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IN RE ALSTOM SA SECURITIES LITIGATION

December 22, 2005.

In re ALSTOM SA SECURITIES LITIGATION. This document relates to all actions.


The opinion of the court was delivered by: VICTOR MARRERO, District Judge

DECISION AND ORDER

I

I. INTRODUCTION

  Lead plaintiffs in this class action, the State Universities Retirement System of Illinois ("SURS"), the San Diego City Employees' Retirement System ("San Diego ERS"), the Louisiana State Employees' Retirement System ("Louisiana ERS"), the West Virginia Investment Management Board ("West Virginia IMB"), and the International Brotherhood of Electrical Workers, Local 269 ("IBEW") (collectively, the "Lead Plaintiffs," as representatives for "Plaintiffs"),*fn1 filed the Consolidated Amended Complaint for Violations of the Federal Securities Laws, dated June 18, 2004 (the "Complaint"), alleging violations of both the Securities Act of 1933, 15 U.S.C. § 77a et seq. (the "Securities Act"), and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (the "Exchange Act"). On September 30, 2004, all defendants moved to dismiss the Complaint. Because of the breadth of issues raised in their various submissions, the Court considers defendants' motions in separate rulings. In this decision, to be referred to as "Alstom I," the Court addresses all motions contesting the jurisdiction of this Court to hear the dispute as to certain parties. In companion opinions to be issued separately, the Court adjudicates the defendants' remaining motions.

  Defendants Alstom S.A. ("Alstom"), Alstom USA, Inc. ("Alstom USA"), Alstom Transportation Inc. ("ATI"), Alcatel,*fn2 the Underwriter Defendants,*fn3 Pierre Bilger ("Bilger"), Patrick Kron ("Kron"), Philippe Jaffre ("Jaffre"), Francois Newey ("Newey"), James Milner ("Milner"), William Purves ("Purves"), Klaus Esser ("Esser"), John Mayo ("Mayo"), Lord George Simpson ("Simpson"),*fn4 Serge Tchuruk ("Tchuruk"), and Jean-Pierre Halbron ("Halbron")*fn5 (collectively, the "SMJ Defendants") move pursuant to Federal Rule of Civil Procedure 12 (b) (1) ("Rule 12 (b) (1)") to dismiss for lack of subject matter jurisdiction the claims pleaded on behalf of foreign purchasers abroad. Their challenge relates only to "the claims pleaded on behalf of investors who are not United States residents and who purchased Alstom common stock on exchanges outside the United States." (Mem. of Law in Supp. of the Mot. of the Alstom Defs. to Dismiss the Claims of Foreign Purchasers Abroad for Lack of Subject Matter Jurisdiction, dated September 30, 2004 ("SMJ Mem."), at 1.) The Court heard oral argument on the issue on September 7, 2005 (the "September 7 Hearing"). For the reasons stated herein, the Court grants the SMJ Defendants' motions to dismiss the claims of foreign purchasers abroad relating to the Marine and Turbine Frauds as defined herein. To the extent that the SMJ Defendants' motions sought to exclude any of the other claims raised by the contested plaintiffs on grounds of this Court's lack of subject matter jurisdiction, the motions are denied.

  In addition, defendants Purves and Tchuruk move to dismiss the Complaint as it relates to them. They assert that the Lead Plaintiffs' failed to sufficiently allege facts supporting the exercise of personal jurisdiction over them. (See T&H Mem. at 6; Mem. of Law in Supp. of the Mots. of Esser, Purves, Kron, Jaffre, Bilger, Newey & Milner to Dismiss, dated September 30, 2004 ("Esser et al. Mem."), at 3-4.) The Court finds that Plaintiffs have sufficiently pled a basis for this Court's jurisdiction over Purves and Tchuruk, but will allow for expedited jurisdictional discovery to more fully develop the record and will hold a hearing on the issue.

  I. BACKGROUND

  The facts recited in this section are derived entirely from the allegations contained in the Complaint and the documents cited or relied upon for the facts pled therein. Additionally, the Second Circuit held in Kramer v. Time Warner, Inc., 937 F.2d 767 (2d Cir. 1991), that "a district court may take judicial notice of the contents of relevant public disclosure documents required to be filed with the SEC." Id. at 774. The Court may consider these filings on a motion to dismiss "not to prove the truth of their contents but only to determine what the documents stated." Id. at 773-74; see In re Omnicom Group, Inc. Sec. Litig., No. 02 Civ. 4483, 2005 WL 735937, at *13 (S.D.N.Y. Mar. 30, 2005). A. THE PARTIES

  1. Plaintiffs

  Lead Plaintiffs bring this action "on behalf of themselves and all other persons or entities who purchased or otherwise acquired the publically-traded stock, ADSs or other shares of Alstom between and including August 3, 1999 and August 6, 2003, inclusive (the "Class Period")," and excluding the defendants and related entities and persons. (Id. ¶ 1.)

  SURS, San Diego ERS, Louisiana ERS and West Virginia IMB are all public pension systems. San Diego ERS purchased Alstom shares and also Alstom American Depositary Shares ("ADSs")*fn6 on February 9, 2001 as a part of the secondary offering of Alstom stock conducted by Alstom, Alcatel and Marconi PLC ("Marconi") on or about February 8, 2001 in the United States and elsewhere pursuant to registration statements and prospectuses that were filed with the SEC (the "Secondary Offering").*fn7 San Diego ERS purchased ADSs from those underwritten by the Underwriter Defendants and sold to customers, but the Complaint does not specify from whom in particular San Diego ERS purchased the shares. San Diego ERS paid no commission on its purchases of Alstom shares. (Compl. ¶¶ 24, 27.) SURS, Louisiana ERS and West Virginia IMB purchased Alstom shares on the premier marché of Euronext Paris ("Paris Exchange") during the Class Period. (Id. ¶¶ 28, 29, 30.) SURS also purchased "Alstom shares" in the Secondary Offering, although the Complaint does not specify whether it purchased ADSs domestically, or Alstom stock on foreign exchanges. (Id. ¶ 29.) IBEW purchased Alstom ADSs on the New York Stock Exchange ("NYSE") during the Class Period. (Id. ¶ 31.) On January 7, 2004, the Court ordered that SURS, San Diego ERS, Louisiana ERS, West Virginia IMB and IBEW serve a co-Lead Plaintiffs in this action. (Id. ¶ 33.)

  2. Defendants

  Alstom is a company incorporated and principally located in France that is involved in many diverse businesses, including rail and marine transportation, and power generation. As of September 30, 2003, there were 281, 660, 523 outstanding shares of Alstom traded on the NYSE in the form of ADSs, on the London Stock Exchange in the form of United Kingdom Depository Shares, and on the Paris Exchange. Alstom filed with the SEC its annual reports on Form 20-F and periodic reports on Form 6-K. (Id. ¶¶ 34-36.)

  Alstom USA, a wholly-owned subsidiary of Alstom located in Connecticut, is a holding company for all of Alstom's subsidiaries in the United States, including ATI. ATI is a wholly-owned subsidiary of Alstom located in New York that manufactures railway cars. (Id. ¶¶ 37-38.)

  Bilger was appointed Chief Executive Officer ("CEO") of Alstom in 1991 after holding various subsidiary positions at the company, and became Alstom's CEO and Chairman of the Board of Directors (the "Board") on May 14, 1998. He served as CEO until January 1, 2003, and as Board Chairman until March 11, 2003. Bilger also served on various committees on Alstom's Board, and as a member of the Supervisory Board of Alstom Power. The Complaint alleges that Bilger, through Newey, his Attorney-in-Fact, signed the registration statement filed with the SEC on Form F-3 on January 17, 2001, as amended on Forms F-3/A filed on January 24 and February 7, 2001 (the "Registration Statement"). (Id. ¶¶ 27, 39.)

  Kron was appointed to Alstom's Board on July 24, 2001, where he served on various committees including the Audit Committee. He replaced Bilger as Alstom's CEO on January 1, 2003, and was appointed Chairman on March 11, 2003. (Id. ¶ 40.)

  Jaffre joined Alstom as an advisor to the Chairman and CEO in February 2002, and was appointed Chief Financial Officer ("CFO") in July 2002. (Id. ¶ 41.)

  Newey joined Alstom in March 1998, and was appointed Senior Executive Vice President and CFO of Alstom in July 1998, remaining in that position through July 3, 2002. Newey is alleged to have signed the Registration Statement. (Id. ¶ 42.)

  Milner served as the Chief Accounting Officer of Alstom "at the time of the Secondary Offering." He is alleged to have signed the Registration Statement on February 7, 2001 through his Attorney-in-Fact, Newey. (Id. ¶ 43.)

  Stephan Rambaud-Measson ("Rambaud-Measson") was the Senior Vice President of ATI until June 30, 2003. The Complaint does not allege when he began his term at ATI. (Id. ¶ 44.)

  Joseph Janovec ("Janovec") was the Vice President of Finance at ATI until June 30, 2003. The Complaint does not allege when he began his term at ATI. (Id. ¶ 45.)

  The Complaint identifies defendants Bilger, Kron, Jaffre, Newey, Milner, Rambaud-Measson and Janovec collectively as the "Officer Defendants." The Complaint alleges that each of the Officer Defendants, as a result of their respective positions at Alstom, "knew adverse non-public information about Alstom during the Class Period, including its financial results and business and financial prospects, and had access to non-public internal documents." (Id. ¶ 46.)

  Purves was appointed to Alstom's Board on June 17, 1998, effective beginning on June 25, 1998. He retired from the Board on July 28, 2003. The Complaint alleges that Purves served as the "Director of Alstom," as Vice Chairman of the Board, and in other capacities as a Board member at undisclosed times. Purves is listed as a signatory on the Registration Statement. (Id. ¶ 47.) The Complaint additionally alleges that Newey signed the Registration Statement as Attorney-in-Fact for Purves. (Id. ¶ 204.)

  Esser was appointed to the Board, effective on June 25, 1998. Through Newey, acting as his Attorney-in-Fact, Esser signed the Registration Statement. The Complaint alleges that Esser served as Chairman of the Audit Committee of the Board during the Class Period. The Complaint does not allege when, if ever, Esser ceased to be a member of the Board. (Id. ¶ 48.)

  Halbron was appointed to the Board on May 14, 1998, allegedly by Alcatel. He is alleged to have signed the Registration Statement through Newey, acting as his Attorney-in-Fact. The Complaint also alleges that Halbron served on the Audit Committee of the Board, and that Halbron is a member of the Board of Directors of Alcatel. The Complaint does not allege when Halbron ceased to be a member of the Board. (Id. ¶¶ 49, 55.)

  Mayo was appointed to the Board on May 14, 1998, allegedly by Marconi. Mayo, through Newey, acting as his Attorney-in-Fact, signed the Registration Statement. Mayo served on the Audit Committee of Alstom's Board, and also is alleged to have been Finance Director and a Director of Marconi. The Complaint does not allege when, if ever, Mayo ceased to be a member of the Board. (Id. ¶ 50.)

  Simpson was appointed to the Board on May 14, 1998, allegedly by Marconi. Simpson is alleged to have signed the Registration Statement through Newey, who acted as Simpson's Attorney-in-Fact. In addition to being a Board member at Alstom, Simpson served as Chief Executive and a Director of Marconi until 2001. The Complaint does not allege when Simpson ceased to be a member of the Board. (Id. ¶ 51.)

  Tchuruk was appointed to the Board on May 14, 1998, allegedly by Alcatel. He was listed as a signatory on the Registration Statement; however, the Complaint does not allege that Tchuruk ever actually signed the Registration Statement. In addition to his responsibilities on the Board of Alstom, Tchuruk served in various high level positions at Alcatel. The Complaint does not allege when Tchuruk ceased to be a member of the Board. (Id. ¶ 52.)

  The Complaint identifies Bilger, Purves, Esser, Halbron, Mayo, Simpson and Tchuruk collectively as the "Director Defendants," as they all served on Alstom's Board at various times during the Class Period. (Id. ¶ 53.)

  Before the Class Period, Alcatel was a fifty percent owner of Alstom in a joint venture with Marconi, which held the other fifty percent share.*fn8 In June 1998, Alcatel and Marconi sold part of their ownership stake in Alstom through a global initial public offering ("IPO"). In the Secondary Offering, Alcatel and Marconi sold an additional portion of their ownership shares in Alstom. Finally, in June 2001, Alcatel fully divested itself of its holdings in Alstom.

  CSFB, Société Générale and Merrill Lynch acted as Joint Lead Managers of the Secondary Offering, and CSFB and Société Générale acted as Bookrunners for the Secondary Offering. CSFB provides financial services worldwide, and, in connection with the Secondary Offering, agreed to purchase from the selling shareholder 17,591,772 ordinary shares in the form of either Alstom shares or ADSs. (Id. ¶ 56.) Société Générale provides financial services to corporate and institutional clients, and, in connection with the Secondary Offering, agreed to purchase from the selling shareholder 17,591,772 ordinary shares in the form of either Alstom shares or ADSs. (Id. ¶ 57.) Merrill Lynch provides various financial services around the world, and, in connection with the Secondary Offering, agreed to purchase from the selling shareholder 12,794,015 ordinary shares in the form of either Alstom shares or ADSs. (Id. ¶ 58.)

  ABN, BNP, Lazard, Morgan Stanley and UBS, each of which provides various financial services, all acted as underwriters for the Secondary Offering, and, in connection with the Secondary Offering, agreed to purchase from the selling shareholder 3,198,503 ordinary shares each in the form of either Alstom shares or ADSs. (Id. ¶¶ 59-63.)

  In connection with the Secondary Offering, the Underwriter Defendants "were granted a 30-day option to purchase on a pro rata basis up to 7,107,786 additional outstanding shares in the form of either Alstom shares or ADSs to cover over-allotments." (Id. ¶ 64.)

  B. FACTUAL ALLEGATIONS

  Alstom, then called GEC Alsthom N.V., was founded in 1989 by Alcatel and the General Electric Company of the United Kingdom, now known as Marconi. Marconi and Alcatel each owned a fifty percent share of the company. On June 22, 1998, Marconi and Alcatel conducted an IPO of Alstom securities on the Paris, New York and London stock exchanges selling approximately fifty-two percent of their collective holdings. Just prior to the IPO, however, Marconi and Alcatel each took a significant dividend payment from Alstom. Bilger, who at that time was Alstom's CEO, opposed the dividend payment internally, but supported the payment in public. The dividend payment left Alstom with little liquid capital, as evinced by its sale in July 1999 of €500 million in corporate bonds. (Id. ¶¶ 67-69.)

  The bond issue unfortunately did not provide Alstom with all the capital that it required, and thus Alstom began a series of business ventures and practices that form the basis of Plaintiffs' claims of fraudulent conduct. These questionable dealings include three transactions allegedly engineered by Alstom that constitute, individually or combined, Plaintiffs theory of fraud: (1) the provision of vendor financing to financially unsound customers at Alstom's Marine division; (2) the formation of a joint venture with ABB, and the subsequent purchase of ABB's fifty percent share, to produce heavy duty gas turbines which Alstom knew from the outset were fatally flawed in their construction; and (3) the understatement of losses in connection with railcar contracts at ATI. (Id. ¶ 70.)

  1. Vendor Financing at the Marine Division

  Although Alstom's Marine division comprised a relatively small sector compared with Alstom's other production units, investors took interest in that unit's business by reason of its growth from FY1999 to FY2000. Alstom also depended on a favorable view of this division to allow Alstom to borrow increasing amounts from banks on behalf of other segments of its business. However, according to Plaintiffs, this growth was illusory, in that it was based on the extension of vendor financing. (Id. ¶¶ 71-72.)

  For example, Alstom announced in 1996 that a United States-based cruise company, Renaissance Cruise Lines ("Renaissance"), had ordered six ships, later expanding its order to eight. These ships were to be produced over several years, guaranteeing Alstom significant revenue for an extended term. Indeed, Alstom recognized the revenue for each ship delivered to Renaissance between June 1998 and February 2001, when the last ship was delivered. Alstom, however, failed to clearly indicate to investors that it had guaranteed the loans Renaissance obtained to purchase the ships, let alone that Renaissance was a commercially weak company that could not have financed the acquisitions without the Alstom guarantees, of which Plaintiffs claim Alstom was aware. Thus, the strong demand for Alstom's cruise ships and the growth experienced in the division was in large part built upon the risk Alstom assumed in the form of loan guarantees which were hidden from the investing public. (Id. ¶¶ 73, 107.) Throughout the balance of this opinion, the Court makes reference to the allegedly fraudulent non-disclosure of the vendor financing arrangements at the Marine division as the "Marine Fraud."

  2. The ABB Joint Venture

  Alstom's largest sector in terms of net sales was its heavy duty gas turbine business, which was a part of the Company's Energy division. For example, turbine revenue accounted for thirteen and one-half percent of the company's operating profit for FY1997. Alstom understood that its turbine business was of vital importance to the company's long term prospects. Thus, in March 1999, when Alstom lost its license to General Electric's ("GE") turbine technology,*fn9 on which its core turbine technology was based, Alstom immediately announced on March 23, 1999 that it was entering into a fifty-fifty joint venture with ABB, a Swedish-Swiss conglomerate. ABB had its own proprietary gas turbine technology, which it marketed under the name "GT24/26" turbines, that Alstom was able to market and thus save its heavy duty gas turbine business. (Id. ¶¶ 74-76, 78.)

  The joint venture with ABB, however, did not turn out to be an entirely positive development. Alstom was aware as early as January 1999 that ABB's turbines were critically flawed. In an internal analysis of its competitors, Alstom had uncovered that all of the turbine units sold by ABB since 1993 that had been delivered and were in operation had been declared defective or the operation of the turbine had been placed on hold because of various flaws in core components. In the case of one turbine, ABB's own personnel considered the machine "dangerous," and two other turbine customers were already being paid penalties and liquidated damages by ABB. (Id. ¶¶ 78-80.)

  Although aware of the significant problems with the ABB turbines, Alstom did not disclose these defects to the public in announcing the joint venture, which was called ABB ALSTOM Power ("ABB ALSTOM"). ABB ALSTOM launched a line of more advanced turbines called GT24B/GT26B turbines. These new turbines, however, were also plagued by structural failures which were immediately apparent. For example, B-grade turbines installed in Taiwan and Korea in 1998 produced fifteen percent less power than they were designed to generate. Notwithstanding these critical defects, Alstom continued to market and sell turbines in the last half of 1999 and first half of 2000, exposing the company to the risk of paying liquidated damages for the failure of the turbines. Additionally, Alstom could not procure insurance to guarantee the performance of the products, and thus had to establish reserves sufficient to remedy any defects associated with turbines that were sold and failed to meet contractual specifications. (Id. ¶¶ 82-84, 86-87.)

  Aware of the difficulties customers experienced with the original and B-grade turbines, ABB ALSTOM created a database, referred to internally as the "Smokers Database," beginning in 1999 to keep track of each turbine client and project, noting any open issues or problems experienced on the specific project or with the client, an estimate of the minimum and maximum costs associated with fixing the problems, and the likely costs to resolve the problems. Alstom also began negotiations with customers to alter contract terms and to develop a plan to remedy the problems and to settle any claims that they may have had. The Complaint alleges that from the information contained in the database and revealed through these negotiations, Alstom was aware of the full extent of its liabilities in connection with its faulty turbines. (Id. ¶ 86.)

  On May 11, 2000, less than a year after the joint venture was established, Alstom bought out ABB's share of ABB ALSTOM for €1.25 billion, recorded €3.953 billion in goodwill and renamed the company Alstom Power. The main asset Alstom received in the buyout was ABB's gas turbines. The Complaint alleges that this buyout was provoked by Alstom's desire to prevent the already-known costs associated with the defective turbines from being listed as expenses on its income statement, as it allegedly would have to have been recorded under French Generally Accepted Accounting Principles ("GAAP"). As a result of the buyout, Alstom was able to book the costs required to correct the turbine defects "as an increase to the provisions in the liability section of the balance sheet and as a corresponding increase to the goodwill generated by the joint venture purchase." Furthermore, because goodwill was amortized over a period of twenty years, Alstom faced a much smaller charge against current net income as a result of the buyout. In addition, under French GAAP, the allocation of the purchase price between goodwill and the fair value of the assets and liabilities associated with the purchase could be finalized up until the end of the fiscal year following the purchase date, allowing Alstom to increase goodwill each time it established a turbine reserve, instead of disclosing the reserve as an expense, until March 31, 2002. (Id. ¶¶ 88-89.)

  The Complaint alleges that the buyout of ABB was motivated precisely to prevent the reserves Alstom had to take as a result of the turbine defects from impacting its net income. This allegation is supported in the Complaint by the assertion that had Alstom not bought out ABB's share, Alstom's net income would have been reduced by an amount equal to fifty percent of the turbine reserves. (Id. ¶ 90.) Throughout the balance of this opinion, the Court makes reference to the allegedly fraudulent non-disclosure of the full extent of the reserves taken in connection with the defective heavy duty gas turbines as the "Turbine Fraud."

  3. Problems Relating to the Turbines are Disclosed

  Alstom issued a press release dated July 31, 2000 disclosing that it was experiencing difficulties with its turbines. The release stated:
In the past months, technical issues have arisen which are not unusual in the commissioning of new high-tech complex products of this type, and for which modifications have been identified and are being implemented. Recent inspections have revealed a further localised [sic] deficiency, which will require component modification on all "B" rating machines. . . . The impact of these issues may involved material additional costs. Any such costs will be included in the purchase accounting treatment of the acquisition of ABB ALSTOM Power, which will be reported in the 30 September 2000 interim accounts. On this basis, the Company does not believe that these issues will affect significantly the operating margin target of 6% for 2002-03 previously disclosed.
(Press Release, Alstom, Market Statement (July 31, 2000), included as Ex. F.6 in the Joint Appendix of Exs. in Supp. of Defs.' Mot. to Dismiss ("J.A."); Compl. ¶ 91.) The Complaint states that this release caused "public concern," and that in response to this concern, Alstom began a publicity campaign to paint a rosier picture of the problems related to the defective turbines. For example, an article in Les Echos dated August 1, 2000 reported that Alstom's management said that "the financial impact of this setback should be minimal." However, the article disclosed that "Alstom will be forced to change the [defective] component in question on all of the turbines already produced or currently undergoing production, a total of up to 80 units. Changing the piece on the first two turbines took the group no less than six weeks." (Compl. ¶¶ 91-93.)

  In terms of disclosures concerning reserves taken to account for any costs associated with the turbine defects, €519 million in reserves were taken for the fiscal year ending March 31, 2000. The Complaint alleges that in the Annual Report filed by Alstom for the fiscal year this reserve was not specifically disclosed as relating to the turbine defects. (Id. ¶ 94.) In Alstom's Form 20-F filed for the fiscal year ending March 31, 2000, the reserve charge appeared in a chart entitled "Provisions for risks and charges" on the line for "Contract loss accruals." (Alstom's Form 20-F, Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, for the fiscal year ended March 31, 2000, filed with the SEC on July 14, 2000 ("2000 Form 20-F"), Note 17, at F-26, at 85, included as Ex. A.2 in the J.A.)

  Alstom issued a press release on November 7, 2000 stating that design flaws associated with the GT24/26 turbines would require Alstom to set aside an additional €903 million, although this release did not disclose prior reserves relating to the turbines. (Compl. ¶ 96.) The press release stated that the "additional provision was established following a contract by contract analysis and is based on the Company's current assessment of the probable additional costs associated with the implementation and consequences of the modifications to the GT24/26 gas turbines delivered or included in the order book." (Press Release, Alstom, First Half Results 2000/01 (Nov. 7, 2000), included as Ex. F.7 in the J.A.)

  The full amount of the turbine reserves taken through September 30, 2000 was revealed on November 30, 2000 in Alstom's half-year consolidated financial statement on Form 6-K, which stated that "[t]he estimates of the related costs as currently determined by the management amount to €903 million. Provisions and other accruals on GT24/26 gas turbines as of 30 September 2000 including this amount total €1,625 million." (Compl. ¶¶ 96; Alstom's Form 6-K, Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934, for the month of November 2000, received by the SEC on November 30, 2000 ("2000 Form 6-K"), Note 2, at 9, included as Ex. E.1 in the J.A.) The Form 6-K stated that
Further issues related to the GT24/GT26 gas turbines have arisen following scheduled inspections on some machines in July which revealed accelerated wear of certain parts and exposure to extra costs and penalties for lack of availability, delay and lack of performance.
Since then, management has undertaken a thorough analysis of these issues and has estimated, on the basis of a set of assumptions . . ., amounts which may become due to customers. . . . The amount provided reflects the expected outcome of the management defined negotiation strategy on a contract by contract basis. The negotiations in process and the technical solutions under development and implementation provide, so far, substantiation of the appropriateness of management approach and assumptions.
The lack of sufficient operating hours, among other factors, results in inherent uncertainty. Any change in key assumptions could have a significant impact on the level of provisions required. Actual costs may vary particularly as a result of negotiations with individual clients and the performance of repaired turbines. Accordingly the provision currently recorded may need to be adjusted as actual performance and costs evolve due to a number of factors including the outcome of a large number of individual negotiations which are at an early stage.
(2000 Form 6-K Note 2, at 9, included as Ex. E.1 in the J.A.)

  In February 2001, Marconi and Alcatel sold over 71 million shares of Alstom stock, representing thirty-three percent of Alstom's outstanding shares, pursuant to the Registration Statement.*fn10 The Underwriter Defendants, as noted above, served as the underwriters for this sale. (Compl. ¶ 100.) The Secondary Offering Prospectus stated on its face in bold type, "Investing in our shares involves risks. See `Risk Factors' beginning on page 10." (Secondary Offering Prospectus, included as Ex. C.3 in the J.A.) On page 10, the Prospectus reiterated many of the statements already made in connection with the turbine defects, and disclosed the reserve figures described above. The Prospectus also cautioned that Alstom "cannot guarantee that the total costs that we ultimately incur in connection with the GT 24/26 problems will not exceed the estimates that we have provisioned nor can we guaranty that the rate of spending will be in line with our current estimates. The total amount and timing of these costs depends in part on factors outside of our control." (Id. at 10.)

  In its 2001 Annual Report, at Note 20, entitled "Provisions for risks and charges," Alstom disclosed that "[i]n 2001, provisions related to all activities of the Power Sector acquired from ABB . . . of approximately € 1,274 million have been recorded against goodwill," of which, the Complaint alleges, €1,068 million was attributable to the turbine defects. (Alstom's Form 20-F, Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, for the fiscal year ended 31 March 2001, filed with the SEC on July 2, 2001 ("2001 Form 20-F"), Note 20, at F-26, at 75, included as Ex. A.3 in the J.A.; Compl. ¶ 95.) The Annual Report went on to state that
These provisions include, among other items, those relating to the GT24/26 turbines which have been estimated on the basis of a set of assumptions, taking into account potential costs relating to the design and manufacture of replacement parts, the opening and repair of the affected turbines, amounts which may become due to customers for delivery delays or under availability and performance guarantees and the specific terms of each individual contract. The current lack of sufficient operating hours, among other factors, results in inherent uncertainty. Any change in key assumptions could have a significant impact on the level of provisions required. Actual costs may vary particularly as a result of negotiations with individual clients and the performance of the repaired turbines. The provisions currently recorded may be adjusted accordingly.
(2001 Form 20-F, Note 20, at F-26, at 75, included as Ex. A.3 in the J.A.)

  In June 2001, Marconi and Alcatel sold all of their remaining interest in Alstom. (Compl. ¶ 101.) 4. Revelation of Vendor Financing in the Marine Division

  In the wake of the tragedy of September 11, 2001, on September 25, 2001, Renaissance declared bankruptcy. On September 27, 2001, Alstom admitted that it had guaranteed the loans Renaissance had used to purchase the eight ships it commissioned from Alstom, and that Alstom was now liable pursuant to those guarantees in an amount of €684 million. In addition to what it owed under the Renaissance guarantees, Alstom revealed that it had undertaken obligations of another €1.3 billion in outstanding vendor financing. This revelation came as a shock to both analysts and investors. (Id. ¶ 103-05.)

  On October 1, 2001, J.P. Morgan Securities issued an analyst report stating that "Alstom has lost EUR 2.1 billion in market value since it revealed the exposure to Renaissance Group. . . . [I]nvestor focus has shifted to Alstom-specific problems like the high leverage, low cash generation and concern about other potential risks `hidden' in its off-balance sheet liabilities." The Complaint states that on this date, October 1, 2001, Alstom disclosed "the full extent of the guarantees." (Id. ¶¶ 106, 108.)

  5. Additional Reserves Taken in Relation to the Turbines

  In a November 8, 2001 analyst report detailing the settlement of claims relating to the defects in the GT24/26 turbines, Alstom management is cited as stating that it expected existing reserves to be adequate. However, in its 2002 Annual Report, Alstom stated that it had "retained € 1,440 million of provisions and accrued contract costs at 31 March 2002 in respect of the[] turbines." (Alstom, Annual Report — Financial Information, Fiscal Year 2002, at 4, included as Ex. B.3 in the J.A.) Alstom's 2002 Form 20-F reported that "[i]n the years ended 31 March 2001 and 2002 provisions relating to the activities of the Power sector acquired from ABB of approximately € 1,646 million in aggregate have been recorded against goodwill, of which € 372 million was recorded in the year ended 31 March 2002." (Alstom's Form 20-F, Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, for the fiscal year ended 31 March 2002, filed with the SEC on May 24, 2002 ("2002 Form 20-F"), Note 18, at F-22, included as Ex. A.4 in the J.A.) This statement was followed by language similar to that included in the 2001 Form 20-F giving warning as to the inherent uncertainty of the adequacy of this provision. (See id.) In its 2003 Form 20-F, Alstom clearly disclosed that it had taken an additional reserve specifically to correct defects with the turbines in the amount of €1.075 billion for the fiscal year ending March 31, 2002. (See Alstom's Form 20-F, Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934, for the fiscal year ended 31 March 2003, filed with the SEC on October 15, 2003 ("2003 Form 20-F"), Main Events of Fiscal Year 2003, at 49, included as Ex. A.5 in the J.A.; Compl. ¶¶ 109-11.)

  In a March 12, 2003 press release, Alstom revealed that it was taking an additional €1.2 billion charge on account of defects in the GT24/26 turbines and forecasted a net loss of between €1.3 and €1.4 billion for the fiscal year ended March 31, 2003. (Compl. ¶ 112; Press Release, Alstom, Alstom Presents New Action Plan (Mar. 12, 2003), included as Ex. F.22 in the J.A.) Alstom's 2003 Annual Report stated that "[a]fter application of €1,070 million during fiscal year 2003, the remaining amount of provisions was €370 million. To cover the total revised net exposure, an additional gross provision of €1,160 has been provided during fiscal year 2003. As a result, the total gross provisions and accrued contract costs at 31 March 2003 in respect of these turbines were €1,530 million." (Alstom, Annual Report, Fiscal Year 2003, at 58, included as Ex. B.4 in the J.A.; Compl. ¶ 113.)

  Finally, in the 2003 Form 20-F, Alstom acknowledged the full extent of the reserves it had taken over time, identifying each reserve taken since FY2000, totaling €4.299 billion. The Form 20-F also increased the reserve figure through March 31, 2003 to €1,655 million with respect to the turbine reserves. The reason for the turbine reserve increase was stated as follows:
In the fourth quarter of fiscal year 2003 unexpected setbacks and delays, now resolved, were experienced in validating and testing several important components of the recovery package. . . . These delays resulted in our being unable to implement certain scheduled performance recovery measures during the recovery periods agreed with certain of our customers.
In the current state of the energy wholesale markets, customers do not have the incentive to accept these machines. These delays therefore mean significantly increased exposure as customers are less inclined to agree to further extensions of the recovery periods and are invoking penalties and liquidated damages. We also incur additional costs because we have been forced to shut down the machines more frequently to replace short life components at our expense. Our previously expected targets were therefore not achievable in the current context.
(2003 Form 20-F at 49; Compl. ¶ 115.)

  6. Understatement of Costs at ATI

  In the summer of 2003, as a result of an anonymous letter sent simultaneously to ATI, the SEC and the FBI, Alstom conducted an internal investigation that uncovered significant cost understatements in ATI's financial results. Alstom revealed the ATI "accounting improprieties" in a press release issued on June 30, 2003, and indicated that the internal review was ongoing. As a result of these understatements, Alstom stated that it would record a net after tax charge equivalent of €51 million for fiscal year 2003. In addition, the press release disclosed that Rambaud-Measson and Janovec had been suspended pending a completion of the internal investigation, and the SEC and FBI were making informal inquiries into ATI. Alstom's stock price declined, a move attributed to the revelation of misconduct at ATI. (Compl. ¶¶ 116-23.)

  On August 6, 2003, Alstom announced that the ATI improper cost accounting was more widespread than initially understood, and that in addition to the €51 million after tax charge, the Company would also reduce the first half of FY2004 earnings by another €100 million. On August 11, 2003, Alstom revealed that the SEC had upgraded its review from an informal inquiry to a "formal order of investigation" concerning ATI. (Id. ¶¶ 124-26.)

  In the 2003 Form 20-F, Alstom disclosed that the ATI accounting impropriety had eliminated more than €167 million from the Company's operating income and that, therefore, the Transport Division had in fact suffered a substantial net loss. In a November 13, 2003 investors' conference call, Kron called the activities at ATI a "fraud," and indicated that ATI had been reorganized in a way to ensure that there was "a new team in place who can take this business forward with confidence" under strengthened internal controls. (Id. ¶¶ 127-28.) Throughout the balance of this opinion, the Court makes reference to the allegedly fraudulent under-reporting of costs at ATI as the "ATI Fraud."

  C. SCIENTER ALLEGATIONS

  The Complaint alleges that Alstom, Alstom USA, ATI and the Director and Officer Defendants all knew that the public documents and statements issued or disseminated by or in the name of Alstom were materially false or misleading, that they had access to and knowledge of confidential proprietary information that revealed the true facts hidden from the public, and that the ongoing alleged fraudulent schemes recounted above could not have gone on without the knowledge and complicity of personnel a the highest levels at Alstom. (Id. ¶¶ 288-90.) The Complaint further alleges that the Director and Officer Defendants had the opportunity and motive to commit fraud, specifically that they desired to materially misrepresent Alstom's financial condition, and to hide adverse facts that enabled Alstom to inflate its financials and stock price so as to raise a significant amount of money as a part of the Secondary Offering, and to allow Alcatel and Marconi to unload their Alstom shares at inflated prices. (Id. ¶ 291.)

  The Complaint goes on to allege that Alstom and its officers knew of the loan guarantees to Renaissance and other Marine division customers, because Alstom issued those guarantees, and also knew that Renaissance was likely to default on the loans by reason of its unstable financial condition. Alstom allegedly is one of the beneficial owners of the company that purchased Renaissance and restructured its debt in April 2001. Additionally, the Complaint notes that analysts were not surprised by Renaissance's bankruptcy declaration, and that one analyst went as far as stating that Alstom was "likely to have known" about Renaissance's shaky financial condition ahead of the bankruptcy filing. (Id. ¶¶ 292-96.)

  Moreover, the Complaint alleges that Alstom knew of the defects associated with the ABB turbine technology, and that it nonetheless hid those defects to allow Alcatel and Marconi to sell their Alstom shares at inflated prices. Plaintiffs further allege that Alstom knew from the founding of ABB ALSTOM the full extent of the liabilities associated with the turbine defects and purposefully underestimated ...


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