AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF...
Transcript of AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF...
UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
MILES SENN, Individually And On Behalfof All Others Similarly Situated, Plaintiffs,
v.
WILLIAM V. HICKEY, T. J. DERMOTDUNPHY, DANIEL VAN RIPER, DAVIDKELSEY, JEFFREY S. WARREN andSEALED AIR CORPORATION,
Defendants.
No. 03-cv-4372 (DMC)
AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERALSECURITIES LAWS
JURY TRIAL DEMANDED
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TABLE OF CONTENTS
SUMMARY OF THE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PARTICULARS OF THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SUBSTANTIVE FACTUAL ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
I. PRELUDE TO THE PACKAGING BUSINESS TRANSACTION: FACING SOARING ASBESTOS LIABILITY, GRACE DID ITS FIRST SPIN-OFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
A. By 1995-1996, Asbestos-Related Liability Was Soaring . . . . . . . . . . . . . . . . . . . 11
B. Grace Spins Off Its Medical Care Business to Isolate Those AssetsFrom Asbestos Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
C. In 1996-1997 as Asbestos Liability Continued to Grow, Grace Took Steps toInsulate its Packaging Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
II. IN MARCH, 1998, THE TRANSACTION WAS CONSUMMATED: THE COMPANYSPUN OFF NEW GRACE AND ABSORBED THE SEALED AIR PACKAGINGBUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
III. TO MAKE THE TRANSACTION WORK, DEFENDANTS NEEDED TOESTABLISH A QUANTIFICATION OF TOTAL ASBESTOS-RELATEDLIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
IV. THE ARTIFICIAL SUPPRESSION OF CLAIMS THROUGH UNDISCLOSEDMORATORIA AGREEMENTS WITH ASBESTOS PLAINTIFF LAW FIRMS,ENABLED DEFENDANTS TO FALSELY REPRESENT THAT THETRANSACTION DID NOT ENTAIL A FRAUDULENT TRANSFER . . . . . . . . . . . . 26
A. The Existence of the Moratoria, as Admitted by New Grace, Had a DramaticEffect in Lowering New Asbestos Claims Immediately After the Transaction . . 26
B. KPMG and New Grace’s Outside Auditors Relied on the Leveling Off of Claimsin Quantifying the Grace Asbestos Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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C. The KPMG Report Did Not Consider the Unique Liabilities Arising from theGrace Operations at Libby, Montana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
V. THE COMPANY FACED ITS DAY OF RECKONING: ITS EXPOSURE TOASBESTOS LIABILITY WAS UNCOVERED, IN ADJUDICATING FRAUDULENTTRANSFER CLAIMS IN THE NEW GRACE BANKRUPTCY PROCEEDINGS . . . 39
A. New Grace Filed for Bankruptcy in Early 2001, as the Moratoria WithPlaintiffs Firms Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
B. The Liability Issue Came to a Head in the Adversary Case Against theCompany within the New Grace Bankruptcy Proceeding . . . . . . . . . . . . . . . . . . 40
C. After Being Informed of the Moratoria, Judge Wolin Ruled thatPost-Transaction Asbestos Claims Could be Considered inEvaluating New Grace’s Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
VI. ADDITIONAL ALLEGATIONS REGARDING SCIENTER . . . . . . . . . . . . . . . . . . . . 44
VII. GAAP REQUIRED DEFENDANTS TO ACCRUE THE COMPANY’SFRAUDULENT TRANSFER LIABILITY ON ITS BALANCE SHEET . . . . . . . . . . . 52
VIII. THE DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS DURINGTHE CLASS PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
IX. A COURT RULING REVEALS THE LIKELIHOOD THAT THE COMPANYWOULD FACE THE CONSEQUENCES OF SPINNING OFF AN INSOLVENTNEW GRACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
X. APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
XI. INAPPLICABILITY OF STATUTORY SAFE HARBOR . . . . . . . . . . . . . . . . . . . . . . . 91
COUNT I
VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACTAND RULE 10b-5 PROMULGATED THEREUNDERAGAINST ALL DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
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COUNT II
VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST ALL DEFENDANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
PRAYER FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
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SUMMARY OF THE ACTION
1. This is a securities class action on behalf of public investors who purchased the
securities of Sealed Air Corporation during the period from March 27, 2000 through July 30, 2002
(the "Class Period"). Lead Plaintiff complains of a fraudulent scheme and deceptive course of
business that injured purchasers of Sealed Air Corporation stock during the Class Period. In
violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated by the Securities and Exchange Commission (“SEC”) thereunder, defendants caused
Sealed Air Corporation’s shares to trade at artificially inflated levels through the issuance of false
and misleading statements including, but not limited to, earnings reports and periodic filings with
the SEC.
2. This case arises from false or misleading representations and omissions pertaining
to whether the defendant Company was liable for a fraudulent transfer, in spinning off a company
laden with enormous asbestos liabilities. The spin-off transaction was conducted in March 1998 by
defendant company Sealed Air Corporation, which at that time was known as “W.R. Grace & Co.”
Thus the defendant Company is hereinafter variously referred to as “Grace-1998,” the “Company”
or “Sealed Air”.
3. In March 1998, Grace-1998 spun off its specialty chemicals business, which was
renamed “W.R. Grace & Co.” and is hereinafter referred to as “New Grace.” The remainder of
Grace-1998, its packaging business, was then combined with the packaging business of pre-existing
Sealed Air Corporation by merging Sealed Air into a Grace-1998 subsidiary. The surviving parent
company (Grace-1998) was renamed “Sealed Air Corporation,” and is the currently-named
defendant.
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1As consideration for the Grace packaging business, Grace-1998 shareholders received 63%of the new Sealed Air’s capital stock (worth approximately $3.7 billion) and New Grace receiveda $1.2 billion cash transfer. See Memorandum of Law in Further Support of the Committees’Motion to Determining Choice of Law and the Standard of Insolvency, W.R. Grace & Co.bankruptcy proceeding, Case Nos. 01-1139 through 01-1200, adversary proceeding No. 02-2210,docket no. 82 at p. 2.
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4. Through this corporate shell game (hereinafter referred to as the “Packaging Business
Transaction” or, alternatively, the “Transaction”), which attempted to shield approximately $3.7
billion in value from asbestos claims1, Defendants hoped to insulate themselves from the growing
asbestos liability exposure arising from the Grace specialty chemicals business. Under the
contractual terms of the Transaction, only New Grace assumed the Grace-1998 asbestos-related
liabilities, and Grace-1998 (now named “Sealed Air”) was absolved of such liabilities.
5. This paper absolution could be defeated, however, if the Transaction were found to
be a fraudulent transfer. The key issue in evaluating the existence of a fraudulent transfer was
whether New Grace could be considered solvent immediately after the Transaction, despite the
existence of enormous asbestos-related claims against the newborn spin-off corporation. Company
counsel brought the fraudulent transfer issue to the board’s attention, and experts were brought in
to opine that New Grace would be solvent.
6. But the expert reports were rigged. In order to proceed with the Transaction and
insulate the Company from Grace’s asbestos-related claims, Defendants artificially suppressed the
number of then-asserted asbestos claims against the Company. Grace-1998 procured, but did not
disclose, contractual moratoria with asbestos plaintiffs’ law firms. The ostensible leveling off of
claims permitted the Defendants to falsely quantify New Grace’s asbestos liabilities and present it
as a solvent corporation at the time of the Transaction.
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7. Also the experts did not consider in their evaluation the gravity of asbestos personal
liability and property damage liabilities faced by Grace because of its asbestos mining operations at
Libby, Montana. The experts based their opinions on general epidemiological data, whereas the
Libby situation was unique in many respects which would uniquely magnify the Grace liability. As
the potential for liability at Libby became more and more clear during the Class Period, Defendants’
statements became more and more reckless in continuing to claim that the Company would not be
held liable for a fraudulent transfer.
8. Therefore, although Defendants had no basis whatsoever for asserting that New Grace
was solvent at that time, Defendants provided continuing reassurances throughout the Class Period,
knowingly or recklessly failed to disclose the artificial suppression of the asbestos-related claims,
and failed to accrue liability for the fraudulent transfer, as required by GAAP.
9. When the market learned of the Company’s vulnerability to fraudulent transfer
claims, as a result of a July 29, 2002 court ruling in New Grace’s bankruptcy, the Company’s stock
abruptly plummeted in price. The bitter truth severely damaged the Plaintiff Class, since undoing
the Transaction, as would be required under the traditional law of fraudulent transferor, would cost
the Company billions of dollars. Ultimately, the Company settled its potential fraudulent transfer
liability for $850,000,000, and recorded a charge for that amount in its 2002 financial statements.
PARTICULARS OF THE FRAUD
10. The end and aim of the Transaction was to insulate the profitable Grace packaging
business from the growing asbestos liability associated with the Grace chemicals business. Grace
CEO Albert Costello openly extolled the potential for the Company to obtain a market valuation
based on the packaging business p/e multiples, unencumbered by asbestos claims. The pre-existing
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Sealed Air Corporation insisted on such insulation as a precondition for entering into the transaction.
11. Company counsel advised the Grace-1998 board that the asbestos taint could be
resurrected after the Transaction, if the Transaction could be characterized as a fraudulent transfer.
Quantification of the Company’s total asbestos-related liabilities was a crucial step in dealing with
this problem. In theory, if the liability could be quantified, it could be contained, by constructing the
spin-off New Grace as a “solvent” corporation, with assets stated on the balance sheet exceeding the
stated liabilities (including asbestos liabilities).
12. Quantification of the future liabilities was a tall order, however. The number of
claims was growing year by year at an unpredictable rate. At the time of the Transaction, the
Company’s outside auditor – Price Waterhouse – had accrued asbestos liabilities on the Company’s
balance sheet only through 2001. Price Waterhouse opined that uncertainty made a more complete
accrual, projecting further into the future, infeasible. To deal with this crucial issue, outside expert
KPMG Peat Marwick LLP (“KPMG”) was hired in the early stages of negotiating the Transaction
to quantify Grace-1998’s asbestos liability.
13. The Company’s plan to paper over the solvency/fraudulent transfer issue culminated
at the mid-August 1997 board meeting approving the Transaction. At that meeting, the Company’s
board was presented by Company counsel with KPMG’s quantification report, and reports of the
Company’s CFO and an outside consultant, Houlihan, Lokey, Howard & Zukin (“Houlihan Lokey”)
which opined that New Grace would be solvent after the transaction--after the transaction was
structured to transfer $1.2 billion from the Grace packaging business to New Grace. Houlihan Lokey
and the Company CFO both relied on KPMG’s quantification of the Company’s asbestos liabilities
in reaching their solvency opinions. Thus, everyone involved in approving the transaction knew that
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2See Memorandum in Support of W.R. Grace & Co.-Conn.’s Motion for the Appointmentof an Examiner or Limited Trustee to Investigate and Prosecute Any Meritorious Claims AgainstSealed Air Corporation, and Its Response to Anticipated Motions of Other Parties, filed in the NewGrace Bankruptcy, Bankruptcy Court, D. Delaware Case Nos. 01-1139 through 01-1200, AdversaryProceeding No. 02-2210, Docket No. 325 at p. 12.
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the KPMG opinion was a keystone in permitting it to go forward.
14. In addition, the pre-existing Sealed Air Corp. relied on the KPMG report by hiring
its own expert to analyze the KPMG report. A submission by New Grace in the bankruptcy case
adversary proceeding states: “The company hired experts Tom Florence, PhD. and Daniel Rourke,
PhD. of KPMG/ARPC to estimate future asbestos liabilities through the year
2039....Contemporaneously in 1998, Sealed Air hired its own outside expert Professor Eric Stallard
of Duke University to analyze the work performed by Drs. Florence and Rourke.2” Eric Stallard’s
report, attached as Exhibit 10 to the aforementioned submission, consists entirely of a critique of the
KPMG Report, and states at p. 4 that “In the remainder of this review, I assume that the reader has
access to the KPMG Report and Presentation.” Thus both the Company and preexisting Sealed Air
Corp. decision makers had copies of the KPMG report.
15. Plaintiffs’ investigation has uncovered facts showing that the KPMG report was
rigged by the Company. In 1997, the Company went to 17 different Plaintiff law firms with a history
of filing asbestos-related claims against the Company, and procured moratoria on their filing of
claims. Claims from those law firms dropped precipitously, almost to zero. KPMG’s report
quantifying the Company’s asbestos liabilities was explicitly based–as shown in KPMG’s
submission to the Company board--on the apparent leveling off of the number of asbestos claims
asserted against the Company.
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16. KPMG was not told that the leveling off of claims was merely a reflection of the fact
that these temporary moratoria were in place. KPMG was also not told of the unique asbestos
liabilities faced by New Grace as a result of the Company’s mining operations in Libby, Montana.
17. The moratoria were a perfect device to accomplish the Company’s goals. An
apparent leveling-off of the asbestos-related claims at the time of the Transaction permitted KPMG
to render a favorable report. Moreover, keeping the claims level for a brief period prevented an
immediate post-Transaction surge which would have called the Company’s bona fides into question
with respect to the claim that New Grace was solvent. And if the fraudulent transfer issue was raised
after the moratoria expired and claims surged, the Company had a ready-made defense; i.e, the
Company could argue that in view of the several years of level claims, the surge came out of the
blue, was unexpected and unpredictable, and the Company could not be held responsible.
18. So throughout the Class Period, more and more asbestos-related claims against New
Grace began to name the Company as a defendant to fraudulent transfer claims. Defendants
consistently denied that such claims had any merit.
19. But the revelations about the Company’s scandalous Libby operations escalated
during the Class Period. Once the other shoe dropped, i.e., the moratoria expired, the number of
asbestos-related claims against New Grace soared. New Grace subsequently filed for bankruptcy.
20. Committees of asbestos-related property damage and personal injury plaintiffs were
authorized to assert fraudulent transfer claims against the Company within the New Grace
bankruptcy proceeding, and filed their adversary proceeding complaint in March 2002. The assertion
of adversary proceeding claims did not significantly depress the Company’s stock price. The market
was confident, because the Company had provided reassurances during the entire Class Period, and
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additional reassurances provided after the March, 2002 case was filed, that the Company would not
be held liable. One prominent analyst, for example, applied a probability of 1% to the fraudulent
transfer claims having to be paid, in evaluating the Company’s target stock price.
21. On July 29, 2002 a ruling in a pre-trial proceeding in the adversary case revealed to
the market for the first time that the Company faced liability for the fraudulent transfer claims. The
judge in that case was informed of the existence of the moratoria. Judge Wolin then ruled that the
adversary proceeding would take into account New Grace’s post-Transaction asbestos liabilities in
evaluating New Grace’s solvency at the time of the Transaction, for purposes of determining the
Company’s fraudulent transfer liability.
22. The Company’s stock price plummeted immediately after the July 29, 2002 ruling
was announced. The market now understood for the first time that Company now faced billions of
dollars of liability as a result of the Transaction and New Grace’s insolvency.
JURISDICTION AND VENUE
23. The claims asserted arise under §§10(b) and 20(a) of the Securities Exchange Act of
1934 (the “Exchange Act” or the "1934 Act"). Jurisdiction is conferred by §27 of the 1934 Act.
Venue is proper pursuant to §27 of the 1934 Act as defendant Sealed Air Corporation and/or the
individual defendants conduct business in and the wrongful conduct took place in this District.
THE PARTIES
24. Plaintiff Miles Senn purchased Sealed Air publicly traded securities as detailed in the
attached Certification and was damaged thereby.
25. Defendant Sealed Air is a corporation organized under the laws of Delaware, with
its principal place of business located at Park 80 East, Saddle Brook, New Jersey 07663.
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26. Defendant William V. Hickey is, and has been since March 2000 President and Chief
Executive Officer, was Chief Operating Officer from 1971 to February 2000, and a director of Sealed
Air since 1999.
27. Defendant T. J. Dermot Dunphy was, until March 2000 and at times relevant hereto,
Chief Executive Officer and a Director of Sealed Air.
28. Defendant Daniel Van Riper was, from July 1998 to January 2002 and at times
relevant hereto, Senior Vice President and Chief Financial Officer of Sealed Air.
29. Defendant David Kelsey is, and has been since January 2002, Vice President and
Chief Financial Officer of Sealed Air.
30. Defendant Jeffrey S. Warren is, and has been since 1996 and at times relevant hereto,
Controller of Sealed Air.
31. Defendants Hickey, Dunphy, Van Riper, Kelsey and Warren are sometimes referred
to herein as the "Individual Defendants." They are liable for the false statements pleaded herein, as
those statements were "group-published" information.
32. Each of the Individual Defendants, by virtue of his high-level position with the
Company, directly participated in the management of the Company, was directly involved in the day-
to-day operations of the Company at the highest levels and was privy to confidential proprietary
information concerning the Company and its business operations, products, growth, financial
statements, and financial condition, as alleged herein. The Individual Defendants were involved in
drafting, preparation and/or dissemination of the various public, shareholder and investor reports or
other communications alleged herein, were aware of, or recklessly disregarded, that materially false
and misleading statements were being issued regarding the Company, and approved or ratified these
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statements, in violation of the federal securities laws.
33. Because of their Board memberships and/or executive and managerial positions with
Sealed Air, each of the Individual Defendants had access to the adverse non-public information
about the business, operations, finances, markets, financial statements, and present and future
business prospects of Sealed Air particularized herein via access to internal corporate documents,
conversations or communications with corporate officers or employees, attendance at management
and/or Board of Directors’ meetings and committees thereof and/or via reports and other information
provided to them in connection herewith.
CLASS ACTION ALLEGATIONS
34. Lead Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal
Rules of Civil Procedure on behalf of all persons who purchased Sealed Air publicly traded
securities (the "Class") on the open market during the Class Period. Excluded from the Class are
defendants, directors and officers of Sealed Air and their families and affiliates.
35. The members of the Class are so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial benefits to
the parties and the Court.
36. Lead Plaintiff’s claims are typical of the claims of absent Class members. Members
of the Class have sustained damages arising out of defendants’ wrongful conduct in violation of the
federal securities laws in the same way as the plaintiffs have sustained damages from the unlawful
conduct.
37. Lead Plaintiff will fairly and adequately protect the interests of the Class. Plaintiff
has retained counsel competent and experienced in class action and securities litigation.
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38. A class action is superior to other available methods for the fair and efficient
adjudication of the controversy. The Class is numerous and geographically dispersed. It would be
impracticable for each member of the Class to bring a separate action. The individual damages of
any member of the Class may be relatively small when measured against the potential costs of
bringing this action, and thus make the expense and burden of this litigation unjustifiable for
individual actions. In this class action, the Court can determine the rights of all members of the
Class with judicial economy. Lead Plaintiff does not anticipate any difficulty in the management
of this suit as a class action.
39. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class which
predominate over questions which may affect individual Class members include:
a) Whether the 1934 Act was violated by defendants;
b) Whether defendants omitted and/or misrepresented material facts;
c) Whether defendants' statements omitted material facts necessary to make the
statements made, in light of the circumstances under which they were made,
not misleading; and
d) Whether defendants knew or recklessly disregarded that their statements were
false and misleading.
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3See “Asbestos Litigation in the U.S.: A New Look at an Old Issue,” issued by RANDInstitute for Civil Justice, August 2001, at p. 12.
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SUBSTANTIVE FACTUAL ALLEGATIONS
I. PRELUDE TO THE PACKAGING BUSINESS TRANSACTION: FACING SOARING ASBESTOS LIABILITY, GRACE DID ITS FIRST SPIN-OFF
A. By 1995-1996, Asbestos-Related Liability Was Soaring
40. At the time of the Packaging Business Transaction, Grace was well-aware that
asbestos liability stemming from its former asbestos-containing building insulation business had
become an ingrained and growing problem for the Company. Asbestos litigation had been going on
for four decades. Numerous substantial companies had been forced into bankruptcy prior to the
Transaction, including Raymark Industries, Forty-Eight Insulations, Unarco, Standard Asbestos,
Johns-Manville Corporation, Eagle-Picher Industries, and Celotex Corporation.
41. A Rand Corporation study noted that “The history of asbestos litigation has been
characterized by failures to accurately estimate its magnitude, scope and evolution.3” RAND cited
the history of the Johns-Manville Corporation asbestos litigation as illustrative. When Johns-
Manville first filed for bankruptcy in the early 1980s, the filing was challenged on the grounds that
asbestos liability was insufficient to establish insolvency. Under the bankruptcy reorganization of
the corporation, a trust was established to pay all claims at full value, based on an estimated 50,000
to 200,000 future claims. By January, 1998 the trust had received over 171,000 claims and was fully
depleted, and Manville returned to bankruptcy court. The new reorganization plan, approved in
1995, provided that claims would be paid at the rate of 10 cents on the dollar. Claim filings
continued to soar, and in a 2000 letter to claimants, Manville’s CEO stated that consultants predicted
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4Both the 1977 and 1985 memos are discussed in Heenan, John, “Graceful Maneuvering:Corporate Avoidance of Liability Through Bankruptcy and Corporate Law,” Vermont Journal ofEnvironmental Law, 2003.
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1.5 million additional claims. Id. Congress dealt with the problem of asbestos liability in the
Bankruptcy Reform Bill of 1994. Section 524g of the bill permitted a debtor in a Chapter 11
reorganization to establish a “trust toward which the debtor may channel future asbestos related
liability.”
42. The Company’s asbestos liability problems stemmed from its 1963 acquisition of
Zonolite Co., including its fireproofing business and related vermiculite mining operations in Libby,
Montana. Grace-1998 assumed all of Zonolite’s liabilities. The now-notorious environmental
contamination at Libby, the EPA’s listing of Libby on the Superfund national priority list, the
pending criminal indictments of New Grace and its officials stemming from the Libby operations,
the knowledge of Company officials of the Libby hazards, and the surfacing of the Libby situation
in the period just before the Transaction, are set forth below in additional allegations demonstrating
scienter.
43. By the late 1970's, Grace was considering divestment of asbestos-related businesses
in order to shelter the company from liabilities. This concept was reflected in a May 24, 1977 Grace
internal memo, which stated that “[c]onsidering the large potential liability” from sale of asbestos-
containing products,...[o]ur exposure to lawsuits cannot be ignored....[An] obvious alternative would
be to seek divestment of the business....” A 1985 Grace memo discussed the possibility of “setting
business up as a subsidiary or in some other legal form to distance from Grace assets.4” The new
bankruptcy law made the divestment concept more attractive, because once the asbestos-related
businesses were divested, a bankruptcy filing of the divested operations could place a ceiling on total
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5See “Insurers Lose High Court Bid to Void W.R.Grace Asbestos Pact”, Bloomberg News,October 10, 1995.
6See “Grace Full Year Operating Earnings Per Share Rise 11 Percent to$3.33, PRNewswireFebruary 5, 1996.
7See “W.R. Grace Increased Liability for Asbestos Litigation in 1995,” Bloomberg News,Marcy 29, 1996.
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potential liability and, through creation of a trust, give official endorsement to isolation of the assets
subject to asbestos liability.
44. Meanwhile, Grace faced a growing asbestos liability problem in the 1995-1996
period. In an October 10, 1995 report, Bloomberg News noted that “Grace has spend years fighting
thousands of lawsuits filed by people and businesses who claimed personal injuries or property
damage from asbestos products manufactured by Grace subsidiaries.5” In the fourth quarter of 1995
Grace took an after-tax charge of $179 million for Asbestos liabilities.6 Through Dec. 31 [1995],
Grace said, it has agreed to pay $530.8 million to settle asbestos litigation. It settled 177 property
damage suits and claims for $421.8 million and 23,700 personal-injury suits for $109 million. Grace
was also held liable for $74.7 million in damages in seven property damage cases.7”
B. Grace Spins Off Its Medical Care Business to Isolate Those Assets FromAsbestos Liability
45. In view of this potentially dire situation, Grace lost no time in moving to insulate its
non-asbestos businesses from the looming threat of liability. First to be distanced from asbestos
liabilities was Grace’s medical care operations, primarily contained in the Grace subsidiary called
“National Medical Care, Inc. (“NMC”). On May 4, 1995, according to Grace’s official version of
the transaction, NMC’s CEO advised Grace’s CEO that Grace should undertake a 100% spin-off of
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8See Form S-4 filed with the SEC on August 2, 1996 by W.R. Grace & Co. (N.Y.), at p. 37.
9See Form S-4 filed with the SEC on August 2, 1996 by W.R. Grace & Co. (N.Y.) At p. 14;Form S-1 filed with the SEC on August 2, 1996 by Grace Holding, Inc., at p. 3.
10See “Grace Reports 82 Cents Fourth Quarter,” PRNewswire February 4, 1997.
14
NMC.8
46. Ultimately a transaction was structured to unite Grace’s medical care business with
Fresenius Medical Care AG, which operated a worldwide dialysis business. In an August 1996
transaction whose basic conceptual framework would be re-used with respect to the Grace packaging
business, W.R. Grace & Co. spun off a new company, “Grace Holding,” which owned all of the non-
NMC assets of Grace, to the Grace shareholders. Grace New York was then re-named “Fresenius
National Medical Care, Inc.” (“FNMC”) and the spun off entity (the “new grace”) was re-named as
W.R. Grace & Co (i.e., the same entity which is Grace-1998/Sealed Air). The renamed FNMC will
join with Fresenius Medical Care, Inc. and Grace New York shareholders will receive ADRs
reflecting ownership of the German parent9.
C. In 1996-1997 as Asbestos Liability Continued to Grow, Grace Took Steps toInsulate its Packaging Business
47. In the period immediately preceding the Packaging Business Transaction, the situation
had considerably worsened. During the fourth quarter of 1996 Grace took a $229 million pre-tax
charge for asbestos litigation which “resulted primarily from Grace’s estimate of the costs associate
with asbestos personal injury claims expected to be filed against it during the five-year period (1997
through 2001). In 1995, the company had reserved for such expenses based on a 3-year
projection.10”
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 18 of 99
11See “W.R. Grace Predicts 1997 Asbestos Cost of $75 Mln to $100 Mln,” Bloomberg News,May 13, 1997.
15
48. On May 13, 1997 Grace “predicted its legal bills and settlement payments for asbestos
lawsuits would exceed insurance reimbursements by $75 million to $100 million this year. That’s
about double the company’s average in recent years of $30 million to $50 million, said Stuart
Pulvierent, an analyst with Furman Selz LLC.11” Grace’s 1997 Form 10-K annual report, filed with
the SEC on March 30, 1998, reported further details of the potential avalanche of asbestos liability
in Item 3, “Litigation,” as follows:
“Grace is a defendant in property damage and personal injury lawsuits relating topreviously sold asbestos-containing products and expects that it will be named as adefendant in additional asbestos-related lawsuits in the future. Grace was a defendantin approximately 40,600 asbestos-related lawsuits at December 31, 1997 (18involving claims for property damage and the remainder involving approximately96,900 claims for personal injury), as compared to approximately 41,500 lawsuits atyear-end 1996 (31 involving claims for property damage and the remainder involvingapproximately 91,500 claims for personal injury)....Through December31,1997...judgments were entered in favor of the [asbestos property damage]plaintiffs in seven cases for a total of $60.3 million (none of which is on appeal); and195 property damage cases were settled for a total of $476.6 million....ThroughDecember 31, 1997, approximately 38,900 such [asbestos personal injury’ suitsinvolving approximately 89,200 claims were disposed of for a total of $255.6million.....Grace's aggregate accrual for asbestos liabilities at December 31,1997, was$855.9 million; this amount reflects all asbestos-related property damage andpersonal injury cases and claims then pending...as well as personal injury claimsexpected to be filed through 2002.”
49. Grace thus immediately proceeded to implement Part II of its plan to contain the
damage from its looming asbestos liability, by undertaking the Packaging Business Transaction.
Grace began discussions with Sealed Air in mid-1994, promptly after the Bankruptcy Reform Act
provision for asbestos-related liability was enacted. Although these were discontinued in early 1995
as the medical care spin-off took precedence, such discussions were resumed in early 1997. In May,
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 19 of 99
12See Form S-4 filed by W.R. Grace & Co. (Delaware) with the SEC on February 2, 1998,at pp. 26-27.
13See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at p. 1.
16
1997, Sealed Air and Grace began discussion of a transaction framework which would entail spin-off
of the specialty chemicals business. By August, 1997, a signed deal was announced12.
II. IN MARCH, 1998, THE TRANSACTION WAS CONSUMMATED: THECOMPANY SPUN OFF NEW GRACE AND ABSORBED THE SEALED AIRPACKAGING BUSINESS
50. Defendant Sealed Air Corporation is a corporate continuation of W.R. Grace & Co.
as that company existed prior to the February, 1998 Packaging Business Transaction. W.R. Grace
& Co. (“Grace-1998") had owned both a chemicals business and a packaging business prior to the
Packaging Business Transaction.
51. Grace-1998 summarized the transaction to its shareholders as follows: “Grace[-1998]
will spin off its specialty chemicals business to its stockholders, and the spun-off company will be
renamed ‘W.R. Grace & Co.’ Sealed Air will then merge with and become a new subsidiary of
Grace[-1998], and Grace[-1998] will be renamed “Sealed Air Corporation.13”
52. The surviving corporations reversed their official names, which lends itself to
potential confusion. The old Grace-1998 was renamed “Sealed Air Corporation” and is the current
defendant. The spun-off specialty chemicals business was renamed as “W.R. Grace & Co.”, yet it
is not a corporate continuation of the old Grace-1998.
53. To summarize the current status of each of the three entities: (1) Old Grace-1998:
renamed as “Sealed Air”; (2) New Grace: formed as spinoff of Old Grace; (3) Old Sealed Air:
merged into a subsidiary of Old Grace, ceased independent existence.
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 20 of 99
14This transaction was embodied in two agreements, a “Distribution Agreement” and a“Merger Agreement.” These were attached as Annexes A and B, respectively, to the Form S-4Registration Statement (called therein a “Joint Proxy/Prospectus”) filed by W.R. Grace & Co. (i.e.,Grace-1998, to be renamed “Sealed Air Corporation”) with the SEC on February 13, 1998. TheDistribution Agreement, executed by W. R. Grace & Co. (i.e., Grace-1998), W. R. Grace & Co.-Conn., and Grace Specialty Chemicals, Inc. (New Grace), provided for the reorganization of Graceby separation of the packaging business, spin-off of the chemicals business, and recapitalization ofGrace Common Stock into new common and convertible preferred stock. The Merger Agreement,between W.R. Grace & Co., Packco Acquisition Corp. (“Packco”)and Sealed Air Corp., providesfor the merger of Sealed Air Corp. into Grace-1998's wholly owned subsidiary (Packco) and forGrace-1998 to change its name to Sealed Air Corporation.
15See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at p. 65.
17
54. This unitary corporate plan, as reflected in the formal corporate documents filed with
the SEC,14 was undertaken in multiple transactional steps, and can be conceptualized in three stages:
first, separation of the packaging business owned by the old W.R.Grace from that company’s
specialty chemicals business, second, the spin-off of the specialty chemicals business; third, merger
of what was formerly known as the pre-acquisition, independent Sealed Air Corporation.
55. The first stage of the transaction was as follows: The historic W.R. Grace & Co.
(“Grace-1998"), listed in the New York Stock Exchange, was a holding company for an operating
company called W.R. Grace & Co.-Conn. (hereinafter “Grace-Conn.”). Grace-1998 caused Grace-
Conn. to transfer its packaging business to Grace-Conn.’s newly formed subsidiary called Cryovac,
Inc., which was then transferred to the direct ownership of Grace-1998.
56. The result of this first stage: Instead of the holding company owning a single
operating company which combined the packaging and chemicals business, the holding company
(Grace-1998) owned the packaging business directly [i.e., “Cryovac”], and also retained ownership
of the operating company (Grace-Conn.) which now consisted of just the chemicals business.15
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 21 of 99
16See Form 14A filed by W.R. Grace & Co. with the SEC on February 13, 1998 at p. 23.
17See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at Annex “B”.
18See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at p. 1.
19See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at pp. 66-67.
20See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at Annex “A”.
18
57. The second stage of the transaction was as follows: Grace-1998 formed a new
subsidiary with no assets, incorporated in August 1997, and called Grace Specialty Chemicals (“New
Grace.”) See information statement16 and Distribution Agreement.17 Grace-1998 contributed the
stock of Grace-Conn (now free of the packaging business) to New Grace. New Grace was then spun
off as a separate company by distributing its common stock on a pro rata basis to the holders of
Grace-1998 common stock. Upon effecting the spin-off, New Grace was immediately re-named
“W.R. Grace & Co.” Each owner of Grace-1998 common shares received a distribution of an equal
number of common shares of New Grace.18
58. The third stage was required to effect the merger of the pre-existing Sealed Air
Corporation into old Grace-1998. as follows: pursuant to an agreement entered into in August, 1997,
each outstanding share of Grace-1998 was recapitalized into a fraction of a share of new common
stock and a fraction of a share of preferred stock.19 Then in the merger, the pre-existing Sealed Air
Corp. was merged into a newly-created subsidiary of Grace-1998, and renamed as Sealed Air
Corporation U.S. (“Sealed Air-U.S.) Grace-1998, now owning Cryovac and Sealed Air-U.S. as
subsidiaries, was renamed as the current “Sealed Air Corporation.” (Merger Agreement20 Preamble
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 22 of 99
21See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at p. 68.
22See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at p. 25.
23The plaintiffs took the position in the adversary case against the Company that thetransaction was valued at $8-9 billion. See September 2, 2002 Salomon Smith Barney Report,valuing the Company on the premise that there is an 85% probability of liability. A BloombergNews report of March 31, 1998 valued the transaction at $6.2 billion. Also, there may be an issueas to whether the $1.2 billion given to New Grace in the Transaction can be used as a set-off, sinceit was merely used to re-pay debts that Grace-1998 was liable for prior to the Transaction. ClassPlaintiffs reserve the right to produce expert opinions and to further investigation the valuation issue.However, since the liquid stock price on the day of the transaction provides a minimum valuation,liability using at least that minimum should have been accrued by the Company under GAAP.
24As explained in a Credit Suisse First Boston analyst report dated April 9, 2002, “Did Gracereceive less than reasonable value for the Cryovac transaction?....[W]e believe the courts could findthat the answer is yet....SEE paid $1.2 billion to WR. Grace and the remaining $3.7 billion to Graceshareholders in the form of common and preferred stock in SEE. As a result, we believe the courtswill likely find that technically Grace received only $1.2 billion for $4.9 billion of assets, while therest went to a third party–the shareholders in this case.”
19
Par. E). Each share of pre-existing Sealed Air Corporation stock was converted to one share of the
former Grace-1998, newly renamed as Sealed Air Corporation. “As a result, New Sealed Air will
be the public parent company owning Grace Packaging [i.e., Cryovac] and the former Sealed Air
[i.e., Sealed Air-U.S.].21”
59. As a result, the Grace-1998 shareholders received approximately 63% of the
Company’s capital stock.22 The total value of the transaction was at a minimum $4.9 billion,23 but
only $1.2 billion in cash went to New Grace. The remainder of the value (capital stock which was
worth $3.7 billion) went to Grace-1998 shareholders and thus was shielded from asbestos liability24.
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 23 of 99
25See “W.R. Grace Placed on S&P Watch, Negative; Re: Restructuring,” PRNewswire,August 15, 1997.
26See “W.R. Grace & Co.’s Ratings Remain on Standard & Poor’s CreditWatch,”PRNewswire, March 17, 1998.
20
III. TO MAKE THE TRANSACTION WORK, DEFENDANTS NEEDED TOESTABLISH A QUANTIFICATION OF TOTAL ASBESTOS-RELATED LIABILITIES
60. The investment community and Defendants were aware that splitting off the highly
profitable packaging business from Grace’s specialty chemicals business would reduce the
wherewithal of the chemicals business to pay its indebtedness, including asbestos-related liabilities.
The overall ability to pay such ballooning claims was clearly impaired by the Packaging Business
Transaction, because under the terms of the Transaction, only New Grace would bear contractual
responsibility for the Company’s asbestos liability and Grace-1998 (new Sealed Air Corp.) would
be absolved of such liability.
61. The Packaging Business Transaction was publicly announced on August 14, 1997.
The next day, Standard & Poor’s downgraded its rating on the debt of New Grace, debt, announcing:
“Standard & Poor's today has placed its ratings on W.R. Grace & Co. on CreditWatchwith negative implications (see list below) following the announcement of a plan thatwill diminish the strength and diversity of its business portfolio and reduce creditors'asset protection. Grace plans to combine its Cryovac flexible packaging filmsbusiness with that of Sealed Air Corp.... At the same time, Grace's specialty chemicaloperations with all of Grace's liabilities (unrelated to Cryovac) will be spun off toGrace shareholders....Cryovac generated 60% of Grace's operating income in 1996,and the spin-off of this strong business to shareholders significantly diminishes assetprotection afforded to creditors.25”
62. The Company remained on Standard & Poor’s Creditwatch as of March, 199826, and
immediately following the Transaction, Moody’s downgraded the rating of Grace’s commercial
paper. Moody’s explained that “The downgrade to Not Prime reflects the step down in the size of
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 24 of 99
27See “W.R. Grace CP Program Cut to ‘Not Prime’ By Moody’s”, Bloomberg News, March24, 1998.
28The Form S-4 filed by W.R. Grace (New York) with the SEC on August 2, 1996 withrespect to the spin-off of Grace’s medical care business, states at p. 30: “Under applicable law, theNMC Distribution would constitute a ‘fraudulent transfer’ if (a) New Grace or Grace Chemicals isinsolvent....Generally an entity is considered insolvent if it is unable to pay its debts as they comedue or if the fair value of its assets is less than the amount of its actual and expectedliabilities....Grace believes that, based on the factors considered in connection with the NMCDistribution, the NMC Distribution will not be a fraudulent transfer. There is no certainty, however,that a court would reach the same conclusions....In this regard, it should be noted that GraceChemicals has had, and is expected to continue to have, significant liabilities arising out of asbestoslitigation and claims.”
29The Company’s Form S-4 stated:
Liabilities of New Grace, Fraudulent Transfer and Related Considerations
Grace's primary U.S. operating subsidiary has significant liabilities relating to previously
21
Grace’s asset and revenue base due to the separation of its Cryovac packaging business, while W.R.
Grace’s obligation profile is significant and consists of substantial asbestos, environmental and other
liabilities.27”
63. Grace had already acknowledged the existence of the fraudulent transfer issue in
connection with the spin-off of its medical care business, noting in particular the issue of asbestos-
related liabilities.28 The Packaging Business Transaction resulted in a far greater reduction of
operating assets available to cover the asbestos-related liabilities. Not surprisingly, the Company
recognized the realities of shifting cash flow and assets away from the pending asbestos-related
liabilities. The Company admitted in the Form S-4 filed with the SEC on February 13, 1998 with
respect to the Packaging Business Transaction, that the Transaction raised the issue of potential
fraudulent transfer claims against the Company by creditors. The Company, of course, said it
believed that no such liability would be found.29
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 25 of 99
sold asbestos-containing products. As a result, Grace and the subsidiary are currently defendants innumerous asbestos-related lawsuits and are likely to be named as defendants in additional lawsuitsin the future.... After the merger and related transactions, New Grace will be responsible for all ofthe asbestos-related liabilities, substantially all of the environmental liabilities (other than certainliabilities relating to Grace Packaging) and other liabilities of Grace and its subsidiaries that areunrelated to Grace Packaging. Based on currently available information and advice provided by theirrespective financial, legal and other advisors, SealedAir and Grace believe that New Grace will beable to satisfy its liabilities as they become due. Nevertheless, claimants might seek to hold NewSealed Air liable for obligations of New Grace. New Grace has agreed to indemnify New Sealed Airfor liabilities and costs that New Sealed Air may incur relating to New Grace's liabilities; however,New Grace may not be able to fulfill its indemnity obligations to New Sealed Air.
Claimants may also bring suit seeking recovery from New Sealed Air or its subsidiaries byclaiming that the transfers of assets and liabilities in connection with the reorganization of Grace,including the separation of Grace's packaging and specialty chemicals businesses and the cashtransfer to and spin-off of New Grace, were "fraudulent transfers".... Sealed Air and Grace believethat Grace, New Grace and their subsidiaries are adequately capitalized and will be adequatelycapitalized after the reorganization, and that none of the transfers contemplated to occur in thereorganization is a fraudulent transfer. Sealed Air and Grace also believe that the reorganization ofGrace and the spin-off of New Grace will comply with applicable dividend laws. However, a courtapplying the relevant legal standards may not reach the same conclusions.
22
64. In view of the foregoing, Defendants knew an essential component of the Packaging
Business Transaction was to formulate a quantification, in hard dollars, of the overall asbestos
liability of Grace. At least three underlying factors for evaluating the Transaction turned on
providing such a quantification.
65. The first of these factors can be described as “technical solvency.” In order to provide
legal grounds for arguing that New Grace was solvent immediately following the transaction, and
to provide assurances that such a legal argument could readily be made, New Grace’s asbestos
liabilities had to be stated as a concrete number on the balance sheet, or as a pre-existing charge for
a specific dollar amount. Any market observer could then determine, by simply calculating the net
equity of the New Grace (subtracting assets from liabilities), that New Grace was solvent and had
not been rendered insolvent by the Transaction.
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 26 of 99
23
66. Technical solvency was particularly important because the pre-existing Sealed Air
Corporation had insisted, as a precondition for consolidation of its packaging business with that of
Grace, on a spin-off of the Grace specialties chemistry business and insulation of the post-
Transaction consolidated packaging business from the asbestos liabilities that pre-Transaction Grace
was facing. While the two businesses (Grace’s packaging and chemical businesses) could be
transactionally separated into two different corporate entities, if the resulting separate chemical
business were adjudged insolvent immediately after being split off, the separate packaging business
would be vulnerable to fraudulent transfer liability to Grace’s pre-existing debtors, i.e., including the
owners of asbestos liability claims.
67. The second factor calling for a quantification of Grace’s asbestos-related liabilities
was the effect of remaining uncertainties on the overall valuation of the post-Transaction Company
(i.e., the renamed “Sealed Air”). One of the objectives of the Transaction was to increase overall
shareholder value by valuing the revenue stream from the Grace packaging business at the price-
earnings multiples of the packaging industry rather than then the price-earnings multiple of the
chemical industry. As noted by a Smith Barney analyst’s report dated August 14, 1997, Grace’s
“CEO Al Costello has repeatedly expressed his desire to have Grace receive a ‘packaging multiple’
instead of a specialty chemical multiple...In particular he has cast his eyes longingly at the multiple
Sealed Air commands. Perhaps the best way to get a packaging multiple is to merge with another
packaging company.”
68. To the extent Grace’s asbestos liabilities remained uncertain, an uncertainty discount
would have to be applied to the post-Transaction Sealed Air’s stock price to take into account the
Company’s potential responsibility for the Grace asbestos liabilities. Conversely, providing the
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 27 of 99
24
appearance of certainty as to quantification of the Grace asbestos liabilities would enhance the
Sealed Air stock price.
69. Third, Defendants were not merely interested in insulating the surviving combined
packaging business entity from fraudulent transfer liability, but also in minimizing the funding that
would be required to so. The net value of any business entity is reduced to the extent it incurs debt
and expends the resulting cash without taking in new value. Therefore, to the extent that funding
had to be moved from the separate packaging business entity into New Grace–by having the post-
Transaction Company borrow to transfer cash to New Grace--in order to present an appearance that
New Grace was solvent, the total market value of the surviving packaging business entity would be
reduced. Moreover, a transfer of cash from the packaging entity to the specialty chemicals business
would not be value neutral, but would reduce the overall value of the entire Transaction, since the
indebtedness would draw on the future cash flows of the entity with a greater price-earnings ratio.
70. That reduction in value would have to reduce the value of the consideration provided
to Grace-1998 shareholders in the Transaction, since the indebtedness had nothing to do with the
value of assets contributed by the pre-existing Sealed Air Corporation to the newly combined entity.
So the greater the amount which had to be transferred to New Grace from the packaging business
to make New Grace appear solvent, the lower the amount of stock in the new packaging business
which would be given to the Grace-1998 shareholders as consideration for their Grace-1998 stock,
or, in other words, the lower the proportion of ownership which the Grace-1998 shareholders would
have in the newly combined packaging business.
71. Defendants therefore knowingly or recklessly artificially shaped the Packaging
Business Transaction to create the false appearance that New Grace was solvent immediately after
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 28 of 99
30See W.R. Grace & Co. S-4 Registration Statement filed with the SEC on February 13, 1998at pp. 26-27.
31See the KPMG Report, which is included in Exhibit 4 to Memorandum in Support of W.R.Grace & Co.-Conn.’s Motion For the Appointment of An Examiner or Limited Trustee to Investigateand Prosecute any Meritorious Claims Against Sealed Air Corporation, and Its Response toAnticipated Motions of Other Parties, W.R. Grace bankruptcy, D.Delaware Case Nos. 01-1139through01-1200, Adversary Proceeding No. 02-2210, Docket No. 326 (hereinafter referred to as“Grace-Conn. Memorandum of Law Exh. 4") at p. BD-0598.
32The Wachtell, Lipton cover letter presenting the KPMG report to the board states that it isa study as of May, 27, 1997. See id. at p. BD-0592.
25
the transaction, even taking into account its potential asbestos liabilities, and to minimize the amount
of funding which would have to be transferred into New Grace in order to create that false
appearance of solvency.
72. The fact that post-Transaction New Grace was measurably solvent, (with solvency
defined as assets exceeding liabilities) could be asserted only if Defendants could obtain an expert
opinion that concluded that the total asbestos liabilities of the Company were measurable. Thus far,
as of 1996, the Company’s auditors represented that they were unable to estimate the total asbestos-
related liabilities, and therefore took a reserve only for liabilities projected to 2001. Then,
“[b]eginning in early 1997, Grace and Sealed Air began to pursue discussions about a possible
combination Sealed Air and Grace Packaging.30” So in March, 1997, W.R. Grace’s counsel retained
KPMG Peat Marwick LLP (“KPMG”) to estimate the costs of currently pending and future bodily
injury claims related to Grace’s production of insulating material containing asbestos.31” In appears
that the KPMG opinion of the total estimate of the Company’s asbestos-related personal injury
liability was first provided in late May, 1997.32 The provision of this report permitted the parties to
the Transaction (Grace-1998 and old Sealed Air) to structure the transaction and begin discussing
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 29 of 99
33See “Grace-Conn. Memorandum of Law Exh. 4" at p. BD-0601.
26
alternative allocations of ownership of the new Sealed Air between old Sealed Air and Grace-1998
shareholders.
73. This correlates with the description of the transaction in the Form S-4, and is also a
logical necessity, in that the quantification of liabilities would determine how much cash would have
to transferred from the Grace-1998 packaging business to New Grace to order to obtain the requisite
expert opinion that New Grace would be solvent. Since KPMG quantified Grace-1998's personal
injury asbestos-related liabilities as equaling $1.25 billion, and the amount of cash transferred
between the packaging business and New Grace was $1.2 billion, it is apparent that the parties to the
Transaction calculated that New Grace could cover all of the future property damages claims, and
virtually none of the future asbestos-related personal injury claims, without such a cash transferred.
IV. THE ARTIFICIAL SUPPRESSION OF CLAIMS THROUGH UNDISCLOSEDMORATORIA AGREEMENTS WITH ASBESTOS PLAINTIFF LAW FIRMS,ENABLED DEFENDANTS TO FALSELY REPRESENT THAT THETRANSACTION DID NOT ENTAIL A FRAUDULENT TRANSFER
A. The Existence of the Moratoria, as Admitted by New Grace, Had a DramaticEffect in Lowering New Asbestos Claims Immediately After the Transaction
74. The number of asbestos claims filed against Grace-1998 had been materially
increasing year by year. By early 1997, when the Packaging Business Transaction began to crystalize
based on negotiations with Sealed Air, the claims were still increasing. Grace faced approximately
24,000 asbestos-related personal injury claims during 1994 and nearly 37,000 such claims during
199533. Another source states that Grace experienced 36,426 claims in 1995 and 38,572 claims in
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 30 of 99
34See Supplemental Memorandum in Further Support of the Committees’ Motion toDetermine the Standard of Solvency, W.R. Grace bankruptcy, D.Delaware Case Nos. 01-1139through01-1200, Adversary Proceeding No. 02-2210, Docket No. 109, at p. 6.
35See Supplemental Memorandum in Further Support of the Committees’ Motion toDetermine the Standard of Solvency, W.R. Grace bankruptcy, D.Delaware Case Nos. 01-1139through01-1200, Adversary Proceeding No. 02-2210, Docket No. 109.,at p. 6
27
199634.
75. From Defendants’ vantage point in early 1997, the prospect of ongoing increases in
claims could prevent Defendants from obtaining an estimate of total asbestos-related liabilities, and
therefore could torpedo the effort to get comfort from experts that the Company would not face
future fraudulent transfer liability. Also, if asbestos-related liabilities related to Grace-1998 were
to increase substantially in the immediate one or two years following the Transaction, that would call
into question whether the parties had acted in good faith in attempting to isolate the packaging
business from the Grace asbestos liability.
76. To avoid all these problems, Defendants went to at least 17 Plaintiffs asbestos firms
and obtained moratoria agreements which provided that these firms would not file claims during
1997-1999. These agreements artificially and temporarily suppressed the number of asbestos
personal injury claims which would be filed against the Company during 1997, 1998 and 1999. This
created an appearance of stability in number of claims, allowing accountants and expert consultants
to provide a complete estimate of liability for the Company’s lifetime at an artificially suppressed
number.
77. The existence and impact of the moratoria were set forth in a pleading filed in the
adversary proceeding for fraudulent transfer brought against the Company in the New Grace
bankruptcy. This pleading35 stated:
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 31 of 99
28
“Moreover, Grace had several overlapping ‘moratoria’ agreements in place withseveral major plaintiffs’ law firms in 1997, 1998 and part of 1999 [fn: not allagreements covered the same time period], whereby the firms agreed not to file newclaims against Grace during the years when the agreements were in place. Thesemoratoria agreements had the cumulative effect of depressing claim filings againstGrace in the years the agreements were in effect. When the moratoria agreementsbegan to expire, the plaintiff firms that were parties to those agreements again beganfiling claims. Again, therefore, the notion of a ‘spike’ [in asbestos-related personalinjury claims] is somewhat of a myth.”
78. The existence and impact of the moratoria were also presented to the court at oral
argument in the July 25, 2002 hearing in the fraudulent transfer adversary proceeding against Sealed
Air (Case No. 02-2210). At that hearing, Plaintiffs’ counsel stated:
“The means of suppressing asbestos-related personal injury claims was toapproach certain law firms which specialized in such claims and requesting amoratorium on the filing of such claims on that grounds that giving Grace suchbreathing room with provide the company with an opportunity to get its financialhouse in order.
There were no moratoria after, as I understand it, after 1999. So, all of asudden, maybe the '98-to-'99 drop-off is predictable since there were agreements notto sue that were in place. And maybe the 2000 spike is predictable since that's whenthe metaphorical dam was set to burst and those agreements expired. All of asudden, in context, perhaps the Court's going to be able to see why we're going to saythat the 2000 spike was really a non-event or at most was a second-tier event and wasnot unforeseeable with the result of an unforeseeable intervening cause, which is whythe Court can consider the information or at least consider the information and decideon its relevance and admissibility at trial.
If you smooth the spike over the prior years when the moratoria were ineffect, as I said, claims were actually lower than the previous years. Yet, amazingly,they were still higher than what Grace purported to predict back in 1998. How canwe just ignore that information at trial?” (7/25/2002 transcript at 22:10-23:8).
79. Debtor’s counsel, in arguing on behalf of New Grace at that same July 25, 1998
hearing, also mentioned the moratoria. He confirmed the existence and nature of the moratoria, but
denied that they had an impact on the expert reports which purported to verify that New Grace would
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 32 of 99
36See Supplemental Memorandum in Further Support of the Committees’ Motion toDetermine the Standard of Solvency, W.R. Grace bankruptcy, D.Delaware Case Nos. 01-1139through 01-1200, Adversary Proceeding No. 02-2210, Docket No. 109., at p. 6.
37See Debtors’ Consolidated Reply in Support of Their Motion for Entry of CaseManagement Order, Establishment of a Bar Date, Approval of the Claim Forms and Approval of theNotice Program, W.R. Grace bankruptcy, D.Delaware Case Nos. 01-1139 through 01-1200,Adversary Proceeding No. 02-2210, Docket No. 1106, at p. 9.
29
be solvent after being spun off in the Packaging Business Transaction. Debtor’s counsel stated as
follows:
THE COURT: How about the impact of your moratoria agreement?
MR. BERNICK: No. The moratoria, and that's something we'll take up inconnection with the experts, we'll be able to do a free spring here and say what wasgoing on with the moratoria. There's already been testimony on it and the testimonythat's occurred is that there were moratoria that were being put in place but they getto have the bite and the estimate that was actually done, the estimate that was actuallydone by Dr. Florence and Dr. Rourke was actually an estimate that was in time inadvance of 3/98; that is, they didn't even have the benefit of this further downwardslope. They were up here. And by the time that they did their estimate, the moratoriawere not even in place and had no impact, and Mr. Hughes has already testified tothat under oath. (7/25/2002 transcript at 65:3-18).
80. The moratoria device had its desired and/or foreseeable effect. New claims declined
substantially, from 38,572 in 1996 to 30,330 in 1997, 20,993 in 1998 and 26,941 in 1999, before
rising abruptly to 48,786 in 2000.36
81. There is clear evidence that the moratoria caused the otherwise unexplained decline
in claims. New Grace explained to the bankruptcy court, in claiming that “There is no explanation”
for the spike in new claims in 2000 that caused the company to file for bankruptcy, that the upswing
in claims was caused by only a small number of plaintiffs firms–seventeen named firms to be
precise. New Grace lists the 17 firms and each individual firm’s number of new claims for 1999 and
200037.
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 33 of 99
38“New Grace stated that these 17 firms “already had filed over 260,000 personal injuryclaims against Grace before 2000.” Id. at p. 10.
39Id. at p. 9.
40See n. 35, supra.
30
82. New Grace notes that these 17 firms, which had filed hundreds of thousands of
asbestos liability claims against company in the past38, filed only 3,025 new claims against the
Company in 1999, but 25,575 new claims against the Company in 2000. “Thus, while the rest of
the plaintiffs’ bar was filing claims against Grace in 2000 at about the same rate as in 1999, these
17 firms somehow generated 22,330 more claims than they had in 1999, raising their collective
annual share of the claims against Grace from 11.8% to more than 53%. The committees offer no
explanation for how such a small number of firms were able to generate such a significant surge of
claims.39” Remarkably, the increase of over 20,000 claims by these 17 plaintiffs firms accounted for
the entire increase from 26,941 claims in 1999 to 28,786 claims in 200040.
83. New Grace, in the aforementioned argument, characterizes the abrupt drop and then
increase in claims by these 17 law firms as inexplicable and unpredictable. But New Grace’s
argument does not mention or take into account the existence of the moratoria.
84. The moratoria device offers a perfect explanation. These 17 firms, by subjecting
themselves to moratoria in filing claims, would naturally have a backlog of claims to file when the
moratoria expired in 2000. The fact that this pattern applies to 17 specifically named firms, and that
these firms filed a negligible number of claims in 1999 despite a history of thousands of claim filings
in the past, further confirms that the 17 specifically-named firms were the very same firms which
agreed to the moratoria.
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 34 of 99
41The document’s first page is stamped as follows “Submitted/presented to the board ofdirectors of W.R. Grace & Co. On ______ Robert B. Lamm, Secretary” and the date “August 14,1997" is handwritten into the blank, with the apparent handwritten initials of Mr. Lamm alsoattached.
31
B. KPMG and New Grace’s Outside Auditors Relied on the Leveling Off ofClaims in Quantifying the Grace Asbestos Liability
85. At the time of the Transaction, the apparent leveling off of Grace’s asbestos-related
personal injury claims permitted the Company to obtain expert opinions which quantified the total
of such claims. By utilizing this artificial quantification, the experts could attest that the spun-off
Grace existing after the Packaging Business Transaction would be solvent, so that Sealed Air would
not be subjected to fraudulent transfer liability. Moreover, since the expert opinions provided to
Grace-1998 (i.e., to defendant Sealed Air) were based on the assumption of a leveling off of such
claims, Defendants knew that an increase in claims after the reports were made would negate the
conclusions in the reports and invalidate any claimed reliance on such reports in asserting that New
Grace would be solvent following the Packaged Business Transaction.
86. On August 13, 1997 the Company’s Board of Directors was presented by outside
Company counsel Wachtell, Lipton, Rosen & Katz with a document entitled “Presentation
Concerning Solvency August 14 Meeting of Board of Directors W.R.Grace & Co.” This document,
which was certified as having been presented to Grace-1998’s board of directors41, stated:
“In considering the proposed transactions, the Board must satisfy itself as tothe solvency of (a) W. R. Grace & Co., referred to here as Grace-Delaware; (b)Grace-Connecticut; and (c) the to be formed parent company of Grace-Connecticut,referred to here as New Chemco [i.e., New Grace], each as they will be at the end ofthe internal reorganization transactions that are contemplated and immediately priorto the proposed merger with Sealed Air. This is necessary because if Grace-Connecticut, New Chemco or Grace-Delaware were to be insolvent after the internaltransactions close, it is possible that the transactions could be attacked as involvingeither an illegal dividend, a fraudulent conveyance or both.
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 35 of 99
42See Grace-Conn. Memorandum of Law Exh. 4 at p. BD-0591.
43Id. at BD-0600.
44Id. at p. BD-0601.
32
In particular, Grace-Connecticut currently is subject to liability on account ofasbestos-related claims and will retain that liability following the transactions.Accordingly, the Board must satisfy itself as to the financial ability of Grace-Connecticut to pay the asbestos liabilities as they become due following thecompletion of the transactions....In considering whether Grace-Delaware, NewChemco and Grace-Connecticut meet the solvency test, you are entitled to rely ingood faith upon...the opinions of experts and professionals concerning Grace that youreasonably believe are within the field of their professional or expert competence.For this purpose, we have attached to this memorandum four reports....At Tab A isa letter from KPMG Peat Marwick summarizing its detailed study of Grace’s overallfuture asbestos bodily injury (BI) liability as of May 27, 1997, prepared at the requestof counsel to Grace42.” (Emphasis added).
87. The KPMG memorandum presented to the Company’s Board of Directors as part of
the aforementioned Wachtell, Lipton presentation contained the actual quantification of New Grace’s
asbestos liability. KPMG therein states that “The challenging component of the liability estimate
is the forecast of the number and timing of the stream of future claims.43” It makes clear that
KPMG’s estimate of Grace’s future asbestos liability was based on a leveling off of future asbestos-
related personal liability claims, i.e., a “stable but higher filing rate.44”
88. More specifically, KPMG’s analysis noted that Grace has experienced an increase in
the number of claims from 1994 to 1995, and that “Generally, the number of claims received in the
year after the increase is about the same as during the year of the increase, indicating that the increase
is [a] one-time event leading to a stable but higher filing rate. This pattern is observed with claims
received by Grace as well as those filed with several other asbestos claims recipients. The increase
in filings is incorporated into the future claims forecast underlying the liability estimate of $1.25
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 36 of 99
45Id.
46Id. at p. BD-0602.
47Stollard’s report appears as Exhibit 10 to Memorandum in Support of W.R. Grace & Co.-Conn.’s Motion For the Appointment of An Examiner or Limited Trustee to Investigate andProsecute any Meritorious Claims Against Sealed Air Corporation, and Its Response to AnticipatedMotions of Other Parties, W.R. Grace bankruptcy, D.Delaware Case Nos. 01-1139 through01-1200,Adversary Proceeding No. 02-2210, Docket No. 326 (hereinafter referred to as “Grace-Conn.Memorandum of Law Exh. 10").
33
billion.45” (Emphasis added).
89. KPMG also explicitly stated that a change in the assumed stable ongoing future rate
of filing claims would undermine the ability to rely on the KPMG report. KPMG stated: “As of July
31st, the 1997 filing rate has declined compared to 1996. A substantial change in the litigation
environment controlling these factors...could make the projection of historical patterns irrelevant,
thereby refuting the assumptions on which the estimates were based.46” This statement put the
Company’s board on notice of KPMG’s reliance on the decline in claims against the Company.
90. Eric Stallard’s critique of the KPMG report, which was written for pre-existing Sealed
Air Corporation, notes the same issue. Stallard’s report47 states at p. 6: “On p. 2, the KPMG Report
states that the underlying claim process has ‘exhibited relatively stable trends in recent years.
However, Exhibit 3 (KPMG Presentation p. 30) shows what appears to be a rapidly increasing claim
filing process, going from about 9,000 claims per year (cpy) in 1990 to 20,000 cpy in 1992-1993,
to over 30,000 cpy in 1995-1996. The graph also shows the projections start at about 27,000 cpy in
1997. If the same methodology had been applied to date through 1993, the 1994-1996 projections
could have been roughly 18,000 cpy, or about 37% lower than that observed number, 85,696 claims.
This suggests than an understanding of the claim filing process will be important, even for short term
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 37 of 99
48See Grace-Conn. Memorandum of Law Exh. 4 at p. BD-0617-634 (Ellenberger) and BD-0635-645 (Houlihan, Lokey).
49Id. at p. BD-0618.
50Id. at p. Bd-0637.
34
projections.”
91. The August 13, 1997 memorandum from Company counsel to its board of directors
also included, as tabs “C” and “D”, respectively, a report by Grace-1998's CFO Larry Ellberger, and
an opinion of Houlihan, Lokey, Howard & Zukin, both opining that New Grace would be solvent
after the Transaction48. However, both of these opinions reflected that they depended on the KPMG
report’s estimation of Grace-1998's asbestos-related liabilities.
92. CFO Ellberger stated that he relied on, among other things, “the analysis of certain
asbestos liabilities prepared by an independent accounting firm.”49 The Houlihan Lokey report states
that “[w]e have relied upon and assumed, without independent verification, that the financial
forecasts and projections provided to us have been reasonably prepared and reflect the best currently
available estimates of the future financial results and condition of New Chemco [i.e., New Grace]
and Grace-Conn and Grace-Del, and that there has been no material adverse change in the assets,
financial condition, business or prospects of the Company since the date of the most recent financial
statements made available to us.50” Thus, Defendants knew that tweaking the results of the KPMG
report provided the key to obtaining all the expert assurances with respect to the solvency of post-
Transaction New Grace.
93. The moratoria also had continued ramifications throughout the Class Period, as the
continuing appearance that New Grace was solvent, up until its filing for bankruptcy, allowed the
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 38 of 99
35
Company to deny any susceptibility to fraudulent transfer claims. The false picture of solvency was
reinforced when, following the lead of KPMG, New Grace’s auditors were enabled by the moratoria
to quantify the entire universe of Grace asbestos liability for the first time in the company’s 1998
financial statements.
94. The apparent leveling off of the asbestos-related personal injury claims filed against
New Grace–resulting from the undisclosed moratoria–created the illusion that the level of future
claims was predictable. This enabled experts to quantify for the first time Grace’s entire predicted
liability for such claims. Accordingly, the 1998 Form 10-K filed by New Grace states at p. 11, under
Item 3 “Legal Proceedings,” as follows:
In the fourth quarter of 1998, Grace changed the period for accruing forasbestos-related personal injury claims. Since 1996, Grace had been accruing for allcurrent asbestos-related personal injury claims and those expected to be asserted overthe ensuing five year period. Based on Grace's experience and recent trends inasbestos personal injury litigation, Grace believes that it can now reasonably forecastthe number and ultimate cost of all present and future personal injury claims expectedto be asserted, and now will accrue for this ultimate cost. Under the new accrualperiod, Grace's gross aggregate accrual for asbestos liabilities at December 31, 1998was $1,194.1 million; this amount reflects all asbestos-related property damage andpersonal injury cases and claims then pending (except for one property damage caseas to which liability is not yet estimable because Grace has not yet been able to obtainsufficient information through discovery proceedings), as well as all personal injuryclaims expected to be filed in the future. Grace's ultimate exposure with respect toits asbestos-related cases and claims will depend on the actual number and nature ofclaims filed and the extent to which insurance will cover damages for which it maybe liable, amounts paid in settlement and litigation costs. (Emphasis added).
95. This total accrual for all liability provided a precise reserve on the balance sheet
which purported to universally cover all liability. Thus, by allowing New Grace’s auditors to claim
that they have accrued an amount which could be reasonably estimated to cover all future liability,
the moratoria allowed New Grace to have an expert accountant backing its claim to be solvent
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 39 of 99
51Grace-Conn. Memorandum of Law Exh. 4 at p. BD-0599.
36
subsequent to the Packaging Business Transaction. With total future liabilities apparently quantified
on the New Grace balance sheet, a quick determination that the assets stated on the balance sheet
exceeded the liabilities stated thereon, was all that was ostensibly necessary to provide reassurance
that New Grace was indeed solvent following the Packaging Business Transaction, according to the
opinion of New Grace’s auditor–a reputable expert.
96. This artificially procured quantification of the New Grace asbestos liabilities would
not have been possible if the moratoria were not secretly put in place. If the moratoria were not in
place and asbestos claims continued to grow as before, KPMG and the management of the Company
and New Grace would have been put on notice, even before the Transaction took place, that the
underlying assumption of the report, a leveling off of claims, was wrong, and that neither that KPMG
report , nor the reports of the other experts who in turn relied on KPMG’s report, could be relied
upon to provide comfort as to New Grace’s solvency.
C. The KPMG Report Did Not Consider the Unique Liabilities Arising from theGrace Operations at Libby, Montana
97. The KPMG Report states that “KPMG has calculated these liability estimates based
on information provided by W.R. Grace & Co. and its advisors.51” It appears that the Company did
not provide KPMG with information concerning the asbestos problems at Libby, Montana, because
KPMG did not take those into account. Instead, KPMG used a method which it calls the “actuarial
method”, which employs general information about historical asbestos claims, specifically “the very
strong historical connections between annual mesothelioma and lung cancer filing rates and annual
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52Id. at BD-0600.
53Grace-Conn. Memorandum of Law Exh. 10 at p. 4.
54A representative description of the asbestos problem at Libby is contained in a statementby the U.S. Senator from Montana, in a 2003 Senate Hearing. Senator Baucus stated: “Thevermiculite mining and milling operations at W.R. Grace blanketed the town of Libby withasbestos-tainted dust for decades, until the early 1990's. The dust was everywhere, on clothes, oncars, on children, on the clothes of workers when they came home from the mine. I can rememberseeing miners years ago come off the mine, got off the bus. The bus itself was just one big dust bag,and the miners themselves were lots of little smaller dust bags, just covered with vermiculite dust.It was on the high school track, this stuff, on the Little League field, in people's homes, in theirgardens. They didn't know the dust was poison, but W.R. Grace new. What W.R. Grace knew wasthat this dust was contaminated not just with asbestos, ordinary asbestos, but with deadly tremoliteasbestos fibers, much worse than the chrysotile asbestos that most of us are aware of. These fibershave killed hundreds of current and former Libby residents. Hundreds more are sick, and many ofthese people will die from asbestos-related diseases and cancers. Thousands may become sick in thefuture, and unlike most any other place in the country, many of these people were significantlyexposed not as workers, but as children.” “Asbestos Litigation Crisis,” Senate Hearing 108-141,before the U.S. Senate Committee on the Judiciary, Statement of Sen. Max Baucus,
37
filing rates for the four other types of injuries.52” Id.
98. Pre-existing Sealed Air’s expert Stallard further notes that the methodology employed
by KPMG has a problem, in that “the size of the population exposed to asbestos products in past
years is not known....The chosen solution to this problem is to assume that the incidence rates for
newly-diagnosed asbestos-related disease are known, in which case one can readily compute the size
of the asbestos exposed population from the counts of newly-diagnosed cases of asbestos-related
disease.” The incidence rates are obtained “from epidemiological studies of select subpopulations
exposed to asbestos.53”
99. The Libby asbestos problem presented a uniquely nightmarish situation which could
not possibly be reflected in general epidemiological studies.54 The fast-moving events concerning
Libby immediately before the Transaction and throughout the Class Period should have constituted
Case 2:03-cv-04372-DMC-MF Document 15 Filed 12/01/2004 Page 41 of 99
55See Senate Hearing 107-1002, “Asbestos Cleanup in Libby, Montana,” hearing before theCommittee on Environment and Public Works, Subcommittee on Superfund, Toxics, Risk andWaste Management, June 20, 2002, at p. 28-29, testimony of Marianne Horinko, AssistantAdministrator, Office of Solid Waste and Emergency Response, U.S. EPA, reporting $60 millionspent through 2002, $21 million in spending planned for 2003 and the same level in 2004.
38
a red flag to Defendants that the liabilities faced by the Company, and then after the spinoff by New
Grace, could and would snowball unpredictably from this one operation alone.
100. The pre-Transaction publicity about Libby, a series of articles in the Seattle Post-
Intelligencer beginning in 1999, Congressional investigations, and EPA investigation begun in 1999,
and an OSHA investigation beginning in 2000, and now a pending criminal indictment, provided
notice to the Company throughout the Class Period that any evaluation of New Grace’s solvency had
to consider the growing potential liabilities at Libby.
101. The Libby liabilities, to compensate for both personal injury and property damages,
were very substantial. See Susan Drumheller, “Lawyers in Libby Case Bag Million, The
Spokesman-Review (Spokane, Washington), September 8, 2002, noting that “People who die from
respiratory illness spend $500,000 to $600,000 on medical care the last five years of life, according
to Dr. Alan Whitehouse, a Spokane respiratory specialist who's cared for hundreds of Libby
residents” and “After three years of cleanup work in Libby, the EPA will have spent about $56
million, plus another $11 million to investigate the nature and scope of contamination.” The EPA’s
clean up costs alone would be a minimum of $100 million only through 2004, according to an
agency spokesman55.
102. The Libby liabilities alone were of an order of magnitude sufficient to render New
Grace insolvent, in view of the thin margin of solvency on the New Grace balance sheet. Defendants
ongoing statements denying that the Company had fraudulent transfer liability, and the corresponding
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39
GAAP violations in the Company’s financial statements, were at a minimum reckless in not taking
into account the potential Libby-related liabilities.
V. THE COMPANY FACED ITS DAY OF RECKONING: ITS EXPOSURE TOASBESTOS LIABILITY WAS UNCOVERED, IN ADJUDICATINGFRAUDULENT TRANSFER CLAIMS IN THE NEW GRACE BANKRUPTCYPROCEEDINGS
A. New Grace Filed for Bankruptcy in Early 2001, as the Moratoria With PlaintiffsFirms Expired
103. The moratoria were temporary, and as they expired the artificially suppressed
asbestos-related personal injury claims against Grace were asserted. The expiration of the moratoria
thus led to Grace’s bankruptcy. As disclosed in Sealed Air’s Form 10-Q filing with the SEC for the
quarterly period ending June 30, 2002, at p. 18:
“On April 2, 2001, New Grace and certain of its subsidiaries filed a petition forreorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. BankruptcyCourt in the District of Delaware. New Grace stated that the filing was made inresponse to a sharply increasing number of asbestos claims since 1999.”
104. In New Grace’s Form 10-K annual report for 2001, filed on March 28, 2002, New
Grace emphasized just how unexpected the “surge” in new bankruptcy claims supposedly was. The
annual report stated at Part I, Item 1, Business: “The filing was made in response to a sharply
increasing number of asbestos-related bodily injury claims....Prior to 2000, Grace was able to settle
asbestos-related claims through direct negotiations. The filing of claims had stabilized, and annual
cash flows were manageable and fairly predictable. In 2000, the litigation environment changed with
an unexpected 81% increase in bodily injury claims, which Grace believes was due to a surge in
unmeritorious claims. Trends in claims filing and settlement demands showed no signs of returning
to historic levels and were exacerbated by the Chapter 11 filings of several co-defendants in asbestos
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40
bodily injury litigation. These trends greatly increased the risk that Grace would not be able to
resolve its pending and future asbestos claims under the state court system.”
105. Of course we know now, as explained above, that the surge in claims was caused by
the expiration of the moratoria. This abrupt surge in claims was not a random event.
B. The Liability Issue Came to a Head in the Adversary Case Against theCompany within the New Grace Bankruptcy Proceeding
106. The Chapter 11 bankruptcy filing by New Grace in U.S. Bankruptcy Court for the
District of Delaware led to a fraudulent transfer complaint being filed against Sealed Air, which
initiated an adversary proceeding within the New Grace bankruptcy case. The Complaint in the
fraudulent transfer proceeding was filed on March 18, 2002 and the case was numbered Adversary
Proceeding 02-02210. As further disclosed in Sealed Air’s Form 10-Q for the quarterly period
ending June 30, 2002, at p. 18:
“Committees appointed in New Grace's bankruptcy case have sought and receivedthe court's permission to pursue fraudulent transfer claims against the Company....InMarch 2002, the court ordered that the issues of the solvency of New Gracefollowing the Cryovac Transaction and whether New Grace received reasonablyequivalent value in the Cryovac Transaction would be tried on behalf of all creditorsof New Grace starting on September 30, 2002. The Company does not know howlong the trial will last, although it expects the trial could be several weeks to severalmonths in duration, nor does it know when the court's trial ruling will be issued. Theproceeding is pending in the U.S. Bankruptcy Court for the District of Delaware(Adv. No. 02-02210).
107. Although the September 30, 2002 trial was not held as scheduled due to supervening
legal events, Sealed Air’s vulnerability to an adverse ruling became evident before the trial began,
due to a July 29, 2002 Opinion by Judge Wolin in Adversary Proceeding No. 02-02210, reported at
281 B.R. 852. The ruling concerned a pre-trial in limine determination of the choice of law and legal
standards to be applied at the upcoming trial to determine the solvency of W.R. Grace.
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41
108. The trial was to deal solely with the issue of constructive fraudulent transfer under
Uniform Fraudulent Transfer Act section 5. The central issue in the in limine determination was the
extent to which the post-Transaction asbestos-related personal injury claims asserted against New
Grace would be admissible to determine New Grace’s solvency at the time of the Transaction.
C. After Being Informed of the Moratoria, Judge Wolin Ruled that Post-Transaction Asbestos Claims Could be Considered in Evaluating NewGrace’s Solvency
109. Defendant Sealed Air, and debtor New Grace as intervenor in the Adversary
Proceeding, argued before Judge Wolin that the determination of New Grace’s solvency at the trial
should turn on whether the Company’s evaluation of New Grace’s solvency was reasonable in view
of asbestos claims filed up until the time of the Transaction, without taking into consideration the
post-Transaction increase in claims. They argued that hindsight was impermissible in determining
solvency.
110. In his July 29, 2002 Opinion, Judge Wolin accepted the Plaintiffs’ view that post-
Transaction claims could be considered on the issue of Grace’s solvency immediately after the
Transaction.
111. In arguing against insolvency, Sealed Air, and debtor W.R. Grace as intervenor, relied
on only a single binding decision: In re R.M.L. Inc., 92 F.3d 139 (3d Cir. 1996). One of Judge
Wolin’s alternate holdings relied on the existence of the moratoria. And the alternate holding
reflects that any reasonable view of the governing case law, including the view expressed by Sealed
Air’s own arguments to Judge Wolin would have required the court to reach the same conclusion.
112. The arguments advanced by Sealed Air and Grace in the adversary proceeding
emphasized that deference should be given to the reasonableness of the debtor’s view of its own
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56See Response of Sealed Air Corporation and Cryovac, Inc. to the Asbestos Committees’Motion to Determine Choice of Law and the Standard of ‘Insolvency,’ Adversary Proceeding No.02-2210 (Docket no. 70), filed on June 28, 2002, at p. 3.
57See Sur-Reply of Sealed Air Corporation and Cryovac, Inc. to the Asbestos Committees’Motion to Determine Choice of Law and the Standard of ‘Insolvency’”, Adversary Proceeding No.02-2210 (Docket No. 108), filed on July 22, 2002, at p. 2.
42
solvency. Sealed Air argued that “The Reasonableness of Grace-Conn’s Projections from its
Perspective at the Time of the Transaction Is the Operative Inquiry.”56 “In making a fair valuation
of those contingent liabilities as of the time of the transaction, the Court must make an analysis of
the likelihood that the event will occur, and discount the liabilities accordingly [citations omitted].
In performing this process, the Court must look at circumstances as they appeared to the transferor
and assess the reasonableness of the transferor’s contemporaneous judgment. In re R.M.L., 92 F.3d
at 155. A hindsight evaluation is prohibited. Id.”
113. Sealed Air tried to focus the Court on the In re R.M.L. holding. Sealed Air stated:
“[T]he Third Circuit’s decision in In re R.M.L., Inc., 92 F.3d 139 (3rd Cir. 1996), is directly
applicable and could not be clearer in its support of Sealed Air’s position in addressing the standards
of solvency....Therefore, ‘[f]ar from ‘hindsight or ‘post-hoc’ analysis, a court looks at the
circumstances as they appeared to the debtor and determines whether the debtor’s belief that a future
event would occur was reasonable.’ Id. at 156.57”
114. It is clear from the existence of the moratoria that at the time of the Transaction, the
actual number of asbestos-related personal injury claims being asserted to Grace at that time were
artificially suppressed, and could not provide a basis for a reasonable estimation of future claims.
In other words, looking at the circumstances “as they appeared to the debtor” (in Sealed Air’s
words), which included taking into account the existence of the moratoria, the available facts (i.e.,
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43
past claims history) did not provide a reasonable estimation of future liability, and that liability was
therefore unknowable.
115. Thus, Judge Wolin expressed in detail the alternative basis for his holding. Having
noted the facts presented to the court about the moratoria on claims solicited by Defendants (281
B.R. at 857), Judge Wolin accepted as an alternative holding the following argument: “Conceding,
apparently arguendo, that post-transfer information should be considered to the extent it was
reasonable for the debtor to know of that information on the transfer date, plaintiffs posit that the
amount of post-transfer asbestos claims was not only unknown, but unknowable. This is, of course,
consistent with the defendants’ arguments regarding the complexity of estimating the future claiming
rate of asbestos injuries. Where later information is unknowable, plaintiffs argue that the burden of
guessing wrong should be placed upon the debtor and its transferee....[T]he Court agrees with
plaintiffs’ contention raised at oral argument. It is consistent with the fundamental purpose of the
fraudulent transfer statement already discussed. There is no unfairness to a debtor or to a less-than-
fair-value transferee in placing the burden of a wrong solvency estimate upon them where there
exists a historically unknowable mass tort liability that my impair the debtor’s ability to meet its
obligations.” (281 B.R. at 867-868).
116. This alternative conclusion was required by the holding in In re R.M.L. The Third
Circuit held that “[A] debtor’s creative accounting practices, which have the effect of grossly
overstating its financial condition, cannot be the basis of a court’s solvency analysis....The less
reasonable a debtor’s belief, the more a court is justified in reducing the assets (or raising liabilities)
to reflect the debtor’s true financial condition at the time of the alleged transfers.” In re R.M.L.,
92 F.3d at 156 (3d Cir. 1996).
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44
117. Thus, under the view argued by Sealed Air itself (taking into account the vantage
point of the debtor at the time of the transaction) and under the law argued by Sealed Air (the In re
R.M.L. case), Judge Wolin’s decision was correct because of, inter alia, the existence of the
moratoria. Judge Wolin properly concluded that “The reality is that asbestos, similar to tobacco, has
been a societal scourge for more than a generation. W.R. Grace knew it had a serious and open-
ended asbestos liability problem for years before the transaction at issue here. Moreover, the asset
transferred away is alleged to have been a substantial part of the company’s portfolio.” (281 B.R.
at 868). Judge Wolin was “justified,” in the words of In re R.M.L., in “reducing the assets (or raising
the liabilities) to reflect the debtor’s true financial condition at the time of the alleged transfers.”
118. Moreover, the law did not require a precise estimation of the existing claims at the
time of the transaction. As Judge Wolin noted, “The Court need not determine the exact value of
the post-1998 claims. All that must be determined is whether they exceeded the debtor’s assets. If
the debtor is found to be insolvent, a post-judgment fluctuation in the claiming rate can only make
the debtor more insolvent.” 281 B.R. at 866. Thus, although the exact number of claims would not
be known to Sealed Air at the time of the transaction, given the estimated magnitude of the number
of claims and the size of the claims, it was knowing or reckless for Defendants to deny that Sealed
Air was, in fact, insolvent at the time of the Transaction.
VI. ADDITIONAL ALLEGATIONS REGARDING SCIENTER
119. Defendants had motivation and opportunity to artificially inflate Sealed Air’s stock
price because Sealed Air shares were used as consideration for the Packaging Business Transaction.
As consideration for the pre-existing Sealed Air Corporation, each owner thereof received one
common share of Grace-1998/New Sealed Air.
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45
120. Defendants had motivation and opportunity to maximize the value of the Company’s
stock by eliminating the corrosive effect of the asbestos liabilities on the stock valuation. Since the
Company’s common stock represented the residual equity value of the Company remaining after
subtracting all liabilities, including legal liabilities, the asbestos-related liabilities borne by Grace-
1998 impaired the stock price in at least three respects: (1) absolute accrued valuation of future
asbestos liabilities as stated on the Company’s balance sheet, (2) an additional discount factor to
account for the uncertainty of future asbestos liabilities, and (3) potential costs of bankruptcy,
discounted for their probability and time value. All these negative items could ostensibly be
eliminated at the stroke of a pen, i.e., by the deal’s contractual terms which purported to eliminate
asbestos-related liability (and related uncertainties thereof) as a claim on the packaging business
assets.
121. There is also direct evidence about this intent: it was openly admitted by the
Company’s management. ‘“This was a great chance to split the packaging company away from the
asbestos liabilities holding down our stock multiple,’ said Albert J. Costello, Grace’s chairman” in
an August 15, 1997 New York Times article entitled “In $5 Billion Deal, Grace Will Sell Packaging
Business.” In a Bloomberg News report on August 14, 1997 of the Company’s announcement of
the Transaction, Costello noted that “‘Asbestos litigation tarnished the value and reputation’ of
Grace as a whole.”
122. There is also additional circumstantial evidence of scienter. Defendants knowingly
or recklessly acted to artificially insulate the Company from the Grace asbestos liability because the
pre-existing Sealed Air Corporation required the transaction to be structured to ensure such
insulation as a precondition of entering into the Transaction. As stated in Recitals paragraph B to
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the Distribution Agreement which resulted in the spin-off of New Grace from Grace-1998, “This
Agreement...set forth certain transactions that SAC [Sealed Air Corporation] has required as a
condition to its willingness to consummate the Merger, and the purpose of this Agreement is to make
possible the Merger by divesting Grace of the Businesses and operations to be conduced by New
Grace and its subsidiaries, including Grace-Conn.” See Distribution Agreement, Annex B to Form
S-4 filed with the SEC by W.R. Grace (Grace-1998) as of February 13, 1998.
123. The timing of the moratoria to coincide with the initiation of the Transaction, and the
usefulness of the moratoria to create the appearance of stability in future asbestos claims and as a
means of insulating the newly consolidated Grace-Sealed Air packaging business from those claims,
both raises an inference of scienter and reinforces the inference raised by the avowed purpose of the
spin-off portion of the Transaction as a precondition set forth by Sealed Air.
124. Additional circumstantial evidence of scienter is presented by the Company’s
concealment of the existence and effect of the moratoria from its own experts opining on New
Grace’s post-Transaction solvency. Not one of the three reports concerning New Grace’s solvency
(from KPMG, CFO Ellberger, and the Houlihan Lokey firm) mentioned the moratoria on new
claims, although the face of these reports reflects that the existence, nature and purpose of such
moratoria would have been a material fact. The failure of the Company’s own CFO to mention the
moratoria, and of the other expert firms to indicate any awareness of the moratoria, demonstrates that
the existence of moratoria, and their effect on the otherwise-increasing asbestos-related claims
against the Company, was concealed from the outside experts at KPMG and Houlihan Lokey. The
concealment in turn raises an inference of impropriety on the part of Defendants.
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58See Form S-4 Registration Statement filed with the SEC by W.R.Grace on February 13,1998, at pp. 65-66.
59See New Grace 1998 Form 10-K, filed with the SEC on March 29, 1999, ConsolidatedBalance Sheet at p. F.-6.
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125. The financial structure of the Packaging Business Transaction also constitutes
circumstantial evidence of scienter because it reflects an awareness and attempt to deal with issues
of New Grace’s insolvency by transferring $1.2 billion from Grace-1998 to New Grace. As part of
the Transaction, Grace-1998 and Cryovac borrowed funds under new credit agreements and
transferred $1.2 billion to New Grace. Of that amount, New Grace used $1.1 billion to repay
outstanding bank and other borrowings, including $644million of public debt issued by Grace-Conn.
and guaranteed by Grace-1998.58 There was no reason why the cash for repayment of existing debt
had to be transferred after the spin-off of New Grace, particularly since the pre-existing debt was an
obligation of Grace-1998 as well as New Grace. This was a movement of cash in form – but not in
substance. The only purpose of the transfer was to attempt to safeguard the Grace-1998 (renamed
as the new Sealed Air Corporation) against fraudulent transfer claims. Had the debt been paid down
by Grace-1998 itself either before or after the spin off, a result which would have been in substance
identical to the actual transaction structure, Defendants could not claim that an additional $1.2 billion
was transferred to New Grace in connection with the Transaction.
126. Additionally, the $1.25 billion overall bodily injury claims estimate in the KPMG
report presented to the Company directors exceeded the mid-1995 estimate by $590 million.
Because New Grace alone had $467.9 million of shareholders’ equity at the end of 199759, and New
Grace’s operating income for 1998 was virtually identical to the income for 1997 (except for the
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60Id. at p. F-4.
61Id. at p. F.-6.
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additional asbestos-related liabilities accrual),60 the resulting thin margin of equity for New Grace
at year’s end was completely foreseeable at the time of the Transaction. In fact, just as the parties
to the Transaction intended, New Grace’s balance sheet reflects that New Grace was left with net
assets (i.e., shareholders’ equity) of only $87.6 million as of December 31, 199861.
127. Given this predictable, razor-thin margin of solvency, Defendants knew or were
reckless with respect to whether New Grace would be insolvent (and, therefore, as to whether post-
Transaction Sealed Air would suffer fraudulent conveyance liability) absent the artificial suppression
of asbestos-related claims through the moratoria. In fact, the razor-thin, post-Transaction margin of
equity was commented on by analysts after Judge Wolin’s ruling in the Grace bankruptcy exposed
Sealed Air’s potential liability. A July 31, 2002 Morgan Stanley analyst’s report stated that “the
judge’s ruling means that the fraudulent conveyance will be determined at whether or not Grace was
solvent at the time of the deal....Our quick-and-dirty solvency test indicates that Grace will be found
to be insolvent. With only a small cushion in the 3/31/1998 balance sheet, even a small adjustment
in assessed liabilities would tip the balance.” (Emphasis added).
128. Company management was well aware at the time of the Transaction that asbestos
liabilities could easily erase this relatively minuscule equity. The KPMG report, which had been
presented to the Company’s board of directors at the meeting when they approved the Transaction,
stated that the increase in estimated liability from $590 billion to $1.25 billion was due to an increase
in claims from 24,000 in 1994 to 38,000 in 1995. If an increased rate of 14,000 annual claims could
increase liability to be accrued by more than $600 million, even a small additional percentage
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62Heenan, John, “Graceful Maneuvering: Corporate Avoidance of Liability ThroughBankruptcy and Corporate Law,” Vermont Journal of Environmental Law, 2003. See, also, an articlefrom the Seattle Post-Intelligencer dated December 3, 1999, entitled “Finally, Libby asbestos victimshave their say,” which mentions that 5 billion pounds of asbestos are still contained in the sparelycovered tailing pile given a clean bill of health by state investigators.
49
increase in claims (e.g., an additional 2,000 claims or 5% ) could wipe out less than $100 million
in shareholder equity.
129. Additional circumstantial evidence of scienter is presented by the timing of the
Transaction with respect to facts concerning the huge asbestos liability stemming from the
Company’s asbestos operations in Libby, Montana, the cover-up by the Company and later by New
Grace of the facts related to Libby, and the related pending criminal indictment of New Grace. The
Libby vermiculite mining operation of Zonolite, acquired by the Company in 1963, is now notorious.
By Grace’s own estimates, the Company’s Libby processing plant released 5000 pounds of asbestos
each day, and in the “dry mill” processing facility there was so much dust that the workers couldn’t
see their hands. Moreover, because the Company refused to provide showers on the premises, dust
was brought home to the workers’ families. A 1969 internal Company memo acknowledged that
Libby could create “a significant financial liability” because workers were faced with “conditions
which we have good reason to believe are hazardous.62”
130. The New Grace website section on its financial reorganization states in the “Asbestos
Litigation Chronology” that during 1995-1997, i.e., the period right before the Transaction, “Libby
mine and the residents of Libby, Montana become the focus of significant media coverage. EPA
begins an investigation of the Libby mine to determine whether any on-going health hazard exists.”
The Libby situation, which was so extreme that the town is now on the EPA superfund’s national
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63See Senate Hearing 107-1002, “Asbestos Cleanup in Libby, Montana,” hearing before theCommittee on Environment and Public Works, Subcommittee on Superfund, Toxics, Risk andWaste Management, June 20, 2002, at p. 47, statement of Marianne Horinko, AssistantAdministrator, Office of Solid Waste and Emergency Response, U.S. EPA.
64Heenan, John, “Graceful Maneuvering: Corporate Avoidance of Liability ThroughBankruptcy and Corporate Law,” Vermont Journal of Environmental Law, 2003.
65According to the EPA’s website, EPA investigations have identified “contamination at twoformer processing plants with asbestos concentrations as high as 12 percent by weight. An initialinvestigation of the former mine showed high concentrations of asbestos in the tailings pile andtailings pond. EPA has also identified the dirt road to the mine as a potential health threat and willaddress it this summer. Ongoing sampling at Libby homes and in school yards is expected to revealmore information on current levels of asbestos contamination and the health threat it may pose.”
66“An [EPA] agency study in 1982 found alarming levels of asbestos [at Libby] in ore thatGrace had said included harmless amounts of the material, which can cause cancer. But the agency
50
priorities list63, imminently threatened to blow up in 1997. This clearly provided an incentive to take
all possible steps to shape the Transaction so as to insulate the Company’s packaging operations
from liability.
131. There was an ongoing cover-up of the Libby situation, by the Company and later by
New Grace. In 1980, as OSHA announced a health study to be conducted of Libby workers, an
internal Company memo discussed whether to “obstruct and block” the study. After the EPA looked
into the situation in the late 1990s, the agency’s lead field coordinator said the Company, “ lied to
us interfered with us....Grace is the most evil company I’ve ever dealt with.64” EPA Action Update
#9, April 2, 2001, available on the agency’s website, discusses the then-know hazards at Libby,65 and
mentions that the Government had to go to federal court in Montana to order New Grace to provide
access to the former mine site to conduct a cleanup. In fact, the EPA, like OSHA, knew of the
asbestos contamination prevailing in Libby since the early 1980s, according to The New York
Times66.
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shelved the report, scuttled follow-up studies and continued to accept the company's lower figures,EPA officials said this week.” See “EPA Discovers it Minimized, Ignored Asbestos Study”, fromthe New York Times news service, appearing in the San Jose Mercury News on July 22, 2000.
67Andrew Schneider, “Labor Dept. Enters Libby’s Asbestos Fight,” Seattle Post-Intelligencer,August 21, 2000.
51
132. An August 21, 2000, article from the Seattle Post-Intelligencer regarding the
commencement of an OSHA investigation concerning Libby reflects the Company’s awareness of
the contamination problems. The article reports that “At Libby, scores of inspections conducted by
federal mine inspectors repeatedly reported the same dangerous levels of asbestos. OSHA and its
research arm...did their own studies confirming the hazard, but there is no indication that the
agencies warned anyone but Grace management.67”
133. New Grace’s November 22, 2004, Form 8-K discloses that New Grace is the target
of an investigation which “relates to Grace's former vermiculite mining and processing activities in
Libby, Montana. By designating Grace as a ‘target’ of the investigation, the government is asserting
that it has substantial evidence linking the company to the commission of a crime. Grace
understands that the investigation is at an advanced stage and that it is likely to be indicted during
the first quarter of 2005....Several current and former senior level employees associated with Grace's
construction products business also have been named as targets of the investigation.” The pending
criminal indictment demonstrates a knowing violation of law with respect with Libby, a state of mind
consistent with a desire to cover-up and reduce liability through a corporate spin-off.
134. Scienter is also demonstrated by the fact that Defendant Dunphy sold 90,000 shares,
or 11.8% of his Sealed Air holdings, for more than $4 million between May 9 and May 17, 2002.
This sale – Dunphy’s first sale of Company stock – was made as the fraudulent transfer claim in the
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New Grace bankruptcy proceeding was moving toward trial.
VII. GAAP REQUIRED DEFENDANTS TO ACCRUE THE COMPANY’SFRAUDULENT TRANSFER LIABILITY ON ITS BALANCE SHEET
135. In addition to misleading the investing public by, inter alia, denying the Company’s
fraudulent transfer liability and failing to disclose the existence of the moratoria, Defendants violated
Generally Accepted Accounting Principles ("GAAP") by failing to accrue for the Company’s
contingent liability to asbestos claimants, which artificially inflated the Company’s earnings, as well
as failing to make the appropriate factual disclosures in the contingencies note to the Company’s
financial statements.
136. Financial Accounting Standards Board (“FASB”) Statement 5 (“FAS-5") establishes
standards of financial accounting and reporting for loss contingencies. FAS-5 requires accrual and
disclosure for an estimated loss from a loss contingency if two conditions are met: (i) information
available prior to issuance of the financial statements indicates that it is probable that an asset had
been impaired or a liability had been incurred at the date of the financial statements, and (ii) the
amount of loss can be reasonably estimated. If a loss contingency is “probable,” and only a range
of possible loss can be estimated, then the minimum amount of the range is accrued.
137. Defendants, however, failed to accrue in the Company’s financial statements for even
the minimum amount of possible loss from Sealed Air’s probable asbestos liability, although the
range of possible loss could be reasonably estimated based on information available prior to issuance
of the financial statements. In particular, since the Company faced an unwinding of the Packaging
Business Transaction based on traditional principles of fraudulent transfer law, and since the
Transaction involved marketable stock as consideration and cash, the Company could readily
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establish a liquid value of the liability it faced, i.e., a return of the market value of Company stock
given to pre-existing Sealed Air shareholders, subtracting the $1.2 billion in cash transferred by the
Company’s packaging business to New Grace immediately preceding the spin-off of New Grace.
138. The Company’s financial statements and statements about them were misleading as
such financial information was not prepared in conformity with GAAP, nor was the financial
information a fair representation of the Company’s operations or the Company’s contingent,
asbestos-related liability.
139. GAAP are those principles recognized by the accounting profession 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)(1)) states that financial statements filed with the
SEC which are not prepared in compliance with GAAP are presumed to be misleading and
inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial
statements must also comply with GAAP, with the exception that interim financial statements need
not include disclosure which would be duplicative of disclosures accompanying annual financial
statements. 17 C.F.R. §210.10-01(a).
140. Sealed Air’s 1999 Form 10-K, filed March 27, 2000 with the SEC; the Form 10-Q,
filed May 12, 2000; the July 26, 2000 press release; the Form 10-Q filed August 11, 2000; the
October 26, 2000 press release; the Form 10-Q filed November 13, 2000; the January 25, 2001 press
release; the 2000 Form 10-K, filed March 23, 2001; the April 25, 2001 press release; the Form 10-Q,
filed May 31, 2001; the July 25, 2001 press release; the Form 10-Q filed August 10, 2001; the
October 24, 2001 press release; the Form 10-Q filed November 13, 2001; the December 10, 2001
press release; the January 24, 2002 press release; the 2001 Form 10-K filed March 27, 2002; the
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April 24, 2002 press release; the Form 10-Q filed May 14, 2002; and the July 24, 2002 press release
presented the Company’s financial results and statements in a manner which violated GAAP,
including the following fundamental accounting principles:
(a) The principle that interim financial reporting should be based upon the same
accounting principles and practices used to prepare annual financial statements was violated (APB
No. 28, ¶10);
(b) The principle that financial reporting should provide information that is useful to
present and potential investors and creditors and other users in making rational investment, credit
and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);
(c) The principle that financial reporting should provide information about the
economic resources of an enterprise, the claims to those resources and effects of transactions, events
and circumstances that change resources and claims to those resources was violated (FASB
Statement of Concepts No. 1, ¶40);
(d) The principle that financial reporting should provide information about how
management of an enterprise has discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it was violated. To the extent that management offers
securities of the enterprise to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and to the public in general (FASB Statement of Concepts
No. 1, ¶50);
(e) The principle that financial reporting should provide information about an
enterprise's financial performance during a period was violated. Investors and creditors often use
information about the past to help in assessing the prospects of an enterprise. Thus, although
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investment and credit decisions reflect investors' expectations about future enterprise performance,
those expectations are commonly based at least partly on evaluations of past enterprise performance
(FASB Statement of Concepts No. 1, ¶42);
(f) The principle that financial reporting should be reliable in that it represents what
it purports to represent was violated. That information should be reliable as well as relevant is a
notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶58-59);
(g) The principle of completeness, which means that nothing is left out of the
information that may be necessary to insure that it validly represents underlying events and
conditions was violated (FASB Statement of Concepts No. 2, ¶79); and
(h) The principle that conservatism be used as a prudent reaction to uncertainty to try
to ensure that uncertainties and risks inherent in business situations are adequately considered was
violated. The best way to avoid injury to investors is to try to ensure that what is reported represents
what it purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97).
141. Further, the undisclosed adverse information concealed by defendants during the
Class Period is the type of information which, because of SEC regulations, regulations of the
national stock exchanges and customary business practice, is expected by investors and securities
analysts to be disclosed and is known by corporate officials and their legal and financial advisors to
be the type of information which is expected to be and must be disclosed.
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VIII. THE DEFENDANTS MADE FALSE AND MISLEADING STATEMENTS DURINGTHE CLASS PERIOD
142. Each of the following statements was the responsibility of those of the Defendants
who were at the Company at the time the statement was issued.
143. The Class Period begins on March 27, 2000, when Sealed Air filed its 1999 Form 10-
K. The Form 10-K was signed by, among others, defendants Hickey and Van Riper, and included
the Company’s financial results for fiscal 1999. The Company reported net earnings of
$211,461,000 or $1.69 per common share.
144. The Company’s 1999 Form 10-K made the following disclosure under Item 3
litigation, with respect to the Company’s potential liability for the asbestos-related liabilities of W.R.
Grace (i.e., New Grace):
In connection with the Merger, New Grace retained, and agreed to indemnify anddefend the Company against, all liabilities of Grace, whether accruing or occurringbefore or after the Merger, other than liabilities arising from or relating to Cryovac'soperations. As a result, New Grace is obligated to indemnify and defend theCompany in a small number of actions raising asbestos-related claims in which theCompany has been named as a defendant as the alleged successor to Grace becauseof the Merger. The Company believes that such claims are without merit as to theCompany and intends to defend vigorously these actions. Based upon currentlyavailable information, the Company believes that future costs, if any, related to suchactions and other indemnified liabilities will not have a material adverse effect on theCompany's results of operations or consolidated financial position.
145. The Company’s 1999 10-K also stated as follows at Note 18 to its financial
statements, entitled “COMMITMENTS AND CONTINGENCIES”:
CONTINGENT LIABILITIES INDEMNIFIED BY NEW GRACE
Pursuant to the Transaction Agreements, New Grace agreed to indemnify theCompany against all liabilities of Grace, whether accruing or occurring before orafter the Merger, other than liabilities arising from or relating to Cryovac'soperations. New Grace also agreed to retain certain liabilities of Cryovac and to
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indemnify the Company against such liabilities. The Company may remaincontingently liable with respect to certain of such liabilities if New Grace fails tofulfill its indemnity obligations to the Company. Based upon currently availableinformation, the Company believes that future costs related to such indemnifiedliabilities will not have a material adverse effect on the Company's results ofoperations or consolidated financial position.
146. The foregoing statements in the Company’s 1999 Form 10-K were false and
misleading as to the existence and likelihood of fraudulent transfer liability and false and misleading
by denying the Company’s fraudulent transfer liability and by omitting relevant material facts as
explained in The Substantive Factual Allegations, and particularly in Section IV thereof above.
Defendants should have disclosed that (1) New Grace was not solvent at the time of the Transaction
due to its increasing asbestos liabilities, and application of relevant legal standards would therefore
render Sealed Air liable to Grace’s creditors (including asbestos personal injury claimants) because
the Transaction was a fraudulent transfer, and (2) the following facts must be considered when
evaluating the extent of Sealed Air’s fraudulent transfer liability arising from the Transaction: (i)
Grace’s asbestos liability had been artificially suppressed during the 1997 through 1999 period, and
was not representative of the number of future claims or the magnitude of future liability, due to the
moratoria; and (ii) Defendants could not provide a reasonable estimation of Grace’s total future
asbestos-related liabilities at the time of the Transaction because of the uncertainty created by the
artificial suppression of claims by the moratoria, and (iii) the Company did not consider Grace’s
asbestos liabilities arising from the Company’s mining operations in Libby, Montana, in making its
determination that New Grace would be solvent after the Transaction.
147. The Company’s 1999 10-K contained a section called “Management’s Discussion and
Analysis of Results of Operations and Financial Condition. By failing to mention Sealed Air’s
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continued liabilities for Grace’s asbestos-related liabilities, particularly based on the legal concept
of fraudulent transfer, that section of the 1999 10-K violated 17 CFR Reg. section 229.303, Item 303
of SEC Regulation S-K, which requires disclose of all in formation “that the registrant believes to
be necessary to an understanding of its financial condition,” and, at paragraph (a)(1), requires the
issuer’s 10-K to “[i]dentify any known trends of any known demands, commitments, events or
uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity
increasing or decreasing in any material way.”
148. The Company’s 1999 Form 10-K reported net earnings of $211,461,000 for 1999 on
its consolidated statements of earnings, and total liabilities of $1,542,541,000. Both of the foregoing
items were false and misleading. The Company failed to accrue its probable liabilities for fraudulent
transfer in connection with the Transaction, and therefore overstated its earnings and understated its
liabilities.
149. On May 12, 2000, Sealed Air filed a Form 10-Q for the first quarter of fiscal 2000.
The Form 10-Q was signed by defendant Warren and reported net earnings of $54,983,000 or $0.49
per common share and total liabilities of $1,568,827,000. The Form 10-Q stated that “While the
Company is not aware that any of the factors listed below will adversely affect the future
performance of the Company, the Company recognizes that it is subject to a number of uncertainties,
such as...future litigation and claims (including environmental matters) involving the Company....”
The Form 10-Q also contained a section entitled “Management’s Discussion and Analysis of Results
of Operations and Financial Condition” which contained a discussion entitled “Liquidity and Capital
Resources,” and another discussion entitled “Environmental Matters” related to environmental
liabilities, but the Company did not mention the facts concerning its liabilities for Grace’s asbestos-
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related liabilities, and the Company failed to correct the omissions in the MD&A portion of the
Company’s 1999 Form 10-K.
150. On July 26, 2000, Sealed Air issued a press release announcing the Company’s
financial results for the second quarter of 2000. The press release announced net earnings of
$53,831,000 or $0.44 per common share. The press release was silent on the subject of the
Company’s potential liability stemming from Grace’s asbestos-related liabilities and the Cryovac
transaction.
151. On August 11, 2000, Sealed Air filed a Form 10-Q for the second quarter of fiscal
2000. The Form 10-Q was signed by defendant Warren and reported net earnings of $53,831,000 or
$0.44 per common share and total liabilities of $1,529,881,000. The Form 10-Q stated that “While
the Company is not aware that any of the factors listed below will adversely affect the future
performance of the Company, the Company recognizes that it is subject to a number of uncertainties,
such as... litigation and claims (including environmental matters) involving the Company. ...” The
Form 10-Q also contained a section titled “Management’s Discussion and Analysis of Results of
Operations and Financial Condition” which included a discussion titled “Liquidity and Capital
Resources,” and another discussion titled “Environmental Matters” related to environmental
liabilities, but Sealed Air did not mention the facts concerning its liabilities for Grace’s asbestos-
related liabilities, and failed to correct the omissions in the MD&A portion of Sealed Air’s 1999
Form 10-K.
152. On October 26, 2000, Sealed Air issued a press release announcing the Company’s
financial results for the third quarter of 2000. The press release announced earnings of $54,714,000
or $0.57 per common share.
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153. On November 13, 2000, the Company filed its Form 10-Q for the period ending
September 30, 2000 with the SEC. The Form 10-Q was signed by defendant Warren and repeated
the financial results announced in the October 26 press release, reporting net earnings of
$54,714,000 or $0.57 per common share and total liabilities of $1,776,669,000. The Form 10-Q
stated that “While the Company is not aware that any of the factors listed below will adversely affect
the future performance of the Company, the Company recognizes that it is subject to a number of
uncertainties, such as... litigation and claims (including environmental matters) involving the
Company. ...” The Form 10-Q also contained a section titled “Management’s Discussion and
Analysis of Results of Operations and Financial Condition” which included a discussion titled
“Liquidity and Capital Resources,” and another discussion titled “Environmental Matters” related
to environmental liabilities, but Sealed Air did not mention the facts concerning its liabilities for
Grace’s asbestos-related liabilities, and the Sealed Air failed to correct the omissions in the MD&A
portion of the Company’s 1999 Form 10-K.
154. The foregoing statements in Sealed Air’s Form 10-Q filed with respect to the first
three quarters of 2000 were false and misleading as to the existence and likelihood of fraudulent
transfer liability and false and misleading by denying the Company’s fraudulent transfer liability and
by omitting relevant material facts as explained in The Substantive Factual Allegations, and
particularly in Section IV thereof above. Defendants should have disclosed that: (1) New Grace was
not solvent at the time of the Transaction due to its increasing asbestos liabilities, and application
of relevant legal standards would therefore render Sealed Air liable to Grace’s creditors (including
asbestos personal injury claimants) because the Transaction was a fraudulent transfer; and (2) the
following facts must be taken into account in evaluating the extent of Sealed Air’s fraudulent transfer
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liability arising from the Transaction as a fraudulent transfer: (i) Grace’s asbestos liability had been
artificially suppressed during the period 1997 through 1999, and was not representative of the
number of future claims or the magnitude of future liability, due to the moratoria; (ii) Defendants
could not provide a reasonable estimation of Grace’s total future asbestos-related liabilities at the
time of the Transaction. because of the uncertainty created by the artificial suppression of claims by
the moratoria; and (iii) the Company did not consider the Grace asbestos liabilities arising from the
Company’s mining operations in Libby, Montana in making its determination that New Grace would
be solvent after the Transaction. The Form 10-Qs were also false and misleading in that their
sections titled “Management’s Discussion and Analysis of Results of Operations and Financial
Condition” failed to correct the omissions contained in the corresponding MD&A section in Sealed
Air’s 1999 Form 10-K.
155. Sealed Air’s Form 10-Qs for the first, second and third quarters of 2000 were also
false and misleading as to the Company’s reported net earnings and total liabilities. The Company
failed to accrue its probable liabilities for fraudulent transfer in connection with the Transaction, and
therefore overstated its earnings and understated its liabilities.
156. Approximately one week following the filing of the Company’s third quarter 2000
Form 10-Q, an article appearing in Bloomberg News (“Bloomberg”) on November 21, 2000,
discussed the asbestos-related and fraudulent transfer lawsuits filed against Grace and Sealed Air.
The article quoted a Sealed Air spokesman who downplayed the Company’s contingent asbestos
liability, and stated:
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Sealed Air Says It Doesn't Expect Effect From Asbestos Lawsuits
Saddle Brook, New Jersey, Nov. 21 (Bloomberg) -- Sealed Air Corp., maker ofBubble Wrap and Instapak foam packaging, said it doesn't believe it will besignificantly affected by any asbestos litigation brought against W.R. Grace & Co.,which sold a packaging business to Sealed Air in 1998.
Sealed Air has been named in lawsuits brought against specialty chemical makerGrace earlier this year. One suit claims Grace tried to shield itself from nearly $1billion in legal claims by shedding profitable businesses, including packaging.
Investors have been asking about the effect of court cases in recent weeks on SealedAir and the company believes that concern over the lawsuits is leading to a declinein Sealed Air's stock, said spokesman Ryan Flanagan.
Saddle Brook, New Jersey-based Sealed Air's shares fell $2.25 to $40 today. Theshares have fallen 21 percent since Nov. 15. Sealed Air, which tripled in size bytaking over Grace's Cryovac unit, did not acquire any business that made or soldasbestos, Flanagan said.
Columbia, Maryland-based Grace once sold building fireproofing that containedasbestos. As part of the sale of its packaging business, Grace agreed to defend andindemnify Sealed Air against any asbestos litigation, Flanagan said. (Emphasisadded).
157. Defendants knew or recklessly disregarded that the Company’s statements in the
November 21, 2000, Bloomberg article were materially misleading because Sealed Air was facing
substantial contingent asbestos liability. Moreover, the article further reflects that defendants were
in violation of GAAP by failing to accrue for Sealed Air’s contingent asbestos liability; by
November 2000 it was probable that Sealed Air would be held liable for asbestos claims against
Grace because more than 20 lawsuits had been filed against Sealed Air alleging, among other things,
that the Company had incurred the asbestos liabilities of Grace and the Cryovac transaction was a
fraudulent conveyance for the purpose of shielding Grace’s assets from judgement creditors.
Additionally, in light of the thousands of asbestos lawsuits already filed against Grace and other
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companies, defendants could reasonably estimate the probable loss or a range of possible loss based
on then-available information.
158. On January 25, 2001, Sealed Air issued a press release announcing the Company’s
financial results for fourth-quarter and full-year 2000. The press release announced net earnings of
$61,791,000 and $225,319,000, respectively, or earnings per common share of $0.97 for the quarter
and $2.47 for the full year. The press release was silent on the subject of the Company’s potential
liability stemming from Grace’s asbestos-related liabilities and the Cryovac transaction.
159. The financial results announced in the January 25, 2001, press release were repeated
in the Company’s 10-K for fiscal 2000, which reported net earnings of $225,319,000 for the full year
of 2000, and total liabilities of $1,902,596,000. The Form10-K was signed by Defendants Hickey,
Van Riper and Warren, among others, and filed March 23, 2001 with the SEC.
160. The Company’s 2000 Form 10-K made the following disclosures under “Item 3
Litigation,” with respect to the Company’s potential liability for the asbestos-related liabilities of
W.R. Grace (i.e., New Grace):
In connection with the Cryovac Transaction, New Grace and its subsidiaries retainedall liabilities of Grace, whether accruing or occurring before or after the CryovacTransaction, other than liabilities arising from or relating to Cryovac's operations.The liabilities retained by New Grace include, among others, liabilities relating toasbestos-containing products previously manufactured or sold by Grace subsidiaries,including its primary U.S. operating subsidiary, which has operated for decades andhas been a subsidiary of New Grace since the Cryovac Transaction. The TransactionAgreements provided that, should any claimant seek to hold the Company, includingany of its subsidiaries, responsible for liabilities of New Grace or its subsidiaries,including such asbestos-related liabilities, New Grace and its subsidiaries wouldindemnify and defend the Company.
Since the beginning of 2000, the Company has been served with a number of lawsuitsalleging that, as a result of the Cryovac Transaction, the Company is responsible foralleged asbestos liabilities of New Grace and its subsidiaries, certain of which are
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also named as co-defendants in these actions. As of March 21, 2001, pending actionsinclude eight purported class action lawsuits and thirteen personal injury lawsuits.These cases are all in the pre-trial stage, and none has been resolved throughjudgment, settlement or otherwise. The purported class action lawsuits include thefollowing:
TENNISON V. W. R. GRACE & COMPANY, ET AL., filed in February 2000 andpending in the U.S. District Court, District of Montana, Missoula Division. The reliefsought includes environmental remediation and restoration, property damages andpunitive damages arising from vermiculite mining and processing operationsformerly owned and operated by Grace in Libby, Montana that allegedly resulted inasbestos contamination of the surrounding area. The putative class consists of ownersof improved private properties within a 12 mile radius of the courthouse in Libby,Montana.
GRENFELL V. W. R. GRACE & COMPANY, ET AL., filed in February 2000 andpending in the Multidistrict Litigation (MDL) 875 in the U.S. District Court, EasternDistrict of Pennsylvania. The relief sought includes medical monitoring and punitivedamages arising from alleged asbestos-contaminated vermiculite mining andprocessing operations formerly owned and operated by Grace in Libby, Montana. Theputative class consists of residents and former residents who lived, for at least oneyear since 1930, within a 12 mile radius of the courthouse in Libby, Montana, andemployees who worked for at least one year at the local vermiculite processing plantand members of their households.
BARBANTI V. W. R. GRACE & COMPANY-CONN., ET AL., filed in March 2000and pending in the Superior Court, State of Washington, County of Spokane. Therelief sought includes identification of affected properties, notification of classmembers, a remediation fund, punitive damages and other relief. The complaint isbrought on behalf of owners or occupiers of real property located in the State ofWashington in which Zonolite Attic Insulation has been installed and alleges thatsuch insulation contains asbestos-contaminated vermiculite. Although the class hasbeen certified, New Grace and the Company have requested discretionary appellatereview of the class certification ruling.
PRICE V. W. R. GRACE & COMPANY, ET AL., filed in April 2000, andHUNTER V. W. R. GRACE & COMPANY, ET AL., filed in July 2000, both ofwhich are pending in MDL 1376 in the U.S. District Court, District of Massachusetts.In both cases, the purported class consists of owners or occupiers of real propertylocated in the United States in which Zonolite Attic Insulation has been installed. Therelief sought includes identification of affected properties, notification to purportedclass members, funds for research, a remediation program, punitive damages andother relief.
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CHAKARIAN V. W. R. GRACE & COMPANY, ET AL., filed in May 2000 andpending in the MDL 875 in the U.S. District Court, Eastern District of Pennsylvania.The purported class consists of all employees who worked for three months or moreat any Grace plant that processed vermiculite and members of their households. Therelief sought includes medical monitoring, research funds, and warnings to thepurported class.
MCMURCHIE V. W. R. GRACE & COMPANY-CONN., ET AL., filed October2000 and pending in the District Court, Fourth Judicial District, County of Hennepin,Minnesota. The purported class consists of owners or occupiers of real propertylocated in the State of Minnesota in which vermiculite attic insulation has beeninstalled. The relief sought includes identification of affected properties, warningsto the purported class, research funds, and other relief.
ABNER, ET AL., V. W. R. GRACE & COMPANY, ET AL., filed in September2000 and pending in the Superior Court of California, County of San Francisco. Thepurported class consists of all persons who have lawsuits on file in the United Statesthat are pursuing unsatisfied personal injury or wrongful death claims against any ofthe defendants based on asbestos exposure. Other defendants include New Grace andrelated companies, Merrill Lynch, Pierce, Fenner & Smith Inc., Credit Suisse FirstBoston Corp., National Medical Care, Inc., and Fresenius Medical Care, Inc., andrelated companies. The plaintiffs allege that the Cryovac Transaction and an earlier1996 transaction between Grace and Fresenius AG constitute fraudulentconveyances, result from civil conspiracies and constitute unfair business practices.Relief sought includes an accounting for all transfers of assets of Grace and proceedsfrom the distribution of such assets and receipt of fees in connection with suchtransactions, a declaration that both transactions were fraudulent transfers,establishment of a constructive trust on all assets transferred in such transactions anda determination that the defendants are jointly and severally responsible for damagesequal to the full fair market value of all assets transferred in connection with suchtransactions, among other remedies.
Plaintiffs in the personal injury lawsuits seek damages for personal injury orwrongful death related to alleged exposures to asbestos-containing products. Whilethe allegations that are directed to the Company in all of the cases mentioned abovevary, these actions all appear to allege that the Cryovac Transaction was a fraudulenttransfer or gave rise to successor liability.
In addition, the Company has been advised that plaintiffs in a substantial number ofOhio state court asbestos-related personal injury lawsuits have been grantedpermission to amend their complaints to add the Company as an additionaldefendant. However, the Company has not been served in any of such actions andlacks further information about these actions.
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The Company believes that it is well-positioned to defend the allegations against itin any asbestos-related actions. Neither old Sealed Air nor Cryovac has everproduced or sold any asbestos-containing products. To the extent that the Companyis named in any asbestos-related actions, the Company intends to defend its interestsvigorously. However, an adverse outcome could have a material adverse effect on theCompany's results of operations or consolidated financial position. While it is notpossible to predict the outcome of any litigation, based on the facts known to theCompany, the Company does not believe that an adverse outcome is probable. Thus,in accordance with generally accepted accounting principles, the Company has notrecorded any liability in its financial statements for these actions. (Emphasis added).
161. Sealed Air’s 2000 10-K, at Note 17 to its financial statements, titled
“COMMITMENTS AND CONTINGENCIES,” repeated the first and last paragraphs from
“Item 3 Litigation” quoted in the foregoing paragraph, omitted the listing of specific cases and, for
the second paragraph quoted above, substituting the following:
Since the beginning of 2000, the Company has been served with a number of lawsuitsalleging that, as a result of the Cryovac Transaction, the Company is responsible foralleged asbestos liabilities of New Grace and its subsidiaries, certain of which arealso named as co-defendants in these actions. These actions include severalpurported class action lawsuits and a number of personal injury lawsuits. Someplaintiffs seek damages for personal injury or wrongful death while others seekmedical monitoring, environmental remediation or remedies related to an atticinsulation product. While the allegations in these actions directed to the Companyvary, these actions all appear to allege that the Cryovac Transaction was a fraudulenttransfer or gave rise to successor liability. These cases are all in the pre-trial stage,and none has been resolved through judgment, settlement or otherwise.
162. The three-paragraph disclosure in Note 17 to the Company’s 2000 financial
statements is also stated in the Form 10-K’s “Management's Discussion and Analysis of Results of
Operations and Financial Condition” section under the heading “Contingencies Related to the
Cryovac Transaction.”
163. The foregoing statements in the Company’s 2000 Form 10-K were false and
misleading as to the existence and likelihood of fraudulent transfer liability and false and misleading
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by denying the Company’s fraudulent transfer liability and by omitting relevant material facts as
explained in The Substantive Factual Allegations, and particularly in Section IV thereof above.
Defendants should have disclosed that: (1) New Grace was not solvent at the time of the Transaction
due to its increasing asbestos liabilities, and application of relevant legal standards would therefore
render Sealed Air liable to New Grace’s creditors (including asbestos personal injury claimants)
because the Transaction was a fraudulent transfer, and/or (2) the following facts must be taken into
account in evaluating the extent of Sealed Air’s liability arising from the characterization of the
Transaction as a fraudulent transfer: (i) the asbestos liability borne by Grace-1998 and inherited by
New Grace had been artificially suppressed during the period 1997 through 1999, and was not
representative of the number of future claims or the magnitude of future liability, due to the
moratoria; (ii) Defendants could not provide a reasonable estimate of New Grace’s total future
asbestos-related liabilities at the time of the Transaction because of the uncertainty created by the
artificial suppression of claims by the moratoria; and (iii) the Company did not consider the asbestos
liabilities arising from the Company’s mining operations in Libby, Montana, in making its
determination that New Grace would be solvent after the Transaction.
164. The reported earnings and liabilities in the Sealed Air’s 2000 Form 10-K, and related
January 25, 2001 press release were false and misleading The Company failed to accrue its probable
liabilities for fraudulent transfer in connection with the Transaction, and therefore overstated its
earnings and understated its liabilities.
165. On April 2, 2001, New Grace issued a press release announcing that it was filing for
reorganization under Chapter 11 of the United States Bankruptcy Code “in response to a sharply
increasing number of asbestos claims.” The bankruptcy filing constituted an admission by New
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Grace that it was insolvent, thereby increasing the likelihood that Grace-1998/Sealed Air would be
found liable under principles of fraudulent transfer law. Yet even after Grace’s bankruptcy filing,
Sealed Air continued to issue false and misleading statements concerning the existence and nature
of that liability, and continued to violate GAAP by failing to accrue for the Company’s contingent
asbestos liability.
166. On April 25, 2001, Sealed Air issued a press release announcing the Company’s
financial results for the first quarter of fiscal 2001. The press release announced net earnings of
$34,560,000 or $0.30 per common share. The press release was silent on the subject of the
Company’s potential liability stemming from Grace’s asbestos-related liabilities and the Cryovac
transaction.
167. The financial results set forth in the April 25 press release were repeated in the
Company’s Form 10-Q for first-quarter 2001. The Form 10-Q, which reported net earnings of
$34,560,000 and total liabilities of $1,926,412,000, was signed by defendant Warren and filed on
May 11, 2001 with the SEC. The Form 10-Q made the following disclosures in Note 9 to its
financial statements, titled “Commitments and Contingencies”:
The Company has been served with a number of lawsuits alleging that the Companyis responsible for alleged asbestos liabilities of New Grace and its subsidiaries as aresult of the 1998 Cryovac Transaction. The Transaction Agreements provided thatshould any claimant seek to hold the Company, including any of its subsidiaries,responsible for liabilities of New Grace or its subsidiaries, including suchasbestos-related liabilities, New Grace and its subsidiaries would indemnify anddefend the Company. For a description of the Cryovac Transaction and certain relatedlawsuits and defined terms, see Notes 4 and 17 to the Consolidated FinancialStatements of the Company and its subsidiaries, which are incorporated by referenceinto the Company's Annual Report on Form 10-K for the year ended December 31,2000.
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On April 2, 2001, New Grace and certain of its subsidiaries filed for reorganizationunder Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in theDistrict of Delaware. In connection with that filing, New Grace filed an applicationwith the Bankruptcy Court seeking to stay all actions related to New Grace's asbestosliabilities and fraudulent transfer claims in which the Company has been named. Thecourt issued an order dated May 3, 2001 staying all such filed or pending actionsagainst the Company. If additional lawsuits are served on the Company after the dateof the order, New Grace has stated that it will seek to stay such actions. TheCompany believes that New Grace's filing for reorganization may provide a singleforum in which all litigation related to New Grace's asbestos liabilities as well asfraudulent transfer claims might be resolved.
The Company believes that it has strong defenses against these claims and intendsto defend its interests vigorously. The New Grace bankruptcy proceeding is in thevery early stages and could take a few years to complete. In connection with NewGrace's bankruptcy proceeding, the Company could incur additional costs in theresolution of claims against the Company that could become material to itsconsolidated results of operations and financial position.
168. On July 25, 2001, Sealed Air issued a press release announcing the Company’s
financial results for the second quarter of fiscal 2001. The press release announced net earnings of
$39,264,000 or $0.30 per common share. The press release was silent on the subject of the
Company’s potential liability stemming from Grace’s asbestos-related liabilities and the Cryovac
transaction.
169. The financial results set forth in the July 25 press release were repeated in the
Company’s Form 10-Q for second-quarter 2001. The Form 10-Q, which reported net earnings of
$39,264,000 and total liabilities of $1,836,331,000, was signed by defendant Warren and filed
August 10, 2001, with the SEC. The second-quarter 10-Q contained far more extensive disclosures
concerning the potential fraudulent transfer liability the Company was facing and, remarkably, the
Company described itself in the third person in referring to the Joint Proxy Statement filed at the
time of the Packaging Business Transaction, noting the claim of solvency for New Grace that was
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made as being “their belief,” i.e., the belief of the Transaction participants, misleading investors to
falsely believe that the Company was not a continuation of Grace-1998 and therefore somehow could
avoid responsibility for the claims that New Grace was solvency which were made at the time of the
Transaction in the joint proxy statement and never corrected.
170. The Form 10-Q for second quarter 2001 disclosed, in Note 9 to the quarterly financial
statements, titled “Commitments and Contingencies,” as follows:
9) Commitments and Contingencies
On March 31, 1998, the Company completed a multi-step transaction (the "CryovacTransaction"), which brought the Cryovac packaging business ("Cryovac") and theformer Sealed Air Corporation ("old Sealed Air") under the common ownership ofthe Company. These businesses operate as subsidiaries of the Company, and theCompany acts as a holding company. As part of that transaction, the Cryovacpackaging business, held by various direct and indirect subsidiaries of the Company,was separated from the remaining businesses of the Company. Such remainingbusinesses were then contributed to a company now known as W. R. Grace & Co.("New Grace"), whose shares were distributed to the Company's stockholders. As aresult, New Grace became a separate publicly owned company. The Companyrecapitalized its outstanding shares of common stock into a new common stock anda new convertible preferred stock. A subsidiary of the Company then merged into oldSealed Air, which changed its name to Sealed Air Corporation (US). The agreementspursuant to which the Cryovac Transaction was carried out are referred to below asthe "Transaction Agreements."
In connection with the Cryovac Transaction, New Grace and its subsidiaries retainedall liabilities arising out of their operations before the Cryovac Transaction, whetheraccruing or occurring before or after the Cryovac Transaction, other than liabilitiesarising from or relating to Cryovac's operations. The liabilities retained by NewGrace include, among others, liabilities relating to asbestos-containing productspreviously manufactured or sold by New Grace's subsidiaries prior to the CryovacTransaction, including its primary U.S. operating subsidiary, which has operated fordecades and has been a subsidiary of New Grace since the Cryovac Transaction. TheTransaction Agreements provided that, should any claimant seek to hold theCompany, including any of its subsidiaries, responsible for liabilities of New Graceor its subsidiaries, including such asbestos-related liabilities, New Grace and itssubsidiaries would indemnify and defend the Company.
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Since the beginning of 2000, the Company has been served with a number of lawsuits(the "New Grace-Related Claims") alleging that, as a result of the CryovacTransaction, the Company is responsible for alleged asbestos liabilities of New Graceand its subsidiaries, certain of which are also named as co-defendants in many ofthese actions. These actions include several purported class action lawsuits and anumber of personal injury lawsuits. Some plaintiffs seek damages for personal injuryor wrongful death while others seek medical monitoring, environmental remediationor remedies related to an attic insulation product. Neither old Sealed Air nor Cryovachas ever produced or sold any asbestos-containing material. These cases are all in thepre-trial stage, and none has been resolved through judgment, settlement orotherwise. All such cases pending on May 3, 2001 have been stayed in connectionwith New Grace's Chapter 11 bankruptcy proceeding discussed below. Twocommittees appointed in New Grace's bankruptcy case to represent asbestos plaintiffshave recently filed a motion seeking the bankruptcy court's permission to pursuefraudulent transfer claims against the Company and certain other entities. A hearingon this request is currently set for early September 2001.
While the allegations in these actions directed to the Company vary, these actions allappear to allege that the transfer of the Cryovac business as part of the CryovacTransaction was a fraudulent transfer or gave rise to successor liability. Under atheory of successor liability, plaintiffs with claims against New Grace and itssubsidiaries may attempt to hold the Company derivatively liable for liabilities whicharose with respect to activities conducted prior to the Cryovac Transaction by NewGrace's primary U.S. operating subsidiary or other subsidiaries. A transfer would bea fraudulent transfer if the transferor received less than reasonably equivalent valueand the transferor was insolvent or was rendered insolvent by the transfer, wasengaged or was about to engage in a business for which its assets constituteunreasonably small capital, or intended to incur or believed that it would incur debtsbeyond its ability to pay as they mature. A transfer may also be fraudulent if it wasmade with actual intent to hinder, delay or defraud creditors. If any transfers inconnection with the Cryovac Transaction were found by a court to be fraudulenttransfers, the Company could be required to return the property or its value to thetransferor or could be required to fund certain liabilities of New Grace or itssubsidiaries for the benefit of their creditors, including asbestos claimants.
In the Joint Proxy Statement furnished to their respective stockholders in connectionwith the Cryovac Transaction, both Sealed Air and Grace stated that it was theirbelief that New Grace and its subsidiaries were adequately capitalized and would beadequately capitalized after the Cryovac Transaction and that none of the transferscontemplated to occur in the Cryovac Transaction would be a fraudulent transfer.They also stated their belief that the Cryovac Transaction complied with otherrelevant laws. However, if a court applying the relevant legal standards reachedconclusions adverse to the Company, such determination could have a materially
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adverse effect on the Company's consolidated results of operations and financialposition.
On April 2, 2001, New Grace and certain of its subsidiaries filed a petition forreorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. BankruptcyCourt in the District of Delaware. New Grace stated that the filing was made inresponse to a sharply increasing number of asbestos claims.
In connection with its Chapter 11 filing, New Grace filed an application with theBankruptcy Court seeking to stay, among other things, all actions related to the NewGrace-Related Claims asserted against the Company. The court issued an order datedMay 3, 2001 staying all such filed or pending actions against the Company. On June1, 2001, New Grace requested that the court modify its order to stay cases filedagainst the Company since May 3, 2001 as well as all future cases that may be filedagainst the Company. As of August 7, 2001, the court had not yet ruled on suchrequest. The Company believes that New Grace's filing for reorganization mayprovide a single forum in which all claims related to New Grace's liabilities,including the New Grace-Related Claims, might be resolved. The New Gracebankruptcy proceeding is in the very early stages and could take a few years tocomplete.
The Company believes that it has strong defenses to the New Grace-Related Claims,and the Company intends to defend its interests vigorously. It is not possible todetermine at this stage of the proceeding the ultimate amount of asbestos-related andother claims which may be made against the Company. In connection with NewGrace's bankruptcy proceeding, the Company could incur additional costs in theresolution of claims against the Company that could become material to itsconsolidated results of operations and financial position.
171. On October 24, 2001, Sealed Air issued a press release announcing the Company’s
financial results for the third quarter of fiscal 2001 ending September 30, 2001. The press release
announced net earnings of $44,410,000 or $0.40 per common share. The press release was silent
on the subject of the Company’s potential liability stemming from Grace’s asbestos-related liabilities
and the Cryovac transaction.
172. The financial results in the October 24 press release were repeated in the Company’s
Form 10-Q for third-quarter 2001. The Form 10-Q, which reported net earnings of $44,410,000 and
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total liabilities of $1,825,853,000, was signed by defendant Warren and filed November 13, 2001,
with the SEC. The Company’s third-quarter 2001 Form 10-Q contained disclosures with virtually
identical wording to that quoted above from Note 9, “Commitments and Contingencies,” in the
Second quarter financial statements. In the Q3 financial statements these disclosures were stated
both in Note 9 to the quarterly financial statements titled “Commitments and Contingencies” and in
the section entitled “Management’s Discussion and Analysis of Results of Operations and Financial
Condition.”
173. The foregoing statements in the Company’s Form 10-Qs for the first three quarters
of 2001 were false and misleading as to the existence and likelihood of fraudulent transfer liability,
and false and misleading because they denied the Company’s fraudulent transfer liability and omitted
relevant material facts as explained in The Substantive Factual Allegations, and particularly in
Section IV thereof above. Defendants should have disclosed that: (1) New Grace was not solvent
at the time of the Transaction due to its increasing asbestos liabilities, and application of relevant
legal standards would therefore render Sealed Air liable to Grace’s creditors (including asbestos
personal injury claimants) because the Transaction was a fraudulent transfer, and/or (2) the following
facts must be taken into account in evaluating the extent of Sealed Air’s fraudulent transfer liability
arising from the Transaction as a fraudulent transfer: (i) the asbestos liability borne by Grace-1998
and inherited by New Grace had been artificially suppressed during the period 1997 through 1999,
and was not representative of the number of future claims or the magnitude of future liability, due
to the moratoria; (ii) Defendants could not provide a reasonable estimate of New Grace’s total future
asbestos-related liabilities at the time of the Transaction because of the uncertainty created by the
artificial suppression of claims by the moratoria; and (iii) the Company did not consider the asbestos
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liabilities arising from the Company’s mining operations in Libby, Montana, when making its
determination that New Grace would be solvent after the Transaction.
174. The Company’s Form 10-Qs for the first, second and third quarters of 2001 and
related press releases were also false and misleading as to the Company’s reported net earnings and
total liabilities. The Company failed to accrue its probable liabilities for fraudulent transfer in
connection with the Transaction, and therefore overstated its earnings and understated its liabilities.
175. Approximately six weeks after the filing of the Company’s third-quarter 2001 Form
10-Q, on Friday December 7, 2001, Sealed Air investors were alarmed by a $30 million asbestos-
exposure verdict against another company, Halliburton Co., an oilfield services company
(“Halliburton”). As reported in a Bloomberg article published that day, the $30 million verdict was
the latest of three such losses68 for Halliburton, and was followed by a 42% decline in Halliburton
stock in one day. Like Sealed Air, Halliburton’s asbestos liability involved its acquisition of a
company purportedly indemnified against asbestos claims. As a result of this news, Sealed Air’s
stock dropped 9.83% by the close of trading.
176. On the following Monday, December 10, 2001, the next trading day after the
Halliburton verdict was announced, Sealed Air stock dropped an additional 9.89% after Bloomberg
reported that the decline in Sealed Air stock was caused in part by concerns that Sealed Air was
facing asbestos-related costs related to the Company’s acquisition of Grace’s packaging business.
Despite investors’ concerns, the media coverage of Halliburton’s most-recent asbestos verdict, and
the increased probability in light of the Halliburton verdict that Sealed Air would be held liable for
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asbestos claims against Grace, Sealed Air disseminated a press release that same day claiming that
“there has been no change in [Sealed Air’s] operations or prospects that it believes would
explain the activity in its stock over the last several days” (emphasis added). The December 10
press release further stated, in part:
Sealed Air Corporation's position regarding the liabilities of W.R. Grace & Co. andthe effect on Sealed Air Corporation in light of the 1998 corporate transactioninvolving Sealed Air and Grace has not changed since its most recent filing on Form10-Q for the quarter ended September 30, 2001.
177. Even after the December 7, 2001, Halliburton verdict, Sealed Air continued to violate
GAAP by failing to accrue for its contingent asbestos liability resulting from the merger of Grace’s
packaging business with Sealed Air.
178. On January 24, 2002, Sealed Air issued a press release announcing the Company’s
financial results for fourth-quarter and full-year 2001. The press release announced net earnings of
$38,463,000 for the quarter and $156,697,000 for the year, or $0.30 and $1.30 per common share,
respectively. The press release was silent on the subject of the Company’s potential liability
stemming from Grace’s asbestos-related liabilities and the Cryovac transaction.
179. The financial results in the January 24, 2002 press release were repeated in the
Company’s Form 10-K for 2001. The Form 10-K, which reported net earnings for the year of
$156,697,000 and total liabilities of $1,691,603,000, was signed by defendants Hickey, Kelsey and
Warren and filed March 27, 2002, with the SEC. In Item 3 to the Company’s full year 2001 financial
statements, entitled “Legal Proceedings,” the Company made further disclosures concerning its
potential liability for the Grace asbestos liabilities. Still referring to itself in the third person with
respect to representations made to investors concerning New Grace’s solvency in the joint proxy
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statement issued at the time of the Transaction, the 2001 Form 10-K Item 3 “Legal Proceedings”
stated, in pertinent part, as follows:
Item 3. Legal Proceedings
On March 31, 1998, the Company completed a multi-step transaction (the"Cryovac Transaction"), which brought the Cryovac packaging business and theformer Sealed Air Corporation ("old Sealed Air") under the common ownership ofthe Company. These businesses operate as subsidiaries of the Company, and theCompany acts as a holding company. As part of that transaction, the Cryovacpackaging business, held by various direct and indirect subsidiaries of the Company,was separated from the remaining businesses of the Company. Such remainingbusinesses were then contributed to a company now known as W. R. Grace & Co.("New Grace"), whose shares were distributed to the Company's stockholders. As aresult, New Grace became a separate publicly owned company. The Companyrecapitalized its outstanding shares of common stock into a new common stock anda new convertible preferred stock. A subsidiary of the Company then merged into oldSealed Air, which changed its name to Sealed Air Corporation (US). The agreementspursuant to which the Cryovac Transaction was carried out are referred to below asthe "Transaction Agreements."
In connection with the Cryovac Transaction, New Grace and its subsidiariesretained all liabilities arising out of their operations before the Cryovac Transaction,whether accruing or occurring before or after the Cryovac Transaction, other thanliabilities arising from or relating to Cryovac's operations. The liabilities retained byNew Grace include, among others, liabilities relating to asbestos-containing productspreviously manufactured or sold by New Grace's subsidiaries prior to the CryovacTransaction, including its primary U.S. operating subsidiary, W. R. Grace &Co.-Conn., which has operated for decades and has been a subsidiary of New Gracesince the Cryovac Transaction. The Transaction Agreements provided that, shouldany claimant seek to hold the Company, including any of its subsidiaries, responsiblefor liabilities of New Grace or its subsidiaries, including such asbestos-relatedliabilities, New Grace and its subsidiaries would indemnify and defend the Company.
Since the beginning of 2000, the Company has been served with a number oflawsuits alleging that, as a result of the Cryovac Transaction, the Company isresponsible for alleged asbestos liabilities of New Grace and its subsidiaries, certainof which were also named as co-defendants in some of these actions. These actionsinclude several purported class actions and a number of personal injury lawsuits.Some plaintiffs seek damages for personal injury or wrongful death while others seekmedical monitoring, environmental remediation or remedies related to an atticinsulation product. Neither old Sealed Air nor Cryovac ever produced or sold any of
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the asbestos-containing materials that are the subjects of these cases. None of thesecases has been resolved through judgment, settlement or otherwise. All such caseshave been stayed in connection with New Grace's Chapter 11 bankruptcy proceedingdiscussed below.
While the allegations in these actions directed to the Company vary, theseactions all appear to allege that the transfer of the Cryovac business as part of theCryovac Transaction was a fraudulent transfer or gave rise to successor liability.Under a theory of successor liability, plaintiffs with claims against New Grace andits subsidiaries may attempt to hold the Company liable for liabilities that arose withrespect to activities conducted prior to the Cryovac Transaction by W. R. Grace &Co.-Conn., or other New Grace subsidiaries. A transfer would be a fraudulenttransfer if the transferor received less than reasonably equivalent value and thetransferor was insolvent or was rendered insolvent by the transfer, was engaged orwas about to engage in a business for which its assets constitute unreasonably smallcapital, or intended to incur or believed that it would incur debts beyond its abilityto pay as they mature. A transfer may also be fraudulent if it was made with actualintent to hinder, delay or defraud creditors. If any transfers in connection with theCryovac Transaction were found by a court to be fraudulent transfers, the Companycould be required to return the property or its value to the transferor or could berequired to fund certain liabilities of New Grace or its subsidiaries for the benefit oftheir creditors, including asbestos claimants.
In the Joint Proxy Statement furnished to their respective stockholders inconnection with the Cryovac Transaction, both Sealed Air and Grace stated that itwas their belief that New Grace and its subsidiaries were adequately capitalized andwould be adequately capitalized after the Cryovac Transaction and that none of thetransfers contemplated to occur in the Cryovac Transaction would be a fraudulenttransfer. They also stated their belief that the Cryovac Transaction complied withother relevant laws. However, if a court applying the relevant legal standards reachedconclusions adverse to the Company, such determination could have a materiallyadverse effect on the Company's consolidated results of operations and financialposition.
On April 2, 2001, New Grace and certain of its subsidiaries filed a petitionfor reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.Bankruptcy Court in the District of Delaware. New Grace stated that the filing wasmade in response to a sharply increasing number of asbestos claims since 1999.
In connection with its Chapter 11 filing, New Grace filed an application withthe Bankruptcy Court seeking to stay, among others, all actions brought against theCompany related to alleged asbestos liabilities of New Grace and its subsidiaries oralleging fraudulent transfer claims. The court issued an order dated May 3, 2001,
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which was modified on January 22, 2002, under which all such filed or pendingactions against the Company were stayed and all such future actions are stayed uponfiling and service on the Company. No further proceedings involving the Companycan occur in the actions that have been stayed except upon further order of theBankruptcy Court. The Company believes that New Grace's filing for reorganizationmay provide a single forum in which all such claims might be resolved.
Committees appointed in New Grace's bankruptcy case have sought thecourt's permission to pursue fraudulent transfer claims against the Company andagainst Fresenius, as discussed below. The claims against Fresenius are based upona 1996 transaction between Fresenius and W. R. Grace & Co.-Conn. Fresenius is notaffiliated with the Company. In March 2002, the court ordered that the issues of thesolvency of Grace following the Fresenius transaction and the solvency of New Gracefollowing the Cryovac Transaction and whether the transferor received reasonablyequivalent value in such transactions would be tried on behalf of all creditors of NewGrace starting on September 30, 2002. The Company believes that the CryovacTransaction was not a fraudulent transfer and the Company intends to defend itsinterests vigorously.
* * *
In view of New Grace's Chapter 11 filing, the Company may receiveadditional claims asserting that the Company is liable for obligations that New Gracehad agreed to retain in the Cryovac Transaction and for which the Company may becontingently liable. To date, no material additional claims have been asserted orthreatened against the Company.
Under accounting principles generally accepted in the United States ofAmerica, an accrual for a contingent liability is appropriate only if it is probable thata liability has been incurred and if the amount of the liability can be reasonablyestimated. The Company does not believe that these conditions have been met withrespect to the claims against the Company related to the alleged asbestos liabilities,the fraudulent transfer claims or the Fresenius indemnification matter, all of whichare described above. Accordingly, the Company has not made any accrual for thesematters as of December 31, 2001.
Final determinations and accountings under the Transaction Agreements withrespect to matters pertaining to the Cryovac Transaction had not been completed atthe time of New Grace's Chapter 11 filing. The Company expects to file a claim inthe bankruptcy proceeding that will include all of the costs and liabilities that it hasincurred or may incur that New Grace agreed to retain or that are subject toindemnification by New Grace under the Transaction Agreements, less certainamounts that the Company is responsible for under the Transaction Agreements.
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Costs and liabilities for which the Company intends to seek indemnification by NewGrace will include certain defense costs related to asbestos and fraudulent transferlitigation and the Fresenius claims, the guaranteed debt paid by the Companydescribed above, any recovery by the creditors of New Grace if the Company werenot successful in defending against the fraudulent transfer or asbestos claimsdescribed above, any recovery by Fresenius if the Company were held liable toindemnify Fresenius and Fresenius were to incur an indemnifiable liability, or any ofthe other potential claims against the Company mentioned above. The Companyexpects that its claim will be as an unsecured creditor of New Grace. It is notcurrently possible to determine the amount of the Company's claim against NewGrace or the amount of the Company's recovery, if any, in the bankruptcy proceeding.
180. Disclosures identical to those quoted above in Item 3 of the 2001 Form 10-K also
appeared in Note 18, “Commitments and Contingencies,” to the Company’s 2001 financial
statements included in the 2001 Form 10-K.
181. The foregoing statements in the Company’s 2001 Form 10-K were false and
misleading as to the existence and likelihood of fraudulent transfer liability and false and misleading
because they omitted relevant material facts as explained in The Substantive Factual Allegations,
and particularly in Section IV thereof above. Defendants should have disclosed that: (1) New Grace
was not solvent at the time of the Transaction due to its increasing asbestos liabilities, and
application of relevant legal standards would therefore render Sealed Air liable to New Grace’s
creditors (including asbestos personal injury claimants) because the Transaction was a fraudulent
transfer, and (2) the following facts must be taken into account in evaluating the extent of Sealed
Air’s fraudulent transfer liability arising from the Transaction as a fraudulent transfer: (i) asbestos
liability borne by Grace-1998 and inherited by New Grace had been artificially suppressed during
the period 1997 through 1999, and was not representative of the number of future claims or the
magnitude of future liability, due to the moratoria; (ii) Defendants could not provide a reasonable
estimate of New Grace’s total future asbestos-related liabilities at the time of the Transaction.
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because of the uncertainty created by the artificial suppression of claims by the moratoria; and (iii)
the Company did not consider the asbestos liabilities arising from the Company’s mining operations
in Libby, Montana, in making its determination that New Grace would be solvent after the
Transaction.
182. The Company’s 2001 Form 10-K and the January 24, 2002 press release were also
false and misleading as to the Company’s reported net earnings and total liabilities. The Company
failed to accrue its probable liabilities for fraudulent transfer in connection with the Transaction, and
therefore overstated its earnings and understated its liabilities.
183. On April 24, 2002, Sealed Air issued a press release announcing the Company’s
financial results for the first quarter of fiscal 2002. The press release announced net earnings of
$60,545,000 or $0.56 per common share. The press release was silent on the subject of the
Company’s potential liability stemming from Grace’s asbestos-related liabilities and the Cryovac
transaction.
184. The financial results announced in the April 24 press release were repeated in the
Company’s Form 10-Q for first-quarter 2002, which reported net earnings of $60,545,000 and total
liabilities of $1,734,974,000. The Form 10-Q was signed by defendant Warren and filed May 14,
2002, with the SEC. In a section of the May 14, 2002 Form 10-Q titled “Commitments and
Contingencies,” and in Part II of that same document in a section entitled “Item 1. Legal
Proceedings,” Defendants repeated the representations and disclosures made in the Company’s 2001
Form 10-K, as quoted above, concerning Grace’s asbestos-related liabilities and the Sealed Air’s
potential liability therefor.
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185. The foregoing statements in the Company’s Form 10-Q for the first quarter of 2002
were false and misleading as to the existence and likelihood of fraudulent transfer liability and false
and misleading because they omitted relevant material facts as explained in The Substantive Factual
Allegations, and particularly in Section IV thereof above. Defendants should have disclosed that:
(1) New Grace was not solvent at the time of the Transaction due to its increasing asbestos liabilities,
and application of relevant legal standards would therefore render Sealed Air liable to New Grace’s
creditors (including asbestos personal injury claimants) because the Transaction was a fraudulent
transfer, and/or (2) the following facts must be taken into account in evaluating the extent of Sealed
Air’s fraudulent transfer liability arising from the Transaction as a fraudulent transfer: (i) the
asbestos liability borne by Grace-1998, and inherited by New Grace liability had been artificially
suppressed during the period 1997 through 1999, and was not representative of the number of future
claims or the magnitude of future liability, due to the moratoria; (ii) Defendants could not provide
a reasonable estimate of New Grace’s total future asbestos-related liabilities at the time of the
Transaction because of the uncertainty created by the artificial suppression of claims by the
moratoria; and (iii) the Company did not consider the asbestos liabilities arising from the Company’s
mining operations in Libby, Montana, when making its determination that New Grace would be
solvent after the Transaction.
186. On July 24, 2002, Sealed Air issued a press release announcing the Company’s
financial results for the second quarter of fiscal 2002. The press release announced net earnings of
$66,005,000 or $0.61 per common share. The financial results announced in the July 24 press
release were repeated in the Company’s Form 10-Q for second-quarter 2002
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187. The Company’s Form 10-Q for the first quarter of 2002, related press release, and
earnings press release for second quarter 2002 were also false and misleading as to the Company’s
reported net earnings and total liabilities. The Company failed to accrue its probable liabilities for
fraudulent transfer in connection with the Transaction, and therefore overstated its earnings and
understated its liabilities.
188. Defendants knew or recklessly disregarded that defendants’ public statements, press
releases and SEC filings as described above were materially misleading because defendants violated
GAAP by failing to accrue for the Sealed Air’s massive, contingent asbestos liability related to
Sealed Air’s merger with W.R. Grace & Co.’s packaging business.
189. Clearly, from the time the adversary proceeding was filed against the Company in the
New Grace bankruptcy, until the July 29, 2002, ruling was issued, the market relied heavily on the
Company’s reassurances that it would prevail and would not suffer any fraudulent transfer liability.
The market relied unquestioningly on Sealed Air’s denial that it would face asbestos-related
liabilities. An April 22, 2002 article appearing in Barrons, titled “A Package Deal? Recovery hopes
have lifted Sealed Air shares, but buyers may be ignoring asbestos-related risk,” notes with respect
to the fraudulent transfer claims raised against the Company in the Grace bankruptcy proceedings,
that “It's impossible to know how Sealed Air will fare in court, or the extent of damages, should the
plaintiffs win. At current levels, however, the company's shares seem to leave little room for
operating or litigation risk. Should Sealed Air stumble, investors may find they've wrapped
themselves in a bubble.”
190. Analysts’ reports in the period following the filing of the adversary proceeding
complaint against the Company, but prior to July 29th, reflected the market’s consensus that the
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probability that the Transaction would be adjudged a fraudulent conveyance, and the Company
would be held liable, was minuscule. For example, an SSB analyst’s report of April 24, 2002
projected a target price of $52 for the company stock, based on a 19-20x price earnings multiple,
“deducting our $3-5 warranted haircut (given our calculations) for Grace’s asbestos liabilities.”
Taking the maximum “haircut” $5 divided by the 20x multiple, give a $.25 per share estimate of
liability, multiplied by the total shares outstanding (approximately 84 million), means an estimated,
probability weighted liability of $21 million. Comparing the $2 billion dollar value of likely total
liability (from SSB report of September 5, 2002) reflects the SSB analyst’s pre-July 29th probability
weighting of 1% that the Company would be held to have fraudulent conveyance liability.
191. The analysts’ reports prior to July 29, 2002 reflected the success of Defendants’
strategy in employing moratoria which artificially suppressed asbestos-related claims against Grace-
1998 and (after the spin-off) against New Grace. A May 7, 2002 SSB report concluded that “SEE
has strong defenses against fraudulent conveyance.” One of the “defenses” was the fact that “WR
Grace remained solvent for 3 years after the Cryovac deal.” That temporary appearance of solvency
was created by the moratoria.
192. The CSFB analyst concluded in his April 9, 2002 report that “it is likely that the court
will rule that SEE is not liable for any part of Grace’s asbestos liability.” That conclusion was based
on the KPMG report. The CSFB analyst explained that “Based on conversations with both Grace
and SEE, it appears that at the time of the Cryovac transfer W.R. Grace used estimates from an
independent auditor whose numbers were based on information available at the time of the
transaction and Grace’s past settlement experience to determine what its potential asbestos liability
would be over the next 40 years...With the benefit of hindsight, that independent auditor’s estimate
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was obviously too low....We believe that the courts will find that this was a reasonable attempt at
identifying the potential liability at the time of the transfer.” Defendants failed to disclose to the
CSFB analyst, just as they failed to disclose to the public, that the moratoria materially reduced the
number of claims at the time of the transaction, and that the KPMG report failed to take into account
the moratoria.
193. This virtually complete reliance on Defendants’ reassurances explains the market’s
violent reaction when the truth about the Company’s susceptibility to fraudulent transfer liability
finally emerged.
IX. A COURT RULING REVEALS THE LIKELIHOOD THAT THE COMPANYWOULD FACE THE CONSEQUENCES OF SPINNING OFF AN INSOLVENTNEW GRACE
194. The Class Period ends on July 30, 2002, when the true nature of Sealed Air’s
contingent asbestos liability was finally revealed as a result of a federal court ruling that potentially
made it easier for asbestos plaintiffs to prove that the Cryovac Transaction was a fraudulent transfer
designed to shield Grace’s assets from asbestos claims. The federal court hearing Grace’s bankruptcy
proceedings ruled on July 29, 2992 that the Company was aware at the time of the Transaction, that
New Grace faced growing asbestos liabilities and was therefore insolvent when it was spun off from
the Company. An article published the next day in Bloomberg explained that the ruling “might make
it easier for people alleging asbestos injuries to prove [W.R Grace & Co.] fraudulently sold
[Cryovac] to Sealed Air Corp. in 1998.” The bankruptcy court’s ruling was highly significant
because – were the Cryovac Transaction found to be a fraudulent transfer – asbestos plaintiffs might
also be able to hold Sealed Air responsible for satisfying a “flood” of asbestos-related lawsuits. The
Bloomberg article stated in pertinent part:
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W.R. Grace, Sealed Air Lose Ruling in Asbestos Case
Newark, New Jersey, July 30 (Bloomberg) -- W.R. Grace & Co. lost a court rulingthat might make it easier for people alleging asbestos injuries to prove the chemicalmaker fraudulently sold a food-packaging company to Sealed Air Corp. in 1998.
Shares of Sealed Air, the maker of Bubble Wrap, were down $15.77, a decline ofalmost 42 percent, closing at $22, in trading on the New York Stock Exchange.
Grace transferred its Cryovac division to Sealed Air in 1998 for $1.2 billion andstock, in a move to shield assets from plaintiffs seeking payment for asbestos-relatedinjuries, according to a lawsuit against Sealed Air and Grace. Sealed Air has said itmay have to hand over Cryovac to asbestos plaintiffs if they win the case.
Attorneys for the plaintiffs say Grace sold Cryovac for less than its actual value,leaving the company unable to pay the potential damages it faced from futureasbestos lawsuits. Grace has said the sale price was fair and that it didn't foresee thesubsequent flood of asbestos claims that prompted its bankruptcy filing in April2001. A federal judge said Grace should have anticipated those claims when it soldCryovac.
“W.R. Grace had a serious and open-ended asbestos liability problem for yearsbefore'' the 1998 transaction, U.S. District Judge Alfred Wolin in Newark ruledyesterday. The plaintiffs ‘should not be the party burdened with W.R. Grace's failureto accurately calculate its actual . . . asbestos liability.’”
‘Arm's-Length Transaction’
Sealed Air, based in Saddle Brook, New Jersey, said in a statement it wasdisappointed with the ruling and will appeal.
The deal ``was an arm's-length transaction negotiated in good faith between twoindependent companies after considering all relevant issues, including Grace'ssolvency under applicable law,'' the statement said.
The lawsuit claims Sealed Air should also pay damages because it assumed Grace'sliability when it bought the Cryovac unit.
A spokesman for Grace, based in Columbia, Maryland, did not immediately returna call seeking comment. Grace shares rose 43 cents to close at $2.94, in trading onthe New York Stock Exchange.
Wolin has set a Sept. 30 trial date. The judge said that for the plaintiffs to win their
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fraud suit they must prove the transfer left Grace with more liabilities than assets andthat the company got less for Cryovac than it was worth.
* * *
195. News of the bankruptcy court’s ruling and Sealed Air’s potential liability for the
asbestos lawsuits against Grace hit the market like a shockwave. By the close of trading on July 30,
2002, the same day as the ruling, Sealed Air’s stock had plummeted more than 41%. The next day,
July 31, 2002, the price of Sealed Air’s stock dropped again, falling 34% from the previous day’s
close.
196. Market analyst reports reflected the shock. A Morgan Stanley analyst’s report noted
that “A federal judge issued a ruling on July 29 laying out procedural grounds for the Sealed Air/WR
Grace...fraudulent conveyance trial....The judge ruled that the trial should consider all asbestos and
other liabilities, including those filed after the 1998 transaction, for the purposes of determining
whether or not Grace was solvent at the time. By significantly expanding the pool of liabilities that
may be considered, the judge has made it more likely that Grace will be found to have been insolvent
at the time of the 1998 Cryovac acquisition. Such a ruling would open up Sealed Air to potential
liability for the Grace asbestos exposure. In reaction to the ruling, SEE shares plunged 41% July 30
to close at $22.” The analysts located that “[w]ith a loss in court likely, we think the company will
explore settlement avenues. A settlement would not necessarily come cheap, as the claimants would
likely seek a comfortable cushion against future claims.”
197. Similarly, the Credit Suisse First Boston (“CSFB”) and Salomon Smith Barney
(“SSB”) analysts following the Company immediately dropped their ratings of the stock after the
ruling, from Buy to Hold (CSFB) and from Buy to Neutral, High Risk (SSB).
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198. The CSFB September 4, 2002 analyst’s report stated: “In our last report on SEE we
dropped our rating to Hold and completely pulled our price target...(which had been $58) owing to
an unfavorable ruling as to how the W.R. Grace solvency issue will be reviewed by the bankruptcy
court in regards to...the possibility of a fraudulent transfer....As we also stated in that report, if the
ruling was not overturned, the chances that SEE would lose the fraudulent transfer case were
relatively high.”
199. The SSB analyst stated “On July 30, Sealed Air, its investors, and we were given a
major surprise by Judge Wolin’s procedural ruling leading up to September 30's fraudulent
conveyance trial....SEE stock has dropped nearly $20 per share since the ruling to land at $15-$16
per share, with most of that drop occurring in the first two trading days after the ruling....[W]hen we
downgraded Sealed Air to Neutral (3H) the day after the ruling, and as we wrote in subsequent
research, our interpretation was then (and remains that the ruling increased the odds that Sealed Air
lost its September fraudulent conveyance trial....We now view this as the more likely scenario. Our
prior thesis was that Sealed Air would prevail given our understanding of facts and precedents.”
200. On November 29, 2002, Sealed Air issued a press release announcing the terms of
a settlement of the fraudulent-transfer and asbestos claims related to Sealed Air’s acquisition of
Grace’s Cryovac packaging business. The press release disclosed that Sealed Air had reached
an agreement in principle with Grace’s creditors and asbestos-injury claimants to pay $512
million in cash and nine million shares of Sealed Air stock. The press release stated in pertinent
part:
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Sealed Air Corporation (NYSE:SEE) announced today that it has reached anagreement in principle with all of the appropriate parties to resolve all of the currentand future asbestos-related claims and the pending fraudulent transfer claims madeagainst it and its affiliates in connection with the 1998 transaction in which SealedAir acquired the Cryovac packaging business from W.R. Grace. The pendingsettlement calls for the Company to contribute 9 million shares of Sealed Aircommon stock. The shares closed at $24.48 on Wednesday, November 27, 2002. Thepending settlement also calls for the payment of $512.5 million in cash plus interest,at a 5.5% annual rate, starting on December 21, 2002 and ending on the effective dateof the W. R. Grace plan for reorganization. The cash payment must be made in fullat that time. Sealed Air will not seek indemnity from Grace for payments made underthis agreement.
The agreement also provides for full protection of Sealed Air from any and all claimsagainst the Company by Fresenius Medical Care AG related to the W. R. Gracetransactions.
This agreement is subject to Sealed Air and its affiliates, subsidiaries, officers,directors et al., receiving the full benefit of 11 U.S.C. Sec. 524(g) and Sec. 105 of theU.S. Bankruptcy Code. This provides that all asbestos-related claims against SealedAir would be channeled to a trust to be established as part of W.R. Grace's plan ofreorganization that will make payments to asbestos claimants on behalf of Grace. Theagreement is also subject to the approval of Sealed Air Corporation's Board ofDirectors and the Asbestos Personal Injury and Asbestos Property Damage CreditorsCommittees in the W.R. Grace bankruptcy proceeding. Approval will be sought bythe respective parties no later than December 6, 2002.
The agreement is also subject to execution of a definitive settlement agreement.
William V. Hickey, President and Chief Executive Officer, stated that: "Thisagreement in principle provides Sealed Air with finality and certainty as we put theGrace-related issues behind us. We believe that reaching this timely and manageablesettlement is in the best interests of our shareholders and our business. Sealed Airwill continue doing what we do best: providing superior, innovative packagingproducts and solutions that add value to our customers around the world."
* * *
201. Including the valuation of the stock included in the settlement, the Company took a
charge of approximately $850,000,000 on its 2002 Statement of Operations. See Sealed Air’s 2002
Form 10-K, Management's Discussion and Analysis of Results of Operations and Financial
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Condition, at p. 15.
202. Although the Company, throughout the Class Period, consistently failed to
acknowledge the significance of Sealed Air’s contingent asbestos liability, the market clearly
demonstrated the market’s view of the materiality of the Company’s asbestos liability. On the day
the proposed settlement was announced, Sealed Air’s stock price shot upward, to close an astounding
56.5% higher than the previous day – the day before the announcement of the pending settlement.
203. Defendants should have disclosed that (1) New Grace was not solvent at the time of
the Transaction due to its increasing asbestos liabilities at the time and application of relevant
statutory standards would therefore render Sealed Air liable to New Grace’s creditors (including
personal liability claimants) for because the transaction would be a fraudulent transfer, and/or (2)
that the following facts must be taken into account in evaluation Sealed Air’s liability arising from
the characterization of the transaction as a fraudulent transfer: (i) the asbestos liability borne by
Grace-1998, and inherited by New Grace, had been artificially suppressed during the period 1997
through 1999, and was not representative of the number of future claims or the magnitude of future
liability, (ii) Defendants could not provide a reasonable estimation of New Grace’s total future
asbestos-related liabilities at the time of the Transaction, and (iii) the Company did not consider the
asbestos liabilities arising from the Company’s mining operations in Libby, Montana in making its
determination that New Grace would be solvent after the Transaction.
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X. APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE
204. At all relevant times, the market for Sealed Air securities was an efficient market for
the following reasons, among others:
a) Sealed Air’s stock met the requirements for listing, and was listed and
actively traded on the New York Stock Exchange (“NYSE”), a highly
efficient market;
b) As a regulated issuer, Sealed Air filed periodic public reports with the SEC
and the NYSE;
c) Sealed Air regularly communicated with public investors via established
market communication mechanisms, including through regular
disseminations of press releases on the national circuits of major newswire
services and through other wide-ranging public disclosures, such as
communications with the financial press and other similar reporting services,
and periodic conference calls; and
d) Sealed Air was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales force
and certain customers of their respective brokerage firms. Each of these
reports was publicly available and entered the public marketplace.
205. As a result of the foregoing, the market for Sealed Air’s securities promptly digested
current information regarding Sealed Air from all publicly available sources and reflected such
information in Sealed Air’s stock price. Under these circumstances, all purchasers of Sealed Air
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securities during the Class Period suffered similar injury through their purchase of Sealed Air
securities at artificially inflated prices and a presumption of reliance applies.
XI. INAPPLICABILITY OF STATUTORY SAFE HARBOR
206. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as "forward-looking statements"
when made. To the extent there were any forward-looking statements, there were no meaningful
cautionary statements identifying important factors that could cause actual results to differ materially
from those in the purportedly forward-looking statements. Alternatively, to the extent that the
statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are
liable for those false forward-looking statements because at the time each of those forward-looking
statements was made, the particular speaker knew that the particular forward-looking statement was
false, and/or the forward-looking statement was authorized and/or approved by an executive officer
of Sealed Air who knew that those statements were false when made.
COUNT I
VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACTAND RULE 10b-5 PROMULGATED THEREUNDER
AGAINST ALL DEFENDANTS
207. Lead Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
208. During the Class Period, defendants disseminated or approved the false statements
specified above, which they knew or recklessly disregarded were materially false and misleading in
that they contained material misrepresentations and failed to disclose material facts necessary in
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order to make the statements made, in light of the circumstances under which they were made, not
misleading.
209. Defendants violated §10(b) of the 1934 Act and Rule 10b-5 in that they:
a) Employed devices, schemes and artifices to defraud;
b) Made untrue statements of material facts or omitted to state material facts
necessary in order to make statements made, in light of the circumstances
under which they were made not misleading; or
c) Engaged in acts, practices and a course of business that operated as a fraud
or deceit upon the Lead Plaintiff and others similarly situated in connection
with their purchases of Sealed Air publicly traded securities during the Class
Period.
210. Lead Plaintiff and the Class have suffered damages in that, in reliance on the integrity
of the market, they paid artificially inflated prices for Sealed Air publicly traded securities. Lead
Plaintiff and the Class would not have purchased Sealed Air publicly traded securities at the prices
they paid, or at all, if they had been aware that the market prices had been artificially and falsely
inflated by defendants' misleading statements.
211. As a direct and proximate result of these defendants' wrongful conduct, Lead Plaintiff
and the other members of the Class suffered damages in connection with their purchases of Sealed
Air publicly traded securities during the Class Period.
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COUNT II
VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST ALL DEFENDANTS
212. Lead Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
213. The executive officers of Sealed Air prepared, or were responsible for preparing, the
Company's press releases and SEC filings. The Individual Defendants controlled other employees
of Sealed Air. Sealed Air controlled the Individual Defendants and each of its officers, executives
and all of its employees. By reason of such conduct, defendants are liable pursuant to §20(a) of the
1934 Act.
JURY DEMAND
Lead Plaintiff hereby demands a trial by jury.
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiff demands judgment:
1. Determining that the instant action is a proper class action maintainable under
Rule 23 of the Federal Rules of Civil Procedure;
2. Awarding compensatory damages and/or rescission as appropriate against
Defendants, in favor of Lead Plaintiff and all members of the Class for damages sustained as a result
of Defendants' wrongdoing;
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3. Awarding Lead Plaintiff and members of the Class the costs and
disbursements of this suit, including reasonable attorneys', accountants' and experts' fees; and
4. Awarding such other and further relief as the Court may deem just and proper.
Dated: December 1, 2004 SQUITIERI & FEARON, LLP
S/Lee Squitieri Olimpio Lee Squitieri (OLS-1684)
13 James StreetMorristown, NJ 17960Telephone: (973) 267-4488Facsimile: (973) 267-4248
Lionel Z. GlancyRobert M. ZabbGlancy Binkow & Goldberg LLP1801 Avenue of the Stars, Suite 311Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160
Attorneys for Lead Plaintiff
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PROOF OF SERVICE BY MAIL, E-MAIL/E-FILING
I, the undersigned, say:
I am a citizen of the United States and am employed in the office of a member of the Bar ofthis Court. I am over the age of 18 and not a party to the within action. My business address is OneGateway Center, Suite 2500, Newark, New Jersey 07102.
On December 1, 2004 , I served the following:
1 AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL
SECURITIES LAWS
on the parties shown below via e-mail and by posting electronically via the court’s ECF program.
For The Defendants
Gregory B. ReillyLowenstein Sandler PC65 Livingston AvenueRoseland, NJ 07068Telephone: (973) 597-2460Facsimile: (973) 597-2461via email onlyto: [email protected]
Daniel J. KramerPaul Weiss Rifkind Wharton & Garrison LLP1285 Avenue of the AmericasNew York, NY 10019Telephone: (212) 373-3000Facsimile: (212) 757-3990via mail and via e-mail to:[email protected]
For The Plaintiffs
Robert M. ZabbGlancy Binkow & Goldberg LLP1801 Avenue of the Stars, Suite 311Los Angeles, CA 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160via e-mail onlyto: [email protected]
Executed on December 1, 2004, at Newark, New Jersey.I certify under penalty of perjury that the foregoing is true and correct.
S/Lee Squitieri Olimpio Lee Squitieri (OLS-1684)
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