Collmer v. U.S. Liquids, Inc. (268 F. Supp. 2d 718, 2003)

MEMORANDUM AND ORDER OF PARTIAL DISMISSAL

HARMON, District Judge.

The above referenced consolidated, securities fraud action, alleges intentional or reckless material misrepresentations and omissions made by Defendants during the Class Period, May 12, 1998 through August 25, 1999, that caused damage to Plaintiffs and the proposed class of investors and untrue statements and omissions of material facts in USL’s March 12, 1999 Registration Statement/Prospectus, grounded respectively in sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Pending before the Court is Defendants U.S. Liquids, Inc. (“USL”), Michael P. Lawlor (“Lawlor”), W. Gregory Orr (“Orr”), and Earl J. Blackwell’s (“Blackwell’s”) motion to dismiss securities suits (instrument # 30) with prejudice for failure to state a claim for which relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6) and for failure to satisfy pleading requirements of Rule 9(b) and of the Private Securities Litigation Reform Act (“PSLRA”) of 1995, 15 U.S.C. § 78u-4 el seq.

After reviewing the complaint, the briefing on Defendants’ motion to dismiss, and the applicable law, for reasons stated below this Court concludes that Plaintiffs have failed to state a claim for which relief can be granted under the Exchange Act of 1934 and the PSLRA, but have stated a claim under the Securities Act of 1933. Moreover, the Court finds that Plaintiffs should be granted an opportunity to re-plead to cure their complaint’s deficiencies.

This action is only one of a number of class action securities fraud suits on this Court’s docket. As a result of extensive research to resolve issues that have arisen in them, the Court realizes that there is a full spectrum of conflicting judicial stances on a variety of issues involving Rule 9(b) and the PSLRA, including scienter, imputing knowledge to individual defendants based on their positions in the company hierarchy or to the company based on the knowledge of its managers and officers, the viability of the group pleading doctrine, fraud based on violations of generally accepted accounting principles (“GAAP”), and application of the bespeaks caution doctrine. Thus a plaintiff can find precedent for almost any stand he wishes to take. Because of this enormous diversity of views, rather than summarize each side’s arguments and authority, the Court will summarize the allegations of the consolidated complaint, set out what the Court has determined should be the controlling standards for a motion to dismiss under Rule 12(b)(6), Rule 9(b), and the PSLRA, and apply them to Plaintiffs’ pleadings.

Allegations of Lead Plaintiffs’ Consolidated Complaint

USL provides integrated liquid waste management services, including collection, processing, recovery and disposal services. It focuses on industrial and commercial wastewater treatment, although it also collects, processes and disposes of oilfield waste. USL operates forty-one processing facilities and serves over 20,000 customers in various states around the country.

Lead Plaintiffs Kevin Diffley, Arthur Donovan, Jim House and Alan G. Pierce’s Consolidated Complaint for Violations of the Securities Exchange Act of 1934(# 27) defines as the proposed class and class period

all persons and entities, other than defendants and their entities, who: (i) purchased the common stock of defendant USL during the period May 12, 1998 through August 25, 1999, inclusive, at artificially inflated prices; or (ii) purchased or otherwise acquired shares of USL common stock in the March 12, 1999 secondary public offering pursuant to the Form S-3/A Registration Statement filed with the SEC on February 24, 1999 and the March 12, 1999 Prospectus, effective March 12, 1999 (referred to collectively as the “March 12, 1999 Registration Statement/Prospectus”), and were damaged by defendants’ violations of the federal securities laws.

Complaint at 1-2. Lead Plaintiffs purchased USL common stock at artificially inflated prices during the Class Period and were allegedly damaged thereby.

The consolidated complaint asserts four causes of action, or “counts,” against Defendants.

The first count alleges violations of Section 11 (false registration statements) of the Securities Act of 1933, 15 U.S.C. § 77k against all Defendants and violation of Section 15 (joint and several liability of “controlling persons”), 15 U.S.C. § 77o, against the individual Defendants.

Count II alleges against all Defendants violation of Section 12(a)(2) (false prospectuses or oral communications) of the Securities Act of 1933, 15 U.S.C. § 77Z, and against individual Defendants, violation of Section 15 (liability of controlling persons), 15 U.S.C. § 77o, for underlying primary violation of Section 12(a)(2).

Count III alleges violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5, against all Defendants.

The last count alleges violation of Section 20(a) (liability of controlling persons and those who aid and abet violations) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t, against the individual Defendants.

Defendant Lawlor was allegedly Chief Executive Officer and Chairman of the Board of Directors of USL until he resigned on January 31, 2000. Defendant Orr served as President and Chief Operating Officer of USL. Defendant Blackwell was Chief Financial Officer, Senior Vice President, and Secretary of USL. During the Class Period all three were contractually bound by “lock-up” agreements with USL’s underwriters not to sell any of then-shares of USL common stock. Each signed various USL SEC filings during the Class Period. The complaint alleges that the individual Defendants, based on then-stock ownership, senior management positions and/or membership on the USL Board of Directors and Committees, were “control persons” within the meaning of Section 15 of the Securities Act of 1933 and Section 20(a) of the Exchange Act of 1934 and allegedly controlled USL’s operations and each of the wrongful acts and practices of which Plaintiffs now complain, including material omissions and false and misleading statements in USL’s press releases, SEC filings, and Registration Statements/Prospectuses. The complaint further asserts that because of their senior management positions in the company, they had access to undisclosed adverse information about USL’s illegal hazardous waste disposal practices, revenues and earnings, directly or indirectly participated in the management of USL, and directly •or indirectly were involved in its day-today operations and privy to confidential proprietary information about USL and its waste disposal practices, lack of adequate waste treatment, lack of internal controls, business prospects, operations, growth and financial condition. They were also purportedly involved in drafting, producing, reviewing, and/or disseminating the false and misleading statements and information alleged by Plaintiffs in SEC filings, the Registration Statements/Prospectuses, press releases, and other public documents. Plaintiffs assert that the individual Defendants were aware of or recklessly disregarded the false and material statements issued about USL, approved or ratified these statements, and had the ability or opportunity to prevent their issuance, but failed to do so. Defendants, particularly Lawlor and Orr, knowingly or recklessly purportedly also misled securities analysts about USL’s financial performance through telephone conferences, meetings, briefings, and written financial releases, and caused materially false or misleading reports to be issued, thereby causing the analysts to make misleading recommendations and projections to the investing public, which in turn relied on that information in purchasing USL common stock. The investment community and investors allegedly relied and acted on the information communicated in these reports and recommendations about purchasing USL common stock. Individual Defendants were responsible for the accuracy of the public reports and releases and ha-ble for any materially false representations in them. They ahegedly also violated then-duty to disseminate promptly accurate and truthful information regarding the Company’s business, operations, financial condition and performance, growth, markets, management, earnings, present and future business prospects, and to correct any previously issued statements that had become materially false.

Specifically, Plaintiffs complain of the following material misrepresentations and omissions during the Class Period regarding USL’s business, operations, financial conditions and performance, growth, markets, management, earnings, and present and future business prospects.

First, Plaintiffs accuse USL of a campaign of rapid acquisition of forty-one waste management companies from November 1996 until October 1999 without conducting proper due diligence or implementing regulatory controls, while falsely representing that USL had done both. Defendants had the resources for modernization and expansion and a determination to grow rapidly by means of acquisitions, emphasis on internal growth, and improvement of existing operations to become the country’s leading and dominant provider of services for the treatment, processing, recovery and disposal of nonhazardous commercial waste within the fragmented market of liquid waste disposal, as they repeatedly indicated in filings with the SEC throughout the Class Period. See, e.g., Prospectus filed on June 25, 1998. That market, at the time USL went public in August 1996, was composed of relatively small owner-operated businesses without resources to modernize or expand and typically lacking regulatory compliance programs or oversight. Plaintiffs allege that as the dominant participant in the industry, USL Defendants were aware of and exploited the fact that the majority of state regulators, because of financial and personnel restrictions, were unable to police effectively all the liquid waste disposal occurring in their states and that hazardous liquid wastes were routinely illegally disposed of without any required processing, with illegally altered labels, by illegally mixing wastes, and by illegally falsifying paperwork.

Plaintiffs charge that to meet and exceed quarterly earnings projections, Defendants exploited their lack of compliance programs, easy concealment of liquid, as opposed to of solid, waste, and the silence of loyal employees about unlawful disposal practices. Plaintiffs charge that USL found it much cheaper to violate the law and risk getting caught than to spend the money to establish compliance programs, which Defendants falsely represented were put in place at the time they acquired these small companies. Plaintiffs contend that because of pervasive unlawful practices in the waste disposal business and the fact that many companies acquired by USL had extensive and long-running histories of illegal disposal and other regulatory violations, it was imperative to USL shareholders that Defendants conduct proper due diligence and install compliance programs, both of which they affirmatively misrepresented as having been done.

Second, assert Plaintiffs, Defendants failed to disclose that these numerous acquired companies had extensive histories of environmental and regulatory violations, but instead touted USL’s ability to integrate the new businesses to “achieve operating compatibility with maximum speed and efficiency and with minimum disruption of ongoing business.” May 12, 1998 S-l/A, at p. 27. For instance, on May 12, 1998, USL represented that it “replaces the acquired business’ computer systems with its own management reporting and control system” and attempts to “retain the acquired business’ qualified managers and key employees, while consolidating certain overhead functions such as cash management, human resources, finance and insurance.” Id. In the March 12, 1999 Prospectus, USL represented that in the acquisition of these companies, it evaluated facts such as the acquisition candidate’s historical and projected financial results, the candidate’s customer service reputation and relationship with local communities, and whether the candidate has definable and controllable liabilities, including potential environmental liabilities. Contrary to its repeated representations, however, the complaint charges that USL failed to conduct adequate due diligence in investigating the acquired businesses’ liabilities and lengthy histories of environmental violations. Instead, USL repeatedly and systematically ignored repeated violations by these subsidiaries and, after completion of the acquisitions, engaged in a pattern of violating federal and state environmental laws and regulations by illegally disposing of unpermitted liquid hazardous waste into public sewer systems, by falsifying documents submitted to federal and state regulatory officials to create the false impression that the company had properly disposed of such waste, and by falsifying samples that it submitted to federal and state regulators to make USL’s practices appear to be in compliance with applicable laws and regulations.

Moreover, by charging customers for disposal services never rendered, as though the hazardous waste disposal had been properly accomplished, USL saved millions of dollars. USL therefore materially understated operating expenses and materially overstated profits and earnings throughout the Class Period, thereby causing the company’s common stock to become and remain artificially inflated throughout that time, all in violation of federal securities laws. USL also violated the securities laws by these unlawful practices and by representing that USL was in compliance with applicable regulations when it was not.

Plaintiffs assert that the Detroit, Michigan plant of City Environmental, Inc., a USL acquisition and subsidiary that became USL’s most important facility, generating about 25 million dollars annually or 10% of USL’s annual revenue, was searched on August 25,1999, pursuant to a warrant, by federal agents based on a tip from a confidential informant that USL had knowingly discharged liquid hazardous waste into the City of Detroit’s public sewer system and had knowingly transported and disposed of hazardous waste at an unpermitted facility without proper manifests. As a result, the complaint alleges, USL was placed under criminal investigation for possible violation of the Federal Water Pollution Control Act (“the Clean Water Act”), 33 U.S.C. §§ 1251 through 1387, the Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. §§ 6901 through 6992k, wire fraud, 18 U.S.C. § 1343, and mail fraud, 18 U.S.C. § 1341.

Plaintiffs rely on the contents of an affidavit of FBI Special Agent Steven T. Flattery, dated August 24, 1999, which established probable cause for and was attached to the search warrant, to support their allegations of wrongdoing (dumping untreated liquid wastes into the sewer system and other illegal disposition of untreated wastes and falsifying tests and facility logs to conceal the practices) at the direction of City Environmental’s Gazi George, a Vice President of USL, and Don Roeser, the plant manager.

The information in the affidavit was provided by five cooperating witnesses who were employees of the plant. The first witness stated that he had telephoned Flattery on May 7,1999 with specific information about USL’s mishandling of solid and liquid hazardous wastes. The witness had access to USL processes and records, including treatment logs that tracked the waste that the plant manifested, treated and released. The witness reported that liquid wastes are treated by adding chemicals which react to form solids. The waste is filtered to remove these solids and the strained solids are pressed into a compacted mass, or “filter cake,” which in turn is transported to a disposal site and disposed of for a fee. The witness stated that the filter cake at USL had not operated for two years, and that USL therefore did not have to make payments for the cake disposal. The witness further informed the FBI that Roeser and George were responsible for the illegal activity because they directed USL employees to discharge untreated liquid waste into the Detroit sewer system. He also stated that USL did not treat the waste so that it could save the costs of purchasing chemicals and of properly treating the waste. He further represented that USL falsified its logs to make it appear that treatment, which was not being done, was being done. Moreover, he asserted that USL billed customers for proper treatment even when USL had not processed the hazardous waste.

The second informing witness, a six-year employee of the Detroit plant, was interviewed on July 16, 1999 by Flattery and EPA Special Agent Gregory Horvath. That witness claimed that he was cooperating because of dangerous situations at the plant. He stated that untreated liquid waste was continually discharged into the Detroit sewer system, confirmed that George and Roeser were responsible for the illegal activity, falsified logs to create the appearance that USL treated the waste before it was discharged into the sewer system, maintained that when the City took samples, USL would not discharge any waste or a USL employee would remove the sampler from the sewer, testified that USL falsified documents relating to a rail tank of PCBs that it received from Safety Kleen in Kentucky, and provided false samples and falsified records for inspection. He confirmed what the first confidential informant had said regarding handling of illegal hazardous waste.

Flattery and Horvath interviewed the third witness, a ten-year equipment operator employee at the plant, on July 16,1999, That witness reported seeing liquid wastes discharged directly into the sewer system without prior treatment and confirmed information provided by the first two witnesses. He further stated that the employees responsible for treating the waste had never been trained in proper waste management procedures nor provided with appropriate materials to treat the waste.

On July 20, 1999, Flattery and Horvath interviewed a fourth witness, who estimated that USL illegally discharged daily between 20,000 and 100,000 gallons of untreated liquid hazardous waste. Falsified logs reported that acids were treated. Moreover, management urged the employees to “get rid of the liquids and do whatever it takes” and instructed them to remove the sampling tubes installed by the City of Detroit to monitor USL’s discharged effluent. He told of samples submitted to USL’s on-site laboratory being switched and that management told the employees to make a sample fail occasionally so as not to create suspicion about USL’s on-site laboratory. He claimed that management told employees to “lie about what was going on at the facility.”

The fifth witness, employed at the facility from 1995-1999, was interviewed on July 29, 1999. He stated that he left the job because of the illegal activities that he and others were asked to perform. He informed Flattery and Horvath that he was ordered to remove a monitor put into the plant by the City of Detroit and that he was asked by management to enter false information into a log book.

The agents’ information further evidenced that George and Roeser not only directed employees to discharge untreated waste into the sewer system, but they issued Certificates of Treatment, which assure proper treatment to customers who delivered hazardous waste to the facility and who had to pay for these certificates as part of the charge for handling the waste. The customers routinely paid for and received the certificates even though USL did not process the waste.

Following the August 25, 1999 raid, the Detroit facility was then temporarily shut down for further investigation. Tests uncovered contamination of the site by highly toxic polychlorinated biphenyls (“PCBs”), however. USL negotiated with various environmental agencies regarding disposal of the PCBs and decontamination of the equipment, while the reopening was delayed until USL ultimately entered into a consent decree regarding maintenance and cleanup of the facility.

On January 31, 2000, USL announced that the cost of a PCB cleanup at the Detroit site had exceeded its expectations and that its earnings for the third and fourth quarter of 1999 would be negatively affected. USL’s Form 10-Q for the quarter ending September 30, 1999 reported high costs for waste disposal at its Shreveport, Louisiana plant, which USL negotiated with the EPA, in addition to those for investigation and decontamination in Detroit. In the January 31, 2000 press release, USL updated ongoing decontamination, which was complete and awaiting certification, and it announced that it had entered into a consent order with the EPA, which included payment to the EPA to settle the EPA’s claims against USL.

On February 28, 2000, in a press release USL announced that at the end of the fourth quarter of 1999, its earnings per share decreased 229.6% to $0.35 per share, from $0.93 in the same quarter in 1998. It also reported a 34.8% increase in revenue for the fourth quarter, to $58.8 million, from $43.6 million in the fourth quarter of 1998, despite the revenue shortfall of $4.9 million caused by the closure of the Detroit facility. USL also reported that its annual revenue increased 90.8%, to $231.8 million for 1999 from $121.5 million, despite a shortfall of $8.1 million caused by closure of the Detroit plant. Net income decreased 248.3%, to $5.5 million from $3.7 million in the comparable period of 1998.

Then on February 29, 2000, during a conference call to discuss the company’s fiscal year 1999 earnings and fourth quarter 1999 results, USL revealed increased costs related to the PCB contamination cleanup in Detroit, the increase in USL’s reserve for bad debts to “acceptable levels” with respect to the collection of receivables from its Detroit, Shreveport, and Texas facilities, and expenses relating to a settlement with the Louisiana Department of Environmental Quality relating to its Re-Claim facility in Shreveport, Louisiana for violations of state and environmental laws relating to the monitoring and reporting of discharges and interpretation of certain regulations.

In its aggressive acquisition campaign, USL also acquired Enviro Waste Management, which had a long history of environmental violations and regulatory non-compliance unknown to USL’s shareholders, including violations of city waste discharge permits in Texas, illegal sewer tap connections, improper sampling procedures, and deliberate dilution of self-reported samples of liquid wastes processed in the facility.

An acquisition of 1999, the Austin Liquid Disposal Company (“ALD”), also had record of repeated environmental violations, including numerous sources of nuisance odor on site that USL chose to ignore.

On June 17, 1997, USL acquired Mesa Processing, Inc., which had engaged in repeated equipment and procedure violations from July 6, 1995 until April 1999. Similarly, USL acquired American Waste-water, Inc. on June 17, 1997. The complaint relates that from December 1994 through September 1999, the Bureau of Air Quality Control of the City of Houston, Texas reported eleven violations of environmental regulations that might be injurious to health and life.

The complaint asserts that USL made false and misleading statements during the second quarter of 1998. .In its May 12, 1998 Amended Registration Statement, which was filed in connection with an offering of 3,750,000 shares of USL common stock, USL for the first time included the financial results of its newly acquired City Environmental Detroit facility in its proforma financial statements. A section entitled “Risk Management” stated, “The Company has implemented various procedures designed to insure compliance with applicable regulations and reduce the risk of damage or loss. These include specified handling procedures and guidelines for regulated wastes, ongoing training and monitoring of employees and maintenance of insurance coverage.”

Based on Defendants’ successful (but deceptive, according to Plaintiffs) creation of a positive image for USL, securities analysts issued “strong buy” and “buy” recommendations and emphasized USL’s continuing growth and strong growth prospects. See, e.g., Donaldson, Lufkin & Jenrette’s June 8, 1998 report by Marc H. Sulman.

On June 25, 1998, USL issued a Prospectus relating to an offering of up to 3,000,000 shares of stock. It repeated the “Risk Management” disclosure of the earlier May 12, 1998 Amended Registration Statement and provided financial data of City Environmental in the pro-form consolidated financial statements. To ensure that the offering would be a success, Defendants allegedly misrepresented that USL was following a well-planned strategy for expansion to achieve a steady revenue growth and increased earnings per share (“EPS”) and that existing liquid waste management operations acquired thus far were performing extremely well in financial and operational terms and exceeding Defendants’ expectations, as well as being successfully integrated into USL’s operations. Defendants also stated that USL was successfully meeting competitive pressures while complying with applicable governmental regulations and restrictions and achieving continuing success. Defendants additionally represented to the investing public that, inter alia, USL’s plant-level fundamentals were among the strongest in the liquid waste management industry, that its existing operations were generating strong revenue and earnings gains, and that its operating return on investment would exceed 25%.

The June 25, 1998 Prospectus was supplemented by USL public filings with the SEC on July 22, 1998, August 17, 1998, September 1, 1998, September 25, 1998, and November 17, 1998, all with essentially the same allegedly materially false and misleading statements and with updated financials where appropriate. Plaintiffs maintain that these statements were materially false and misleading because (1) USL was not in compliance with applicable regulations; (2) the companies acquired by USL were not properly investigated by USL before their acquisition or, if they were, the illegal activities occurring at them were ignored; (3) its “specified handling procedures and guidelines for regulated wastes” were either illegal as written or thwarted and not followed by USL employees at the direction of USL management; (4) USL employees were not properly trained in waste management procedures; and (5) Defendants were aware or reckless or negligent in not being aware that USL’s proclaimed successful expansion strategy and increased profitability resulted from its illegal charging of its customers for unperformed waste disposal services and artificial inflation of reported revenues, while simultaneously understating its operating expenses because of savings from the nonperformance of proper and lawful waste disposal.

In the third quarter of 1998, USL made additional false and misleading statements. On August 3rd, in a press release announcing financial results for the second quarter, ending on June 30, 1998, USL stated that fully diluted earnings per share rose 100%, to $0.20 from $0.10, in the same period from the previous year. USL reported $28 million in revenues, an increase of 183% over revenue from the second quarter of 1997. Net income increased 250% to $2.1 million from $0.6 million in the comparable period of 1997. Lawlor commented, “To be able to report these results is a real tribute to the employees and management team of U.S. Liquids. The company continues to grow at a rapid pace and it would not be possible to implement our strategic plan without these dedicated people.” Orr, in turn, stated, “All of the thirteen acquisitions made during the second quarter have been fully integrated and we are beginning to see the positive effects from the operational enhancements we have put in place .... ”

The same financial results as were reported in the August 3, 1998 press release were reiterated in USL’s 1998 second quarter From 10-Q (“1998 Q2 Form 10-Q”), filed with the SEC on August 27, 1998. In the section entitled “Management’s Discussion and Analysis,” USL represented that it had achieved dramatic increases in revenue largely because of its acquisitions during the first six months of 1998. Regarding one, the City Environmental Detroit location, which was under federal investigation at the time, USL stated under the subheading “Basis of Presentation,” “The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the [SEC] .... In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the financial position, results of operations and cash flows with respect to the interim consolidated financial statements, have been included.” Lawlor and Blackwell signed the 1998 Q2 Form 10-Q for the second quarter of 1998.

On September 16, 1998, Lawlor made the following representations to the 1998 Donaldson, Lufkin & Jenrette Growth Stock Conference: (1) USL was not experiencing any slowdown in its industrial business; (2) USL enjoyed 30% revenue and EPS growth; (3) USL’s acquisition strategy was succeeding, with an acquisition backlog of approximately $350 million, and USL’s business condition remained strong; (4) USL would achieve FY98 and FY99 EPS of $.82-.85 and 1.16 respectively; (5) USL was in compliance with all environmental laws and regulations governing its liquid waste management business; (6) USL was successfully integrating its various acquisitions into its business, including into its management and information systems, such that it was achieving significant cost savings and operating efficiencies in its acquisitions that would contribute to continuing strong EPS growth; and (7) because of successful integration of its acquisitions and the economies of scale provided by the acquisitions, USL’s operating profit margins were increasing and would continue to increase throughout FY98. Later that day a report about USL by Donaldson, Lufkin & Jenrette’s analyst Marc Sulman, issued by the Donaldson, Lufkin & Jenrette Growth Stock Conference, stated that USL “re-confirmed its revenue and EPS growth targets of 30% a year and reiterated that it had seen no slowdown in any of its industrial businesses. Management also expressed comfort with consensus earnings estimates.” On September 23, 1998, Marc Sulman further stated in writing, “[W]e expect USL will continue to aggressively pursue acquisitions within its liquid waste markets, with acquisitions announcements for the third quarter anticipated in the near-term. As well, business conditions remain strong such that our third quarter estimate of $0.23 per share may prove conservative. We continue to rate USL buy.”

Plaintiffs allege that all these statements were materially false and misleading again because USL was not in compliance with applicable regulations; the acquired companies had not been properly investigated by USL before their acquisition or illegal activities occurring at them were ignored in USL’s rush to acquire them; “specified handling procedures and guidelines for regulated wastes” were either illegal as written or thwarted and not followed by USL employees at the direction of USL management; USL employees were not properly trained in waste management procedures; and Defendants knew or should have known that because of their illegal dumping activities at the Detroit plant, they would have to make substantial expenditures to remain in compliance with federal and state laws, including but not limited to (1) the costs associated with the clean-up of the Detroit facility, (2) the costs associated with outside investigation of its activities, once they were discovered, and (3) fines associated with its illegal actions at the Detroit facility.

The complaint also addresses specific, material false and misleading statements issued during the fourth quarter of 1998. On November 2, 1998, in a press release announcing its financial results during the third quarter ending on September 30, 1998, USL represented that fully diluted earnings per share rose 44% to $0.26 per share from $0.18 in the third quarter of 1997. It reported a 290% increase in revenues for the third quarter, to $37.5 million from $9.6 million in the third quarter of 1997. Net income increased 161%, to $3.4 million from $1.3 million in the comparable period of 1997, and Orr stated, “The operating results continue to demonstrate the dedication of our employees and the outstanding leadership of our managers .... ”

The 1998 Q3 Form 10-Q, filed by USL with the SEC on November 18, 1998, repeated the financial results of the November 2, 1998 press release. Under its subheading “Basis of Presentation,” USL represented, “The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the [SEC] .... In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the financial position, result of operations and cash flows with respect to the interim consolidated financial statements, have been included.” Lawlor and Blackwell signed this 1998 Q3 Form 10-Q.

On November 3, 1998 at a conference for analysts, money and portfolio managers, institutional investors and large USL shareholders to discuss USL’s third quarter results, business and prospects, Lawlor and Orr stated the following: (1) that USL was not experiencing any slowdown; (2) that USL enjoyed 30% revenue and EPS growth; (3) that USL was engaged in a $350 million acquisition backlog, which would allow it to continue to report increasing revenues, net income, and EPS; (4) that USL was in compliance with all environmental laws and regulations governing liquid waste management; (5) that USL was successfully integrating the new acquisitions into its business, including into its management information systems, and achieving significant cost savings and operating efficiency that would contribute to ongoing strong EPS growth; and (6) that the successful integration of the acquisitions and the economies of scale made for increasing operation profits margins would continue to grow throughout FY98. Plaintiffs contend that these statements were materially false and misleading because Defendants failed to disclose that a substantial portion of USL’s revenue and income was the result of their failure to perform services that they pretended they had performed. Instead USL, at the direction of its management officials, was illegally disposing of unpermitted hazardous waste into public sewer systems and falsifying documents that were submitted to federal and state regulatory officials to create the impression that USL had properly disposed of the waste and to conceal its illegal activities. USL also allegedly falsified samples submitted to federal and state regulators so they would believe that USL was complying with applicable laws and regulations, when it was not. Furthermore, the complaint again asserts that the companies acquired by USL were either not properly investigated before their acquisition or their illegal activities were ignored by USL in its acquisition campaign. The complaint also charges that USL’s annual and quarterly financial results, as reported during the Class Period, materially overstated USL’s net income and assets, in part because of its inclusion of revenues made by illegal evasion of federal law in dumping hazardous wastes at its Detroit and Van Burén sites. The complaint additionally asserts that USL’s earning growth was largely due to its illegal dumping at its most profitable site, the Detroit site, which accounted for 20% of its EBIT (earnings before interest and taxes).

The complaint also accuses USL of material omissions and misrepresentations in its March 12, 1999 Registration Statement/Prospectus, which was signed by USL and by each of the individual Defendants. Under the subheading “Failure to Comply with Governmental Regulations” at p. 9, the Prospectus stated, “If existing regulatory requirements change, we may be required to make significant capital and operating expenditures. Although we believe that we are presently in compliance with applicable laws and regulations, our operations may not continue to comply with future laws and regulations.” Under the subheading “Acquisition Program” at p. 31, the March 12, 1999 Prospectus stated,

We have disciplined pre-acquisition review procedures for acquisition candidates, including legal, financial, engineering, operational and environmental reviews. The environmental reviews include, where appropriate, investigation of geologic, hydrogeologic and other site conditions, past and present operations (including types of waste processed and disposed of), design and construction records, permits, regulatory compliance history, regulatory agency records and available soil sampling, groundwater and air monitoring results.

Finally, under the subheading “Risk Management” at p. 37, the Prospectus asserted, “We have implemented various procedures designed to ensure compliance with applicable regulations and reduce the risk of damage or loss. These include specified handling procedures and guidelines for regulated wastes, ongoing training and monitoring of employees and maintenance of insurance coverage.”

Plaintiffs contend that these statements were also materially false and misleading when the March 12, 1999 Registration Statement/Prospectus was declared effective for the same reasons indicated previously. First, Defendants failed to disclose that a substantial part of USL’s revenue and income came from Defendant’s nonperformance of services they claimed to have performed. In particular, the complaint reiterates that USL was illegally dumping unpermitted liquid hazardous waste into public sewer systems, falsifying documents submitted to federal and state regulatory officials to make them believe USL had properly disposed of the waste and to cover up its illegal activity, and falsifying samples for federal and state regulators to make them believe the USL’s liquid waste practices were in compliance with applicable laws and regulations when they were not and management knew they were not. Other reasons again include improper investigation of acquisition target companies or ignoring their illegal activities, profitability based on illegal charging of customers for waste disposal services that were never performed and understating operating expenses because they were not performed, procedures and guidelines that were illegal or thwarted or not followed by USL employees, lack of training of employees in waste management procedures, and costs that they would inevitably face to be in compliance with federal and state laws. Plaintiffs add that Defendants did not possess “disciplined pre-acquisition review procedures” or did not employ them. They note that Defendants, as officers and directors of USL, were responsible for the preparation of, and were signatories on, the March 12, 1999 Prospectus and were responsible for dissemination of the materially false and misleading public filings. Plaintiffs assert that no Defendant made a reasonable investigation or possessed reasonable grounds for a belief that the public filings were true and not misleading.

Statements issued during the first quarter of 1999 were also false and misleading at the time they were made, according to the complaint. USL’s 1998 Form 10-K, filed with the SEC on March 29, 1999, reported USL’s financial results for the fourth quarter and year ending on December 81, 1998. It disclosed that revenue increased 304% to $43.6 million in the fourth quarter of 1997, while revenue for the 1998 fiscal year increased 218% to $121.5 million from $38.2 million in the fourth quarter of 1997. Net income increased by 247% to $3.7 million for the fourth quarter of 1998, from $1.1 million in the same quarter of 1997. Net income for fiscal 1998 increased 178% to $10.8 million from $3.9 million for fiscal 1997. USL also reported a 108% increase in diluted earnings per share for the fourth quarter of fiscal 1998, to $0.27 from $0.13 in the same quarter the previous year. USL further proclaimed that EBITDA (earnings before interest, taxes, depreciation and amortization) for the fourth quarter of fiscal 1998 increased 228%, to $9.8 million from $3.0 million in the last quarter of 1997. Moreover, the projected annual revenue for companies acquired during 1998 was reported as $137.7 million.

Lawlor announced that “1998 was the year the U.S. Liquids took a leadership position in the liquid waste services industry.” At the same time Orr boasted about USL’s “successful integration” of 1998’s acquisitions: “The rapid and successful integration of the twenty-nine companies we acquired in 1998 was a tribute to our employees. Their dedication enabled us to perform above expectations.” The individual Defendants each signed the 1998 Form 10-K, on page 3 of which USL touted its acquisitions as essential to enhanced revenues and claimed that the acquisition of the twenty-nine businesses “collectively had approximated $136.5 million of annual revenues in 1998.” On page 4 of the same document, USL boasted that its Wastewa-ter Division was a major revenue generator that “contributed approximately 85.7% of our 1998 revenues.” The 1998 Form 10-K further represented that City Environmental was operating in compliance with the RCRA; on page 7, it stated that although City Environmental “had never been granted a permit under the RCRA,” that it “is continuing to operate under interim status, as allowed by RCRA,” and that “all necessary applications and other documentation were timely filed and applicable regulations allow the facilities to continue to operate.”

On January 26, 1999, First Security Van Kasper issued a report on USL by John Froley that rated USL as a “Strong Buy” and stated,

Acquired in April 1998, City Environmental, a former division of USA Waste, operates treatment facilities in Detroit serving customers by truck and rail in the Midwest and the Northeast and represents roughly 8% to 10% of estimated consolidated 1999 revenues.

We continue to rate U.S. Liquids Strong Buy and are increasing our 12-month price target to $80 per share based on a multiple of 20 times estimated 2000 EPS of $1.55.

At a USL-held conference for analysts, money and portfolio managers, institutional investors and large USL shareholders on February 23, 1999 to discuss USL’s Q498 and FY 98 results and its business and prospects, Lawlor and Orr again stated that USL was successfully integrating its acquisitions into its business, including management information systems, was achieving significant cost savings and operational efficiencies in its acquisitions that would support continuing strong EPS growth, that its operating profit margins were increasing and would continue to increase throughout FY99, and that it would achiever FY99 EPS of $1.25.

According to the complaint, these representations were known by Defendants to be false and misleading when issued for the same reasons as earlier ones: much of USL’s revenue and income were realized because Defendants were pretending to perform services that they did not perform; dumping unpermitted waste into public sewer systems; falsifying documents and samples to fool federal and state regulators; not complying with applicable regulations; not properly investigating acquisition targets or ignoring their illegal practices; representing that USL was successfully pursuing a well-planned expansion strategy to realize steady revenue growth and increased EPS while they were aware or should have been aware that USL’s increased profitability was based on charging customers for services never performed and artificially inflating reported revenues and understating operating expenses because of the nonper-formed services of lawful waste disposal; employees using illegal procedures or thwarting or not following legal procedures; lack of employee training in waste management procedures; substantial costs of which Defendants knew or should have known that will be required to achieve compliance with federal and state laws, including clean-up of the Detroit site, investigations of uncovered activity, and fines; overstatement of USL’s net income and assets by, inter alia, including revenues from evading federal law by dumping hazardous waste at the Detroit and Van Burén sites; and earnings growth from illegal dumping activity at the Detroit site.

The complaint also targets allegedly materially false and misleading statements issued in the second quarter of 1999. On April 6, 1999, USL issued a Prospectus in relation to issuance of 5,020,161 shares of common stock. Its purpose was to issue or reserve shares of common stock from time to time relating to the acquisition of various businesses. The Prospectus stated, “Although we believe that we are presently in material compliance with applicable laws and regulations, our operations may not continue to comply with future laws and regulations.” Incorporated into the Prospectus were pro-forma financial statements of USL data from January 1, 1998 through March 19,1999.

On April 19,1999 USL issued a Prospectus for the issuance of 1,318,188 shares of common stock. One purpose of the Prospectus was to allow Orr and Blackwell to sell 96,550 and 92,500 shares of common stock, respectively. Although USL was not to receive any proceeds from the sale, it was to pay nearly all the costs of the offering. The Prospectus allegedly contained the same materially false and misleading statement as the April 6, 1999 Prospectus, i.e., “Although we believe that we are presently in material compliance with applicable laws and regulations, our operations may not continue to comply with future laws and regulations.”

On or about May 3, 1999, USL reported that in the first quarter of 1999 (“Q199”) revenues increased 348% to $55.3 million from $12.3 million in the previous year’s first quarter, net income increased 172% from $4.2 million, from $1.5 million the previous year’s first quarter, and EPS increased 56% to $.28 per share from $.18 per share in the year ago quarter. Orr stated, “This marks the seventh consecutive quarter since our IPO that we have exceeded consensus estimates. This is something that every employee at U.S. Liquids can take pride in.” Lawlor commented, “We have already closed on acquisitions with annualized revenues of $70 million. This raises our confidence in being able to surpass estimates for 1999. Our pipeline of opportunities remains large and active.”

In its Form 10-Q for the quarter ending March 31, 1999 (“1999 Q1 Form 10-Q”), filed with the SEC on May 14, 1999 and signed by Lawlor and Blackwell, USL reported increased revenues and attributed them again to USL’s acquisitions in 1998 and the first quarter of 1999. As noted, revenue increased 348% to $43.0 million from the previous year’s $12.3 million. Wastewater Division contributed $7.3 million, or 59.4% of first quarter revenues in 1998’s first quarter and $50.5 million, or 91.3 of 1999’s first quarter.

The complaint reiterates the same reasons to explain why the statements of this quarter were materially false and misleading: much of USL’s revenue and income were realized because Defendants were pretending to perform services that they did not perform; dumping unpermitted waste into public sewer systems; falsifying documents and samples to fool federal and state regulators; not complying with applicable regulations; not properly investigating acquisition targets or ignoring their illegal practices; representing that USL was successfully pursuing a well-planned expansion strategy to realize steady revenue growth and increased EPS while they were aware or should have been aware that USL’s increased profitability was based on charging customers for services never performed and artificially inflating reported revenues and understating operating expenses because of the nonper-formed services of lawful waste disposal; employees using illegal procedures or thwarting or not following legal procedures; lack of employee training in waste management procedures; substantial costs of which Defendants knew or should have known that will be required for compliance with federal and state laws, including clean-up of the Detroit site, investigations of uncovered activity, and fines; overstatement of USL’s net income and assets by, inter alia, including revenues from evading federal law by dumping hazardous waste at the Detroit and Van Burén sites; and earnings growth from illegal dumping activity at the “most profitable” Detroit site, which the Complaint alleges accounted for 20% of USL’s EBIT (earnings before interest and taxes).

The complaint charges USL with additional false and misleading statements in the third quarter of 1999. A press release on August 2, 1999 announced USL’s financial results for the second quarter of 1999: fully diluted earnings per share rose 45% to $0.29 from $0.20 in the comparable period of 1998; a 110% increase in revenues, to $58. 7 million from $28.0 from the comparable 1998 period; and a 133% increase in net income to $4.9 million from the $2.1 million reported for the second quarter of 1998. Lawlor commented, “Our continued year to year and quarter to quarter improvement in revenue, income, EBITDA and earnings per share demonstrate that our strategic plan is working.” The same financial results were printed in the quarterly report filed on Form 10-Q (“1999 Q2 Form 10-Q”) by USL with the SEC on August 9, 1999 and signed by Lawlor and Blackwell. The form disclosed that the increase in revenues was again mainly the result of acquisitions. In an August 3, 1999 conference for analysts, money and portfolio managers, institutional investors and large share holders to discuss its Q299 results, business, and prospects, Lawlor and Orr represented that USL engaged a $350 million acquisition backlog that would allow USL to report increasing revenues, net income and EPS; that USL was in compliance with all environmental laws and regulations governing its liquid waste management business; that it was successfully integrating acquisitions into its business and achieving significant cost savings and operating efficiencies in its acquisition, thereby contributing to strong future EPS growth; and that USL would achieve FY99 EPS of $1.25-$1.26.

The complaint asserts that these financial disclosures during the third quarter of 1999 were materially false and misleading for identical reasons given for disclosures in other quarters: much of USL’s revenue and income were realized because Defendants were pretending to perform services that they did not perform; dumping un-permitted waste into public sewer systems; falsifying documents and samples to fool federal and state regulators; not complying with applicable regulations; not properly investigating acquisition targets or ignoring their illegal practices; representing that USL was successfully pursuing a well-planned expansion strategy to realize steady revenue growth and increased EPS while they were aware or should have been aware that USL’s increased profitability was based on charging customers for services never performed and artificially inflating reported revenues and understating operating expenses because of the unperformed services of lawful waste disposal; employees using illegal procedures or thwarting or not following legal procedures; lack of employee training in waste management procedures; substantial costs of which Defendants knew or should have known that will be required for compliance with federal and state laws, including clean-up of the Detroit site, investigations of uncovered activity, and fines; overstatement of USL’s net income and assets by, inter alia, including revenues from evading federal law by dumping hazardous waste at the Detroit and Van Burén sites; and earnings growth from illegal dumping activity at the “most profitable” Detroit site, which the Complaint alleges accounted for 20% of USL’s EBIT (earnings before interest and taxes).

Finally, on August 25, 1999, trading in USL’s common stock on the American Stock Exchange (“Amex”) was suspended when it was announced that employees had alleged that USL in its Detroit, Michigan facility had participated in, inter alia, illegal dumping of hazardous wastes and that the FBI, EPA, and the United States Attorney General’s Office were investigating the City Environmental hazardous waste facility there. On August 26,1999, Bloom-berg news service reported that USL had stated, relating the illegal activities that occurred within the past two years, that it would be fined as much as $50,000 per day and that any employees involved might face imprisonment for up to three years. Orr was quoted as saying, “If it occurred on our watch it’s our nickel.” As a result market analysts slashed USL common stock’s investment ratings and estimates of revenue and earnings. Stock prices plummeted.

The complaint charges Defendants with accounting fraud based on violations of the Generally Accepted Accounting Principles (“GAAP”), recognized by the accounting professions and the SEC as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. § 210.4-01(a)(l)) provides that financial statements filed with the SEC that are not prepared in accordance with GAAP are presumed to be misleading or inadequate regardless of footnote or other disclosure unless the SEC has provided otherwise. Plaintiffs contend that USL violated GAAP by recording revenue on services that were not provided. The complaint lists and briefly describes standards that were violated, but fails to identify any specific factual information that should have been provided by Defendants in response to each. Complaint at pp. 43^44.

Plaintiffs contend that the material misrepresentations and omissions about USL’s business and financial results and performance noted in their complaint created an unrealistically positive assessment of the company in the market and caused its securities to be overvalued and inflated during the Class Period. They allege that Defendants’ untrue portrayal of USL and its financial condition directly or proximately caused or was a substantial contributing cause of damages to them and proposed class members, who bought and held their stock or sold their stock during the Class Period.

Plaintiffs further assert that Defendants acted with scienter, i.e., that they knew or recklessly disregarded that the public documents and statements issued or disseminated by USL were materially false and misleading, that they knowingly and substantially participated or acquiesced in the issuance or dissemination of the statements or documents in violation of federal securities laws, and that by virtue of their information of the true facts and their control over or receipt of or modification of USL’s materially misleading statements or association with USL that made them privy to proprietary information, participated in the alleged fraudulent scheme. Lawlor, Orr, and Blackwell were the top executives of USL and ran it as “hands-on” managers. Through such daily management of USL and their intimate involvement in the acquisitions and investigation of acquired operations, these Defendants knew or recklessly disregarded that untreated liquid waste was being dumped into city sewers and that companies acquired by USL had long histories of regulatory and environmental violations. They also had actual knowledge, based on USL’s financial statements, that expenses were artificially depressed because USL was not processing a substantial portion of the waste it purported to be processing legally. They also were aware that once discovered, their illegal dumping activities would result in multi-million dollar fines and financial loss.

Plaintiffs claim that Defendants had a motive, to continue the acquisition strategy by using high priced stock to fund the acquisitions, and opportunity to perpetrate the fraudulent scheme by presenting USL’s business in a very favorable light to the investment community so as to inflate the value of that stock to ever higher levels. The inflated rise of the stock’s value also allowed USL to issue fewer shares to complete and acquisition, which therefore was less dilutive to USL and its EPS. During that Class Period USL sold six million shares of its stock for proceeds of $120 million, thus profiting from the artificial inflation of the stock price. Furthermore USL’s executive compensation structure provided an additional motive for the individual Defendant’s participation in the alleged scheme. Each was provided with a “cash bonus incentive plan” whereby he would receive cash bonuses if the growth in USL’s earnings exceeded expectations. Each quarter during the Class Period USL reported better than expected earnings because of its fraudulent use of the Detroit site. Thus the individual Defendants received hundreds of thousands of dollars in bonuses.

Applicable Law

A. Bespeaks Caution Doctrine

The “bespeaks caution” doctrine is a defense to securities fraud claims that protects statements in the nature of projections that are accompanied by meaningful cautionary statements and specific warnings of the risks involved, so as to “bespeak caution” to investors that actual results may differ, thereby shielding the statements from § 10(b) and Rule 10b-5 liability. See Saltzberg v. TM Sterling/Austin Assoc., 45 F.3d 399 (11th Cir.1995) (per curiam) (holding that explicit cautionary language in private placement memorandum rendered alleged misstatements immaterial and made them not actionable under “bespeaks caution” doctrine); In re Westinghouse Sec. Litig., 90 F.3d 696, 707 (3d Cir.1996) (“[W]e can state as a general matter that, when an offering document’s forecasts, opinions or projections are accompanied by meaningful cautionary statements, the forward-looking statements will not form the basis for a securities fraud claim if those statements did not affect the “total mix” of information the document provided investors. In other words, cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law.”).

The Fifth Circuit rejects the application of the “bespeaks caution” doctrine as a per se bar to liability. Rubinstein v. Collins, 20 F.3d 160, 162 (5th Cir.1994). Observing that the use of the doctrine by district courts “reflects a relatively recent, ongoing, and somewhat uncertain evolution in securities law,” the Fifth Circuit skeptically comments,

In essence, predictive statements are just what the name implies: predictions. As such, any optimistic projections contained in such statements are necessarily contingent. Thus the “bespeaks caution” doctrine has developed to address situations in which optimistic projections are coupled with cautionary language— in particular, relevant specific facts or assumptions — affecting the reasonableness of the reliance on and the materiality of those projections. To put it another way, the “bespeaks caution” doctrine merely reflects the unremarkable proposition that statements must be analyzed in context.

Id. at 167 [footnotes and citations omitted]. Under Fifth Circuit precedent, “[C]aution-ary language is not necessarily sufficient in and of itself, to render predictive statements immaterial as a matter of law. Rather, ... materiality is not judged in the abstract, but in li