Waste Management Loses Top Officials, Faces Single Class-Action Lawsuits

Steve Webb

Waste Management Inc.'s (WMI) second-in-command has been dismissed, and the Houston-based company's chief executive officer has resigned following controversies over the company's plummeting stock prices, revised earnings projections and allegations of insider trading.

Rodney Proto, president and chief operating officer, was ousted by the company's board of directors last month, while chairman and chief executive officer John Drury stepped down from his post.

The company has hired the firm Korn/Ferry International, New York, to find a new CEO and COO, according to reports.

To improve its finances, the company announced that it planned to sell all or part of its international waste operations, its assets not involved in the waste business, and other operations performing poorly.

Robert "Steve" Miller, a former Chrysler Corp. vice president, will serve as interim CEO during the search for a permanent top executive.

At press time, WMI could not be reached for comment.

Amid these developments, lawsuits are pending in U.S. District Court in Houston stemming from allegations that 10 top-level executives profited by selling millions of stock shares shortly before the company's stock prices fell.

For example, Proto sold 300,000 WMI shares on May 11 and 12 for between $55 and $55.50, collecting about $16.5 million.

Spector & Roseman P.C., Philadelphia, and the Law Office of Steven E. Cauley, Little Rock, Ark., have filed securities and fraud lawsuits on behalf of WMI's shareholders. Individual suits are set to be combined into a single class-action suit against the company in September, says Robert Roseman, attorney for Spector & Roseman.

The suits charge that Waste Management executives issued misleading revenue projections that caused the company's stock prices to inflate to artificially high prices. Particularly, the suit says the company made overly optimistic statements about the financial benefits of its spring 1998 merger with USA Waste, Houston. Additionally, the suits say 10 high-level company officials also engaged in insider trading to sell individual shares at prices as high as $56.41, cashing in $57.3 million in various sales from May 10 to May 19.

WMI issued a statement July 6 stating that second quarter sales in 1999 would be $250 million below previous projections, and growth in future quarters would be significantly lower than previously estimated.

This announcement caused the company's stock to fall from $5391/416 on July 6 to $33151/416 on July 7, the suits state. And investors who bought the company's stock based upon Waste Management officials' misleading projections lost millions of dollars, according to the suits. As of press time, the company's stock price was hovering at $24 to $25 per share.

The dollar amount of the damages sought and the number of plaintiffs to be represented has yet to be determined. The suits presently cover the stock period from March 31 to July 6, but that also may change, the two attorneys say.

"Waste Management's integration efforts of its acquisitions as well as the USA Waste Services/Waste Management merger were extremely troubled," the Cauley suit states. "It had cost Waste Management significantly more than anticipated to convert its systems."

Roseman says several firms have filed similar suits in the U.S. District Court in Houston against Waste Management on behalf of its shareholders. A motion was scheduled to be filed at the court the first week of September calling for the selection of lead counsel and lead plaintiff, which should consolidate the individual suits into one class-action case.

WMI has launched an internal investigation to determine whether the insider trading allegations are true, says Jewel Sikes, WMI's vice president of public relations.

The company also is conducting a budget and operations review, she adds.

In the meantime, the financial controversy has prompted the resignation of Chief Financial Officer Earl DeFrates and General Counsel Gregory T. Sangalis, both of whom stepped down in July. DeFrates remains an employee with the company to assist with the budget and operations review, which should provide "improved financial guidance" for the remainder of 1999. At press time, the review results were scheduled to be announced on August 16.

The company also is conducting a strategic initiative, headed by Board Chairman Ralph Whitworth, to increase shareholder value. However, WMI still may have to revise its first quarter earnings report because it may have included $95 million of pretax non-recurring items as operating income, according to a company press release.

According to Reuters news service, in early August, WMI posted second quarter earnings of 58 cents per share. With the deduction of special items, including interest costs and issues related to waste-to-energy plants and landfills, the company's net income for that period was 51 cents per share, or $322.5 million. The company previously was expected to earn as much as 78 cents per share during that quarter.

Last year, the company's second quarter earnings were $242.9 million, or 41 cents a share.