e^ 6 N ITED L U STATES DISTRICT COURT s^d^ o ^ SOUTHEIZN DISTRICT ( TEXAS H 01iSTO N DIVISION APR ° 200; ^

In Re., AZ(.1 IX CORP. SECURITIES LITI GATION Master File No. H-QO-3493 This Doc um ent Relates Toe ALL ACTIONS }

CONSOLIDATED AND AMENDEDCLASS ACTION COMPLAINT

TO THE HONORABLE UNITED STATES DISTRICT COURT JUDGE:

COME NOW, Plaintiffs, individually and on behalf of all other persons similarly situated by their undersigned attorneys, for their Consolidated and Class Action Amended Complaint, allege upon personal knowledge as to themselves and their own acts, and upon information and belief as to all other matters, based upon, inter cilia, the investigation made, by and through their attorneys, review of the public filings of Azurix Corp. ("Azurix" or the "Company") and Enron Corp.

("Enron") with the Securities and Exchange Commission (the "SEC"), press releases , news articles, and interviews with former employees of the Company.

NATU RE OF ACT ION

1. Plaintiffs bring this action as a class action on behalf of themselves and all persons and entities, except defendants and certain related parties, who purchased the common stock of Azurix on the open market or pursuant to the Company's initial public offering during, the period

June 9, 1999 through and including August 8, 2000 (the "Class Period"), to recover damages caused by defendants' violations of the federal securities laws. During the Class Period, defendants disseminated to the investing public materially false and misleading statements in public filings and press releases concerning the Company" s privatization strategy, acquisitions, financial condition, and future prospects. As a result of these statements, the market price ofthe Company°s common stock was artificially inflated during the Class Period.

2. In a registration statement and prospectus filed with the SEC on June 9,1999, and June 11, 1999, respectively, pursuant to its Initial Public Offering (the "1PO") and in numerous press releases and financial statements, Azurix touted its ability to take advantage of the growing trend of privatization and outsourcing of government-owned water and wastewater assets and services.

3. The Company also repeatedly vaunted its successful bid for an interest in a long-term water and wastewater concession in Buenos Aires, Argentina (the `Buenos Aires

Concession"). The Buenos Aires Concession, Azurix's second biggest asset after the Wessex water unit ("Wessex"), cost $438.6 million, a small part of which was financed by the IPO proceeds.

4. Further, the registration statement and prospectus specifically stated that defendants "`carefully reviewed" and conducted "due diligence" on prospective projects. However, it was not disclosed until much. after the IPO that the books and records of the Buenos Aires

Concession were incomplete and certain assets were never "transferred" to Azurix, both events materially impairing the financial condition of Azurix,

5. In addition, defendants failed to disclose the extent of the water quality remed,iation costs involved with the Company's performance under the Buenos Aires Concession agreement, which skyrocketed during the Class Period, and which caused a material adverse impact on the financial condition of Azurix.

2 6. On November 4,1999, after the close of tradinthe Company announced in a press release that it would. miss fourth quarter analysts' expectations and that it would be altering its previously advertised business strategy ofpursuing large water privatization contracts by placing greater emphasis on privately negotiated transactions. Upon the re lease ofthis news, the Company's stock fell approximately 40%, dropping from $12.8125 per share to $7.775 per share. Defendants failed to disclose, however, that the shift of Azurix's business strategy was in reaction to the cancellation and postponement of major privatization contracts in the second half of 1999.

7. On March 30, 2000, defendants filed the Company's annual report on Form

10-K for the year ended December 31, 1999 (the "1999 10-K"). In the 1999 10-K, while discussing the causes of a $32.4 million fourth quarter restructuring charge, defendants stated that during the

"second half of 1999" a number of large privatization projects had, in fact, been canceled or postponed. The $32.4 million charge was almost three times as large as the Company's net income for the quarter. Notwithstanding this belated disclosure, defendants still continued to misrepresent that Azurix was making "steady progress" with respect to its existing businesses.

9. The 199910-K also disclosed that the Buenos Aires Concession had been, and was, suffering from various problems since the day Azurix assumed operations. Such difficulties included incomplete customer accounts and related billing difficulties. Defendants failed, however, to disclose additional existing problems at the Buenos Aires Concession concerning poor water quality and tariff disputes.

9. Despite the foregoing, defendants sought to offset negative news with rosy prospects . For example, on May 8, 2000, defendants painted an unrealistic picture of Azuri x`s future

by stating, "Azurix continues to make steady progress toward the Company's objectives to maximize

3 the returns on our existing businesses" in the same press release in which the Company reported a

29% decline in first quarter 2000 earnings.

10. On August 8, 2000, the end of the Class Period, Azu.rix announced its financial results for the second quarter of 2000. The Company announced a charge of $5.4 million caused by problems and expenses relating to poor water quality in Bahia Blanca, Argentina -- which charge amounted to a staggering 87% ofAzurix's $6.2 million of net income for the quarter. The

Company also reported that: i) earnings per diluted share had fallen approximately 75% from $.19 cents for the second quarter of 1999 to $.05 cents for the second quarter of 2000; and ii) net income had fallen approximately 70% from $11.4 million in the first quarter of 2000 to $6.2 million for the second quarter of 2000. Defendants also stated that, inter alia , slow growth in Argentina would cause the Company to lower its earnings forecast for the year 2000 from the prior target of $310-

$340 million to $270-$290 mil lion. After the August 8, 2000 announcement, Azurix" s share price fell 12%, or $1 5/64, to $7 1/4 on extremely heavy volume. Azurix stock traded during the Class

Period as high as $23.875 per share.

11. On August 25, 2000, Azurix announced that its Chairman and CEO, defendant

Rebecca Mark, resigned fron the Company, as well as from the board of directors of Enron, which owned thirty-four percent of Azurix common stock.

12. On December 16, 2000, Enron agreed to buy Azurix ' s publicly traded shares for approximately $325 million, taking the Company private at $8.375 per share (prior to the takeover announcement Azurix shares were trading at a mere $3.50 per share) only eighteen months after the Company's 1110. An article in the Houston Chronicle published on the day of the takeover announcement stated that. "Azurix has been struggling almost since its inception. Its business plan

4 was to acquire and operate or manage public water and wastewater facilities that are being privatized worldwide. But the company was never able to compete effectively in bidding for water systems against ... huge multinational rivals . . ." Defendants' ill-conceived privatization plan and the endemic problems at the Buenos Aires Concession together caused the slow but continuous collapse of the Company.

13. On January 22, 2001, Azurix announced that it would write off $470 million as an "asset impairment" charge related to its investment in the Buenos Aires Concession. This amount constituted $30 million more than the Company's initial investment in the Concession.

JUMSDICTION AND VENUE

14. Plaintiffs bring this action pursuant to Sections 11, 12(a)(2), and 15 of the

Securities Act of 1.933 (the "Securities Act"), 15 U.S.C. §§ 77k, 771(2), and 77(o), and Sections

10(b) and 20(a) of the Securities and Exchange Act of 1934 (the `Exchange Act"), 15 U.S.C. §§

78j(b) and 78t, and Rule I.Ob-5,17 C.F.R. § 240.1 Ob-5 promulgated under Section 10(b) by the SEC.

15. This Court has jurisdiction over this action pursuant to Section 22(a) of the

Securities Act, 15 U.S.C. § 77v(a), Section 27 ofthe Exchange Act, 15 U.S.C. § 78aa; and 28 U.S.C.

§§ 1331, 1337.

16. Venue is proper in this District pursuant to Section 22 ofthe Securities Act,

15 U.S.C. § 78v, Section 27 of the Exchange Act; 15 U.S.C. § 78aa, and 28 U.S.C. §§ 1391(b) and

(c). The Company's corporate headquarters are located in this District. Thus, many of the acts giving rise to the violations complained of herein, including the dissemination of false and misleading information, occurred and had their primary effects in this District.

5 17. In connection with the acts, transactions and conduct alleged herein, defendants used the means and instrumentalities of interstate commerce, including the United States mails, interstate telephone communications and the facilities of national securities exchanges and markets.

THE PARTIE S

18. Lead Plaintiffs MilledEloward Investments, Inc., Masoud Faisal, M. Al

Fuhaid, and Walter Wooten purchased shares ofAzurix common stock during the Class Period, and were damaged thereby.

19. Defendant Azurix is a Delaware corporation that maintains its principal executive offices at 333 Clay Street, Suite 1000, Houston, Texas 77002. During the Class Period,

Azurix stock traded on the New York Stock Exchange ("NYSE") under the symbol "AZX." The

Company maintains a website at "www. azurix.com," where the Company's SEC. filings, conference calls, and press releases may be found. Azurix is a global water company engaged in the business of owning, operating, and managing water and wastewater assets, providing water and wastewater related services and developing and managing water resources. The Company was formed in 1.998 by Enron,nron, a defendant named herein, and, as detailed below, through its interest in Atlantic Water

Trust ("Atlantic"), Enron owned 34% of Azurix during the Class Period, and, prior to the IPO,

100% of Azurix through Atlantic. Enron controlled both Atlantic's and Azurix's board of directors.

As of March 27, 2000, Azurix had outstanding 117,221,895 shares of its common stock.

20. Defendant Rebecca Mark ("Mark") was, at all relevant times, the Company's

Chief Executive Officer and Chairman of Azurix's Board of Directors until August 25, 2000, when she "resigned." Mark served as a director of Enron since July 1991, as well as a Vice Chairman of

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*,.`: AJ, Enron from May 1999 io July 1999; as Chairman of Enron International Inc. ("Enron Intl"); a wholly-owned subsidiary of Enron from January 1996 to July 1998; and Chairman and CEO of

Enron Development Corp. ("Enron Development"), a wholly-owned subsidiary ofEnron, from July

1991 to January 1999. She was also Chief Executive Officer of Enron Int'l from January 1996 to

May 1998 and Vice President and Chief Development Officer of Enron Power Corp.. a wholly- owned subsidiary of Enron, from J uly 1990 to July 1991. Because of Marks positions with the

Company and Enron, she had access to adverse, non-public information about Azurix's business, finances, markets, and present and future business prospects. As of February 29, 2000, Mark beneficially owned 550,100 shares of the Company's common stock. Mark signed the 1999 10-K and the June 9, 1999 registration statement (the "Registration Statement"). Mark was frequently quoted in press releases issued by the Company throughout the Class Period.

21. Defendant Rodney L. Gray ("Gray") served as a director of Azurix since July

1998, as Vice Chairman, Finance, Risk Management and Investments, and Chief Financial Officer of Azurix since November 1998. Gray was Executive Vice President of Enron International from.

January 1997 until he joined Azurix. Because of Gray's positions with the Company and Enron, he had access to adverse, non-public information about Azurix's business, finances, markets, and present and future business prospects. Gray resigned all his positions with Azurix by December 31,

1999. Gray's severance agreement permitted him to retain 200,000 vested Azurix stock options and receive $71,666 monthly payments from January 31, 2000 through February 15, 2004. Gray signed the Registration Statement.

22. Defendant Rodney L. Faldyn ("Faldyn") was, at all relevant times, a managing director and Chief Accounting Officer of Azurix. As of March 31, 2000, Faldyn resigned from

7 Azurix. From 1997 until he joined the Company, Faldyn served as Vice President of Merchant

Services of Enron Int'l, From 1995 until 1997, he served as a director of Enron Capital & Trade

Resources Corp., renamed Enron North America Corp. ("Enron North America"), a wholly-owned. subsidiary of Enron. Because of defendant Faldyn's positions with the Company, at all relevant times hereto, he had access to adverse, non-public information about its business, finances, markets, and present and future business prospects. Faldyn signed documents filed with the SEC that contained materially false and misleading statements.

23. Defendant Joseph Sutton ("Sutton") was, at all relevant times, a director of

Azurix and also served as Vice Chairman of defendant Enron. Sutton served as President of Enron

Int'l from January 1996 to July 1999, and as its Chief Executive Officer from May 1998 to July

1999. From January 1996 to May 1998, he also served as Enron Int' l's Chief Operating Officer.

From 1995 to January 1996, Sutton served as President and Chief Operating Officer of Enron

Development, and from 1992 to 1995 was a Vice President of Enron Development. Because of defendant Sutton's positions with the Company and Enron, he had access to adverse, non-public information about Azurix's business, finances, markets, and present and future business prospects.

As ofFebruary 29, 2000, Sutton beneficially owned 20,000 shares ofthe Company's common stock.

Sutton signed the 1999 10-K and the Registration Statement.

24. Defendant Jeffrey Shilling ("Skilling") was, at all relevant times, a director of the Company. He also served as President and Chief Operating Officer of Enron since January

1997. From January 1991 until December 1996, he served as Chairman and Chief Executive

Officer of Enron North America Group and its predecessor companies , which were and remain wholly-owned subsidiaries of Enron. Skilling also served as a director of Enron. Because of

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2 8 defendant ",killing's positions with the Company and Enron, he had access to adverse, non-public information about Azurix ' s business , finances, markets , and present and future business prospects.

As of February 29, 2000, Shilling beneficially owned 20,000 shares of the Company's common stock. Skilling signed the 1999 l 0-K and the Registration Statement.

25. Defendant Kenneth Lay ("Lay") was, at all relevant times, a director of the

Company. He also served for over five years as Chairman ofthe Board and ChiefExecutive Officer of Enron since 1993, and President and Chief Operating Officer of Enron since January 1997.

Because of defendant Lay's positions with the Company and Enron, he had access to adverse, non- public information about Azurix's business, finances, markets, and present and future business prospects . As of February 29, 2000, Lay beneficially owned 20 , 000 shares of the Company's common stock. Lay signed the 1999 10-K and the Registration Statement.

26. Defendants Mark, Gray, Faldyn, Sutton, Skilling. and Lay are referred to herein as the "individual Defendants,"

27. Defendant Enron is an Oregon corporation maintaining its principal executive offices at 1400 Smith Street, Houston, Texas 77002. Enron purports to be a leading electricity, natural gas, and communications company. In 1998, Enron formed Azurix. In December 1998,

Enron contributed Azurix to Atlantic, a Delaware business trust, by contributing Enron Water

(Holding) L.L.C. and merging it into Azurix. In connection with Enron's contribution of Azurix to

Atlantic, Marlin Water Trust ("Marlin"), a Delaware business trust held by five institutional investors and their affiliates, acquired a 50% voting interest in Atlantic for $1.149 billion, with

Enron retaining the remaining 50% interest in Atlantic. Following Azurix's IPO, Atlantic held 67% of Azurix 's common stock, the remainder held by public stockholders. Until December, 2000,

9 Enron effectively controlled 33.5% of Azurix's common stock. In addition, a majority of the directors on Azurix's board of directors were also directors or officers of Enron during the Class

Period.

28. Defendant Atlantic is 50% owned by Enron and 50% owned by Marlin.

However, the entire board of directors at the time ofthe IPO was appointed by Enron. Atlantic sold

19,500,000 shares ofAzurix common stock, or more than half of the shares issued in the IPC. , to the public.

29. The Individual Defendants, as officers and directors of the Company, and

Enron, as a controlling stockholder of the Company, were controlling persons of the Company within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act. By reason of their positions with or stockholdings of the Company, they were able to and did, directly or indirectly, in whole or in part, control the content of public statements issued by or on behalf of the Company. They participated in and approved the issuance of such statements made throughout the Class Period, including the materially false and misleading statements identified herein.

30. By reason of their positions with or stockholdings of the Company, the

Individual Defendants and Enron had access to internal Company documents, reports and other information, including the adverse, non-public information concerning the Company's privatization plan, financial condition, and future prospects, and attended management and/or board of directors meetings. As a result of the foregoing, they were responsible for the truthfulness and accuracy of the Company's public reports and releases described herein.

31. Azurix, Em-on, and the Individual Defendants, as officers, directors, and controlling stockholders of a publicly-traded company, had a duty to promptly disseminate truthful

10 and accurate information with respect to Azurix ; end to promptly correct any public statements issued by or on behalf of the Company that had become materially false or misleading,

CLASS ACTION ALLEGATIONS

32. Plaintiffs bring; this action as a class action putsaam to Federal Rukcs of Civil

Procedure 2°1(a) and (b)(3) on behalf c.)fa class consisting o all persons and entities who purchased the Comm par y-'s common stock during the period June 9, 1999 through and including August 8, 2000, on the open market or pursuant to the Registration Statement and prospectus, dated June 11, 1999

(the "Prospectus"), and who sustained damages thereby (the "Class"). Excluded from the Class are the defendants, members of the Individual Defendants' families, any entity in which any defendant has a controlling interest or is a part or subsidiary of or is controlled by the Company, and the officers, directors, affiliates, legal representatives, heirs, predecessors, successors, and assigns of any of the defendants.

31. The mem ers of the Class are so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to the plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe there are, at a minimum, thousands of members ofthe Class who purchased the Company's common stock during the Class Period.

34. Plaintiffs' claims are typical of the claims of the members of the Class because, like all members of the Class, they acquired their shares either pursuant or traceable to the

IPO, and/or at inflated prices in the open market, and were damaged as a result of defendants' violations of the federal securities laws complained of herein.

11 3 5. Plaintiffs will fairly and adequately protect the interests ofthe Class and have retained counsel who are experienced and competent in class and securities litigation. Plaintiffs have no interest that is contrary to or in conflict with those of the members of the Class.

36. Common questions of law and fact exist as to all members of the Class and predominate over any questions affecting solely individual members of the Class. Among the questions of law and fact common to the Class include whether:

(a) the federal securities laws were violated by defendants' acts as alleged herein;

(b) the Company issued materially false and misleading statements during the

Class Period;

(c) defendants caused the Company to issue false and misleading statements during the Class Period;

(ci) with respect to plaintiffs' claim under Section 10(b) of the Exchange Act defendants acted knowingly or recklessly;

(e) with respect to plaintiffs' claims under Sections I 1 and 12(a)(2) of the

Securities Act, defendants acted negligently;

(f) the market prices of the Company's stock during the Class Period were artificially inflated because of de Eendants' conduct complained of herein; and

(g) the members of the Class have sustained damages and, if so, what is the proper measure of damages.

37. A class action is superior to other available methods for the fair and efficient adjudication of the controversy since joinder of all members of the Class is impracticable.

12 Furthermore, because the damages su.fR€red by individual Class members may be relatively small, the expense and burden of individual litigation. make it impracticable for members of the Class members individually to redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

R I..., ANC :, ALL EGATIONS

38. As to plaintiffs' Section 10(b) claim. plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-on-the-market doctrine in that:

(a) defendants made public misrepresentations or failed to disclose material facts during the Class Period;

(b) the omissions and misrepresentations were material;

(c) the securities of the Company traded in an efficient market;

(d) the misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company's securities; and

(e) plaintiffs and members ofthe Class, who purchased the Company's stock between the time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, did so without knowledge of the omitted or misrepresented facts.

NO STAT UTORY SAFE HARBOR

39. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any ofthe false statements pleaded in this complaint because none ofthe statements pleaded herein was either identified as a "forward-looking statement" when made or contained meaningful cautionary statements accompanying those statements identifying important factors that could cause actual results to differ materially from those in the statements.

13 To the extent that the statutory safe harbor does apply to any statements pleaded herein deemed to be forward-looking, defendants are liable for those false forward-looking statements because at the time each of those statements was made, the speaker either actually knew the forward-looking statement was false or the statement was authorized and approved by an executive officer of the

Company, who actually knew that those statements were false when made. The statutory safe harbor does not apply to the IPO.

SUBSTANTIVE ALLEGATIONS

Backgro und

40. Azurix was formed on January 29, 1988 by Enron to pursue opportunities in the global water supply industry, including participating in the global privatization of the water and wastewater industry. As reported by The Wall Street Journal Europe, on August 29, 2000, "the idea was to establish a beachhead as governments from Argentina to the United Kingdom began privatizing the heavily regulated water business." Mark believed that "governments were ready to embrace private capital as a solution to fixing their troubled water systems, just as they had done by privatizing" other utilities, "such as electricity grids and phone companies."

41. For one year, Mark campaigned Lay and other Enron executives to convince them that Enron could play a major role in privatizing the $400 billion global water industry, just as Enron had done in the power industry . As a result, Enron acquired Wessex Water LLC for $2.4 billion in 1998, and quickly started a water subsidiary that soon was spun off into Azurix in the IPO.

42. All of Azurix 's common stock prior to the IPO was ostensibly owned by

Atlantic. Atlantic is owned equally by Enron and Marlin. In December 1998, Enron contributed

Azurix to Atlantic. The principal purpose of Atlantic was to own equity interests in Azurix and

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c/,, ^v Bristol Water Trust ("Bristol"). In connection with Enron's contribution of Azurix to Atlantic,

Marlin acquired a 50% voting interest in Atlantic for $1.49 billion. Of the $1.49 billion paid by

Marlin, $900 million was used to repay a portion of indebtedness incurred by Enron affiliates in connection with the acquisition of Wessex. The remaining $249 million was deposited into an account established by Bristol, a wholly-owned subsidiary of Atlantic.

43. At the time of the fl? 0, Enron appointed all of the directors of Atlantic, even though Marlin had the right to appoint 50% of them,

44. Azurix' s business was intricately involved with Enron. The two had entered into no less than five agreements. Four of the agreements are summarized as follows:

(1) Business Opportunities A reement: The agreement limited Aztirix's

business and provides that Enron and its affiliates may engage in

wat.r-related businesses even if they have a competitive effect on

Azurix.

(2) Services Agreement: Under this agreement, Enron provides various

corporate staff and support services to Azurix at an annual rate of

approximately $15 million.

(3) Credit Agreement : Enron provided at least $180 million in revolving

credit to Azurix for working capital needs.

(4) License A recment: This agreement permits Azurix to use the phrase

"an EEiiron Company" and the Enron logo in identifying Azurix as

part of the Enron enterprise.

15 45, In addition, a majority of the directors of Azurix were also directors and officers of Enron during the Class Period.

46. Azurix's original business strategy included acquiring, owning , operating, and managing water and wastewater assets. This entailed providing services to municipal and industrial customers, operations management and engineering, services to dispose ofwastewater and biosolids that result from wastewater treatment, and underground infrastructure remediation and development.

The Company also pursued opportunities in water resource development and management, which included financing, technical, and operational requirements of the water industry.

47. Over the past decade, international governments began privatizing their heavily regulated water supply businesses and sought out private capital to improve municipal water services. The water supply industry is a field of intense competition, and a politically sensitive sector. At the time of Azurix's creation, two French companies, Suez Lyonnaise des Faux and

Compagnie Generale des Faux, were recognized as the leading competitors in the internationalwater and wastewater markets.

48. Prior to going public, in an effort to position itself as a competitive player in the field, Azurix acquired Wessex, a water and wastewater company based in Southwest England, for $2.4 billion on October 2, 1998. According to Wasserstein Perella & Co. ("Wasserstein

Perella"), Wessex was expected to provide a base off of which to build a global water business.

Thus, at the time of the IPO, Wessex represented Azurix's primary asset, and ultimately accounted for three quarters of Azurix's reported revenue in 1999. Prior to the IP O, Azurix also pursued several other acquisitions, entering into agreements to acquire interests in several international companies, including Industrias del Agua, S.A. de C.Cv., a Mexican company, Philip Utilities

1:6 Management corporation, a Canadian-based company, and a joint interest in a water/wastewater concession for Cancun, Mexico.

49. On or about May 14,1999, the Company submitted a bid for a concession for the water and wastewater systems operated by the Administration General de Obras Sanitarias

Buenos Aires in two of the three regions of the Province of Buenos Aires, Argentina.

50. On May 18, 1999, Azurix stated in a press release that it was awarded water and wastewater concessions for two regions in the province of Buenos Aires, Argentina. Defendant

Mark stated in the press release:

We are delighted to have won these concessions to participate in one oftithe last major water privatizations in Argentina... Operating these assets and participating in the Mendoza concession establish Azurix as a key player in the Ar^ggentina water market. and demonstrates our commitment to provide clean, efficient and reliable water and wastewater ser ,=ices to customers in these growing regions ofSSouth America. [Emphasis added.]

The False and Misleading, Registratio n St ate m ent an d Prosp ectus

51. On March 15, 1999, Azurix announced that it had filed a registration statement with the SEC to conduct an initial public offering of Azurix stock.

52. Pursuant to the Registration Statement and Prospectus, the Company offered a total of 36,600 000 shares to the public at a price of $20.50 per share. More than half ofthe shares offered, l 9,500,000, came from Atlantic the "selling stockholder." The total proceeds ofthe offering were $327.1 million, of which, $254.2 million were to "repay" loans to Enron or its affiliates. The remainder of the proceeds, approximately $72.9 million, was used to finance the Buenos Aires

Concession.

53. The Registration Statement touted Azurix's ability to become a successful

17 player in the global water and wastewater industry. Azurix identified numerous large public privatization projects in Europe, North America, Latin America, the Carribean, the Middle East,

Africa, Asia and the Pacific Rim that were targeted. for those respective regions. (Registration

Statement at 47-52.) Azurix advertised its "experienced management and business development teams," its "operating experience and technical expertise" "regulatory and government affairs expertise" and "financing expertise" as significant strengths that would ultimately enable the

Company to become a successful competitor in the water business. (Id. at 56-58.)

54. Specifically, the Registration Statement and Prospectus stated the following regarding the Company's various expertise and competitive advantages:

We have several competitive strengths that should enable us to compete successfully in the global water industry:

- f XPER.1 :'NCED MANA(JENJENT AND BUSINESS D VI .I_,OPM1: NTI TEAMS. Although Azurix was recently formed, we have an experienced management team from 1. nron, Wessex and other multinational co panies with experience in developing global infrastructure pro_;ects and operating and managing water and wastewater assets. Our senior executives are complemented by a group o[`experienced business developers who identify opportunities in the global water industry.

- WESSEX OPERATING EXPERIENCE, AND lECIINICAL EXPERTISE. From. Wessex, we have obtained the operating experience and technical expertise necessary to evaluate potential. water projects, to qualify for bidding on water projects throughout the world, to build transition and operating teams for new acquisitions and to manage existing and new water and wastewater assets.

- REGULATORY ANI) GOVT. RNM NT` AFFAIRS EXPERTISE. Our management team has extensive experience in. working with regulators and other governmental agencies and has knowledge ofthe regulatory framework and privatization processes in many of the

18

2 q. countries in which we intend to pursue water and wastewater opportunities.

- FINANC ING EXPERTISE. Members of` our management team have experience using sophisticated r t. ing and capi,al raising techniques in both gl obal and local rru _ :>s to lower the cost of capital for the Financing of projects and acquisitions.

55. Although privately negotiated transactions also formed a component in the

Company's business strategy, defendants specifically emphasized the global privatization development opportunities it purportedly intended to vigorously pursue as a crucial part of Azurix's business plan:

Our asset portfolio also includes [in addition to Wessex I interests in long-term water concessions in . . . Argentin a and ... Mexico. We have made each of these investments through one or more subsidiaries, which will be our approach as we pursue our worldwide growth strategy.. .

Azurix has a business strate y consisting of growth through acquisitions and development projects. Azurix has recently put in place a business development effort . . . to pursue arid. support acquisition. and privatization activity on a global scale.

(Registration Statement at 1, 30.)

56. The Registration Statement and Prospectus continued:

We carefully evaluate each project to assess its value. First, we conduct a due diligence review, identifying and quantifying the specific risks of the transaction. We then measure and manage these risks by preparin . a d .tailed financial projection containing elements that we believe rm.-tay affect the project materially through-out its economic lit =.

(Id. at 60.) Thus, the Registration Statement and Prospectus led the investing public to conclude that defendants performed due diligence on the Buenos Aires Concession, as well as other concessions

19 and projects, before bidding for such and certainly before the effective date of the Registration

Statement.

57. The Registration Statement and Prospectus stated that the Company "will be awarded an interest in a 30-year water and wastewater concession in two regions of the province, for an aggregate price of $438.6 million." The documents continued by describing the vastness of the project, and Azurix's ambitions to make it even larger:

The Province of Buenos Aires surrounds the Argentine capital city. It is the country's largest province., with a total population of approximately 13.5 million. The provincial water and wastewater administration currently serves a population of approximately 3.8 million. . . The two regions included in our concession have a total population of approximately two million and approximately 450,000 water or wastewater customers. . . . We anticipate expanding operations to surrounding municipalities and offering industrial customers cost-effective alternatives.

(Registration Statement at 7I.)

58. The Registration Statement and Prospectus also stated that the Company would assume operations of the Buenos Aires Concession on June 18, 1999. The contract between

Azurix and Buenos Aires was not attached to the Registration Statement or Prospectus, hoVever, some of the Concession Agreement terms were discussed.

59. Finally, the Registration Statement and Prospectus reported that the required investment plan pursuant to the Concession Agreement would call for Azurix to expend approximately $1 billion over 30 years, with $405 million expended within the first five years.

(Registration Statement at 70.) The Registration Statement stated that financing these "capital"

20 improvcments would come from "operating cash flows and long-term debt and equity at the concession level." (Id.)

60. However, these statements were false and misleading because: (a) the

Company financed these capital improvements with short-terms. debt, not "operating cash flows and long-terra debt ,end equity at the concession level." and (h) required capital e ;pendiwres were enormous - far greater than represented. Indeed, in the year 2000 such expenditures were at least

$300 million.

61. On June 24, 1999, less than two weeks after the final Prospectus was issued,

Azurix, through its subsidiary Azurix Buenos Aires S.A., entered into a credit agreement and borrowed $394 million on June 29, 1999. The loan was secured by cash and other short-term liquid investments in the aggregate of8401.2 million as of September 30, 1999. The loan was due on June

22. 2000, less than. one year later.

61 Only wee ss after the IPO, Azurix entered into several short-term. credit agreements to finance not only long-term investments, but also a steadily growing working capital deficit. At June 30, 1999, only weeks after the IPO, Azurix's working capital deficit was a staggering

$ 510.1 million. This was up frog . a working capital deficit of $134. 5 million at March 31, 1999.

63. Under Generally Accepted Accounting Principles ("GAAP"), debt due within one year is considered short-term debt. (Financial Accounting Standards Board Statement No. 95

("SFAS")). Debt due within one year is not considered "operating cash flows," "long-term debt," or "equity." ice gg^ SFAS No. 95.

64. Further, on September 30, 1999, Azurix entered into a 354-day $150 million unsecured revolving credit facility with a group of banks. This financing agreement, like many of

21 the others that Azurix had, contained restrictive covenants that included limitations on borrowings, the maintenance of financial ratios such as interest coverage, net worth and debt to equity, and contracts to perform or refrain from undertaking certain acts. In addition, this particular facility required Azurix to amend other credit agreements by March 31, 2000, that prohibited the payment of dividends to Azurix Europe shareholders. Again, because this loan was due in less than one year, this was also short-term debt-

65. On November 15, 1999, the Company reported a working capital deficit of

$ 635.7 million as of September 30, 1999, in the Form l0-Q filed with the SEC (the "1999 Third

Quarter 10-Q"). The 1999 Third Quarter 10-Q stated that most of the increase in the deficit was due to an increase in short-term borrowings to "refinance" long-term debt of $ 476.5 million. In other words, not only was Azurix not financing its investments with "operating cash flows," "long-term debt," or "equity," as the defendants reported the Company would in the Registration Statement and

Prospectus, it was borrowing short-term money to make payments on long-term debt,

66. By December 31, 1999, Azurix reported that its required capital expenditures for the year 2000 was expected to be $300 million. (1999 10-K at 49-50.)

67. On July 7, 1999, defendants filed on Form 8-K with the SEC a Current

Report describing the acquisition of the Buenos Aires Concession (the "July 1999 8-K"). The July

1999 8-K outlined some terms. of the Concession Agreement, stated that it was dated "June 30,

1999," and that the full agreement would be attached to a forthcoming Form. 8-K amendment. The

July 1999 8-K was signed by defendant Gray.

68. On July 12, 1999, defendants Atlantic and Enron each sold 1,963,468 shares of Azurix stock at $17.86 per share in a private sale to cover the over-allotment option excersied by

22 the underwriters who brought the Company public. Total proceeds for each defendant equaled approximately $35 million.

69. Finally, on August 25, 1999, Azurix filed with the SEC on Form 8-K\A,

Amendment No. I to Current Report, dated June 30, 1999 (the "8-K\A'). The 8-K\A was signed by delIcn.dant Gray. Attached to the 8-K\A was the agreement between Azu.irix (or the

"Concessionaire") and Buenos Aires (or the "Province") concerning the Buenos Aires Concession.

70. Paragraph 15.3.1 ofthe Concession Agreement stated the following regarding inspection of assets:

Annex L contains a list of the Service Related Assets , the easements and the ownership restrictions to be transferred upon Taking of Possession.

As of the date of execution of the Contract , the Concessionaire may verif the existence of such assets, easements and restr i ctions, and shall make pertinent comments no later than five (5) days prior to the Taking of Possession. If the (.7,oncessionaire becomes aware o f any error or omission in said Annex's contents , OSBA must provide the necessary cooper .tionz to correct said errors and omissions.

71. However, not until March 30, 2000, did the Company "reveal" in its 1999 10-

K) that:

We did not receive complete billing and customer records when we took over the [Buenos Aires] [C ]oncessio.. which has impeded collection efihrts and adversely affected our operating revenues derived from this concession to date.... In addition, the province did not transfer some ofthe assets that the concession agreement required it to transfer, including some accounts receivable, has not completed some work projects that the concession agreement obligates it to perform; and has not paid some pre-takeover costs that we now have paid.

23

2 C11 0 72. Thus, defendants failed to disclose in the Registration Statement and

Prospectus that their "careful review" and "due diligence" of prospective projects either: (a) could or did not include any review for the completeness, accuracy, or validity of accounts receivable and other assets until after possession was taken; and/or (b) that billing and customer records were incomplete.

73. Further, the Concession Agreement also made clear that Azurix. was responsible for compliance with environmental regulations concerning water purity and remediation costs. Paragraph 3.6 of the Concession An Bement, styled Water Quality, states in relevant part:

16.1 RAW WATER. The Concessionaire shalt take all measures technically necessary to ensure that the quality of Raw Water is acceptable for the corresponding potabilization treatment. At a minimum., this shall include sampling it to evaluate physical, chemical and bacteriological parameters .. .

If substantial variances exist in the quality of Raw Water or if a contamination producing accident occurs impacting the duality of Water supplied to Users, the Concessionaire shall adopt and pay tcbr the remedial measures, regularly reporting to the Regulatory Agency,

3.6.2 POTABLE. WATER. The Potable Water provided by the Concessionaire must comply with the requirements established ;n Annex C. In all cases. noncompliance with the technical quality requirements for Potable Water shall he considered as a potential health hazard to the population. In the presence of any abnormality in the quality of Potable Water, the Concessionaire shall take all necessary measures to rectify the situation. and correct it as soon as possible .. Noncompliance with the standards governing bacteriological levels requires exhaustive investigations to be conducted by the Concessionaire. The detection of presumed coliform bacteria in a sample, detected at any point in the Water system, Including the subsurface Raw Water sources, constitutes sufficient grounds for conducting such investigations.

24

yea :: m. l 74, Not later than the Spring of2000, it was reported that Azurix was in violation of Argentinean water quality standards. For example, the 11 ouston Business Journal reported on

May 5, 2000 that:

Azurix Corp. has had a rough ride since the. Fn. •on subsidiary was spun off as a public company last summer. In the latest episode, Azurix, has landed in hot water in Argentina. Authorities in the city of Bahia Blanca have w- -arned nearly hal t-million residents that their water- supplied and treated by Azurix, is contaminated with toxic bacteria. "I've worked here for 25 years and this is the worst water crisis I've ever seen here,'- the city's public health chief, Ana Maria Reimers, told news media. Bahia Blanca. a petrc',•. , _sic production and agricultural center is located 420 riles southwest of Buenos Aires.

Residents noticed a bad odor emanating from their tap water early in April. They have been instructed by authorities to drink bottled water and limit the time they spend in the shower or bath.

75. Although Azurix. disclosed this particular event in its Form. 10-Q for the quarter ended March 31, 2000 filed with the SEC` on May 15. 2000 (the "2000 10-Q"), defendants characterized it as a "contract dispute." However, as a result of this and other "contract disputes," primarily concerning remediation matters, only months later in the fourth quarter of 2000, Azurix wrote off almost its entire investment in the Buenos Aires Concession or $389.5 million. A later release by the Company, on January 22, 2001, stated that the write-off would be $470 million for

Argentinean assets.

76. Thus, defendants failed to disclose in the Registration Statement and

Prospectus concerning the Buenos Aires Concession, either that: (a) they conducted no due diligence in regard to water quality and related remediation costs; and/or (b) water quality was so substandard

25

9C, 4 " that required remediation costs would have a material adverse impact on the C ompany ' s financial condition and results of operations.

77. In short, the statements and topics identified above in the Registration

Statement and Prospectus were false and misleading for the following reasons:

(a) as noted by Way se rst .in e.rella in the Form i F 3. the B„-' ns ,- ires Concession -`freed numerous problems" at the very hegirnni of the conceSsio n, "including incomplete custoa mer accoutnts, difFiculti.es in-al- counts receivable collection, water quality issues lid disputes over tariffs'"

(b) according to a former A7.urix employee atAzurix Buenos Aires, S_A., chiring the period June 1999 through .tune 2000, Azurix sent Wessex emnployrees to assess the concession before the Company took over its operations. During their review, these employees learned that the concession had been poorly operated and had serious problems with collections. Prior to May 1999, the concession was operated by a state-owned company that had invested little resources in its operations.

(c) net ithstanding the significant challenges and problems that the Buenos Aires Concession posed, as a former employee at Azurix North America said, Aru.ri:x hastily, bid for the concession because management wanted to make a signif caant impact on. the market. As Wasserstein. e.rella noted, the Buenos Aires Concession became the Companyr's second largest asset.

(d) as alleged above, the Concession Agreement required Azurix to perform water quality services and remed.iation. As noted by Wasserstein Perella, the contractual obligation to perform clean-up services from the commencement ofoperations required "significant capital expenditures," which the Company did not have.

(e) despite employing so-called "experienced managernent and business development teams," Azurix could not compete with its two larger competitors - Vivendi's Generale des faux and Suez Lyonnaise des Eaux. According to Wasserstein Perella, as well as post-mortem news articles, Azurix "was at a disadvantage because its cost of capital was significantly higher than Vivendi and Suez L-yonnaise (approximately 9%-I0%vs. 6%-7% for competitors).

(f) among the problems affecting the Company's ability- to reduce its cost of capital was its high leverage and capital constraints. Without access to

26

2 u' C.^: car i,ai, a highly leve ' ,1 !.+^d. ee^ ' ^^ •' : ' :ut liquidity to fund ns A -i,, cab flow, Azuri could not comp=,•: it`i its primary coz petitors.

Additional False and i skkadin.g Stat, I'_lade ri y the ( ', - P e riod

78. As a consequence of the purported success of the IPG, and the positive statement mad to an al sts in con ection ti ersti ith. Painewebber. Inc. initiated coverage ofAzurix in a report date€i.iul3 6, 1999. Analyst W.,1. Kirchherger rated Azurix a "buy" and seta I2-month target price of $:32 per share . The report stated that:

[ w]e believe that Azarix represents the right opportunity, with the right management and the right vehicle, for participation. in the rapidly privatizing global ixater and wastewater industry /mjanagetnent has identified approximately $16 billion in potential privatization projects that are likely to come into [sicj fruition over the next 18 to 24 months ... [ rnphasis added.]

79. On the basis of its business plan, which in large part was to win concessions to manage and operate water and wastewater assets as the industry was privatized, thus achieving growth through acquisitions, defendants reported to analysts at the time of the IPOthat Azurix's earning before interest, taxes and depreciation would approximate $500 million for the year 2000 and $800 million for the year 2001. Given the Company's heavy debt burden, lack of liquidity, and lack of access to the equity capital market, defendants lacked any basis to make such a statement.

80. On August 5, 1999, the Individual Defendants caused Azurix to announce its results of operations for the quarter ended June 30, 1999. In the press release , defendants announced the following:

Azurix Corp. announced today 1999 second quarter operating net income of 520.2 million and earnings per diluted share of $0.19. The operating results exclude a $6.8 million, or $0.06 per diluted share, after tax non-recurring charge related to refinancing a portion of the company's long-term debt, . .

27

2 6, "The second qutar ter Iva a period Qsignificant caccom17plz,.shmrEenat f«r° Azurix, " said Rebecca P. Mark, chairtuan and CEO `° W'e won a Lw co is <_^,.^. wo in the hr ctvan€ c^ of z^er ^,;^t ire, ester rli,^liir^ the cor^mpany as a major participant in the ,1 ;nine water market,

In addifi on. Ae acquire d an imp oLtan 1, opc. pla'f rii "o the expansion of our services business in North j.-:j rica and L_-ccd into an agreement to ac,clrir a services business in Mexico,"

" %e also completed our very, successful i. itial public offering during the quarter. This offering pr aides Azu.riv with access to additional. financial resources to fund the many growth opportunities that will distinguish the company is a leading jiayer in the global water indu try." [Emphasis added]

81. The foregoing statements in the August 5. 1999 press release were materially false and misleading because defendants knew or recklessly disregarded the following:

(a.) the Company could not function as a "leading player in the global water industry" because of, among other thugs, its high cost of capital. As noted by Wasserstein Pereila, Azurix could not compete with it two larger competitors - Vivendi's Generale des faux and Suez Lyonnaise des J.-aux. Azurix "was at a disadvantage because its cost of capital was significantly higher than Vivendi and Suez Lyor naise(approximately 9%%,-10°i'() vs. 6'io-71/',0 for competitors). In fact, as later revealed by Busine s s Week, d-Luring this time period, as a consequence of the Company's high costs, Azarix lost a major bid for Berlin-s water company, Berliner Wasserbetricbe.

(b) the Company could not effectively reduce its costs due to, among other thing s. its highly leveraged balance sheet.. capital infusion constraints, and insufficient liquidity to fund its negative cash flow. As discussed herein. Azurix was financing its long-term assets with short-term debt. with high interest rate provisions. Az€urix's high debt burden foreclosed any opportunity to raise much needed cash through equity offeri.n

(c.) the IPO did not provide Azurix with sufficient resources to take advantage of "growth opportunities." At March 3E, 1999, Azurix had a working capital deficit of $134.15 million. Only a small portion of the proceeds, S72 million, was used to take advantage of "growth opportunities" - Azurix used the $72

28

C million to finance the Buenos Aires Concession, which required an Initial in,,estrnel4 of over S438 ; illion. The re tainder of the Il^PO's proceeds was used to -; _, down debt to Enron anti its affiliates,

(d.) there were serious problems afec:ting the Buenos Aires Concession at the outset. including incomplete customer accounts and billing records. difficulties in accounts receivable collection, water quality issues, and tariff disputes. which jeopardized both the concession's future profitability and the {:.'.ompany',s Financial health.. Sign if cantly. defendants later stated that problems with the Buenos Aires (.onc:es: ion adversely affected the Company's earnings and that poor water quality caused it to take a costly charge. (8e 1i0. 122..123.)

(e.) as alleged above, the Concession Agreement required Aziirix to perform water quality services and remediation. As noted by Wasserstein perella in the 13E-`l, the contractual obligation to perform clean-up services from the commencement of operations required "si< nifican.t capital expenditures," which, as alleged herein, the Company did not have.

82. The Company's misleading statements concerning the Buenos Aires

Concession were also related to the marketplace through analysts. On August 6, 1999,1'ainewebber reiterated its "buy" rating and stated that "[w]e are maintaining our. . . 12-month target price of $32

The report continued:

ACQUI SITION STRATEGY REMAINS ROBUST

During the quarter, the company was awarded a large concession in the Province of Buenos Aires, Argentina.. estahiishm , the company as a major participant in the Ar entine pater market . . . [this acquisition] should begin contributing to operating results in the third quarter.

83. On August 16, 1999, the Individual Defendants caused Azurix to file with the SEC on Form 10-Q the Company's interim report for the quarter ended June 30,1999 (the "1999

Second l 0-Q"). The 1999 Second 10-Q was signed by defendant Faldyn. The 1999 Second 10-Q

29

A; "; ; reI ,,w I many of the statements contained in the August 5, 1999 press release. Thus, the 1999

Second 10-Q was false and misleading for the reasons stated in paragraph 81 a-e.

84. On September 15,1999, Azurix acquired Brazil's AMX Acqua Management

("Brazil AMX") for $55 m illion in cash and stock. As Wasserstein Perella noted, management knew that in conjunction with Azurix's highly leveraged balance sheet and insufficient liquidity, the

Company's stock price was affecting its ability to function as a global player in the water industry.

If the Company's stock price fell to the levels that reflected the true state of affairs at Azurix, the

Company would have had to issue more shares to consummate the transaction. The issuance of more shares would exacerbate the Company's liquidity problems. Moreover, acquiring companies such as Brazil AMX enabled defendants to mask these problems by portraying the Company as growing through acquisitions. Thus, it was imperative that defendants keep the Company's stock inflated to ensure success of the transaction.

85. On September 27, 1999, the Company announced that it had. signed an agreement to acquire Lurgi Bamag ("Lurgi Bamag") GMBII, a process engineering company specializing in the water sector, for $30 million. On October 18, 1999, Azurix acquired Lurgi

Bamag for $30.2 million.

86. On October 4,1999, Azurix acquired privately-held wastewater management company J&J Baker Enterprises and its Nutri-Cycle Inc. unit for $4 .million. Also on October 4,

1999, Azurix acquired the Madera Ranch Project (the "Madera Project") for approximately $32 million.

87. On October 15, 1999, Painewebber published a report maintaining its "buy" rating for Azurix on account of, inter alia, the Company's pipeline:

30 ACQI 1SITION PIPEfJNEE;

Management has recently emphasized that the Company's pipeline of attractive privai -l and publicly announced transactions remains very till and. it it. ii _ve-stors should anticipate several more announcements in t ; _; next few months.

88_ On October'-'0. 1999, the price of Azurix stock fell from $ 14 per share to $12 per share, a decline of 7.7%. On that clay, the Dow Jones News Service ran the following story:

Az .irix Corp. said there isn't any corporate news to account for the 7.7% dip in its shares Wednesday. Our fundamentals are strong," offered spokeswoman Carol Hensley, adding that she also isn't aware of any analysts' comments on the ouston-bayed water services provider.

These comments (i.e., "<[ojur fundamentals are strong") were made just two weeks before the

Company's November 4,1999 announcement that earnings would fall short ofWail Street estimates.

This press release was materially false and misleading because defendants knew at the time of this release that the Buenos Aires Concession was plagued with multiple problems and that numerous privatization projects were canceled and/or postponed during the second half of 1999, which rendered the fundamentals of the Company anything but strong.

89. On November 4, 1999, the Individual Defendants caused Azurix to announce its results of operations for the quarter ended September 30, 1999. In the press release, defendants

stated the following.:

Azurix today reported consolidated revenues of$170.5 million for the quarter ended September 30, 1999, and consolidated net income of $ 18.8 million , or $.16 diluted earnings per share...

Earnings before interest, taxes, depreciation and amortization, and minority interest (FBITDA) for the current quarter were $76.2 million. Earnings and revenues for the quarter reflect the continued strength of Wessex Water, a full quarter of operations in Buenos

31 Aires and North America, and reduced general and administrative expenses.

"Since our public offerin t7l we have continued to pursue a strategy which involves t. ree product. lines in the water and wastewater business: resource development and m ina`,gement. operational services and residual services," said Rebecca Mark, chairman and CEO of Azurix. We have made a number of acquisitions in support of this strategy, including our operational. services activities itsTorth America and Mexico, the A POX water resource development and manage ent business in Brazil. the Madera water hank project in California and the [,urgi 3amag process engineeri mg business with key operations in Gernm.any, the C_UK and Brazil ...

"The pipeline ofprivate transactions and announced public tenders that we are pursuing remains very strong, even though the tithing of certain transactions is unpredictable, " Mark said. "We will frx us more on pr/ratelv negotiated opportunities and less on the large public privatizations. which we will only consider if our investment can return significant value to our shareholders. With the uncertain timing of public bids, we are ensuring that our operating and general and administrative expenses are in luxe, with our current iarvcstmcnts. "

A urix anticipates that the fiiurth quarter 1999 EBJTDA from its existing businesses will he in the i 72 million to $7' million range and fully diluiw recurring earnings per share fi-omn existing businesses will he approximately $.09 to $. 11.

(Emphasis added.)

90. The anticipated earnings for the fourth quarter failed to meet Wall Street estimates, This failure, coupled with the announcement that Azurix would alter a crucial aspect of its business strategy and focus more on "privately negotiated opportunities" shocked the market -- especially in light of defendants' repeated emphasis on the Company's global privatization plan.

The announcement that fourth quarter earnings per share would be approximately $.09 cents to $.11 cents constituted a drop of32% -44% from third quarter figures of $.16 per share. Following the issuance ofthe November 4, 1999 press release, the Company's shares fell 40%, dropping from the.

32

. •

2 QJt 7s previous day's close of S1tit. i 25 per share to close at $7.775 per share on extremely heavy volume of 7,653,000 shares.

91. The statements in the November 4, 1999 press release characterizing the

Company's pipeline as "very strong" were materially false and misleading because major privatization pry j ect including projects in Peru, Morocco and Rumania,. had been either ca cel d and/or postponed or would be imminently canceled and/or postponed as of the time of this press release. Defendants later admitted that numerous cancellations and postponements occurred in the second half of 1999. (See 1999 19-K infra at ¶106.) Thus, the timing of public bids (i.e.., privatization bids) was not "unpredictable." The cancellation and postponement (or imminent cancellation and postponement) of numerous privatization projects rendered the outcome of many bids quite predictable.

92. Defendants also failed to disclose that the shift in strategy was made in part because ofsuch cancellation:rs and postponeme nts. Thus, because of defendants' continued fa Ise and misleading statements and omissions, the market was still unaware of the true state of affairs at

Azurix.

93. On November 15, 1999, the Individual Defendants caused the Company to file with the SEC on Form 10-Q its interim report for the quarter ended September 30, 1999 (the

" 1999 Third I O-Q"). The 1999 Third 10-Q was signed by defendant Faldyn. The 1999 Third 10-Q contained many of the statements contained in the November 4, 1999 press release . Thus, the statements made in the 1.999 Third 10-Q were false and misleading for the reasons stated in paragraphs 91 and 92.

33

<: U, 94. The 1999 Third I0-Q also illustrated the magnitude ofthe Company's change in strategy by previewing the massive charge the Company would take in the fourth quarter on account of such change;

Azurix estimates a non-recurring pretax charge in the fourth quarter 1999 concerning reduction in corporate pci^;':..3^_^i, sl ace,, and othe^ restructuring charges of approximately S30 to S35 mi llion.

(1999 Third 10-Q at 12.) The fourth quarter charge was thus estimated at almost twice as much as the Company' s entire $18.8 million of net income for the third quarter. However, the Company knowingly failed to disclose the then-existing conditions necessitating the estimated fourth quarter pretax charge. (See ¶J 81, 88 , 102.)

95. On November 16,1999, the Company announced the resignation ofdefendant

Gray.

96. On January 12, 2000, the Business Standard published an article stating that

"[Azurix's] global ambitions have been hit by slow-paced privatizations in a string of developing countries like Peru, Morocco. and Romania."

Azurix's $600 Millio n Debt Offering

97. On January 26,2000, Azurix announced that it intended to offer $500 million of U.S. dollar and U.K. bound sterling denominated senior notes due 2007 and U.S. denominated senior notes due 2010. On January 28, 2000, Moody's Investors Service ("Moody's") assigned a

Ba3 senior unsecured rating to Azurix's proposed $500 million senior notes offering. On January

28, 2000, Moody's was quoted in a Capital Markets Report: "Azurix's Ba3 rating reflects

34 bondholder risk associated with its high levera ,e and the relatively low cash flow generation outside of Wessex." (Emphasis added.)

98. Also on January 28, 2000, Standard & Poor's assigned its BB+ corporate credit rating to Azurix and its BB rating to the Corr. pany's $500 million unsecured debt securities.

99. On February 11., 2000. Azu:rix agreed to sell $240 minion principal amount of 10 1/8%i senior notes due 2007, GBP 100 million principal amount of 10 318% senior notes due

2007, and $200 million principal amount of 10 3/4% senior notes due 2010, fora total offering price of approximately $600 million.

100. The stated use of the net debt offering proceeds of $583.1 million was $150 million to pay down the Company's revolving credit facility, $386 million to pay down the Azurix

Europe. Ltd. revolving credit facility, $18.1 million to pay down amounts outstanding under a credit agreement with Enron, and $11.5 million to pay accrued interest on the three credit facilities. (Form

131: -3 at 19.) With a highly leveraged balance sheet and a declinin : stock price (Azurix stock had fallen from $19 per share at the time of the 1110 to $10.375 on January 26, 2000, the date on which the Company announced its intention of engaging in the debt offering), the success of the debt offering was critical for Azurix's survival.,

101. On February 7, 2000. the Individu al Defendants caused Azurix to announce its results of operations for the fourth quarter of 1999. In the press release, defendants stated:

Azurix today reported revenues of $199.3 million for the quarter ended December 31, 1999, and net income of $11.9 million, or 5.10 earnings per diluted share, excluding a restructuring charge. `The non- recurring charge was $34.2 million ($22.5 million, net of income tar) and is primarily attributable to a reduction in personnel and office space and is within the range previously reported.

35 Earnings before interest, taxes, depreciation and amortization, minority interest and non-recurring charges (EBITDA) for the current quarter were $76.5 million ...

Full Year Results

For the full year 1999. Azurix reported recurring, net income of $67.0 million or $.6i earnings per diluted share, ont. revenues of ,$618.0 nil llion and EBIIDA of $277,5 million. These results exclude pion- recurring charges totaling 5 29.3 million, net ofinco re tax.

"In the past year wtwe have assembled the core assets and capabilities for strong growth in our key markets," stated Rebecca Mark, chairman and CEO of Azurix. `°11^ hcx^°e suec^es.5fz^ll expanded our operations through the ownership of'assets and through the services we afjer as a total solutions provider to our municipal and industrial customers. Our services businesses contributed approximately $60 million of revenues and almost $10 million of 1= BITDA in the most recent quarter.

"We are also targeting o portuni.ties to develop water resources and create markets in the wholesale water business. Our Il^Vadera Ranch Water Bank project in Calijbr rmia is an example of an innovative resources project which has considerable potential both for the community and forthe company." [Emphasis added.]

102. Defendants' statement that during 1999Azurix had "assembled the core assets and capabilities for strong growth in [its] key markets" was knowingly false and misleadiTig. First, as alleged above, the Company had been grappling with acute problems that adversely affected revenue generation at the Buenos Aires Concession. The Buenos Aires Concession had been yielding poor operating results due to incomplete customer accounts and billing records, difficulties in accounts receivable collection , water quality issues, and tariff disputes. Second, given the numerous cancellations and postponements of major privatizations, such as projects in Peru,

36

R Morocco, an^.i Re ^ b is bat occurr d iz _ thc. second half of 1999, Mark's statement hat the Company had "assembled [its] core assets and capabilities for strong growth" was also materially false and misleading.

103. 1arlc's statement that the Madera Project "has considerable potential For the

... company" was materially false and misleading. Mark knew, or recklessl.yT disregarded, that tI.he

Madera Pro was contingent upon. numerous governmental permits, construction expenditures, and local property owner concerns that rendered the Madera Project inherently uncertain.

Defendants knew that the Madera Project was unlikely to produce revenue in upcoming qt - s and might not produce any revenue at all. Wasserstein Perella characterized the Madera Project as a risk affecting the Company because it was uncertain whether the project would ever generate any revenue.

104. Mark' s statement concerning the Company' s expansion ofoperations to municipal and industrial customers was materially misleading. Mark knew, or recklessly disregarded, that generating revenue from municipal and industrial customers was challenging and problematic. According to a former employee at Azurix's North America office, many municipalities had water works over 100 years old, and needed to be replaced and/or refurbished. The cost of replacing or refurbishing these water systems was substantial. This former employee identified locations such as the Great Lakes area and New York City as two such examples.

105. Although defendants' public statements portrayed Azurix as a company poised to grow as a result of its expansion to private contracts with municipal and industrial customers, defendants knew otherwise. According to Wasserstein Perella, as a consequence of the

Company's highly leveraged balance sheet, insufficient liquidity to fund projected negative cash

37 flow through 2002, stock price, and difficulty in pursuing concessions and acquisitions with limited access to capital, defendants retained a consulting firm in February 2000 to study strategic alternatives. As a result, Azurix management recommended to the Board of Directors that the

Company "seek an acquirer or strategic investor."

The 1 999 Form 10-K

106. On March 30, 2000, the Individual Defendants caused the Company to file

with the SEC the 1999 10-K. The 1999 10-K was signed by defendant Mark and contained many

of the statements contained in the February 7, 2000 press release. The 1999 10-K was misleading

for the reasons discussed in paragraphs 102 through 105. Further, the 1999 10-K contained a new

and previously undisclosed fact concerning the prior and the existing state of affairs at the Company:

RESTRUCTI.7RING CHARGE

In 1998,.we adopted a business strategy focused on growth through acquisitions and development projects around the world. During the fourth quarter of 199 8 and the first half of 1999.. we initiated a business development effort requiring increased personnel to pursue and support acquisition and privatization. activities; worldwide. This initiative was based. on our expectations as to the size, number, location and timing of privatization projects that would be awarded in 1999. 2000 and beyond. Tang the second ha/f of 1999, several l€7rgc, pri i>crtiZcatLO:z projects were postponed or• c nceiec . in the fourth. quarter of 1.999, we reevaluated our cost structure in relation to our business development efforts. As a result, we reduced our corporate personnel by approximately one-third, reduced our leased office space and eliminated other costs primarily relating to the pursuit of concessions in certain regions, resulting in a non-recurring., pretax expense of $34.2 million for the fourth quarter of 1999. Azurix intends to focus more on service contract opportunities and its existing assets in the near term.

(1999 1 0-K at 77.) (Emphasis added.)

14 107. Defendants thus ` that tD , " million chFarsne was needed to effect their shift of business strategy from global privatizations to privately negotiated contracts, which shift was caused -- as defendants further conceded -- by the cancellations and postponements of projects during the srecond half of 1999 (se(Z 1196.) Az._uri:x's change of qtr .• was not realistic be cause the C ompany wvas already foundering at this time as is evidenced by the fact that excluding the restructuring charge Azurix's net Income still plummeted 63% from $18.8 million to $11.9 million in the fourth quarter. If the charge is included (as it is in the 1999 10-K), then

Azurix would have reported a net income loss of `fs 10.6 million for the fourth quarter (i.e., a drop of

147%). (1999 10-K at 82.)

108. The Company's statement in the 1999 10-K that several "large privatization projects were postponed or canceled" in the second half of 1999 discredits its numerous releases touting Azurix as possessing a .'very strong pipeline:" as having "assembled the core assets and capabilities for strong growth in [its] key markets;" and as being a future "leading player in the global water industry" that were disseminated during the second half of 1999 and early 2000. (See

¶J 80, 89, 101.)

109. As stated above, Azurix's reevaluation ofits cost structure consisted ofa one- third reduction in corporate personnel, a reduction in office space, and a non-recurring expense of

$34.2 million -- almost three tines the Company's $ 11.9 million net income for the quarter. Such a drastic reassessment is an acknowledgment of the material adverse effect of the failed privatizations (which created the need to restructure) on the Company.

110. Defendants also admitted in the 199910-K that they had known ofthe billing problems at Buenos Aires at its inception:

39 We did not receive complete billing, and cv mcrd s tivhen we took. Over die 00, Which ha s irr7t - ollI '.io,n efforts and advervA iy affected our operation. revs ues derived from this coon :-11-0 ^t:o date. We ha,,,c embarked on a program to improve biilin : and debt collection procedures and increase the number of acc.oU.Ekts billed, which we believe will impxove collections. [l mnphasis added, l

(Form 10-K at 21-22.) Thus. at the time defendants were exto lling the "si.gni ficant accomplishment" of Azurix's Buenos Aires Concession, they knew that the, concession was plagued with, inter alia, customer billing problems which were severely affecting operating revenues at the concession. On

May 1, 2000, Business We ek observed the following:

Azurix . .. found it wasn't easy to squeeze profits from the assets it did grab. Its $439 million, 30-year Buenos Aires Concession, purchased in June, has significantly underpei orfned expectations because wily 60% of its customers paid their bills last year. [Emphasis added]

111. Although defendants disclosed sonic of the problems affec€in ; the Buenos

Aires Concession in the 1999 10-K. they did nottell the whole story. While admitting the existence ofcustomer billing problems, defendantsfaiied to disclose the ongoing tariff disputes and poor water quality at the concession. That the Company knew of such issues at the time the 1999 10-K was filed is clear from Wasserstein Perella's recitation of the facts surrounding Enron's acquisition of

Azurix in a going private transaction, as well as the due diligence performed by Wessex employees.

S ¶j77a-b.)

112. The 1999 10-K also disclosed the uncertain nature of the Madera Project:

Completion of the Madera Water Bank Project will require various governmental permits and construction expenditures that we currently estimate to be in the range of $35 to `540 million during 2000 and 2001. We will also need to satisfy local property and owner and county concerns regarding the impact the project will have on local

40 'ctCW:._" reso 11 p, I •. i' expect to O iaint2^ 1: - 1.`-_ Ci 'lt Cll'1CO s l a timely mai icr .. . we cannot yet be assur i these e. forts will be successful.

{1999 10- K at 19.) This ad .ission. is in stark contrast to the February 7, 2000 announcement concerning the Madera Project, which stated that the project had "considerable potential for the co parny."

111. On March 31; 2000, one day after 01ing the 1999 10-K, the Company announced the resignation of Chief Accounting Officer Rodney Faldyn. 1:aldyn was the second high-level financial officer to resign within five months.

114. On. April 10, 2000, ('"hristopher Warden, head of the Company's highly publicized internet ventures, abruptly resigned.

115, The May 1, 2000 Business Week article illustrated the increasing doubts analysts harbored about Azurix by the middle of fiscal year 2000:

Some analysts now say that the offerinEg was rushed. "it would have been nice to see them with more of a business in hand," says analyst Debra S. Coy of Charles Schwab & Co. Soon after the IPO. many of Azurix's most promising prospects fizzled. Entrenched French water giants Suez Lyonnaise des Faux and Vivendi's Generale des F=;aux outbid Azurix on several bi g projects, including a concession granted last summer in Berlin.

116. On May 8. 2000, the Individual Defendants caused Azurix to announce its results of operations for the quarter ended March 31, 2000. In the press release. defendants stated the following:

Azuurix today reported. revenues of $ 194.6 million for the quarter ended March 3 I , 2000, and net income of$ 1 1 . 4 million, or $.10 earnings per diluted share. These results compare with revenues of

41 1. ? 6.9 million: for the quarter c tided Marcy ..^ I, 1999, and net income of $16.1 cn=ltion, or $16 nn, per X22 are.

Far"n i iws below interest , t 9v - `errw.I r wf7 and anicaiza.tx'un a minority interest (>BI'IDA.) fr t? -urre.nt quarter were pillion, which i rent b> a° t. m $ 62 7 milli =n E1311 a)A reported for the quarter ended March 31, 1999, This increase in i.T31TDA . I.. i `'.:1y the r alt o f the husine, s';e a r-;2ied during the past year and Lontinned strong performance of WVessex Water . The Ei 1TDA growth was offset by higher interest, depreciation and amorti zation. costs related to acquisitions close d subsequent to March 31. 1999. These fh ctors, as well as an increase in the averarre number of shares Outstanding , were the primary contri butors to the difference in earnings per diluted share from the prior year.

"A_urix continues to make steady progress toward the camp anv's olhjective to maximize the returns on our exisli businesses, grow our municipal and i ndustria l servic es business and develop our e- business and knowledge based ,services," said Rebecca P. Mark., chairman and CEO of Azurix. " 1..BiTDA margins and targeted collection efforts at Azurix Buenos Aires improved significantly during the quarter , We recently won a 20-year contract to operate and maintain the Wildwood . New Jersey water system and we are vigorously pursuing negotiations with several large . North American industrial customers for long-term outsourcing contracts for their water and wastewater treatment facilities. Water2Water,com and WaterDesk_con continue to attract widespread intere st as we move ahead with our innovative strategy to provide customers with knowledge-based. services su ch as procurement, billing, trading and customer care. " [ Emphasis added-']

117. Mark's statement that -"Azurix continues to snake steady progress toward the

Company's objectives to maximize the returns on our existing businesses" was materially false and misleading. Mark knew or recklessly disregarded that the. Company 's earnin gs would be negatively impacted by water quality problems in Bahia Blanca. Argentina. According to a former employee at Azurix Buenos Aires, S.A., the water in Bahia Blanca had algae that the Company maintained was, nevertheless, drinkable. In April 2000, Argentinian authorities tested the water. determined the

42

j'4^ water was not drinkable, and demanded ti-h.at Arurix clean the water. As Bahia.,, Blanca was part of the Buenos Aires Concession, Azurix agreed to clean the water, which it began to do by late April, early May 2000. Cleanup efforts did not conclude until June 2000. This water quality problem was a causativ e factor in the Company's decision to take a charge for the second quarter equal to almost

87% o¢` its net income for the quarter. ( sec, j 1 %D.)

1 [8. On May 15, 2000. the Individual Defendants caused Azurix to file with the

SEC on Form I0-Q its interim report for the quarter ended March 31, 2000.

1 19. In the 2000 10-Q, defendants discussed the problems at Bahia Blanca:

During April 2000. residents o:f'the city of Bahia Blanca . Argentina and surrounding areas began noticing, unpleasant taste and odor in their water supply; which is provided by A2..Unx Buenos Aires. S.A. The taste and odor were traced to a substance released by algae that have grown to high levels i n. a reservoir operated by an agency of the Province of Buenos Aires and that had entered the local water supply .. .

Before the situation was corrected. at the. request of government officials, Azurix. Buenos Aires acquired water from other sources for delivery in trucks and bottles to residents in Bahia Blanca. A;urix Buenos Aires has agreed not to bill residential customers for water services for a 21-day period during which the taste and odor of supplied water were allegedly unsatisfactory . . . Because this situation has occurred only recently, we have not completed are analysis of the impact on costs and revenues by these actions.

(2000 10-Q at 7-8.)

120. The 2000 l 0-Q repeated many of the statements contained in the May 8, 2000 press release. Thus, the 2000 First 10-Q was false and misleading for the reasons stated at paragraph

117.

43 1.2 On July 5, 2000, the Company acquired Baker Hughes Industrial Services.

Inc. for $8 million. This was Azurix's first major acquisition since the Madera Project acquisition on October 4, 1999.

Thee August 8, 2€1()€Press Release

1.22. On August 8.20(0 , the Individual Defendants caused Azurix to annou nce its results of operations for the second quarter of 2000. In the press release, defendants stated the following:

Azurix today reported revenues of $189.2 million for the quarter ended June 30, 2000. and net income of $6.2 million, or S.05 earnings per diluted shore, excluding nun-recurring items of approximately $5.4 million (S3.2 million, net of income tax and minority interest) related to -water quality issues in .Bahia Blanca, A rg>entina. Reimbursement for these non-recur n£g items, consisting of expenses and loss of revenue, is being pursued with the provincial government of Buenos Aires.

Revenues and ElI DA (earnings before interest, taxes, depreciation and amortization, minority interest and non-recurri.tag items) increased from the quarter ended June , 1999. Revenues increased by 44 percent from $131.3 million recorded for the same quarter of last year. EB1 T[)A for the current quarter was $70.7 million, which is a 14 percent increase from. $62..1 million reported for the quarter ended June 30, 1999. EI I'TDA. reflected a continued strong performance by Wessex Water in spite of the onset of the regulatory 12 percent price cut effective April 1 and the weakening of t e pound sterling in relation to the dollar.

For the quarter ended June 30, 1999,.net income and diluted earnings per .hare, excluding a non-recurring char e, were $20.2 million and $. I9, re,spectivvely. Interest, depreciation. and amortization costs increased in the second quarter of 2000 over the prior year quarter and were primarily related to acquisitions closed subsequent to June 30, 1999. 'these costs, as well as the Wessex rate cut, significant tax rate differences and an increase in the average number

44 cal` on stw^ndirr l,' ; primary onto iutor ; to the difference Li c at net income net earnings per dliluted shar : from the prior

zuri x previously had announced an LUTDA tar y€ t of $ 1(7 to $340

mill"Jon for the vei 2000. U the sterling exchange rate continues at approxim '-ly 1.50 to one sterling pound, the company would expect further i;- €lo ration of $ 10 m $12 million in l_1S dollar reported FB1TDA during the last. half of the year. This exchange rate deterioration angled with . `loiwwer than targeted growth, particularly in Argentina and Luurgi 13wnog u1-111 mean, Mal jdtr the year 20(10, EBJTDJ will most likely he in the ran ;e cif' S2 70 to $290 million and earnings per share n ill he helow analysts' current projections. This FBIT1'.A range, after adj sIin f r• taxes, would not lead to additional material earnings per shai"e ]%r the remainder of the year.

"Our management tean is working hard on the challenges that we face in Argentina and to maximize the returns on our existing businesses," said Rebecca P. lark, chairman and CEO. "We are pleased witlh Wessex Water's performance and the growth in our North American service businesses. Azurix North America reported strong double-digit revenue growth during the quarter and announced wins in municipalities in New Jersey and Louisiana. The acquisition. of Baker Hughes industrial. Services gives us an unmatched industrial services platform and expertise in the North American market, and we are negotiating contracts with key large industrial customers for long-term outsourcing of their water and wastewater treatment facilities."

(Emphasis added.)

123. Thus, poor water quality in Bahia Blanca -- of which defendants were aware, or in reckless disregard should have been aware, of prior to the IPO --- caused the Company to take a charge of $5.4 million, i.e., an amount equal to 87% of the Company' s net income for the second quarter of 2000. Defendants finally disclosed the materiality of the poor water quality at Bahia

Blanca only because they were forced to do so by taking the charge.

124. Even excluding the charge related to poor water quality, Azurix's diluted earnings per share plummeted 50% from the first quarter of 2000, and 75% from the second quarter

45

r ,s of 1999; its net income fell almost 50% from the first quarter of 2000, and 70% from the second quarter of 1999.

125. Although the Company attributed the decline in diluted earnings per share and net income to the Wessex rate cut, acquisition costs, tax diffbrences, and an increase in outstandin shares (see }122.) In reality. the decline was ;t; -r. 'v bro ght abouut becatuse A.nurix's privatization strategy never got off the aaround, defendants' attempt to shift business strategies had been a failure, and the Buenos Aires Concession, which was supposed to yield revenue for the

Company by the third quarter of 1999, produced consistently poor operating results. Indeed, only

601%%% of Azurix Buenos Aires customers paid their bills in 1999. (See 411110.) Thus, defendants' attempt to blame the collapse of the Company' s financials entirely on other factors is disingenuous because it ignores the heart of the problems affecting the Company. As announced in January 2001, the problems occurring in Buenos Aires caused the Company to take a $470 million charge to earnings.

126. Following dissemination of the August 8, 2000 release, the price of Azurix shares fell 12%, or $1 5/64, to $7 1/4, on volume of 392,900 shares, compared with average daily volume of 136,500 shares. According to First Call/Thomson Financial, analysts had been looking for the Company to earn $0.14 cents per share for the second half of 2000, or about $0.30 cents per share for the full year. Analysts attributed the earnings shortfall to, inter alia, Azurix's failed privatization strategy.

Post-Class Period Even ts

127. on August 25.2000, defendant Mark resigned her positions with the Company and also abdicated her seat on Enron's board ofdirectors. Azurix's share price dipped $9116 per share,

46

2 3 closing at 5 per share. Quoting defendant I_.a a, 'IT! .'all 6 gm al. on August 29 2000. suggested that Mark was forced to resign: "t think it's best for [Mark.I to start afresh." In an August

25, 2000 ," wife news article. Barry Hyman, c ief market strategist at Ehrenkrant ; King

Nissenbaum Inc., noted that "Novo her 4. 1999 was `tlie be^gir minna; of the end' of Arl.irix's business strategy because the precipitous drop that day crimped the (.Company's ability to make acquisitions using Azurix stock." Hyman also noted that A.zurix', "goal was to buy Lip water properties globally.

It turned out to be a feeble attempt."

128. As of October 26, 2000, Arurix stock was trading at about $3.50 per share

Azurix stock had fallen approximately 82% from its offering price of $19 per share, and approximately 86% from its Class period high of $23.875 per share.

129. On October 27, 2000, Enron announced a takeover offer of $7 per share for

A mix. This announcement caused the stock to rise approximately 84"/o to $6.5625 per share.

130, On December 16, 2000, Enron agreed to hhuy Azurix-s Publicly traded shares for approximately $325 million, taking the Company private at $8.X75 per share only 18 months after its IP(). Among the reasons identified in Wasserstein Pere] la's presentationto the Company's special committee to support the transaction were: (a) by 2002, the Company would have insufficient liquidity to fund its negative cash flow; (h) the continuing problems encountered by the Company in. connection with the Buenos Aires Concession; and (c) as a small, capital-c onstrained company,

Azurix would remain at a competitive disadvantage in the global water industry.

131. On January 22, 2001, the Company announced that it was taking a $470

million charge related to its investment in the Buenos Aires Concession.

47 S?`i; `i F ER AL C,t !'_) S

132. As alleged herein, defendants acted with scienter in that they knew or recklessly disregarded that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading:: knew or rec klessly disregarded that such statements or documents would be issued or disseminated to the investing public; and knowingly participated in the issuance or dissemination of such statements or documents as primary violators of the federal securities laws.

1.33. Defendants had actual knowledge ofthe facts and circumstances alleged herein.

(a.) In connection with the proposed going-private transaction between, Enron aad Arurix. Wasserstein Perella had been retained by a special committee of the Company to examine the financial fairness of the transaction. To that end_ Wasserstein Perella met with Company management in November and December of 2000 to discuss "Azr rix's financial condition, iric.iudin

13-y the end of 1999, Azurixs strategy of growth through acquisitions began to slow ... for the major water concessions that did come available, larger international water companies such as Vivendi and Suez 1-yonnaise outbid Azurix. Azurix was at a disadvantage in bidding, for large concessions because its cost of capital was significantly higher than competitors such as Vivendi or Suez Lyonnaise ... as a result of these developments, Azurix decided to scale back its growth program significantly In the fourth quarter of 1999.. .

48 The Buy Fps _ ims concession. the ' - is,'s second largec,t; ,_ ,• i. has taced ,Ianlerous ume the ac quivit'r"z including Incomplete cu-: accounts, difficulties in accounts receivable coU3.ec`, .ton, water quality issues and disputes over tariffs .

(Form 13E-3 at 17-18.)

(b.) Former employees also confirmed defendants' actual knowledge of the false and misleading statements alleged herein when made. 134. As set forth herein, the Individual Defer dants, by virtue of their receipt of information reflecting the true facts regarding the Company and/or their control over the Company, whichmade them privy to confidential proprietary intormat:ion, participated in the fraudulent scheme alleged herein. With respect to non-forward-looking statements and/or omissions, defendant.; knew and/or recklessly disregarded the falsity and misleading nature of the information which they caused to be disseminated to the investing public.

135. The Individual Defendants had the opportunity to commit and participate in the wrongful conduct complained of herein Each is, or was, a senior executive officer_ director and/or controlling shareholder of the Company and, accordingly, controlled the information disseminated to the investing public in the Company's press releases, SEC filings, and communications with analyst's. Thus. each could falsify, and did falsify, the information that reached the public about the Company's business and financial results.

136, n e Individual Defendants engaged in such a scheme and course of conduct

to inflate the price of the Company's common stock in order to, inter alio, use its stock as currency

for acquisitions. (ee 11194-86.) As Barry Hyman observed in the August 2Srr Bloomberg article,

"November 4, 1999 was `the beginning of the end' of Azurix's business strategy because the

precipitous drop that day crimped the Company's ability to make acquisitions using Azurix stock."

49

4? 137. The Individual 1)t ,-°,. is were also motivated to commit the fraud alleged herein to ensure the success of the Company's debt offering worth approximately $600 million. The

Company's stock price had fallen almost 50% from $19 per share at the time of the IPO to $10.375 per share on January 26, 20001, the date on which the Company announced its intention to conduct a debt o f (rln .. On January 28.2000, Moody' s stated that A zurix was "highly le eraaed." "lhe staled purpose of the $583. 1 million in proceeds from the debt offering was for reduction of debt; namely,

$150 million to pay down the Company's revolving credit facility, $386 million to pay down the

Azurix Europe Lid. revolving credit facility, $18.1 million to pay down amounts outstanding under a credit agreement with Enron, and $11.5 million to pay accrued interest on the three credit facilities.

(Form 13E-3 at 19.)

138. Azurix was still treading water at this time. There was little cash generated from operations. Further, the Company was meeting both its short-term obligations (such as vendor payables and payroll) and its long-term financ ing, needs (i.e., acquisitions and capital investments) by using short-term credit facilities. The short-term credit lenders required liquid assets as collateral, and such financing was becoming, increasingly expensive as interest rates climbed.

139. Unless Azurix could issue long-term financing , either in the form of equity capital or long-term debt (as it stated it would. in. the Registration Statement and Prospectus), the

Company was headed toward insolvency.

140. Thus, the Individual Defendants were motivated to misrepresent the success and status of the Company's privatization strategy and the Buenos Aires Concession in order to gain access to badly needed capital at favorable interest rates. This was especially true considering the fact that Standard & Poor's and Moody's had given Azurix low ratings of Ba3 and BB+, respectively.

50

^: a^ c R a -)ne , tel.( Company had n.o alternati v'e means to grow t i u 1 acquisitions , and more importantly. fund ats ne e'stivc cash flow and reduce its heavy debt burden.

141. As alleged above, on November 16, 1999, the Company announced the resignation of defendant Cray. Gray's resi znation came 1; days after the (Company announc ed. 1999 third quarter results, and one day after the Company filed its 1999 10-Q on November 15. 1999, which reported that Azarix's t-^i ! per share f' ll from %0.16 cents in the third quarter to $0,09 to

$0.11. cents in the fourth quarter - af dl of 32-=14% -- and that earnings in the fourth quarter and the following year would fall short of` Wall Street targets.

142. On March 31, 2000, the day after the Company made disclosures concerning the cancellation and postponement of contracts in the second half of 1999, and the ongoing problems plaguing the Buenos Aires Concession in its 1999 10-K.. Azurix announced the resignation of defendant Faldvn, the Chief Accounting Officer of the Company.

143. On August 25, 200 0. CEO Rebecca Mark resigned her positions with the

Company -- only two and a halfwee ks after the full truth concerning the Company's poor operating results was disclosed on August 8. 2000.

144. The executive positio ns held by these defendants and the timing of their departures fior the Company (following the announcement of unfavorable news about the

Company's business and financial condition) support a strong inference that, at the very least, defendants Gray, Faldyn and Mark knew of or recklessly disregarded the misstatements disseminated by the Company during the Class Period.

145. The Individual Defendants had furthermotive to commit and participate in the

wrongful conduct complained of herein. On May 1, 2000, Azurix filed a Schedule 14A Information

51

uc.: -j Statement (the ` Azurix Information Statement"). As set forth in the Azurix Information Statement,

Azurix executive compensation consisted of base salary, annual incentives (i.e. bonuses), and long term incentives, including shares of performance-based restricted stock and options to purchase

Azurix stock . As the Azuri:x. information Statement states:

[T he executive compensation program. is designed to reward performance that is directly relevant to A urix's success.

1999 CHIEF EXEC UTIVE OFFICER PAY

x

The Committee -ranted stock options for two million shares to Ms. Mark in February 1999 as an incentive to increase shareholder value. These awards are tied to performance in that the executive only realizes income from stock options if the stock price rise.

146. As of 1`ebriiary 29, 2000, defendant Mark beneficially owned 550,100 shares ofAzurix stock. Additionally, defendant Mark was ^,; =riled two million shares ofcommon stock underlying the options she had been granted in February 1999. Defendant Lay owned 10,000 shares, and defendants Skilling and Sutton owned 20,000 shares each. Moreover, defendants Lay, Skilling, and Sutton, by virtue oftheir positions at defendant Enron, beneficially own 78,536,532 shares owned by Atlantic.

147. Thus, the Individual Defendants were highly motivated to inflate the vague of

Azurix stock.

VIO LATIONS OF SEC R EPORTIN( l R ULES

148. During the Class Period, defendants materially misled the investing public, thereby inflating the price of the Company's securities , by publicly issuing false and misleading

52 statements and omitting to disclose material facts necessary to make def'kndarts' 't ' 2 F 5< as sel forth herein, not false and misleading. Said statements and omissions were r Materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Com pany , its privatization strategy, its concessions andprojects, and its financial condition in violation of the federal securities laws.

149. SEC Rule l2h-2 0 requires that periodic reports contain such Further

information as is necessary to make the required statements, in light ofthe circumstances under which they are made, not misleading,

150. In addition, Item 303 of Regulation S -K requires that the Management

Discussion and Analysis Section ("MD&A") must include. among other things, a discussion ofany

material changes in the registrant's results of operations with respect to the most recent fiscal

year-to-date period for which an income statement is provided. Instructions to Item 303 require that

this discussion. identify any significant elements of the registrant's income or loss from continuing

operations that do not arise from or are not necessarily representative of the registrant's ongoing business . Item 3 03(a)(2)("ii} to Regulation S-K requires the following discussion in the &A of a

company's publicly filed reports with the SEC:

Describe any known trends Or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unlavorahle impact on net sales or revenues or income from. continuing operations. If the registrant snows of events that wi.11. cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in relationship shall. be disclosed.

Paragraph 3 of the Instructions to Item 303 states in relevant part:

53 and Liz] '.r I i=.. ^, :... Tor 1anala,L . i(L i. reported it ^re' financi^ii t_i Fr,t not to he irily° indicative of future op rati'Jr k ,11; i t:€r sir Inc al c ^.± n(lition. Fleis r :^ a .cl include desi;rir iin; . i;: o:f ("LO matters that cn-otild have an inpact on v not had an impact iri the pat ...

151. During ta.^ ( . =-, I criod, defendants vtolate€t S C discdo t e.roles. )eibn.dant; f nled to disclose the existence of known trends, events or uncertainties that they reasonably expected would have a n-taterial, unfavorable impact on net revenues or income or that were reasonably likely to result in the Corr parry's liquidity decreasing in a material ^ ay°, in violation of Item. 303 of

Re ulatiorn S-K under the federal securities laws (17 C.F.R. § 229.30 3), and that failure to disclose the information rendered the statements that were made during the Class Period materially false and misleading.

152. Defendants were required to disclose in the Company's SEC filings the existence of the material facts described herein . The Company. failed to make such disclosures.

D t,-,adan-its knew_ or were reckless in not knowing, the Cacts which indicated that many of the

Company's press releases, public statements, and filings with the SEC, which were disseminated to the investing public during the Class Period, were materially false and misleading for the reasons set fdrth. herein. Had the true position o , and the ability of the Company to compete for, the global water privatization projects been disclosed during the Class period, the Company's common stock would have traded at prices well below that which it did.

54

kid C011"N"I'l

(AGAI NST CERTAIN i a -" ANT`. FOP VIOL ATIONS L." ACT)

..53. I'Iaintb€1:L repeat and 1,,^EZilcgc tht ALYcid +, contained a ove, as if set forth full1v herein, except to the extent that such paragraphs charge def,wL :awis with intentional or c r 1 ^:s nmiscondtnct. This count is brought pursuant to Section 1 1 ofthe `ecru ties Act, 15 L S.C. § 77k, on, behalf of the Class against the Individual Defendants, Azurix and Atlantic..

154, The Company, Atlantic, and the Individual Defendants catnsed to be effected an offering of s ares of Azurix common stock to the public pursuant to the Regis tration Statement that was in effect daring the Class Period. The Reg istration Statement was materially misleading; contained untrue statements of material facts, omitted to state material facts required to be stated therein or necessary to make the statements made, under the circumstances in which they were made, not misleading; and failed adequately to disclose material facts as set firth above.

155. The Company is the registrant for the offering and filed the Registration

Statement as the issuer of the Azurix shares issued in the offering, as defined in Section .l 1(a)(5) of the Securities Act. The Company, Atlantic, and the Individual Defendants named herein were responsible for the contents of the Registration Statement and caused its Tiling with the S C.

156. The Company is the i ssuer of at least 17. 100 ,000 shares of its stock sold by

means of the offering. As issuer of the shares, Azurix is liable to plaintiffs and the Class for the

misstatements in, and omissions from, the Registration Statement.

55

0 157. Atlantis, sold at least 19.500.000 shares of Azurix stock by means of the offering. As issuer of the shares, Atlantic is liable to plaintiffs and the Class for the misstatements in, and omissions from, the Registration Statement.

158. The Company and the individual 1`eafC indants signed the Registration Statement and/or otherwise cau sed it to be prepared , filed v ith the SEC. and circulated to the public, including plaintiffs and the other members of the Class.

159. None of the defendants named herein made a reasonable investigation or possessed reasonable grounds for the belief that the statements described above, which were included in the Registration Statement, were true, were without omissions of any material facts, and were not misleading.

160. At the time they acquired the ('empany's common stock, neither plaintiffs nor any member of the Class knew or by the exercise of reasonable care could have known of the facts concerning the inaccurate and misleading statements and omissions alleged herein.

161. The shares of the C'ompaii 's common stock purchased during the Class Period by plaintiffs and by the other members of'the Class were acquired by them in the offering.

162. In connection with the offering and issuance of Azurix common stock, de.fend.ants, directly or indirectly , used the means and instrumentalities of interstate commerce, the facilities of a national market and/or the United States mails.

163. This action was brought within one year after the discovery of the untrue

statements and omissions and within three years after Azurix common stock was issued to the public

in the offering,

56

f 164. By reason of the 1 defendants have violated 11 of the

Securities Act and are liable to plaintiffs and the members ofthe Class, each of whoa. has been damaged by reason of such violations, in a total amount to be determined at trial.

COUNT If

(AGAINST AI.J., DE FE'NDAN TS F O R V IOLAT IONS OF S}X[ Om 12 (a)(2) OF '1 HF S F1 I 1 ES A(':1)

165. Plaintiffs repeat and rcailege the allegations contained above., except to the extent that such paragraphs charge-- defendants with intentional or reckless misconduct. This is brought pursu ant to Secti o n 12(a)(2 ) o f the Securities Act. 1.5 U.S.C, § 771, on behalf of the Class against all defendants.

166. Defendants offered and issued a security , namely shares of Azurix common stock, by means of the Prospectus. This Prospectus contained untrue statements of material frets and omitted to state material facts required to be stated therein or necessary to rnake the statements made in the Prospectus not misleading, as set forth above.

167. The offering materials included untrue statements o.f. material fact and omitted to state material facts necessary in order to make the statements made, in light of the circumstances tinder which they were made, not misleading, as set forth with. herein. Defendanats' actions included participating, in the preparation of the false and misleading Registration State ent and Prospectus.

168. Plaintiffs and the members of the Class did not know of any of the untruthful

statements and omissions alleged and in the exercise of reasonable care could not have known of

them.

57 1.69. This action is commenced within three years of ^ ` : I EEO and within one year ofthe time plaintiffs and the other Class rrmerobers discovered or could ha -e discovered the existence of untrue statements by exercising due diligence.

170. Plaintiffs and the other Class members hereby tender their common stock to defendant: and seek rescission off their purchases to the extent that they continue to own such securities.

COUNT HI

(AGA NST T E INDIVIDUAL DE F ENDANT S AND EN RON FORV O LA PI ON S OF SE CTIO N 15 OF THE ' ,C TI F S AC fl

171. Plaintiffs repeat and re.allege the allegations contained above, as if set forth fully herein, except to the extent that such paragraphs charge defendants with intentional or reckless misconduct. This Count is brought pursuant to Section 15 oftbe Securities Act, 15 T.S.C. § 77o, on behalf of the Class against the Individual Defendants and 1nron..

172. 'Throughout tlx : Class Period, each of the Individual Defendants and Enron by reason of his/her executive position or positions, and as the owner, directly and/or indirectly, of their/its shares of the Company's common stock.. had the power and authority to cause the Company to engage in the wrongful conduct complained of herein . As a result, at the time of the wrongs alleged herein, the Individual Defendants and Enron were "controlling persons" of the Company within the meaning of Section 15 of the Securities Act.

173. Each of the Individual Defendants and Enron named herein issued, caused to be issued, and participated in the issuance ofthe materially false and misleading statements contained

in, or the material facts omitted from, the Prospectus and the Registration Statement and signed the

58 latter. Pursuant *o Section I5(a) of the Securities Act, by reason of dv f _.eh of, the

Individual Defendants is liable to the same extent as is Azuhx for the Company's aforesaid violations of Sections 11 and I2(a)(2) ofthe Sec-,.u-ities Act. As a direct arid proximate result o:f said defendants' wrongi'ul conduct during the .lass Period, plaintiffs and the other members of the Class have suffered substantial damages in connection with their acquisition. of Aztrrix common stock.

COUNT IV

(AGAINST ALL DEFF ANTS EXC EPT ATLANTIC AND ENRON FOR V I O .., T .O S OF SECT I ON 1. 0 (b) OF THE E .CU- .A G EACT AND RULE 10h-5 PROMULGATED T HE REUNDER)

174. Plaintiffs repeat mid re-allege the allegations contained above. as iffufly set forth herein.

175. This Count is asserted against the Individual Defendants and Az rix and is based upon Section 10(h) of` the 1934 Act, 15 U.S.C. § 78J(h)- and Rule l0h-S promulgated thereunder.

176. During the C lass Period, the Individual Defendants and Azurix. singly and in concert, directly engaged in a common plan, scheme, Lind unlawful course ofconduct. The Individual

Defendants and Azurix knowingly- or recklessly engaged in acts, transactions, practices, and courses

ofbusiness. which operated as a fraud and deceit upon plaintiIls and the other members of the Class.

Defendants named herein made various deceptive and untrue statements of material facts and omitted

to state material facts in order to make the statements made, in light of the circumstances tinder which

they were made. not misleading to plaintiffs and the other members of the Class. The purpose and

effect of said scheme, plan, and unlar^t ful course of conduct was, among other things. to Induce

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2 3 0 plaintiffs and the other members of the. Class to purchase the Compan.y's common stock zl 7.-! the

Class Period at artificially inflated prices.

177. During the Class Period, the Individual Defendants and Azurix, pursuant to said .schei-ne. Plan, and unlawful course of conduct, kn€)winQly and recklessly issued, cause to be issued, p ; tiCriated in the issuance of deceptive and materially false and m isleading statements to the investing public as particularized above.

[7$. As aresuit ofthe dissemination ofthe false and misleading, statements set forth above, the :market price of the Company' s common stock was artificially inflated during the Class

Period. in ignorance of the false and misleading nature of the statements described above and the deceptive and.manipul ative devices and contrivance s employed by said defendants, plaintiffs and the other members of the Class relied, to their detriment , on the integrity of the market price ofth e stock in purchasing the C.^o pa y"s common stock. Had plaintiffs and the other members of the Class known the truth, they would not have purchased said shares or would not have purchased them at the inflated prices that were paid.

179. Plaintiffs and the other members of the ("lass have suffered substantial dam ages as a result cif the wrongs herein alleged in an amount to be proved at trial.

180. By reason. of the foregoing, the Individual Defendants and Azurix. directly violated Section 10(b) of the Exchange Act and Rule I Ob-a promulgated thereunder in that they: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material facts or

omitted to state material facts in order to make the statements made, in.. light of the circumstances under which they were made, not misleading. or (c) engaged in acts, practices, and a course of

60 business that operated as a fraud and deceit upon plaintiff and the other members of the Class in connection with their purchases of the Company's common stock during the Class Period.

CUNTV

(AGAINST THE INDIVIDUAL DEFENDANTS AND ENROL FOR VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT

181 o Plaintiffs repeat and reallege the allegations contained above, as if set forth

fully herein.

182. The Individual Defendants and Enron, by virtue of their positions, stock

ownership and/or specific acts described above, were, at the time of the wrongs alleged herein,

controlling persons within the meaning of Section 20(a) of the Exchange Act.

183. The Individual Defendants and Enron had the power and influence and

exercised the same to cause the Company to engage in the illegal conduct and practices complained

of herein.

184. By reason of the conduct alleged in Counts IV and V of the Complaint, the

Individual Defendants and Enron are liable for the aforesaid wrongful conduct, and are liable to

plaintiffs and to the other members of the Class for the substantial damages they suffered in

connection with their purchase of the Company's common stock during the Class Period.

PRAYER FOR RELIEF AND JU Y DEMAND

WHEREFORE, Plaintiffs, on their own behalf and on behalf of the Class, pray for

judgment as follows:

A. Declaring this action to be a proper class action and certifying plaintiffs as

class representatives under Rule 23 of the Federal Rules of Civil Procedure;

61 C. T E1 A I ^F SE_RV CT

The reed certifies that this docum.en 'ja^: : -i. ied on all parties of rector th.rouph. 'et out below iz accordance with i e Feder,' Rules of (.:ivii Procedure on this tile 21 da,of'ApriL, NOI, via hand delivery, In t U.S. Mail and/or Dy fac°sinule

Ro bin Gibbs Gibbs Bruns LLP 1.100 1xmisi.ana, Suite 5'00 Houston, TX 77002-5778

Charles W. Schwartz Vinson & Elkins 2300 First City "lower 1001 Fannin Street Houston . TX 77002-6760

--^ ^ axe

Thomas L . 3 uIck

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