 1998 as part of an agreement with New York state officials to lower electricity rates on Long Island. The Long Island Power Authority, a state agency, took over LILCO's electric lines. KeySpan acquired LILCO's power plants that provide electricity to about 1 million customers. The KeySpan gas-service area expanded to 1,417 square miles.
LILCO's Chief Executive, William Catacosinos, became KeySpan's chief executive after the merger, with Catell taking the job of president. Controversy soon erupted when reports surfaced that Catacosinos and 20 other former LILCO executives had been paid $67 million in bonuses.
After Catacosinos resigned under pressure, taking his $42 million bonus with him, Catell succeeded him and demanded the other executives either return their bonuses or resign. Eleven kept their bonuses and left. Ten gave theirs back and stayed.
* * *
Investors will be attracted, [Catell] hopes, by the Eastern Enterprises acquisition. The combined company will have 2.4 million natural-gas customers, making KeySpan the largest gas distribution company in the Northeast. KeySpan estimates the purchase will dilute earnings by 5 cents a share in 2001 and add 4 cents in 2002.
New England and Long Island, Catell said, are ripe for growth. Forty percent of homes in Eastern's territory in Massachusetts and New Hampshire use natural-gas furnaces, compared with the national average of 54 percent. About 28 percent of Long Island households use gas. KeySpan's goal is to sign up 17,000 new gas customers a year in New England, 9,000 in Long Island and 3,000 in New York.
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"We are going to aggressively expand the KeySpan brand," Catell said.
Catell plans to use the same marketing techniques that helped the company boost gas usage in its New York City service area to 80 percent of households, up from 30 percent in the 1950s.
7. But Bloomberg News also reported analysts' skepticism of Catell's plans for a turnaround. Those analysts said that they were worried that even Catell's ambitious plans for adding customers wouldn't achieve rapid profit growth.
“Increasing market share is a very slow process that could take 40 years," said Michael Heim, an analyst at A.G. Edwards & Sons Inc., who has a "maintain position" rating on KeySpan's shares.
8. Bloomberg News reported an alternative growth strategy being advocated by analyst Edward Tirello of Deutsche Banc Alex Brown: namely, the making of more acquisitions.
If KeySpan doesn't expand even more, other companies will be substantially larger and could attack its customer base," said Tirello, who rates KeySpan's shares "market perform."
9. Indeed, KeySpan saw increased growth opportunity arising from increased demand for natural gas in the Northeast, fueled by residential and commercial oil-to-gas conversions and the need to power cleaner burning electric generation. To advance this goal, the
Company had started its energy services business in 1997. This startup unit allowed KeySpan to provide unregulated energy solutions to homes and businesses throughout its growing territory that were otherwise prohibited to the Company’s regulated entities. Initially focused on providing appliance service contracts, the division grew to derive half of its revenues from the installation of gas equipment, such as boilers, furnaces, central air conditioners and water heaters.
Although it took a few years to contribute to the Company’s bottom line, by 1999 the unit had sufficiently developed to be considered a viable growth business. Indeed, by that time the energy
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services business included unregulated, subsidiary companies that designed and/or operated energy systems for commercial and industrial customers, provided energy-related services to clients, provided and serviced various appliance, heating, ventilation and air conditioning service contracts to the Company’s customers, and marketed gas and electricity to retail customers.
Many of the subsidiary companies in the energy services unit were only acquired in 1998-1999.
In fact, in the latter half of 1999, KeySpan accelerated its acquisition plan and negotiated the purchase of Roy Kay, Inc. (“Roy Kay”), a contracting company headquartered in Freehold, New
Jersey, which KeySpan represented was a major energy contracting company.
10. However, notwithstanding defendants’ contemporaneous priming of the public investment community with representations that the Roy Kay acquisition advanced KeySpan’s stated strategy of expanding while maintaining revenue and profit growth, defendants concealed material facts that became known to or recklessly disregarded by them concerning substantial and material segments of the acquired Roy Kay which were incompatible with KeySpan’s growth and profit plans because, in truth: (i) Roy Kay lacked proper accounting controls and had incurred but not properly recorded substantial contract liabilities; and (ii) KeySpan would belatedly take two special charges against Roy Kay’s earnings that caused KeySpan to report consolidated losses for the second and third quarters of 2001 due to cost overruns on contracts and other contract costs that should have been previously recorded in calender year 2000.
11. Defendants concealed the truth from the investing public in order to inflate
KeySpan’s stock price, which reversed course and steadily rose as a result of their positive reports during the Class Period, so that they could sell substantial amounts of their own stock holdings near its then high prices and to facilitate the Company’s floatation of billions of dollars
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in public debt under very advantageous terms, terms that were commensurate with the high debt ratings the Company garnered as a result of its outwardly stellar (but inwardly troubled) performance.
12. At the end of the Class Period, KeySpan publicly admitted that Roy Kay engaged in material undisclosed financial and operational improprieties and that the Company was compelled to jettison the non-energy businesses and take huge reserves for substantial liabilities that had gone unreported during the Class Period, reversing any profit reported from the acquisitions and reversing course from the Company’s prior stated strategy of expanding into non-energy contracting businesses, forcing KeySpan to revert its focus on its core business operations tied to energy distribution.
13. Specifically, during the Class Period, defendants failed to disclose the following material adverse facts:
a. that the Company's representations of success were lacking in a reasonable basis at all times because a key unit of the Company, Roy Kay, had engaged in material financial and operational improprieties, had developed a negative reputation amongst major construction developers, and was known by the Individual Defendants and KeySpan managers to be replete with cost overruns on its largest, high profile contracts and to be the target of administrative actions preventing it from completing at least one other major contract. The defendants knew or in the absence of recklessness should have discovered this reputation for problematic construction projects and that Roy Kay was experiencing major difficulties in attempting to complete several of its major construction projects, including, but not limited to, its general construction contract with the New York State Construction Fund to build the Student Activities
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Center at the State University of New York at Stony Brook and its contract with the Pohatcong
Board of Education to build the New Pohatcong School; and
b. that defendants knew of the fiscal, contractual and administrative problems at Roy
Kay by no later than the fall of 2000, and “basically took over running of the company” shortly
thereafter. On April 20, 2001, the Kay family was discharged by defendant Feraudo and forcibly
removed from the premises of the headquarters of the company in Freehold, New Jersey.
14. Ultimately, the Company shocked the investing public with the following disclosures:
a) that it was taking a special charges against earnings of $30.1 million (after-tax) on
July 17, 2001, and by disclosing later, on October 24, 2001, that it was exiting Roy Kay’s general contracting business;
b) that in the third quarter ending September 30, 2001, the Company recognized additional after-tax losses related to the Roy Kay companies of $56 million deriving from the discontinuance of the general contracting activities of the unit, the costs to complete work on certain loss construction projects, and general operating losses;
c) that in the fourth quarter the Company would also take a $5.5 million operating loss
on the Roy Kay operations;
d) that for the year ending December 31, 2001, the Company would write off goodwill
and accounts and retainage receivables relating to the Roy Kay purchase in the amount of $12.4
million because the asset was not recoverable; and
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e) that, as set out in its April 26, 2002 Form10-Q filed for Q1 2002, the Company had
incurred an EBIT loss of $7.9 million and was later forced to guarantee $167.9 million of surety bonds in transactions not recorded on KeySpan’s Consolidated Balance Sheet.
JURISDICTION AND VENUE
15. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of
the Exchange Act [15 U.S.C. §§ 78j(b), 78t(a)] and Rule 10b-5 promulgated thereunder by the
Securities and Exchange Commission [17 C.F.R. § 240.10b-5].
16. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act [15 U.S.C. § 78aa].
17. Venue is proper in this district pursuant to Section 27 of the Exchange Act, and 28
U.S.C. § 1391(b). KeySpan maintains its principal place of business in this district and many of
the acts and practices complained of herein occurred in substantial part in this district.
18. In connection with the acts alleged, defendants, directly or 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.
PARTIES
19. Lead Plaintiffs, as set forth in their certifications previously filed with the Court
and incorporated by reference herein, purchased KeySpan stock at artificially inflated prices
during the Class Period and have been damaged thereby.
20. Defendant KeySpan, the largest investor owned New York energy utility
corporation, with offices at One MetroTech Center, Brooklyn, New York, is a registered holding
company under the Public Utility Holding Company Act of 1935 (“PUHCA”), 15 U.S.C. § 79 et
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seq., a member of the Standard & Poor's 500 Index, and manages a portfolio of subsidiary service companies.
21. The following defendants (the “Individual Defendants”) were, at all material times, senior officers and/or directors of KeySpan. Each had knowledge of the adverse information complained of herein and concealed from investors in the Company’s stock during the Class Period, and each profited handsomely by selling KeySpan stock during the Class
Period. Collectively, the Individual Defendants profited almost $27 million in insider trading proceeds.
22. Defendant Robert B. Catell (“Catell”) served as Chairman of the Board of
Directors and Chief Executive Officer of KeySpan. He also served on KeySpan’s Executive
Committee, which exercised all of the powers of the Board of Directors when the Board was not in session. Defendant Catell also served as Chairman of the Board of KeySpan Services, Inc.
(“KSI”), a Delaware corporation umbrella subsidiary holding title to and overseeing the energy services companies, whose offices are in Parsippany, New Jersey. According to the Company’s press release of February 3, 2000, defendant Feraudo reported directly to defendant Catell.
Defendant Catell’s office, at all relevant times, was atop KeySpan’s MetroTech Center headquarters, right next to the offices of defendants Matthews, Luterman, and Feraudo. During the Class Period, while in possession of adverse undisclosed information about the Company, and at the same time that KeySpan made false statements and issued false financial results to the investing public, defendant Catell sold almost 200 thousand shares of stock, all of which he acquired through the exercise of vested options, at prices between $39.68 to $39.87 per share, for illegal insider trading proceeds of almost $7 million. These sales reflect the disposal of almost
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90% of the shares acquired from the exercise of options and almost 75% of all of the shares he owned, including the exercised options. These sales were made near the all time high closing price for KeySpan’s stock and on the heels of a critically successful debt placement required to finance the Eastern acquisition. Many of the materially false and misleading SEC reports filed by KeySpan during the Class Period were signed by defendant Catell.
23. Defendant Craig G. Matthews (“Matthews”) served as Vice Chairman of the
Board of Directors and Chief Operating Officer of KeySpan. He also served on the Corporate
Responsibility Committee, which inter alia, oversaw corporate ethics. Defendant Matthews’ office, at all relevant times, was also atop KeySpan’s MetroTech Center headquarters, right next to the offices of defendants Catell, Luterman, and Feraudo. According to the PR Newswire press release of March 1, 2001, announcing his appointment as Vice Chairman of the Board of
Directors, defendant Matthews’ focus as the COO was the successful implementation of the
Company’s customer based growth strategy and its integration of acquisitions. During the Class
Period, while in possession of adverse undisclosed information about the Company, and at the same time that KeySpan made false statements and issued false financial results to the investing public, defendant Matthews sold 234,566 shares of KeySpan stock, all of which he acquired through the exercise of vested options, at prices between $39.68 to $39.87 per share, for illegal insider trading proceeds of over $9.25 million. These sales reflect the disposal of 98.7% of the shares acquired from the exercise of options and more than 70% of all of the vested options that he beneficially owned at the time. In addition, shortly before KeySpan’s July 17, 2001, disclosure of its $30.1 million charge to earnings, and while the Company was still issuing false financial results, defendant Matthews again sold 54,666 shares of KeySpan stock at prices
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between $38.06 to $40.01 -- near the all time highs for the Company’s stock price and on the heels of a successful debt placement -- for illegal insider trading proceeds of over $2 million.
24. Defendant Gerald Luterman (“Luterman”) served as Chief Financial Officer and
Executive Vice President of KeySpan. Defendant Luterman’s office, at all relevant times, was also atop KeySpan’s MetroTech Center headquarters, right next to the offices of defendants
Catell, Matthews, and Feraudo. During the Class Period, while in possession of adverse undisclosed information about the Company, and at the same time that KeySpan made false statements and issued false financial results to the investing public, defendant Luterman sold
32,568 shares of KeySpan stock at $39.87 per share, for insider trading proceeds of almost $1.3 million. In addition, before KeySpan’s July 17, 2001, disclosure of its $30.1 million charge to earnings, and while the Company was still issuing false financial results, defendant Luterman, on or about May 11, 2001, exercised options for and sold another 20,000 shares of KeySpan stock for $38.06 per share, for illegal insider trading proceeds of $761,200. These sales reflect the disposal of 98.57% of the shares acquired from the exercise of options, 97.65% of his total share ownership, and 100% of all of the vested options that he beneficially owned at the time.
Defendant Luterman signed the false and misleading 10Ks and 10Qs filed with the SEC during the Class Period.
25. Defendant William K. Feraudo (“Feraudo”) served as board member (together with defendant Catell) and President of KSI. He oversaw all of KeySpan’s unregulated business activities, including those of the Roy Kay companies. As stated above, defendant Feraudo reported directly to defendant Catell. Defendant Feraudo had, at all relevant times, two offices.
One was at KSI’s offices in Parsippany and the other was also atop KeySpan’s MetroTech Center
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headquarters, right next to the offices of defendants Catell, Matthews, and Luterman, where he spent most of his office time. In addition, Roger Walz, Senior V.P. & CFO, Corporate Services,
Tom Bonacuso, Senior V.P. Client Solutions, and Gene Martin (all under the KSI umbrella at all relevant times) reported directly to defendant Feraudo.
26. Defendant Feraudo was the key person at KeySpan responsible for finding acquisition candidates of small, built up businesses that had entrepreneurial capacity and skills complementary to KeySpan’s expanding KSI unit. He was responsible for executing the acquisitions made in this field and integrating them into the KSI unit.
27. During the Class Period, while in possession of adverse undisclosed information about the Company, and at the same time that KeySpan made false statements and issued false financial results to the investing public, defendant Feraudo sold 160,333 shares of KeySpan stock at $39.68 per share, for illegal insider trading proceeds of over $6.3 million. In addition, before
KeySpan’s July 17, 2001, disclosure of its $30.1 million charge to earnings, and while the
Company was still issuing false financial results, defendant Feraudo sold an additional 62,366 shares of KeySpan stock at prices between $38.06 and $39.92 per share, for illegal insider trading proceeds of more than $2.5 million. All told, defendant Feraudo exercised more than
100% of his vested options for KeySpan stock during the Class Period and sold 100% of the shares so acquired, vel non, by these transactions.1
1 According to Feraudo’s Form 4 of December 2000, he exercised 100% of the options granted to him on May 20, 1999, carrying a strike price of $27.75. However, according to the December 1999 Form 5, only two-thirds of these options, or 56,000, were fully vested on December 21, 2000; thus, the remaining third did not vest until August 13, 2001. Accordingly, it appears that 28,000 options were exercised prematurely.
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28. Because of the Individual Defendants' respective positions with KeySpan, they each had access to the adverse undisclosed information about its business, operations, products, operational trends, financial statements, markets, and business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof, and via reports and other information provided to them in connection therewith, as more fully set forth herein.
29. It is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume that the false, misleading and incomplete information conveyed in the
Company's public filings, press releases, and other publications as alleged herein, are the collective actions of the narrowly defined group of defendants identified above. Each of the above officers of KeySpan, by virtue of his high-level positions with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels, and was privy to confidential proprietary information concerning the Company and its business, operations, products, growth, financial statements, and financial condition, as alleged herein. They were involved in the drafting, producing, reviewing and/or disseminating of the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws.
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30. As officers and controlling persons of a publicly held company whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the New York
Stock Exchange (“NYSE”), and governed by the provisions of the federal securities laws, each of the Individual Defendants had a duty to disseminate promptly, accurate and truthful information with respect to the Company's financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings and business prospects, to cause
KeySpan’s financial statements to conform to Generally Accepted Accounting Practices
(“GAAP”), to correct any previously issued statements that had become materially misleading or untrue, and to disclose any adverse trends that would materially affect the financial operating results of the Company, so that the market price of the Company's publicly traded common stock would be based upon truthful and accurate information. The Individual Defendants' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.
31. The Individual Defendants participated in the drafting, preparation, and/or approval to disseminate the various public, shareholder, and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. In addition, because of their Board memberships and/or executive and managerial positions with KeySpan, each of the Individual Defendants had access to the adverse undisclosed information about KeySpan's business prospects and financial condition and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts
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rendered the positive representations made by or about KeySpan and its business or adopted by the Company materially false and misleading.
32. The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Class Period. Each Individual Defendant was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the
Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for the representations contained therein.
33. At all relevant times, the Company's day-to-day operations were managed and directed by all of the Individual Defendants.
34. Each of the defendants is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of KeySpan securities through the dissemination of materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding KeySpan's business, operations, management and the intrinsic value of KeySpan securities; (ii) enabled the Individual Defendants to sell their personal shares of KeySpan common stock, reaping proceeds of almost $27 million; and (iii) caused the Lead Plaintiffs and other members of the Class to purchase KeySpan securities at artificially inflated prices.
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CLASS ACTION ALLEGATIONS
35. Lead Plaintiffs bring this action as a class action pursuant to Federal Rules of
Civil Procedure 23(a) and (b)(3) on behalf of all those who purchased KeySpan’s securities during the Class Period and were damaged thereby (the “Class”). Excluded from the Class are defendants, the officers and directors of the Company, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.
36. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, KeySpan common shares were actively traded on the NYSE. While the exact number of Class members is unknown to Lead Plaintiffs at this time and can only be ascertained through appropriate discovery, as of March 11, 2002, there were more than 140 million shares of the Company’s common stock outstanding and, as of March 1,
2002, KeySpan had 82,321 registered record holders of its common stock. Accordingly, there are thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by KeySpan or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions.
37. Lead Plaintiffs’ claims are typical of the claims of the members of the Class, as all members of the Class are similarly affected by defendants' wrongful conduct in violation of the federal law that is complained of herein.
38. Lead Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation.
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39. Common questions of law or fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:
a. whether the federal securities laws were violated by the acts alleged herein;
b. whether statements made by defendants to the investing public during the Class
Period misrepresented material facts about the business, operations, financial condition and management of KeySpan; and
c. to what extent the members of the Class have sustained damages and the proper measure of those damages.
40. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.
SUBSTANTIVE ALLEGATIONS
A. KeySpan’s Acquisition of Roy Kay
41. In July 1999, in connection with KeySpan’s initial overtures to acquire the Roy
Kay companies from its then owners, the Kay family, Roger Walz visited and was given a tour of the Roy Kay facilities in Freehold, New Jersey. He was shown the headquarters and facilities supporting the general construction operations of Roy Kay.
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42. In August 1999, LeRoy and David Kay, father and son principals of Roy Kay, dined with Tom Bonacuso and Gene Martin. In the course of their conversations, they discussed
KeySpan’s desire to acquire Roy Kay and KeySpan’s plans for the company after it was acquired.
At that time, Messrs. Bonacuso and Martin expressly mentioned KeySpan’s intention to capitalize on all of Roy Kay’s contracting businesses, including the general contracting activities which comprised 30% of Roy Kay’s business, and KeySpan’s desire to construct power co- generating plants through or with the help of Roy Kay’s general contracting business.
43. On or about August 25, 1999, KeySpan commenced its purported due diligence investigation of Roy Kay, which continued through the closing of the acquisition. According to the documents filed in the Monmouth County litigation, KeySpan was provided with numerous documents of Roy Kay’s finances and operations, all of which indicated that Roy Kay’s general contracting business was substantial and growing. According to defendant Feraudo’s deposition in the Monmouth County litigation, Sanders & Morris assisted in KeySpan’s due diligence investigation of Roy Kay.
44. In August or September of 1999, KeySpan was supplied with an independent report prepared by First Business Advisors that stated that approximately 30% of Roy Kay’s business was non-energy related, general contracting.
45. In September 1999, LeRoy Kay, Janet Kay, David Kay and Alice Kay met with
Messrs. Walz, Ken Fritz, and defendant Feraudo. In the course of that meeting, David Kay specifically represented that a critical underpinning and key motivating factor for the Kays to sell to KeySpan was the opportunity for Roy Kay to provide substantial services to affiliate companies of KeySpan.
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46. In November 1999, at about the same time KeySpan was negotiating with, and ultimately agreed to an acquisition of, Eastern (as more fully described below), Mr. Martin of
KeySpan voiced opposition to the Kays making a bid through Roy Kay on a major general contracting project called Polytech. He expressly told the Kays that his opposition was grounded on the fact that KeySpan believed that the project was one that could and should be worked on together by both Roy Kay and KeySpan after closing on the Roy Kay purchase.
47. In January of 2000, before KeySpan closed on its acquisition of Roy Kay, Mr.
Bonacuso objected to Roy Kay’s placing a bid on a $5 million general contracting job known as the LIJH project. He represented to the Kays that the proposal should wait the closing of
KeySpan’s acquisition of Roy Kay so that the companies could work on the project together.
48. On January 20, 2000, KSI acquired all of the stock of Roy Kay and its related entities. In connection with the transaction, and in reliance upon the representations to the Kays concerning KeySpan’s expansion plans for Roy Kay’s general contracting business in part due to
Roy Kay’s providing substantial services to KeySpan affiliates, the Kays agreed to accept less than half of the agreed upon purchase price in cash, with the majority of the consideration made contingent upon the future growth, performance and profitability of all of the Roy Kay companies.
49. Never disclosed to shareholders until charged in the Monmouth County litigation and later reported in a press report on April 29, 2002, were the facts that Roy Kay faced a financial crisis; that it did not have the funding to fulfill its contractual obligations, to maintain an adequate workforce, to maintain safety standards, to comply with deadlines, or to pay its vendors, some of whom had bills outstanding for as much as seven months; and that there were
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thirty-six times since January 31, 2000, or beginning within approximately ten days after -- and prior to the public announcement of -- the Roy Kay acquisition, that KeySpan extended a total of
$31.5 million in cash credit to Roy Kay (or 150% of the consideration paid (and 350% of the cash paid) to the Kays in the acquisition). Indeed, as more fully set forth below, defendants
Catell and Feraudo were the ones that arranged for this extension of credit in response to repeated and severe cash short falls at Roy Kay that threatened its ability to continue operating because Roy Kay lacked the funds to pay its payroll, suppliers and subcontractors. The extensions of credit permitted Roy Kay to continue operations.
50. On February 4, 2000, The Wall Street Journal reported KeySpan’s purchase of
Roy Kay, together with two other engineering and construction contracting companies in the
New York Metropolitan area, in pursuit of KeySpan’s stated objectives of building up the
Company’s HVAC business. It reported that KeySpan expected the acquisitions to provide as much as 20% of KeySpan’s profits within five years.
51. Also, on February 4, 2000, KeySpan issued a press release over PRNewswire in which it reported that the newly acquired companies combined doubled the size of KSI, and that the presidents of each acquired company will continue in the same positions. The press release quoted defendant Catell as follows: “[t]hese acquisitions are consistent with KeySpan Energy’s aggressive strategy to expand our home-energy and business-solutions companies. Our goal is to become the premier energy company in the Northeast and this is a major step to achieving that goal.” Defendant Feraudo was further quoted stating that: “[t]he acquisitions are key to achieving the earnings goals set for this year. The Companies we’ve acquired are among the leading energy service companies headquartered in New York and New Jersey. They have blue-
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chip clients that include some of the leading hospitals, real-estate developers, manufacturers and
pharmaceutical companies in the region.” “KeySpan will build on the impressive credentials and
formidable reputations of our new subsidiaries," added Feraudo. "The fit is a natural. We supply
developers as well as established commercial, industrial and residential customers with
engineering, design, construction, financing, their fuel of choice and the energy management
services they want and need.”
52. A report on the following day in The Record (a local paper in Bergen County,
New Jersey) reported that since KeySpan’s utility markets were opening to competition, the
acquisitions reflected the Company’s broader expansion plans into less regulated energy related
businesses that would offer higher profits, similar to the Company’s acquisition of Whippany,
New Jersey, based Philip Fritze & Sons in 1998.
53. According to a July 17, 2001, investment report published by UBS Warburg, Roy
Kay was purchased by KeySpan for approximately $20 million. Based on the allegations
contained in the pleadings in the Monmouth County litigation, of the total $20 million
consideration agreed to, the Kays received less than $9 million (i.e., less than half of the
consideration) in cash. The remaining payment was to be made in the future and was contingent
upon the future growth, performance and profitability of all of the Roy Kay companies.
54. The acquisition of Roy Kay did not require KeySpan shareholder approval and
was made without prior disclosure to its prospective investors and public shareholders.
55. On Febraury 8, 2000, only four days after the announcement of the Roy Kay
acquisition, KeySpan was rated a new “buy” by analyst Gordon Howald at Credit Lyonnais, with
a 12-month target price of $27.00 per share. On March 17, 2000, the Company’s rating was
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raised to near-term “buy” from short-term “neutral” by analyst Donato J. Eassey at Merrill Lynch
& Co., with a 12-month target price of $33.00 per share. Mr. Eassey’s long-term rating remained a “buy.”
56. On the heels of these disclosures and the purported fit of its acquisitions to the
Company’s growth strategy, KeySpan’s stock started to pick up steam from its closing price of
$22.50 per share on February 4, 2000, and began a struggled but steady increase. By March 23,
2000, the day before commencement of the Class Period, KeySpan’s stock price closed at $25.75 per share, up 14% from the date of the disclosure of the Roy Kay acquisition.
B. Roy Kay’s Financial And Operational Difficulties
57. As mentioned above, beginning on or about January 31, 2000, defendants Feraudo and Catell learned that Roy Kay faced a severe financial crisis because it did not have the funding to fulfill its contractual obligations, to maintain an adequate workforce, to maintain safety standards, to comply with deadlines, or to pay its vendors. Thus, starting January 31, 2000, at thirty-six separate times, KeySpan, through defendants Catell and Feraudo, extended a total of
$31.5 million in cash credit to Roy Kay in response to repeated and severe cash short falls that threatened Roy Kay’s ability to continue operating because it didn’t have the funds necessary to stay in operation.
58. On February 10, 2000, three weeks after KeySpan acquired Roy Kay, Michael
Burton, Deputy Commissioner of Structures of the New York City Department of Design and
Construction, ordered Roy Kay to show cause at an administrative hearing to be held the following week why Roy Kay should not be held in default of its general contracting commitments with respect to the project called the Concourse Village Childcare. As grounds for
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the Order, Mr. Burton cited Roy Kay’s failure to maintain an adequate work force, failure to uphold appropriate site safety standards, and failure to meet many of the critical completion dates mandated in the contract. See Ex. A. By letter dated March 20, 2000, the acting Deputy
Commissioner of the New York City Department of Design and Construction concluded that Roy
Kay was, in fact, in default on this project and terminated the contract. See Ex. B.
59. On October 11, 2000, at a meeting between Roy Kay and the State University
Construction Fund concerning two general contracting projects for the State University of New
York at Stony Brook and Old Westbury, Roy Kay acknowledged its deficiency in falling behind schedule and purported to agree to a new schedule to get back on track. However, even a year after its acquisition by KeySpan, Roy Kay did not abide by its agreement and was notified of its default by subsequent letters on January 23, 2001, and February 5, 2001, respectively.
60. On November 8, 2000, upon KeySpan’s becoming a regulated entity under
PUHCA, it began restricting Roy Kay’s general contracting activities and effectively eliminated any possible growth from those activities.
61. On December 7, 2000, counsel for the Mason Tenders District Council Trust
Funds wrote to Roy Kay demanding payment and other relief in connection with Roy Kay’s default of almost $200,000 in contributions that were not made to certain funds in the second and third quarters of 2000. See Ex. C.
62. On December 18, 2000, the Internal Revenue Service mailed its Final Notice and
Notice of Intent to Levy in connection with Roy Kay’s failure to pay taxes for the 1999 calendar year in an amount exceeding $100,000. See Ex. D.
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63. On or about January 19, 2001, Roy Kay was advised by the New York City
Transit Authority, in connection with the general contracting project known as the Rail Control
Center project (the “Rail project”), that Roy Kay was in default. As a result, Liberty Bond
Service (“Liberty”) was forced to deliver on its performance bond, subject to its rights against
Roy Kay, and as of March 20, 2001, estimated its costs to be $5 million. In that connection,
Liberty notified both Roy Kay and KeySpan, by letter dated March 20, 2001, that Liberty was performing on its bond commitment and would seek full remediation from Roy Kay and
KeySpan for at least $5 million. See Ex. E.
64. Notwithstanding this unambiguous notification, KeySpan improperly failed to make the necessary and appropriate financial reserves required under the circumstances and, instead, in early April 2001, reserved only $3 million in the Roy Kay companies’ financial statements. See Ex. F.
65. On or about Thursday, January 25, 2001, an evening meeting, at times contentious, was held at Roy Kay’s Freehold headquarters and attended by defendant Feraudo and LeRoy and David Kay. At that meeting (which was recorded), several matters of pressing concern to both companies were discussed.
a. First, defendant Feraudo acknowledged that Liberty called KeySpan directly and requested that the latter “step in” in Roy Kay’s stead. “Stepping in” refers to Liberty’s request that KeySpan replace Roy Kay as the contractor on the Rail project to complete the job as required. Liberty, Feraudo also said, requested to “walk the job with [KeySpan] on Monday,” which KeySpan agreed to do in order to learn the extent of the remediation that would be required if KeySpan were to take over the job. Feraudo told the Kays that KeySpan intended,
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after the walk through, to discuss the options available to KeySpan respecting the Rail project vis
à vis Roy Kay’s default and Liberty’s rights under the performance bond. Feraudo represented that KeySpan was strongly considering replacing Roy Kay on the Rail project and desired to gauge its rights and liabilities associated therewith before taking the plunge.
b. Second, after some more discussion concerning the Rail project and other Roy Kay problem contracts, including the Student Activities Center at the State University of New York at
Stony Brook, defendant Feraudo confessed to having intimate knowledge (on his and defendant
Catell’s part) of all of Roy Kay’s problem construction projects. He said:
I am going to tell you now I made some plans – I can’t – I had to come up with a plan. I can’t work like this anymore. O.K. I can’t. You get two disqualifications, I get Tom Murphy threaten a third one. O.K. The landing stations want to sue us. So I mean, I have fucking vendors calling me every day, calling Bob Catell every day. It is really getting out of hand. It’s unbelievable. Instead of getting better, it is getting worse. I can’t allow this to go anymore. I have put together a plan that is why we are down here tonight. I want to try to go through this plan, see if we can all get on board with it, and see if we can get ourselves out of this situation. So that’s what I want to walk through with you because I can’t, I can’t let this go on. And I suspect I am going to have to put in another big chunk of cash in here and I am not just going to put it in here. I will put it in here and administer it the way I want to administer it. (Emphasis added.)
c. Later on, in the same conversation, defendant Feraudo continued:
But I mean the situation is you have serious cash problems. I mean I am sure you got yourself out. The problem is, I will tell you what I think and again I do not want to argue this.
* * *
I think you got very big very quick. And I don’t think the systems and the processes were in place to keep track with that. Then we ended up in cash problem. Then you ended up having [inaudible]. Then all of a sudden this whole thing, which is all tied together, starts to, starts to creek. And what happened now? It’s so far in a ditch, you can never win. You’re never going to generate enough cash to keep these people happy. I mean some of these vendors are out
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there 6 months, 7 months [inaudible]. So here we are in this situation. We can debate forever how the hell we got here and I really don’t want to. . . . I know I am going to have to put some more money. I think one of the things we have to do is get you current so you don’t have a vendor up your ass every five minutes. Get the projects under control and get the billing going correctly. (Emphasis added.)
66. Although the precise amount and timing of KeySpan’s cash advances are unclear from the foregoing statements, it is clear that, at least by January 25, 2001, a year after the acquisition, a substantial sum was already advanced to Roy Kay deriving from its “serious cash problems” and further sums equal to or greater than those already made in the past were now again required. It is also clear that defendants Feraudo and Catell knew by this time that Roy
Kay: (i) did not have the proper financial and operations systems, processes and controls in place to keep track of its finances and performance; (ii) had a substantial cash problem; (iii) could not generate enough cash to continue operations without substantial and multiple cash infusions from
KeySpan; and (iv) that Roy Kay’s projects were not under control and the billing on those projects was unreliable.
67. In defense of his actions, David Kay responded to defendant Feraudo as follows:
They want. They owe me a million and a half dollars and they don’t want to pay me. Tom [Bonacuso] doesn’t want to pay me the money. They want to take the money that, that they were supposed to pay me so I could pay the people that I need to pay, and they want to pay the people that they want to pay. So, so now I can’t pay my payroll. I can’t pay my staff because they are not paying me and they’re paying who they want. I mean this is preventing me from doing any work. We all know that SUNY is not paying me. But, but I got no money there. I got no money at the, the, the KeySpan jobs because they’re not paying me and they’re going to pay my subs. So they’re not going to pay. So, so where am I supposed to go? I’m boxed in a corner. (Emphasis added.)
68. From the foregoing statements it is clear that at least as of January 25, 2001, defendant Feraudo knew, in addition to the matters stated above, that the condition at Roy Kay
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had deteriorated to the nadir that it could not make its payroll, was up to seven months late in paying its vendors, and “instead of getting better, it is getting worse.”
69. Later on in the same conversation, after discussing earlier contracting and payment problems on the Rail project and disclosure of LeRoy Kay’s firing of a key supervisory employee because of Roy Kay’s financial difficulties, defendant Feraudo retorted:
You know, again, you still have your remedies. You still have your remedies to go after, to go after them to get your money. I’m not going to stop you from doing that. But . . . right now we’re in a poison, where I got to tell you KeySpan’s reputation is being killed with this. (Emphasis added.)
70. Finally, in wrapping up their conversation, defendant Feraudo advised the Kays of his intention to have KeySpan take over the Rail project with the help of a loaner of key Roy Kay personnel to see that job through completion. In addressing the remaining problems of Roy Kay,
Feraudo said:
I want to take out the projects in distress. O.K. And my intent is to fix them to the best of my fucking ability, O.K. I’m at the point where I don’t even give a shit if we just break even. If we can fucking break even I’ll raise a flag, O.K. I don’t want to take major fucking losses on these projects.
* * * And then your supervisors got lax. So right there is four fucking things that are gonna take you down. To get big, there’s no way you gonna get big. So I’m saying step back the goodness out of this trip, is that we learned a fucking lot? O.K. So now given that, let’s re-systematize Roy Kay. We gotta get back our reputation, O.K. Our reputation is fucking shit on Long Island. You can’t believe the fucking letters I’m getting and it just becomes a snowballing, a snowballing thing. The other day a vendor refused to deliver now to [KSI’s Consumer Services division], to Mike Ruff’s company, because Roy Kay owes them money. Listen, what the fuck are you doing? We’re not delivering. I say fuck you, but understand what’s going on now, O.K. We got damaged reputation. We got to fix that because our whole fucking, our whole fucking future is based on our reputation. (Emphasis added.)
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In rounding out the meeting, the participants also discussed the problems plaguing the Brooklyn,
College, Baruch and Queens Hospital, and Einstein projects.
71. On or about March 31, 2001, defendant Feraudo received a Contracts in Progress
Report or Work in Progress Report (collectively and generically, the “WIP report(s)”) specifically and exclusively relating to all of the Roy Kay operations for the month ending March
2001. WIP reports were routine monthly reports reflecting the latest, up to the minute progress, profitability and financial and operational information and benchmarks pertaining to all active contracting engagements undertaken by Roy Kay. In this spreadsheet, the leftmost column contained the name of each contracting engagement. Each following column contained the dollar or percentage amount for the period reported reflecting various results of operations in three categories, by row corresponding to each contract; namely, from inception to the preparation date, as of the final date in the month, and for the period since the prior year end. The first category reported the contract price inclusive of any change orders, estimated gross profit, earned revenues, costs incurred, percentage of job completion, gross profit, billings to date, and the estimated cost to complete. The second category reported the costs and estimated earnings in excess of billings and, separately, the billings in excess of costs and estimated earnings. Finally, the last category reported the contract revenue, contract costs and the gross profit or loss.
72. At his deposition held on March 20, 2002, in the Monmouth County litigation, defendant Feraudo testified that he received WIP reports on a regular and consistent basis, by fax, hand or overnight delivery to his MetroTech office, at or about the time of their preparation. In addition, he testified that the WIP reports were reviewed at meetings of the Board of Directors and were supplied to Roger Walz, Kevin Parker and others. He also testified that these WIP
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reports were used by Roger Walz in preparing consolidated statements for all of the KSI entities, which were always passed on to Feraudo’s superiors at KeySpan on a timely and monthly basis.
73. The March 31, 2001, WIP report reflected a gross loss at Roy Kay of slightly more than $4 million. It represented a total of 23 contracts, of which 60% were operating at a loss, one was at break-even, and of the remaining nine which reflected a modest profit, only four were in the final stages of completion and their average profit margin was only 4%. Conversely,
12 of the projects operating at a loss were in the final stages of completion. Pursuant to
Accounting Research Bulletin No. 45 Long-Term Construction-Type Contracts (“ARB No. 45”), provision for total projected loss on all contracts expected to result in a loss had to be (but was not) made during the period in which the current estimate of total contract costs exceeded the current estimate of total contract revenues.
74. On April 20, 2001, as a result of the financial, operational and other problems plaguing Roy Kay, defendant Feraudo terminated the employment of LeRoy Kay, Janet Kay,
David Kay and Alice Kay, all prior owners of Roy Kay. Based upon the allegations in the pleadings in the Monmouth County litigation, defendant Feraudo, on April 20th, sent KeySpan personnel to the headquarters of Roy Kay for the purpose of downloading documents and locking out the Kays while dining with LeRoy Kay at a nearby diner. The Kays have alleged that
KeySpan subsequently dumped and shredded relevant Roy Kay records.
75. According to the Kay family, the Kays were forcibly evicted by a platoon of security personnel summoned by KeySpan. In addition, KeySpan representatives told the police that were summoned and reported to the scene of the eviction that the Kays had looted the company, that David Kay was personally guilty of fraud.
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76. On Monday April 23, 2001, defendant Matthews, in connection with KeySpan’s preparation of its financial reports for the first quarter of 2001, sent an email message to defendant Luterman and the latter forwarded it onto defendant Feraudo. Defendant Matthews wrote:
Since we are a few cents ahead for the first quarter, is there any sense to taking some additional reserve for Roy Kay. I understand what we took is all expected to be written off but there may be some funds related to receiveable [sic] collections that we may be sued for by the principals just terminated. (Emphasis
added.)
77. Defendant Feraudo responded:
i think we have done enough for the first quarter ,, 6-7 million ,,,, this is what we are aiming for ,, i will not be able to have a more accurate number until the next quarter.
78. On or about April 30, 2001, defendant Feraudo received the April 2001 WIP report for Roy Kay. As was the case with the March 2001 WIP report, the April 2001 WIP report was reviewed at a meeting of the Board of Directors, supplied to Roger Walz, Kevin Parker and others, and used in preparing consolidated statements for all of the KSI entities, which were transmitted to KeySpan. This WIP report reflected a stark and dramatic further deterioration of
Roy Kay’s profitability. It reflected a gross loss of $40 million dollars since FY 2000, negative contract revenue of more than $7 million dollars since FY 2000, and a gross loss on all contracts from inception to date of almost $25 million. As stated in paragraph 74, pursuant to Accounting
Research Bulletin No. 45 Long-Term Construction-Type Contracts (“ARB No. 45”), provision for total projected loss on all contracts expected to result in a loss had to be (but was not) made
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during the period in which the current estimate of total contract costs exceeded the current estimate of total contract revenues.
79. On or about May 23, 2001, defendant Feraudo received the May 2001 WIP report for Roy Kay. As was the case with all WIP reports, the May 2001 WIP report was reviewed at a meeting of the Board of Directors, supplied to Roger Walz, Kevin Parker and others, and used in preparing consolidated statements for all of the KSI entities, which were transmitted to KeySpan.
This WIP report reflected a stark and dramatic further deterioration of Roy Kay’s profitability and a reversal of the prior year’s reported profit. It reflected a gross loss of $44.5 million dollars since FY 2000, negative contract revenue of more than $15 million dollars since FY 2000, and a gross loss on all contracts from inception to date of more than $31 million. This WIP report also showed that the profit of $13 million reported in FY 2000 required reversal, resulting in the full
$44.5 million loss.
80. On Thursday, June 28, 2001, defendant Feraudo penned an email to defendant
Catell concerning the Roy Kay impact on KeySpan’s earnings:
we are trying to complete the total impact of roy kay by next week on earnings (we are still in the 20-25 cent range) ---- there is one area though that i would like to get your concurrence on ---- alan fischer had indicated to me to get “everything out of the way now at one time” don’t let it carry forward ------so we are adding an additional reserve for the mta and making sure we are covered in all of our estimates to complete– – however , there is an option of shifting some of the hurt to goodwill—i am against this because my fear is if we have to divest or shut down the company next year because it can’t survive,, i don’t want to be looking at a significant write-off ------the trade off is that this quarter will take the full brunt of this hit and gerry is concerned by that —we are probably talking about 5- 10million dollars so from my parochial perspective i think we should just get it over with –i don’t want to take any chance of this issue resurfacing again in a significant way next year------your thoughts please???? (Emphasis added.)
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81. Defendant Catell responded: “I need to see all the numbers before I decide and we need Gerry’s input. Why don’t you have a recommendation for me when I return?”
82. At the deposition of James Q. Riordan, a former KeySpan director, in the
Monmouth County litigation, Mr. Riordan testified that:
a. The Board of Directors of KeySpan, or its Audit Committee, was kept
informed of accounting controls and performance issues with acquisitions made
by defendant Feraudo by management, including defendant Feraudo.
b. Any director on the Board of KeySpan that was also on the board of a
subsidiary company was the point person at the board for information relating to
that subsidiary. Accordingly, board members kept abreast of the activities at the
subsidiary so that they could discuss them at the meetings of the KeySpan board.
83. Defendants failed to disclose to the investing public all of the foregoing events concerning the improprieties and battles for control over Roy Kay until the disclosures of and the analyst conference call held on July 17, 2001 and thereafter.
C. The False and Misleading Financial Reports To The Public
1. Fiscal Year 2000
84. On March 24, 2000, the beginning of the Class Period, KeySpan reported in a press release, and reaffirmed in its 8-K filed with the SEC on March 27, 2000, that “earnings
[were] significantly ahead of analysts' estimates for the first quarter of 2000 and could be up to 7 percent higher for calendar year 2000." Defendant Catell specifically attributed the higher numbers to success in implementing the Company’s growth strategy. "Our dividend yield and earnings growth are superior to our respective industry groups and make us confident of
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increasing long-term value for our shareholders," he said. In addition, KeySpan said that its merger with Eastern was proceeding on schedule and was expected to be completed by the Fall.
"We are confident that we will exceed our goal of achieving $30 million in synergy savings and are hoping to achieve a level of savings that will make the merger non-dilutive in the first full year," said Mr. Catell.
85. On April 26, 2000, KeySpan issued a press release reporting its consolidated earnings for the first quarter of 2000. It reported an increase of 30% in its earnings, from $134.5 million the previous year to $163.6 million, or an increase from $0.94 cents per share to $1.22 per share. KeySpan noted that the electronic-services segment had earnings of $42.7 million or
32 cents per share in the first quarter, as compared to $16.6 million, or $0.12 cents per share in the first quarter of 1999.
86. The March 24 and April 26 statements were materially false and misleading because they failed to include the true results of the financially troubled Roy Kay operations, which were required to be included in the financial reports for virtually that entire quarter inasmuch as the purchase of Roy Kay was completed in January 2000. Therefore, KeySpan, which had operational and financial control of Roy Kay for more than two months before issuing the financial statements, had no reasonable basis for reporting such earnings, which failed to properly account for the continuing and mounting contract losses associated with the Roy Kay general contracting operations. The defendants concealed the facts that Roy Kay lacked proper accounting controls; that it had material unrecorded liabilities, exceeding the cost of the acquisition; that substantial cash infusions were advanced to Roy Kay to support the very survival of its operations; and that substantial and material cost overruns, delays and disputes
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with general contracting customers about major projects had surfaced that materially compromised Roy Kay’s viability and contribution to KeySpan. As a result, defendants violated
GAAP because they failed to accrue or otherwise disclose in the Company’s financial statements, as required by FASB 5 & 38, the probable contingencies for existing conditions, situations, or circumstances involving uncertainty as to outcome that would be resolved upon the occurrence of future events.
87. On May 12, 2000, the Company filed its Form 10-Q for the period ending March
31, 2000, which was signed by defendant Luterman. In reporting its misstated earnings for the quarter, KeySpan echoed its April 26, 2000, press release, stating that consolidated earnings per share were $1.22 for the first quarter, as compared to $0.94 per share for the same period in
1999, an increase of 30%. Therein the Company also reported that its assets increased by approximately $200 million in its energy related services unit due to the acquisition of complementary companies, including Roy Kay.
88. Because KeySpan failed to properly disclose and account for the troubled Roy
Kay operations, and the resulting impact on its earnings, its report of earnings for this period was materially false and misleading.
89. In response to the foregoing materially misleading and false statements of March
24, April 26, and May 12, 2000, KeySpan’s stock price closed at $26.375 per share on March
24, at $29.813 per share on April 27, and at $30.313 per share on May 15 (the first full trading day after the May 12 filing), up almost 18% from the day before commencement of the Class
Period.
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90. On July 12, 2000, the Company filed a Form 8-K reporting the unaudited consolidated financial statements of a combined KeySpan/Eastern as of the first quarter ended
March 31, 2000 and for the year ended December 31, 1999. These reports were only illustrative since KeySpan and Eastern had not yet combined and were not expected to combine until the fourth quarter. However, this filing was materially false and misleading because it failed to mention or make provision for the losses incurred by Roy Kay and the impairment of Roy Kay’s general contracting business.
91. On July 26, 2000, in a press release and in a Form 8-K filed with the SEC,
KeySpan reported its purported earnings for the second quarter of 2000, ending June 30. Its results for that quarter were represented as $47.1 million, or $0.35 per share, up from $14.3 million, or $0.10 per share, for the same period for 1999. These results exceeded analyst estimates by 30%. The release highlighted this “significant” increase and the Company’s purported profits from its energy-related services segment of $17.2 million or $0.13 cents per share as opposed to a net loss of $0.9 million or $.01 per share in the same quarter in 1999. The
July 26, 2000, press release and Form 8-K were also materially false and misleading for the reasons set forth in paragraph 86.
92. On August 8, 2000, in an interview on the financial broadcast Your World with
Neil Cavuto, defendant Catell extolled KeySpan’s growth prospects by stating: “I think investors are recognizing the utility sector is a good place to be, but even more important from my perspective, they`re recognizing that KeySpan is a good investment. The sector is up over 25 percent. We are up over 44 percent total return to our shareholders.” Defendant Catell continued:
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Well, I think from the standpoint of Keyspan, I think our strategy is working. We’ve demonstrated to the marketplace our second quarter earnings exceeded estimates by 30 percent. We are really making the growth happen. I think we have a greater growth potential in our territory than any company in our industry, and I think the investors are seeing that, seeing the ability -- it is more than just a dividend play. We pay a nice dividend, 5 percent, with a 10 percent return on top of that, possibly more than that.
* * *
CAVUTO: What about the story of low interest rates? Right now, that has been the proverbial wind at your generator, and I wonder if whether you see that continuing here, whether that is just sort of -- just added oomph for you?
CATELL: Well, it is always hard to tell what Mr. Greenspan is going to do. To the extent that interest rates do stay where they are, that helps us. We are generally a capital-intensive business. So the fact that we can borrow money at lower rates, that helps us, improves our bottom line, so that`s a good story for us. (Emphasis added.)
93. Defendant Catell’s statements of August 8, 2000, were materially false and misleading because they failed to properly disclose and account for Roy Kay’s true financial condition and operations and the resulting jeopardy to earnings and failed to disclose that it was only because the Company concealed the crisis at Roy Kay that KeySpan’s credit standings remained so high that it could borrow money on a continuing basis at lower rates.
94. On August 10, 2000, KeySpan filed a Form 10-Q with the SEC, which was signed by defendant Luterman, reporting its misstated earnings for the period ending June 30, 2000. In that10-Q, KeySpan affirmed the financial results announced on July 26, 2000, reporting consolidated earnings of $47.08 million or $0.35 per share, compared with $0.10 per share for the same period in 1999.
95. Again, this report was also materially false and misleading for the reasons set forth in paragraph 86.
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96. In response to the foregoing materially misleading and false statements of July 26, and August 8 and 10, 2000, KeySpan’s stock price closed at $32.828 per share on July 26, at
$35.625 per share on August 8, and at $35.828 on August 11 (the first full trading day after the
August 10 filing), up almost 40% from the day before commencement of the Class Period and up
18% from May 15, 2000. Indeed, this marked the first time that KeySpan’s stock price recovered to trade near and above the prices it had traded immediately after the LILCO merger.
97. On October 24, 2000, KeySpan issued a press release reporting its purported earnings for the third quarter of 2000. KeySpan’s stated results for that quarter were $13.2 million, or $0.10 per share, compared to a break even quarter for the same period in 1999. The
Company highlighted in its release its purported profits from its energy-related services segment of $9.6 million or $0.7 cents per share.
98. On October 31, 2000, KeySpan filed its Form 10-Q with the SEC for the quarter ending September 30, 2000. The Form 10-Q was signed by defendant Luterman. Confirming the statements in the October 24 press release, the Form 10-Q reiterated that consolidated earnings per share were $0.10 for the first quarter.
99. The October 24 press release and October 31, 2000 Form 10-Q were materially false and misleading for the reasons set forth in paragraph 86.
100. In reaction to the foregoing materially misleading and false statements of October
24 and 31, KeySpan’s stock price closed at $35.313 per share on November 1, 2000.
101. On November 8, 2000, Fitch assigned an “A-“ rating to KeySpan's $1.65 billion senior unsecured debt shelf registration, maintaining a stable ratings outlook. The debt issuance represented by the shelf registration was anticipated to be sold by year-end 2000 to replace the
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Company’s short-term debt and commercial paper expected to be issued in an equal amount under the Company’s capital markets bridge facility in order to make the Eastern purchase.
102. The Fitch rating was based on misreported financial and operational results which concealed the crisis at KeySpan’s Roy Kay. Moreover, the Fitch rating was premised upon its belief that quantitative credit measures for KeySpan on both a consolidated and parent company standalone basis were consistent with the rating. Fitch expressly relied on the reported plans of the Company to continue to expand its unregulated retail energy operations through acquisitions and internal growth. Neither Fitch nor the public investors knew that defendants concealed that those operations, which included the Roy Kay heating, air conditioning, and ventilation service and installation business, had not only higher business risk than the utilities side, but also that
Roy Kay had no operations and accounting controls that could assure the reporting of earnings and financial reports in conformity with GAAP, that it was experiencing operational and financial crises, and could not operate as a standalone going concern. Accordingly, Fitch did not anticipate any significant near-term problems.
103. As stated in paragraph 101, Fitch’s positive debt rating was critical to KeySpan’s financing of the Eastern acquisition and an additional motivating factor to conceal the operational and financial crises at the Roy Kay subsidiary that would have jeopardized the Fitch rating.
104. On Nov. 15, 2000, the debt takedown from KeySpan's shelf registration under the foregoing Fitch rating was priced in three tranches: $700 million 7.25% debt securities due 2005;
$700 million 7.625% debt securities due 2010; and $250 million 8.00% debt securities due 2030.
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105. As a result of the foregoing positive developments, KeySpan’s stock price rose from its closing price of $33.625 per share on November 9, 2000, to $38.125 on November 30,
2000.
106. On January 25, 2001, the same day as the evening meeting between defendant
Feraudo and LeRoy and David Kay, referred to in paragraph 65, supra, KeySpan issued a press release, reiterated in a Form 8-K filed on the same date, reporting its misstated consolidated earnings for fiscal 2000 of $282.7 million or $2.10 per share. The Company also announced its purported fourth quarter earnings of $100 million or $.74 per share, along with a restructuring charge, which lowered the quarterly earnings to $58.9 million or $.44 cents per share. The purportedly higher earnings “resulted from solid performances from all of KeySpan’s business segments.” The Company also highlighted KSI’s “first annual profit, adding $40.9 million, or
$.31 cents per share, to consolidated earnings, compared to a loss of $2.5 million, or $.02 per share last year.” In addition, the Company reported that its energy management businesses achieved profitability according to schedule, with fourth quarter earnings of $15.1 million, or
$.11 per share, versus essentially break-even results the prior year.
107. The release reported further:
Commenting on the Company’s performance, Robert B. Catell . . . emphasized that KeySpan is in an excellent position to continue its earnings growth in 2001. “We are pleased that our 2000 earning . . . were . . . 49% higher than 1999. All of our business segments performed exceptionally well.”
* * *
Looking to the future, Mr. Catell said, "We have a sound strategy and a strong foundation for future earnings growth. All our business segments have a positive outlook and should be able to build upon this year's strong performance. Conversions from oil to natural gas in New England and on Long Island are
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expected to continue at a healthy pace. We maintain a rigorous budget process to control costs and expect to achieve our synergy savings target. As a result, we expect to earn between $2.60 to $2.65 per share in 2001. We will keep our shareholders abreast of any changes to this earnings forecast which may arise from factors including the level of gas prices, winter weather patterns, and the demand for electricity this summer." (Emphasis added.)
108. The foregoing reports were materially false and misleading because KeySpan failed to properly disclose and/or record losses for the troubled Roy Kay operations, the totality of which actually reversed approximately $100 million of the reported earnings of $282.7 million or $2.10 per share before the restructuring charge. Furthermore, KeySpan misreported an annual profit of $40.9 million for its energy services segment, which was known to be false and misleading due to the necessary reserves and charges that should have been taken in the period to offset the financial and operational difficulties and improprieties plaguing Roy Kay. Finally, defendant Catell’s statements that “[a]ll of our business segments performed exceptionally well” and “have a positive outlook” and that the Company maintained a rigorous budget process to control costs so that target earnings would be achieved were materially false and misleading because of the same reasons stated in this paragraph. Alternatively, they were false and misleading because KeySpan failed to disclose material accounting issues at Roy Kay and inevitable divestiture of its general contracting business.
109. In response to the foregoing materially misleading and false statements of January
25, 2001, KeySpan’s stock price closed at $39.00 per share.
110. On March 30, 2001, KeySpan filed its annual Form 10-K with the SEC, which defendants Luterman and Catell signed. In that 10-K, KeySpan misstated its annual consolidated earnings of $282.7 million or $2.10 per share, compared with $1.62 per share reported in 1999.
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It also reported that the energy services division reported consolidated earning of $40.946 million in 2000.
111. Because KeySpan failed to properly disclose and account for the troubled Roy
Kay operations or, alternatively, failed to disclose that the Company could not ascertain the loss related to Roy Kay because of its lack of financial controls, its statements relating to its earnings for 2000 were materially false and misleading.
112. Moreover, notwithstanding that KeySpan was inclined to terminate Roy Kay’s general contracting business, and was further aware of the liabilities deriving from the Roy Kay general contracting business’ inability and failure to perform many significant contracts such that it had defaulted on its obligations and was liable for substantial damages thereunder, separate from the financial improprieties at Roy Kay that made impossible the reporting of its earnings in conformity with GAAP, KeySpan’s earnings reports for 2000 were materially false and misleading because they did not make the appropriate adjustments in its financial statements, or, alternatively, did not disclose in its notes to its financial statements that the amount of loss could not be ascertained on that date. To wit, pursuant to Accounting Research Bulletin No. 45 Long-
Term Construction-Type Contracts (“ARB No. 45”), provision for total projected loss on all contracts expected to result in a loss had to be (but was not) made during the period in which the current estimate of total contract costs exceeded the current estimate of total contract revenues.
KeySpan’s materially misleading statements and omissions were relied upon by the investing public.
113. The Company’s representations of being positioned for success lacked a reasonable basis at all times because KeySpan and the Individual Defendants knew but failed to
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disclose that Roy Kay was replete with severe operational and fiscal problems and cost overruns on several of its construction projects, in particular, its general construction contract with the
New York State Construction Fund to build the Student Activities Center at the State University of New York at Stony Brook and its contract with the Pohatcong Board of Education to build the
New Pohatcong School; that Roy Kay had a horrible reputation on Long Island; that Roy Kay would not be able to attain its profit target due to its being restricted from the acceptance of general construction work deriving from a severe cash flow shortfall and financial crisis; and that, as a result, KeySpan had to discontinue or curtail Roy Kay’s general contracting business in order to stop the bleeding. Indeed, immediately upon KeySpan becoming a regulated entity under PUHCA on November 8, 2000, it began restricting Roy Kay’s general contracting activities and effectively eliminated any possible growth from those activities.
114. On April 11, 2001, analyst Gordon Howald at Credit Lyonnais reiterated his
“buy” recommendation for KeySpan, with a 12-month target price of $50.
115. In response to the foregoing materially misleading and false statements of March
30, 2001, KeySpan’s stock price climbed from its closing price of $38.13 per share on March 30 to $40.47 on April 10, up 6% in less than two weeks. Indeed, this was only the second sustained time since the LILCO merger that KeySpan’s stock crossed the $40 price mark, the first time being December 2000.
116. In the Monmouth County litigation brought against the Kays, who filed certain counterclaims against KeySpan, KeySpan admitted that it knew of the problems at Roy Kay as far back as March 2001. However, in truth, the defendants were aware of the Roy Kay problems within weeks of its acquisition by KeySpan. Notwithstanding such knowledge, however,
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KeySpan failed to make timely public disclosure about the Roy Kay problems and failed to record the charges that were needed to account for them and/or perform an exhaustive analysis of the massive extent of those problems until the third quarter of 2001.
2. Fiscal Year 2001
117. On April 26, 2001, one week before filing a $1 billion shelf registration and two weeks before defendants Feraudo, Luterman and Matthews began selling more than 137,000 shares of KeySpan stock, KeySpan misreported “record” earnings of $223.3 million, or $1.63 per share for the first quarter ending March 31, 2001. In light of those results, KeySpan updated its annual results to reflect a forecast of $2.70 earnings per share. In that press release, the Company highlighted that KSI had EBIT of $2 million.
118. The April 26 earnings report was materially false and misleading because
KeySpan actually had a first quarter operating loss of $5.5 million as a result of the financial and operational crisis at Roy Kay that was concealed from the public. This $5.5 million loss, in fact, was not disclosed until a press release issued by KeySpan on October 24, 2001. Indeed,
KeySpan disclosed in its July 17 and October 24, 2001, press releases that it had combined losses of approximately $100 million that were revealed on related to the Roy Kay operations.
119. On May 7, 2001, four days after the filing of the shelf registration, four days before defendants Feraudo’s, Luterman’s and Matthew’s selling spree, and ten days before the
Fitch rating, KeySpan filed a Form 10-Q with the SEC affirming its reported consolidated earnings announced on April 26, 2001. The 10-Q, which was signed by Defendant Luterman, stated that KeySpan had consolidated earnings of $223.3 million, or $1.63 per share compared to the $163.6 million or $1.22 per share for the corresponding period in 2000. In that same 10-Q,
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KeySpan raised its projected consolidated earnings from $2.40-$2.50 per share to $2.70 per share. Because KeySpan did not properly disclose or recognize the losses from Roy Kay general contracting operations, its report of earnings was materially false and misleading.
120. In response to the foregoing materially misleading and false statements of April
26 and May 7, KeySpan’s stock price accelerated from $38.35 per share on May 7 to $40.04 on
May 16 and $40.30 on May 23. Indeed, this was the third sustained time since the LILCO merger that KeySpan’s stock crossed the $40 price mark, and the second time in which the defendants engaged in insider trading.
121. On May 17, 2001, right in the middle of the time period of the second tranch of insider sales, Fitch assigned an “A-” rating to KeySpan's $1 billion senior unsecured debt offering that was part of a universal shelf registration filed on May 3, 2001, maintaining a stable ratings outlook. The registration anticipated that $400 million of KeySpan notes would be issued in the coming weeks with the proceeds used to pay down a like amount of KeySpan commercial paper. At the time, KeySpan had outstanding its debt of $1.65 billion issued in connection with the Eastern merger and an additional $1.0 billion of commercial paper.
122. As in November 2000, this Fitch rating was based on misreported financial and operational results which concealed the crisis at KeySpan’s Roy Kay. Moreover, the Fitch rating was premised upon its belief that quantitative credit measures for KeySpan on both a consolidated and parent company standalone basis were consistent with the rating. Fitch expressly relied on the reported plans of the Company to continue to expand its unregulated retail energy operations through acquisitions and internal growth. Neither Fitch nor the public investors knew that defendants concealed that those operations, which included the Roy Kay
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heating, air conditioning, and ventilation service and installation business, had not only higher business risk than the utilities side, but also that Roy Kay had no operations and accounting controls that could assure the reporting of earnings and financial reports in conformity with
GAAP, that it was experiencing operational and financial crises, and could not operate as a standalone going concern. Accordingly, Fitch did not anticipate any significant near-term problems.
123. On May 21, 2001, KeySpan issued $500 million in 5-year notes with a 6.15% coupon. They were priced inside initial guidance, with an issue price of 99.828. The spread was only 120 basis points more than comparable Treasuries. Because of the strong market demand for these notes, KeySpan increased its original offering from $400 million to $500 million.
124. As a result of the foregoing positive developments, KeySpan’s stock price rose from its 52 week low closing price of $28.875 per share on May 22, 2000, to $40 per share on
May 17, and $40.13 on May 21, 2001, back up near its highest price of $40.82 per share for
2001, which was reached on April 17, 2001. It is in this high price range environment that the second tranch of insider sales occurred.
125. On June 25, 2001, KeySpan issued a press release announcing that it was combining its unregulated business into KeySpan Energy and Services and Supply, and that its regulated businesses would be combined into KeySpan Energy Delivery. KeySpan stated that such actions would enable it “to implement [its] growth strategy and are consistent with the evolution of [its] organizational structure into regulated and unregulated businesses.” Because
KeySpan did not properly disclose or account for the troubled Roy Kay operations, its statements were materially false and misleading.
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D. KeySpan’s Belated Disclosure Of The Truth
126. On July 17, 2001, the end of the Class Period, the Company issued a press release and filed a Form 8-K with the SEC stating, for the first time, that it would take a $53.6 million special charge in its energy services business in the second quarter, as a result of the operations of the Roy Kay companies. The Company said that the special charge reflected purportedly unanticipated costs to complete work on certain construction projects, as well as the impact of inaccuracies on the books of these companies, relating to their overall financial and operational performance. The Company went on to report that as a result of its findings, KeySpan terminated the employment of the former owners of the Roy Kay companies and installed new management in their place, that the parties were engaged in litigation relating to the termination of the former owners, as well as other matters relating to the acquisition of the Roy Kay companies, and that
KeySpan intended to pursue all available legal remedies to recover the damages it had incurred as a result of the activity of the former owners.
127. The press release went on to state that the Company expected to report earnings of approximately $0.16 per share for the second quarter, excluding the special Energy Services after tax charge of $0.22 per share. It also disclosed that for 2001, excluding the special charge, the
Company reduced its earnings expectations from approximately $2.70 per share to a range of
$2.50 to $2.60 per share, expecting to be towards the middle of the range. Finally, the press release advised investors of a Conference Call to be held the same day at 11:30am to discuss with the financial community the matters announced.
128. The July 17, 2001 Conference Call was attended by defendant Matthews, defendant Luterman, Mike Taunton and other members of KeySpan’s finance team. In that call,
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defendants reiterated the matters already stated in the prior disclosures that KeySpan was taking a
$30 million after tax, or $0.22 cents per share, charge to earnings in the second quarter of 2001 due to the problems with the Roy Kay unit. The $53.6 million total pre-tax charge taken at the time was more than 2 ½ times the total purchase price of Roy Kay.
129. In that Conference Call, defendant Luterman admitted that KeySpan became aware of the problems at Roy Kay in March and April of 2001, but claimed that “to put our hand around the size and scope of it” had taken until July (six months after the January 25, 2001 meeting related in paragraph 65, supra, at which defendant Feraudo claimed to have intimate knowledge of all of Roy Kay’s problem construction projects). KeySpan falsely claimed that it had discovered these problems only as a result of an analysis done in conjunction with the close of the second quarter of 2001 by a group of outside expert-consultants in accounting and construction, which included Arthur Andersen, the Company’s auditor at the time. No explanation was given as to why the outside experts were able to detect the problems but
KeySpan was not or why the Company and the experts failed to discover the problems during the reporting of the December 31, 2000 financial results. This supposed “discovery” effectively reversed the earnings reported by KSI going back to the time of its acquisition of Roy Kay.
130. Moreover, notwithstanding KeySpan’s claim that its “experts” discovered the problems with Roy Kay in March of 2001, two months before defendants Feraudo, Luterman and
Matthews sold more than 137,000 shares of stock, and a month before the April 26, 2001 press release announcing first quarter earnings, KeySpan still delayed disclosing the loss and any of
Roy Kay’s operational or financial difficulties until July 17, 2001, after the issuance of the Fitch rating and the insider sale of shares. Three months later, in its October 24, 2001 announcement
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of third quarter earnings, KeySpan took an additional $56.6 million after tax charge related to the discontinuance of all of Roy Kay’s general contracting business and slipped it into its third quarter Form 10-Q the revelation that Roy Kay had a first-quarter after tax operating loss of $5.5 million. However, KeySpan failed to ever restate its first quarter earnings or disclose the falsity of key information related to the effect of these losses on the $2 million first quarter EBIT announced for KSI, which included the Roy Kay operations.
131. In response to the July 17, 2001 disclosures, the price of KeySpan common stock fell that day from $34.50 to $32 per share, and bottomed out at a 52-week low of $29.35 on July
24, 2001.
132. On August 13, 2001, KeySpan filed its Form 10-Q for the second quarter ending
June 30, 2001, which reported that the Company and the former owners of the Roy Kay companies were engaged in litigation relating to the termination of the former owners, as well as other matters relating to the acquisition of the Roy Kay companies. It represented that KeySpan alleged that the former owners misstated the financial statements of the Roy Kay Companies and certain underlying work-in-progress schedules, that KeySpan sought damages in excess of $76 million as well as a declaratory judgment that KeySpan was not required to pay the former owners any further amounts under the terms of the stock purchase agreement entered into in connection with the acquisition of the Roy Kay Companies, and that the causes of action asserted include breach of contract and fiduciary duty, fraud, and violation of the New Jersey Securities
Laws.
133. The August 13, 2001 Form 10-Q also reported that the former owners filed counterclaims against KeySpan and certain of its subsidiaries and officers to recover damages
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claimed to have been incurred as a result of, among other things, their improper termination and the alleged fraud on the part of KeySpan in failing to disclose the limitations imposed upon the
Roy Kay Companies with respect to the performance of certain services under PUHCA. It disclosed that the fraud claims asserted by the former owners included claims under the New
Jersey Uniform Securities Law and RICO statutes. The Form 10-Q represented that the
Company was unable to predict the outcome of the proceedings or what effect, if any, such outcome would have on the Company’s financial condition, results of operations or cash flows.
134. Finally, the Form 10-Q reported that new senior management was operating the
Roy Kay companies, a new business model was developed, and that the Company continued to monitor the on-going business and carrying value of the investment.
135. On Wednesday, August 15, 2001, in an article entitled “EXECS BAILED
BEFORE $LIDE,” The New York Post reported that “[t]op executives at Brooklyn energy company KeySpan sold millions of dollars worth of stock and stock options before announcing a significant loss that sent the company’s shares tumbling. KeySpan’s Roy Kay unit - which provides plumbing, mechanical and electrical contracting - was in financial straits for three months before the company held a heads-up conference call with Wall Street analysts in mid-
July. The problems at the unit eventually lead to a $30 million after-tax loss at KeySpan that sent the stock tumbling. In the meantime, as many as 11 executives made $5.8 million by selling stock and options. ” The article continues to state, “[o]n April 20, KeySpan fired the heads of the Roy Kay unit because of suspected financial improprieties. ‘We clearly knew that there was a problem in April and we tried to solve it.’ said Bob Mahoney, a KeySpan spokesman.”
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136. On October 23 and 24, 2001, KeySpan issued a press release and filed a Form 8-K with the SEC. Therein, the Company reported on its third quarter results for the period ending
September 30, 2001, slipping in a disclosure concerning the first quarter. The statement read, in pertinent part:
Special Items . . . [I]n its Energy Services segment, it has been determined that the general contracting business conducted by the KSI Contracting companies (previously named the Roy Kay companies) will be discontinued since these activities are no longer consistent with our core competencies, strategic focus and risk profile. Consequently, the Company has recorded a third quarter after tax charge of $56.6 million, reflecting costs to complete all current projects, as well as the discontinuance of the general contracting activities of those companies. Year to date special charges also include an additional Roy Kay first quarter operating loss of $5.5 million after tax.
* * * Including the special charges, Energy Services had an EBIT loss of $51.7 million for the third quarter and $95.2 million on a year-to-date basis. (Emphasis added.)
137. The financial statements supplied with the Form 8-K also disclosed special charges for the three months and nine months ending September 30, 2001, of $72.6 million and
$133.7 million EBIT, respectively, to discontinue the general contracting business of Roy Kay to complete its projects, to write off accounts and retainage receivables, and to record operating losses. Notwithstanding the disclosures in the Form 8-K, KeySpan did not restate the first quarter for this loss or for the $30.1 million loss announced on July 17, 2001, nor did it restate its first quarter earnings to reflect the $5.5 million operating loss due to the Roy Kay operations.
138. On November 14, 2001, KeySpan filed its Form 10-Q for the third quarter ended
September 30, 2001. In addition to reflecting the information contained in its prior third quarter press release and Conference Call, this filing also disclosed:
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For the third quarter of 2001, the Roy Kay companies incurred an after-tax loss of $56.6 million [$0.41 per share] reflecting: (i) additional project completion costs; (ii) discontinuance costs of the general contracting activities of those companies, including the write-off of goodwill, and certain accounts and retainage receivables; and (iii) quarterly operating losses. For the third quarter of 2001 the Roy Kay companies recorded an EBIT loss of $72.6 million and for the nine months ended September 30, 2001 these companies recorded an EBIT loss of $133.7 million and net loss of $92.2 million [$0.67 per share]. For the third quarter of 2000, the Roy Kay companies recorded EBIT of $0.7 million and net income of $0.3 million; for the nine months ended September 30, 2000 these companies recorded EBIT of $3.1 million and net income of $1.4 million.
139. The same Form 10-Q also disclosed that KeySpan was cooperating in preliminary inquiries by the U.S. Attorney's Office, Southern District of New York, and the SEC regarding trading in KeySpan stock by individual officers prior to the July 17, 2001 disclosure that
KeySpan was taking a special charge in its energy services business and otherwise reducing its
2001 earnings forecast. On March 25, 2002, the SEC commenced a formal investigation into insider trading and the truthfulness of disclosures by KeySpan and its directors.
140. On January 24, 2002, KeySpan issued a press release and filed a Form 8-K with the SEC to report its financial performance for the year ending December 31, 2001. In that connection, the Company disclosed the following special charges against fiscal year 2001 earnings:
KeySpan Construction (formerly Roy Kay): After-tax charge of $95.0 million or $0.69 per share due to the discontinuance and exit of general contracting activities in our Energy Services segment.
141. The Class Period statements were alive and uncorrected throughout Class Period.
142. During the Class Period, before disclosure of the true facts, the Individual
Defendants exercised all or a substantial portion of their vested options and then sold the
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KeySpan stock acquired thereby, generating almost $27 million in illegal insider trading proceeds.
THE MONMOUTH COUNTY LITIGATION
143. On April 29, 2002, a Bloomberg report summarized the claims, counterclaims, and other developments in the Monmouth County litigation between KeySpan and the Kays:
KeySpan Corp. told a New Jersey judge about inflated profits at a subsidiary after insiders had sold more than $14 million in company stock and almost two months before disclosing the news to investors.
Officials of KeySpan, the Northeast's largest natural-gas supplier, sold the shares last year, around the time the company was investigating its Roy Kay Inc. plumbing, mechanical, and electrical contracting units, court and regulatory records show. The U.S. attorney's office in Manhattan and the Securities and Exchange Commission are investigating whether company officials engaged in insider trading.
KeySpan bought Roy Kay in February 2000, fired owners LeRoy Kay and his son David in April 2001, then sued them for fraud. Less than a month later, KeySpan insiders began selling shares, according to company filings with the SEC. Two weeks after that, KeySpan disclosed in court papers that its investigation found Roy Kay had overstated earnings, as well as the work performed on projects, and improperly transferred costs.
“There has been a concerted effort on the part of the Kays to present to (KeySpan) false financial and profit and loss statements,” said Kevin Parker, a comptroller installed at Roy Kay by KeySpan, in a May 25 court filing as part of the company's fraud suit. The purpose, Parker said, was to “forestall the eventual day of reckoning.” KeySpan didn't tell investors about Roy Kay's problems until July 17. U.S. regulators later began investigating the stock sales. KeySpan shares fell 7.9 percent on July 17, after the company cut earnings by $30 million and disclosed the problems. * * * KeySpan also said it had extended credit to Roy Kay 36 times since Jan. 31, 2000, for a total of $31.5 million.
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* * * The Kays have denied KeySpan's allegations of inaccurate accounting and also filed a defamation lawsuit on April 19 against several KeySpan officials. The suit said accusations by KeySpan that the Kays committed fraud and misstated earnings were “false and known to be false when made.”
* * * The litigation between Roy Kay and KeySpan has been contentious. After firing the Kays last April, KeySpan obtained a court order barring them from their former Freehold offices. KeySpan claimed that at the time of their termination, the Kays had screamed obscenities, destroyed property, and threatened employees.
The Kays said KeySpan officials sent “an army” of employees to “tear apart the office.” The Kays also claimed KeySpan fraudulently induced them into the sale.
They asserted in court papers that KeySpan never disclosed to them that the November 1999 acquisition of Eastern Enterprises, a Boston natural gas utility, effectively precluded Roy Kay from doing general contracting work under federal law. As a result, the Kays say, they lost almost one-third of their business.
On Feb. 1, the Kays also accused KeySpan of dumping and shredding Roy Kay records relating to the litigation, in violation of a July 6 court order. Those records, which David Kay said he found in a trash bin outside a company building, included original construction plans and architect's drawings the Kays say were needed to help determine KeySpan's final payout to them.
* * * Superior Court Judge Clarkson S. Fisher Jr. in Freehold hasn't ruled on whether KeySpan violated his July 6 order. He signed a new order on March 20 requiring KeySpan to retain all original business records.
144. With the exception of a claim for negligent misrepresentation, on December 31,
2001, the judge in the Monmouth County litigation denied cross motions to dismiss the direct and counter claims asserted by all of the parties in that litigation, has determined that the various
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claims raises substantial issues of credibility, and has set the course of that litigation for full discovery and trial. The Monmouth County litigation remains pending.
DEFENDANTS’ SCIENTER
145. As alleged in the preceding paragraphs, the Individual Defendants acted with scienter in that they had actual knowledge, throughout the Class Period, and failed to disclose that: (i) Roy Kay was in the midst of a financial crisis; (ii) Roy Kay did not have the funding necessary to fulfill its contractual obligations, to maintain an adequate workforce, to maintain safety standards, to comply with deadlines, or to pay its vendors, whose bills remained outstanding for as much as seven months; (iii) Roy Kay could not generate enough cash to continue operations and required thirty-six emergency injections of cash since January 31, 2000, or beginning within approximately ten days after its acquisition by KeySpan; (iv) Roy Kay did not have proper and adequate financial and operational systems, processes and controls in place to keep track of its operations, finances, billings and performance; (v) Roy Kay was replete with cost overruns on its largest, high profile contracts; (vi) Roy Kay was unable to collect large amounts of accounts and retainage receivables; (vii) Roy Kay had engaged in material financial and operational improprieties; and that (viii) Roy Kay had developed an extremely negative reputation amongst major construction developers.
146. The Individual Defendants knew, throughout the Class Period, that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the
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issuance or dissemination of such statements or documents as primary violators of the federal securities laws. As set forth herein in detail, the defendants admitted in the Monmouth County litigation and in the July 17, 2001 Conference Call that they knew of the problems at Roy Kay as far back as March 2001. Moreover, the Individual Defendants regularly received WIP reports detailing Roy Kay’s operational and financial condition and, as set forth in paragraph 82 herein, the Board of Directors of KeySpan was kept informed of accounting controls and performance issues of acquired companies, including Roy Kay. Additionally, vendors were “calling every day” to complain about Roy Kay’s lack of performance, failure to fulfill contractual obligations, and failures to make payment. By virtue of their receipt of information reflecting the true facts regarding KeySpan, their control over, and/or receipt and/or modification of KeySpan's materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning KeySpan, the Individual
Defendants participated in the fraudulent scheme alleged herein.
147. Having adequately pleaded the Individual Defendants’ conscious misbehavior,
Lead Plaintiffs are not required to plead motive and opportunity. Nevertheless, the facts pleaded herein demonstrate that the Individual Defendants’ scienter is also evidenced by the timing and magnitude of shares which they sold during the Class Period. The Individual Defendants, while issuing materially false and misleading statements about KeySpan and its business during the
Class Period and omitting material information concerning Roy Kay, directly or indirectly, disposed of more than 700 thousand shares of the stock they owned, and which they acquired through the exercise of vested options, for insider trading proceeds of almost $27 million.
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148. The first tranch of sales took place in December 2000, when the Individual
Defendants knew or recklessly disregarded, for the reasons set forth above: that (i) Roy Kay’s financial crisis was so severe that on December 18, 2000, the Internal Revenue Service mailed its
Final Notice and Notice of Intent to Levy for the failure to pay its 1999 taxes; (ii) Roy Kay was in default in making payment of almost $200,000 in contractually due fringe benefit contributions for the period June 1 through October 30, 2000; (iii) Roy Kay was in default in making payments to vendors for as much as half a year; and (iv) Roy Kay was only getting deeper into its hole, with no light at the end of the tunnel.
149. The second tranch of sales took place in May 2001, after the run up in KeySpan’s stock price occasioned by the positive first quarter 2001 earnings report and failure to properly disclose or recognize the losses from Roy Kay general contracting operations. The selling spree began eight days after the filing of the shelf registration, four days after the filing of the positive
Form 10-Q, and six days before the Fitch rating, when the Individual Defendants knew or recklessly disregarded, for the reasons set forth above, all of the foregoing and that: (i) KeySpan had materially under-reserved its financial obligations in connection with the Liberty performance bond; (ii) “instead of getting better, it is getting worse”; (iii) Roy Kay had “serious cash problems” and was “so far in a ditch, [it] can never win.” It was “never going to generate enough cash” to satisfy its financial obligations; and (iv) Roy Kay’s projects were “in distress.”
150. Each of the Individual Defendants personally benefitted from the artificial inflation in KeySpan's stock price their fraudulent scheme created. This massive sell-off by the
Individual Defendants was clearly out of their ordinary investing practice, as none of the
Individual Defendants had previously sold their KeySpan holdings prior to December of 2000 or
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in the prior year and had not before exercised any of their options.2 In fact, the Individual
Defendants during the Class Period either (a) acquired shares via exercise of options and liquidated all or substantial portions of their exercised options immediately, or (b) liquidated all or substantial portions of their currently owned shares not held in retirement accounts. The
Individual Defendants did not of their own volition purchase on the open market any KeySpan shares.
151. Notwithstanding their access to non-public information as a result of their positions with the Company and their knowledge of the adverse information concerning Roy
Kay, but concealed from the investing public, the Individual Defendants directly or indirectly disposed of the following amounts of KeySpan common stock:
INSIDER NAME DATE SHARES PRICE PROCEEDS Robert B. Catell 12/12/00- 12/21/00 194,999 $39.68-39.87 $6,883,750.70
Craig G. Matthews 12/12/00- 12/21/00 179,900 $39.68- $39.87 $7,141,643.00 5/11/01- 5/31/01 54,666 $38.06- $40.01 $2,128,686.66
Gerald Luterman 12/12/00- 12/21/00 32,568 $39.87 $1,298,486.16 5/11/01 20,000 $38.06 $ 761,200.00
William K. Feraudo 12/21/00 160,333 $39.68 $6,362,013.44
2 Excepting William K. Feraudo, who sold 600 shares of common stock on August 20, 1999.
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5/11/01- 5/31/01 62,366 $38.06- 39.92 $2,401,550.00
GRAND TOTAL 704,832 $26,977,329.96
152. The Individual Defendants’ scienter is clearly evidenced by the insider selling of the Individual Defendants and other KeySpan insiders. Said defendants’ scienter can be drawn from their trades, as set out above, because of the magnitude and timing of the trades. The receipt of almost $27 million dollars in insider trading proceeds from sales made at times when
KeySpan’s stock price was near its all time highs, and prior to the release of the information concerning the true operational and financial condition of Roy Kay, motivated the Individual
Defendants to artificially inflate KeySpan’s stock price by disseminating false and misleading statements and omitting to state material facts necessary to make the statements made not misleading.
153. The increase in the Individual Defendants’ selling of shares in the proposed Class
Period was inconsistent with the assumption that the market was fully informed as to the prospects for KeySpan, inconsistent with prior base line of insider trading before 2000, and evidence that the Individual Defendants had knowledge of the artificial inflation of the share price of KeySpan and were selling shares well beyond the levels suggested for individual wealth diversification and liquidity purposes.
154. The rate at which insider selling increased among the Individual Defendants generally throughout the proposed Class Period (beginning with significant selling activity in
December 2000) reached a peak in May of 2001, prior to the July 17, 2001 announcement of the
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adverse disclosure of KeySpan’s $30.1 million charge to earnings and just after the placement of
KeySpan’s public debt at very advantageous terms. This timing indicates the Individual
Defendants’ knowledge that the share price of KeySpan was artificially inflated during the Class
Period.
155. Defendant KeySpan’s scienter is established by the knowledge that the Individual defendants had and is also evidenced by its need to secure public debt financing to replace its commercial paper debt at more advantageous terms than carried and by the fact that the Company desperately needed these financing vehicles in order to consummate the numerous acquisitions made during the Class Period.
156. The market for KeySpan’s securities was open, well-developed, and efficient at all relevant times. As a result of the materially false and misleading statements and failures to disclose set out herein, KeySpan’s common stock traded at artificially inflated sales prices during the Class Period. Lead Plaintiffs and other members of the Class purchased or otherwise acquired KeySpan securities relying on the integrity of the market price of KeySpan’s securities and market information relating to KeySpan, and have been damaged thereby.
157. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantially contributing cause of the damages sustained by Lead Plaintiffs and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about KeySpan’s business and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive
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assessment of KeySpan and its business and operations, thus causing the Company’s securities to be overvalued and artificially inflated at all relevant times. Defendants’ material false and misleading statements and omissions during the Class Period resulted in Lead Plaintiffs and other members of the Class purchasing the Company’s securities at artificially inflated prices, thus causing the damages complained of herein.
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
158. At all relevant times, the market for KeySpan's securities was an efficient market for the following reasons, among others:
a KeySpan's stock met the requirements for listing, and was listed and actively traded on the NYSE, a highly efficient and automated market;
b As a regulated issuer, KeySpan filed periodic public reports with the SEC and the
NYSE;
c. KeySpan regularly communicated with public investors via established market communication mechanisms, including through regular disseminations of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and
d KeySpan was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace.
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159. The market for KeySpan's securities was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, KeySpan's securities traded at artificially inflated prices during the Class Period. The artificial inflation continued until the time KeySpan revealed the financial and operational crisis at Roy Kay, and this information was digested by the securities markets, resulting in a drop in the value of KeySpan securities on the NYSE. Lead Plaintiffs and other members of the Class purchased or otherwise acquired KeySpan securities relying upon the integrity of the market price of KeySpan's securities and market information relating to KeySpan, and have been damaged thereby.
160. During the Class Period, defendants materially misled the investing public, thereby inflating the price of KeySpan's securities, by publicly issuing materially false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations.
161. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by Lead Plaintiffs and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series of materially false or misleading statements about KeySpan's business and operations. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of KeySpan and its business and operations, thus causing the Company's securities to
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be overvalued and artificially inflated at all relevant times. Defendants' materially false and misleading statements during the Class Period resulted in Lead Plaintiffs and other members of the Class purchasing the Company's securities at artificially inflated prices, thus causing the damages complained of herein.
162. As a result of the foregoing, the market for KeySpan's securities promptly digested current information regarding KeySpan from all publicly available sources and reflected such information in KeySpan's stock price. Under these circumstances, all purchasers of KeySpan's securities during the Class Period suffered similar injury through their purchase of KeySpan's securities at artificially inflated prices and a presumption of reliance applies.
NO SAFE HARBOR
163. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the false statements pleaded in this Complaint. None of the specific statements pleaded herein were identified as “forward-looking statements” when made. To the extent that any statements are deemed to be forward looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any statements pleaded herein, defendants are liable for those false statements because at the time each of those statements was made, the particular speaker knew that the particular statement was false, and/or the statement was authorized and/or approved by an executive officer of KeySpan who knew that those statements were false when made.
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VIOLATIONS OF GAAP
164. KeySpan repeatedly violated GAAP in that its internal controls were inadequate to address the weaknesses in the information technology systems which produced inaccurate financial information relating to its Roy Kay unit until the July 17, 2001 disclosures, when the revisions resulting in additional charges of $30.1 million were made. This contradicted management’s representations referred to above in the Form 10-K for the year ended December
31, 2000, pertaining to KeySpan’s internal controls. Given the fact that the Roy Kay unit was acquired in January of 2000, it is inconceivable that a large portion, if not all of the $30.1 million dollar loss, was not attributable to fiscal year 2000. As confirmed by the attached exhibits and described herein, defendants became aware of or were reckless in not learning of the fact that the
Roy Kay unit was not in compliance with construction benchmarks contained in several contracts shortly after its acquisition and had a negative cash flow.
165. Defendants violated section 13(b) of the Securities Exchange Act of 1934, which requires that every issuer of a security maintain a sufficient system of internal accounting controls. Defendants also breached their duty to allocate the purchase price, under APB 16, by failing to verify that the contract costs and profit recognition were being appropriately estimated by the use of the percentage of completion methods required by Statement of Position (“SOP”)
81-1.
166. Defendants also violated section 13(b) of the Securities Exchange Act of 1934 because, in violation of Accounting Research Bulletin No. 45 Long-Term Construction-Type
Contracts (“ARB No. 45”), defendants failed to provide for total projected loss on all contracts
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expected to result in a loss during the period in which the current estimate of total contract costs exceeded the current estimate of total contract revenues.
167. Defendants violated section 13(b) of the Securities Exchange Act of 1934 because they failed to accrue or otherwise disclose in the Company’s financial statements the probable contingencies for existing conditions, situations, or circumstances involving uncertainty as to outcome that would be resolved upon the occurrence of future events, as required by FASB 5 &
38.
168. KeySpan’s Form 10-K filed during the Class Period violates section13(b) of the
Securities Exchange Act of 1934, which requires in relevant part that every issuer of a security must maintain sufficient financial records, including the balance sheet and earnings statements, in that the Form 10-K filed during the Class Period states:
KeySpan and its subsidiaries’ Consolidated Financial Statements were prepared by management in conformity with Generally Accepted Accounting Principles. KeySpan’s system of internal controls is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorizations and recorded to permit preparation of financial statements that present fairly the financial position operating results of KeySpan. KeySpan’s internal auditors, [then] Arthur Andersen, LLP, evaluate and test the system of internal controls. The Company’s Vice President and General Auditor reports directly to the Audit Committee of the Board of Directors, which is composed entirely of outside directors. The Audit Committee meets periodically with management, the Vice President and General Auditor and Arthur Andersen LLP to review and discuss internal accounting controls, audit results, accounting principles and practices and financial reporting matters.
169. KeySpan’s financial statements issued during the Class Period failed to:
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a. Comply with the accounting principle of reliability, which requires that reported information be reliable to the extent that users can depend on it to represent economic conditions or events that it purports to represent and the such information is reasonably free from error or bias. FASB Statement of Concepts No 2.
b. Comply with the accounting principle of completeness, which requires financial information to be complete and validly represent the underlying events and conditions. FASB
Statement of Concepts No 2.
c. Comply with the accounting principle of relevance which requires that the reported information have the capacity to make a difference in a decision by helping users form predictions about the outcome of past, present and future events. FASB Concepts No. 2.
d. Comply with respect to its Roy Kay subsidiary with GAAP’s SOP 81-1, which requires that in order to use the percentage-of-completion method of accounting: (a) a company must have the ability to make reasonably dependable estimates of (1) progress toward completion, (2) contract revenue, and (3) contract costs; (b) contracts executed by the parties normally include provision that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement; and (c) the buyer can be expected to satisfy his obligations under the contract; and the contractor can be expected to perform his contractual obligations.
e. Comply with ARB No. 45, which required defendants to provide for total projected loss on all contracts expected to result in a loss in the period in which the current estimate of total contract costs exceeded the current estimate of total contract revenues.
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f. Comply with FASB 5 and 38, which required the timely accrual or disclosure of probable contingencies for existing conditions, situations, or circumstances involving uncertainty as to outcome which would be resolved upon the occurrence of future events.
g. Comply with APB 9 and 20, which required the restatement of financial reports for prior periods that were corrected as a result of error. This required the restatement of
KeySpan’s Form 10-K and 10-Qs for the first quarter of 2001 to reflect the $5.5 million after tax loss in the Roy Kay Unit and the proportionate share of the $133.7 million EBIT which was announced July 17, 2001, and October 24, 2001, and restatement of the earnings for the year ending December 31, 2000, and each quarter of the year ending December 31, 2000. In particular, given that KeySpan historically earned most of its annual earnings in its first quarter due to the seasonal nature of its business, such restatement would have put a reasonable investor on notice of the actual state of its first quarter earnings. Accordingly, the amounts represented as
KeySpan’s first quarter earnings were materially false and misleading. Notwithstanding the material losses that clearly should have attributed to its first quarter, KeySpan failed to ever restate anything related to its first quarter of 2001 during the Class Period.
170. In violation of Section 13(b), as incorporated into the Securities Exchange Act of
1934, KeySpan’s Forms 10-Q released during the Class Period stated:
In the opinion of the Company, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position of the Company as of [the relevant period], and the results of its operations and cash flows for three in six months ended [as of the date of the relevant period] and [as of the same period in the prior year] the accompanying financial students should be read in conjunction with the consolidated financial statements and notes included in the Company’s [prior] annual report
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on Form 10-K. Income from interim periods may not be in the indicative of future results. Certain reclassifications were made to conform prior period financial statements with the current period financial statement presentation. Other than as noted, adjustments were of normal, reoccurring nature.
171. Directly contrary to defendants’ misrepresentations, all adjustments had not been made to provide a fair presentation of the financials, since after tax adjustments in the amounts of
$30.1 million, $56.6 million, and $30.4 million, primarily relating to fiscal 2000 and prior were required to be made in the fiscal year 2000 were not appropriately recorded. Additionally, the
$5.5 million operating loss resulting from the Roy Kay operations was not properly disclosed recorded or restated.
172. As a result of KeySpan’s failure to implement proper internal control procedures, its financial statements contained in Forms 10-Q for the quarters filed May 12, 2000, through
July 17, 2001, and the Form 10-K for the year ended December 31, 2000, were materially false and misleading and materially overstated its assets and stockholders’ equity and earnings and understated its expenses and losses.
173. In sum, KeySpan’s financial statements and related press releases, including but not limited to its Forms10-K and 10-Q filed during the Class Period, did not timely reflect the losses incurred during the Class Period. Said items were materially false and misleading as set out above.
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FIRST CLAIM Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder (Asserted Against All Defendants)
174. Lead Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein.
175. During the Class Period, defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including Lead Plaintiffs and other Class members, regarding KeySpan’s business, operations, management, and the intrinsic value of KeySpan securities; (ii) artificially inflate and maintain the market price of KeySpan's securities; (iii) cause Lead Plaintiffs and other members of the Class to purchase KeySpan's securities at artificially inflated prices; and (iv) enable the
Individual Defendants to sell almost $27 million dollars worth of stock for illegal insider trading proceeds.
176. In furtherance of this unlawful scheme, plan and course of conduct, defendants took the actions set forth herein, including but not limited to the following: (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 the statements made not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's securities in an effort to maintain artificially high market prices for KeySpan's securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5.
177. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
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continuous course of conduct to conceal adverse material information about the business and operations of KeySpan as specified herein.
178. Each of the Individual Defendants' primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company's management team or had control thereof; (ii) each of said defendants, by virtue of his responsibilities and activities as a senior officer and/or director of the Company was privy to and participated in the creation, development and reporting of the Company's internal budgets, plans, projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with the other defendants and was advised of and had access to other members of the
Company's management team, internal reports and other data and information about the
Company's finances, operations, and sales at all relevant times; and (iv) each of these defendants was aware of the Company's dissemination of information to the investing public which they knew or recklessly disregarded was materially false and misleading.
179. The Individual Defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them.
Such defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing KeySpan's operating and financial condition from the investing public and supporting the artificially inflated price of its securities.
As demonstrated by defendants' statements and misstatements of the Company's business, operations and earnings throughout the Class Period, defendants, if they did not have actual
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knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.
180. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of KeySpan's securities was artificially inflated during the Class Period. In ignorance of the fact that market prices of
KeySpan's publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants during the Class Period, Lead Plaintiffs and the other members of the Class acquired KeySpan securities during the Class Period at artificially high prices and were damaged thereby.
181. At the time of said misrepresentations and omissions, Lead Plaintiffs and the other members of the Class were ignorant of their falsity, and believed them to be true. Had Lead
Plaintiffs and the other members of the Class and the marketplace known of the true financial condition and business prospects of KeySpan, which were not disclosed by defendants, Lead
Plaintiffs and other members of the Class would not have purchased or acquired their KeySpan securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid.
182. By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act, and Rule 10b-5 promulgated thereunder.
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183. As a direct and proximate result of defendants' wrongful conduct, Lead Plaintiffs and the other members of the Class suffered damages in connection with their purchases of the
Company's securities during the Class Period.
SECOND CLAIM Violation Of Section 20(a) Of The Exchange Act (Asserted Against The Individual Defendants)
184. Lead Plaintiffs repeat and reallege each and every allegation set forth above as if fully set forth herein.
185. The Individual Defendants acted as controlling persons of KeySpan within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the
Company's operations and/or intimate knowledge of the false statements filed by the Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did, in fact, influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which Lead Plaintiffs 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 other statements alleged by Lead Plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.
186. In particular, each of these defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to
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control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.
187. By virtue of their positions as senior insiders of KeySpan, the Individual
Defendants were in possession of material, non-public information about KeySpan at the time of their collective sales of almost $27 million of their own KeySpan stock to Lead Plaintiffs and members of the Class at artificially inflated prices.
188. By virtue of their participation in the scheme to defraud investors described herein, and/or their sales of stock while in possession of material, non-public information about the adverse information detailed herein, the Individual Defendants violated the 1934 Act and applicable rules and regulations thereunder.
189. As set forth above, defendants each violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, Lead Plaintiffs and other members of the Class suffered damages in connection with their purchases of the Company's securities during the Class Period.
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THIRD CLAIM Violation of Section 20A of the Exchange Act (Asserted Against the Individual Defendants)
190. Lead Plaintiffs repeat and reallege each and every allegation set forth above as if fully set forth herein.
191. By virtue of their positions as officers and/or directors of KeySpan, the defendants were in possession of material non-public information about the Company that resulted in a duty to either disclose the information or abstain from trading.
192. Defendants sold KeySpan stock while in possession of material, non-public information, as stated herein.
193. Such sales were made contemporaneously with some of the purchases by Lead
Plaintiff Donald Kassan and the other members of the Class.
194. Lead Plaintiffs and all other members of the Class who purchased shares of
KeySpan securities contemporaneously with the sales of KeySpan securities by these defendants
(1) have suffered substantial damages in that they paid artificially inflated prices for the securities as a result of the violations of §10(b) and Rule 10b-5 herein described; and (2) would not have purchased KeySpan stock at the prices they paid, or at all, if they had been aware that the market prices had been artificially and falsely inflated by defendants' misleading statements and omissions. At the time of the purchase by Mr. Kassan, the fair and true market value of said securities was substantially less than the price paid by him.
WHEREFORE, Lead Plaintiffs pray for relief and judgment, as follows:
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A. Determining that this action is a proper class action, and certifying Lead Plaintiffs and/or other members of the class as class representatives under Rule 23 of the Federal Rules of Civil
Procedure;
B. Awarding compensatory damages in favor of Lead 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 Lead Plaintiffs and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and
D. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
195. Lead Plaintiffs hereby demand a trial by jury.
196. Lead Plaintiffs reserve the right to further amend this Complaint to reflect facts to be uncovered in discovery and in the Monmouth County litigation or otherwise and, separately, to appeal the dismissal of the first consolidated complaint upon the resolution of this action.
Dated: New York, New York ______/s/______April 7, 2003 Mark D. Smilow (MS-2809) WEISS & YOURMAN Joseph H. Weiss (JW-4534) 551 Fifth Avenue New York, NY 10176 (212) 682-3025 [email protected]
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Steven E. Cauley, Esq. Allen Carney, Esq. Deborah Sallings, Esq. CAULEY GELLER BOWMAN & COATES, LLP P.O. Box 25438 Little Rock, Arkansas 72221 (501) 312-8500 [email protected]
Co-Lead Counsel
75 EXHIBIT A -,M., E)ILr City of New York D"rtawnt of Design and Consfteflon JK*nnoth Heiden Commissioner
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File EXHIBIT C . j- e .
,t.t g, 1(Avt-ra £ L* TH U , $D, C . ATM RNLfAT LAW t 7'STARTC CA?. B*a FLOOR NCO ., yr orp m NEW YORK . NEW Y4gn 1 *004420 ma"am 40. (212)L-604900 r'Ax(2frl# -Z PecAtnber 7,
Urcy Kay, Pros do nt Ray Kay, Iac. 1 kt Y Freehold, New JurAry 07729
Re: Fri ige Benefit Contributions Due to the MRson T ers District Council Fringe Bettefit Fund s clieftVU tit No•' - 04-50011DIM
Mar Ir. Kay:
We are the attorneys r rbe Mason Tender. District Council Tnnt funds (the "Fund .5') and have been advised by our client that based upon available reports, Roy Kay. Inc. has failed to make +contr ucte fy due fmn a benefit conuibutions in the amoamt of at IeAst $187.919.34 for the period June I, 2000 through October 30, 2000, together with such additional amou= if any which may be determined to be owed upon an audit o Ray TCsy, [ric.'s books and rds.
We are also the attorneys for the Mason Tendons District Council (the'"€Tra on"), and have been advised that Roy Kay, Inc. has Wed to remit dues checknfc in the amount of at ]cast g v U Kp t wvr WormAm ® P.C.
Lem day', Pre"OL Roy f inc . Decen*er 77.2000 Pup 2
S13j9191 .50 andP't et f Ardan eC ibutt inthe ofatleast amO= $1391 .$$ for the period June 1, 2000 6=0 Ocbobw30,2000 Said ==U am OWW to the Union pimant to the Meon i Inc. and the Union.
The Trustees insist that you abide by your contractual obIiga ons and make paymem and edule an it,1 f one has not already scheduled, within of the dart of this lzuer or fkce the alt=udw ofl al action wi its attendant costs and addWonal sanctions .
Your prom% attention to this matter is strongly urged ..
Very truly yours~
MjV/Mjv "
cc: John J. ts, a, Dim tor Ma un Tenders f i ,t Council Trust funds EXHIBIT D p m ntofthe Tr+ ,urge r 955 51 $ zoo Ints t Revenue rvi HOLT ILLS NY 0050 1
ion ist nce: I ~ -7650 ROY KAY Z ► I MARKET YARD
FINAL. NOTICE NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO HEARING PLEASE RESPOND IMMEDIATELY
Your federal tax Is still rot paid. We previously aek you to pay this, but we still haven't received your payment. This rre on ence 63 your notice of our intent to levy under Inte rnal Revenue Code (lRC) Section and your right to receive Appeals consideration under !RC Section 6330.
Wo may file a Notice of Federal Tax Lion at any time to protect the government°x interest. A lien Is a public natiea to your creditors that the government has a right to your current assets, Including any assets you acquire after we file the hart.
To prevent collection action, please send your full payment today. Make your check or money order payable to the United States Treasury. Write your social security number on your payment. Sand your payrrmant to us in the a ore envelope with a copy of this letter. The amount you owe is shown below:
Form Number Tax Period Assessed Balance Statutory Additions amount You Ow e
941 DEC. 37, 1599 115,87053 8,889.63 924.754.1
6f you haverecently paid this tax or you cant pay It, call us immediately at the telephone number shown in the Collection Assistance box, and let us know.
The assessed balance May include tax, penalties and Interest you still owe . it also Include3 any credit* and paymenta we've received since we sent our last correspondence to you.
S fi asco VFC0 4 COPY Of N a J&Icr PUb 67 49 pub 1160 Form t21 Eri'velope EXHIBIT Liberty BondScrvices. Surely Law t
KeApw Services, Inc. Keyspan E=V gemcn; lac. KcySgsn Buuinch& Solutions Company 1719 , 10 r }, MT 07054
Roy Kay, Im . Y. ;: y one mzket Y Ms. land Kay Freehold, 2I 0772S I Dcbra o Masily m NJ 07740 Attru LeRoy ]day
Roy Kay EIe 'tcieal Con pa y, Inc. r. David A. Xxy 1303 8 Avis Averni MS, Ali Kay Staten ISI d, New York 10314 112 " . Morpnvilk, 141 0775 1 Attn: LeRoy Kay. President
RE, go 1Ca I®Liberty pq d SWvieea I Z SirslMsclams:
in a letter dated Jant r 19, 2001, the TA advised RYJ that it was defaulted Under its cant with the TA providing for cons action of the Rail Control Project and it demmded that L138 c plete the Project under the performance bond that it had issued L the q t of RKf. LBS has advised the TA that it shall honor its performance bond, obligations, subject to I re$ctvttt Of righrs.
PfU cC/(332001RKLdoe Ma=SL 20, 2001 Page Two
Please be advised that LBS may be requited to in s this me%-m of $5,0W,000 and, co spon+ ly, to arc a f ear for collateral as to the R211 i Project Also, as you know, l T has been defaulted by the State University Consftucfi= F =d on projects located at Stony Drool: and Old Westbury. LBS may dompe1]ed, in the nor firtum to post reserves and make copal security deposit dcmnds as to those pmi .
P/ M4/fl'%7.rrfRTCT .rirr P
March 20, 2001
` y of t* LBs, paw= to 3 of the Tn 'ter Agreenwnt all -hooks, vewrds 1or wxmian, r 1R to the Rail Cou of irmjcct LBS y rturves all of its `
r.Iy.
Fmt~ cisn 3. CPA, CF E Senior SumV Mewga
FJMj Enelcsta=
cc: Pct Metzger, Esquire Few Gm
'ot/McC 32001=dm EXHIBIT F -ROY KAY, INC. A SPA COMPAW
ONE MMKET YAM F+cr. cv o 732-308-IOM FAX- 7
Ap 17, 200 1
Very truly yours, Roy Kay, Inc . I KeySpan de;2i- LR y President
LRK/kw EXHIBIT -STATE OU'Al'y"ERSITY 'A N STRU CTI 0 N F U H ~
m r 3tutc Univenity Ph= F ' MCKC= PCO 0008 8430t z 9AR btembe * NY 1220149,U P"MO r Iii Td: (519) of MU*O Fax: (538) 689-2631
January 23, 2001
VT aos*rn a and Regi*stered M i1 R Roy y, hie. One M Yard Freehold. New Jamey 0772 6 A : Mr. Roy Kay. President
Re: SUCF Project No. 113A55 StudentActvides Center Phase 11 St3W Iniv reity of Now York at Stony Brea k Dear Mr. Kay:
You were awarded tho on ct an January 22, 1992 and the c0mpdatian d Is + b+ r IS. 2001. Given, the agave, it l dear that you have been un bla to darnonett*te to the Fund that you have the necessary skill and resources to complete this Project by the scheduled completion date .
The Fund, therefore . declares you In default of your contract for the above-re(wa Project pursuant to aectlon 2.26 of the Agreement botwnc» your firm and the Fund ,
I Manager Copy : Peter Goetz, Esq . Anthony Sertar, Key ip n Andrew oldrnon Liberty Mutual Insurance Company, Bond Claims Department Richard Mann, SUNY Stony Brack 'EXHIBIT H FE8 25 ®911 e3--iiPm ^
L ACTIO N ZdWsrd P Ifelfta Pau CO&W Box I" r #+ Nvawx NY =1.154t NO." Y- 7~f"Mhi T&- (Sly (S
F*bnuwy ;s, =I
'Me Fund, V% spelorr, d e y*Q in d Lull of your contract for'thQ a w,ref r nc d Projdugt purcuont to section 2.26 of the Agreement hetwean your firm and the Fund. ,,, " Case 1:01-cv-05852-ARR-MDG Document 64 Filed 04/07/2003 Page 97 of 97
CERTIFICATE OF SERVICE
This is to certify that on this 7th day of April 2003, a true and correct copy of the attached Amended Class Action Complaint, together with the exhibits annexed thereto, were served on the parties set forth below by regular U.S. mail and electronic mail.
Brian R. Michael, Esq. (BM 9076) [email protected] SIMPSON THACHER & BARTLETT 425 Lexington Avenue New York, New York 10017-3954 Tel: (212) 455-2000 Fax: (212) 455-2502
Attorneys for Defendant Keyspan Corporation
Steven J. Roman, Esq. [email protected] DICKSTEIN SHAPIRO MORIN & OSHINSKY LLP 2101 L Street, NW Washington, D.C. 20037-1526 Tel: (202) 785-9700 Fax: (202) 887-0689
Attorneys for Individual Defendants
______/s/______MARK D. SMILOW