Allan Selbst, et al. v. McDonald's Corporation, et al. 04-CV-2422 ...securities.stanford.edu/filings-documents/1030/MCD04-01/2004112_… · Securities and Exchange Commission ("SEC")

Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 1 of 66

IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION NOV 0 2 2004

ALLAN SELBST, On Behalf of Himself And ) No.: 04-C-2422 llFtdge Blanche M. ManningAll Others Similarly Situated, } (Consolidated) Un d States District Court

Plaintiff, }DOCKETED

VS. ) CLASS ACTION? Nova 3 2004

McDONALD'S CORPORATION, ) Judge Blanche M. ManningMagistrate Judge Michael T. Mason

JURY TRIAL DEMANDEDDefendants. )

AMENDED CLASS ACTION COMPLAINTFOR VIOLATIONS OF FEDERAL SECURITIES LAWS

Lead Plaintiffs Central States, Southeast and Southwest Areas Pension Funds; California

ironworkers Field Trust Fund and Teamsters Local No. 863 Pension Fund make the following

allegations based upon the investigation of their counsel, which included a review of United States

Securities and Exchange Commission ("SEC") filings by McDonald's Corporation ("McDonald's"

or the "Company"), as well as regulatory filings and reports, securities analysts' reports and

advisories about the Company, press releases and other public statements issued by the Company,

interviews with former employees of McDonald's and media reports about the Company, and

Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth

herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a federal securities class action on behalf of purchasers of the securities of

McDonald's between December 14, 2001 and January 22, 2003, inclusive (the "Class Period"),

seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act").

all

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JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule lOb-5 promulgated thereunder by the

Securities and Exchange Commission ("SEC") [17 C.F.R. § 240.10b-5].

3. This Court has jurisdiction over the subject matter ofthis action pursuant to 28 U.S.C.

§§ 1331 and 1367 and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

4. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28

U.S.C. § 1391(b). McDonald's maintains its principal place of business in this District and many

of the acts and practices complained of herein occurred in substantial part in this District.

5. In connection with the acts alleged in this complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not limited

to, the mails, interstate telephone communications and the facilities of the national securities

markets.

PARTIES

6. Lead Plaintiffs Central States, Southeast and Southwest Areas Pension Funds;

California Ironworkers Field Trust Fund and Teamsters Local No. 863 Pension Fund, as set forth in

their certifications which were previously filed with the Court and are incorporated by reference

herein, purchased the securities of McDonald's during the Class Period and have been damaged

thereby.

7. Defendant McDonald's operates in the food service industry and primarily operates

quick-service restaurant businesses under the McDonald's brand in more than 100 countries

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worldwide. The Company's principal executive offices are locates at McDonald's Plaza., Oak Brook,

Illinois.

S. Defendant Jack M. Greenberg ("Greenberg") served as the Company's Chairman and

Chief Executive Officer ("CEO") and Director from May 1999 through December 2002. On

December S, 2002, Defendant Greenberg resigned from his positions at the Company.

9. Defendant Matthew H. Paull ("Paull") served as the Company's Executive Vice

President and Chief Financial Officer ("CFO") at all times relevant to this action.

10. Defendants Greenberg and Paull are sometimes referred to herein as the "Individual

Defendants."

11. Because of the Individual Defendants' positions with the Company, they had access

to the adverse undisclosed information about its business, operations, products, operational trends,

financial statements, markets and present and future business prospects via access to internal

corporate documents (including the Company's operating plans, budgets and forecasts and reports

of actual operations compared thereto), conversations and connections with other corporate officers

and employees, attendance at management and Hoard of Directors meetings and committees thereof

and via reports and other information provided to them in connection therewith.

12. It is appropriate to treat the Individual Defendants as a group for pleading purposes

and to presume that the false, misleading and incomplete information conveyed in the Company's

public filings, press releases and other publications as alleged herein are the collective actions ofthe

narrowly defined group of defendants identified above. Each of the above officers of McDonald's,

by virtue of their high-level positions 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

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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. Said defendants were involved in drafting, producing, reviewing and/or disseminating the

false and misleading statements and information alleged herein, were aware, or recklessly

disregarded, that the false and misleading statements were being issued regarding the Company, and

approved or ratified these statements, in violation of the federal securities laws.

13. As officers and controlling persons of a publicly-held company whose common stock

was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the New York

Stock Exchange ("NYSE"), and governed by the provisions of the federal securities laws, the

Individual Defendants each had a duty to disseminate promptly, accurate and truthful information

with respect to the Company's financial condition and performance, growth, operations, financial

statements, business, products, markets, management, earnings and present and future business

prospects, and to correct any previously-issued statements that had become materially misleading

or untrue, so that the market price of the Company's publicly-traded securities would be based upon

truthful and accurate information. The Individual Defendants' misrepresentations and omissions

during the Class Period violated these specific requirements and obligations.

14. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public and shareholder and investor reports and other communications complained

of herein and were aware of, or recklessly disregarded, the misstatements contained therein and

omissions therefrom, and were aware of their materially false and misleading nature. Because of

their Board membership and/or executive and managerial positions with McDonald's, each of the

Individual Defendants had access to the adverse undisclosed information about McDonald's'

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business prospects and financial condition and performance as particularized herein and knew (or

recklessly disregarded) that these adverse facts rendered the positive representations made by or

about McDonald's and its business issued or adopted by the Company materially false and

misleading.

15. The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various SEC

filings, press releases and other public statements pertaining to the Company during the Class Period.

Each Individual Defendant was provided with copies of the documents alleged herein to be

misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent

their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is

responsible for the accuracy of the public reports and releases detailed herein and is therefore

primarily liable for the representations contained therein.

16. Each of the Defendants is liable as a participant in a fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of McDonald's securities by

disseminating materially false and misleading statements and/or concealing material adverse facts.

The scheme: (i) deceived the investing public regarding McDonald's'business, operations, financial

statements, management and the intrinsic value of McDonald's common stock; (ii) lowered

McDonald's borrowing costs on more than $900 million of U.S. debt offerings during 2002; (iii)

enabled the Individual Defendants and other McDonald's insiders to sell more than $26 million

worth of their personally-held shares of McDonald's common stock at artificially inflated prices; and

(iv) caused Plaintiffs and other members of the Class to purchase McDonald's securities at

artificially inflated prices.

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PLAINTIFFS' CLASS ACTION ALLEGATIONS

17. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise

acquired the securities of McDonald's between December 14, 2001 and January 22, 2003, inclusive

(the "Class Period") and who were damaged thereby. Excluded from the Class are Defendants, the

officers and directors ofthe Company, at all relevant times, members of their immediate families and

their legal representatives, heirs, successors or assigns and any entity in which defendants have or

had a controlling interest.

18. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, McDonald's common shares were actively traded on

the NYSE. While the exact number of Class members is unknown to Plaintiffs at this time and can

only be ascertained through appropriate discovery, Plaintiffs believe that there are hundreds or

thousands of members in the proposed Class. Record owners and other members of the Class may

be identified from records maintained by McDonald's or its transfer agent and may be notified of

the pendency of this action by mail, using the form of notice similar to that customarily used in

securities class actions.

19. Plaintiffs' claims are typical ofthe claims ofthe members ofthe Class as all members

of the Class are similarly affected by Defendants' wrongful conduct in violation of federal law that

is complained of herein.

20. Plaintiffs will fairly and adequately protect the interests of the members of the Class

and has retained counsel competent and experienced in class and securities litigation.

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21. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class, Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants' acts as alleged

herein;

(b) whether statements made by Defendants to the investing public during the Class

Period misrepresented material facts about the business, operations and management of McDonald's;

and

(c) to what extent the members of the Class have sustained damages and the proper

measure of damages.

22. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

Summary And Overview

23. Defendant McDonald's is in the food service industry and primarily operates

quick-service restaurant businesses under the McDonald's brand name in more than 100 countries

worldwide. McDonald's also operates other restaurants under `partner' brands including Boston

Market and Chipotle, among others. The combined financial results for all restaurants operated by

the Company and under the terms of franchise arrangements and by affiliates operating under

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joint-venture agreements are referred to by Defendants in the Company's press releases and SEC

filings as "systemwide" restaurants.

24. McDonald's periodically reports revenues and/or profit margins and earnings for its

Company operated restaurants, franchise restaurants and systemwide restaurants. At December 31,

2001, the Company's systemwide restaurants numbered more than 30,000, with revenues of

approximately $40.6 billion. Approximately fifty-five percent of the Company's 2001 earnings were

derived from McDonald's international operations.

25. In the 1990s, McDonald's growth was primarily driven by its expansion into overseas

markets as its ability to grow domestically became increasingly constrained. By the late 1990s and

into 2000, however, McDonald's international operations began to experience declining growth as

international economies slowed dramatically and slipped into recession and Europe and Japan were

buffeted by the Mad Cow disease scare which lead to a drastic decrease in the consumption of beef

products in those markets.

26. At the same time that the growth in McDonald's intemational operations began to

slow, the Company's domestic-based operations were beset by their own set of problems. Due to

increasing competition, McDonald's was forced to dramatically slash prices and engage in other

promotional activities, thereby reducing its profit margins. As a result, McDonald's franchisees were

becoming increasingly alienated from the Company as they were being forced to participate in

McDonald's promotional activities and were therefore no longer able to generate the profit margins

that they had historically been able to. Furthermore, the level of customer service in McDonald's

domestic (and international) operations had declined dramatically, thereby causing the Company to

lose repeat sales. Finally, McDonald's domestic chain ofstores was aging, in deteriorating condition

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and in need of a dramatic remodeling, which would be extremely costly but which the Company was

not undertaking.

27. As a result of the foregoing problems in its international and domestic markets

McDonald's suffered a seventeen percent decline in earnings in 2001.

28. The declining financial results brought increasing pressure on Defendant Greenberg -

CEO of the Company and the primary architect of the company's growth and customer service

strategies since the mid-1990s. News reports at this time suggested that the McDonald's Board of

Directors would soon force Greenberg's resignation if McDonald's declining financial performance

was not reversed.

29. By the start of the Class Period, in December 2001, McDonald's was continuing to

suffer declining results due to, in part, the adverse factors described above. In order to conceal the

true financial condition of McDonald's and to protect their positions at the Company, Defendants

Greenberg and Paull engaged in a fraudulent scheme whereby they repeatedly projected strong

earnings growth for McDonald's without any reasonable basis for doing so and they artificially

inflated McDonald's reported earnings through a variety of accounting manipulations in order to

meet analysts' earnings estimates, as detailed herein.

30. As a result of Defendants' fraudulent scheme, the price ofMcDonald's rose by more

than fifteen percent reaching a Class Period high of more than $30 per share in or about May 2002.

Additionally, the Company purportedly met or exceeded analysts' earnings estimates for the first and

second fiscal quarters of 2002.

31. Unbeknownst to investors, however, also in May 2002, in apparent recognition of the

true state of affairs of the Company, Defendant Greenberg was the subject of a "coup" attempt. As

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detailed fiu-ther herein, Fred Turner, who was Chairman of McDonald"s Board of Directors and a

co-founder of the Company attempted to oust Defendant Greenberg in favor of Jim Cantalupo. In

May 2002, the McDonald's Board of Directors took a vote on whether to remove Greenberg, which

was not successful. Defendant Greenberg retained his job but the McDonald's Board of Directors

gave him six to eight months to turn things around.

32. Shortly after the "coup" attempt, on June 17, 2002, McDonald's reported surprising

second quarter 2002 financial results as the Company exceeded analysts' earnings expectations and

increased earnings expectations for fiscal year 2002. In truth and in fact, however, McDonald's was

still performing poorly and experiencing declining growth trends as the seemingly positive financial

performance was the result of various accounting manipulations which artificially inflated the

Company's financial results, as detailed herein.

33. On July 30, 2002, Sarbanes-Oxley was passed into law and, among other things,

requires the CEO and CFO of any publicly traded company to make personal certifications in each

quarterly and annual report filed with the SEC certifying among other things that: (i) the officer has

reviewed the report; (ii) the report does not contain any untrue statements; and (iii) the report is not

misleading. Under Sarbanes-Oxley, defendant Greenberg and Paull were required to file their initial

certifications of McDonald's financial statements for the quarter ended September 30, 2002,

scheduled to be filed with the SEC during November 2002.

34. Then, in September 2002, Defendants' fraudulent scheme began to unravel. At that

time, McDonald's reported that "comparable sales" (i.e., year-over-year sales comparisons for

restaurants that had been opened for more than thirteen months) had declined, especially in U.S. and

European markets, and the Company would have to lower its 2002 earnings guidance to $1.43 per

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 1 1 of 66

share. Thereafter, in November 2002, McDonald's announced that it was going to incur

restructuring charges of $350 million to $425 million for restaurant closings, among other things.

The Company also announced that it would not achieve its previously announced earnings estimate

for fiscal 2002.

35. On December 5, 2002, McDonald's announced that Defendant Greenberg was being

forced into retirement and that Jim Cantalupo would succeed him.

36. Following the announcement of Greenberg's retirement, the true facts concerning the

Company's financial condition and operating results quickly began to emerge. On December 17,

2002, McDonald's announced that its 2002 recurring earnings would actually decline by more than

three percent when compared to 2001 to $1.33 per share. This represented an earnings miss of

hundreds of millions of dollars when compared to the earnings estimate of $1.54 per share provided

to investors at the start of the Class Period. And, on January 23, 2003, the last day of the Class

Period, McDonald's announced that it would incur a staggering fourth quarter loss of $343.8 million,

or ($0.27) per share which reflected losses of more than $810 million related, primarily, to the

closure of over 700 underperforming restaurants and the write-off ofhundreds of millions of dollars

of technology costs that had previously been capitalized.

37. During the Class Period, while McDonald's stock was trading at artificially inflated

levels, Defendants Greenberg and Paull and other high-level executives of McDonald's sold their

personally-held McDonald's common stock to the unsuspecting market generating more than $26

million in proceeds. In addition, McDonald's issued $900 million in debt on more favorable terms

than it would have otherwise received had the truth about its business been known.

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McDonald 's 2002 Earnings Forecasts and ProjectionsWere Materially False and Misleading When Issued

38. Throughout the Class Period, Defendants issued materially false and misleading

earnings forecasts and projections. At the start of the Class Period, Defendant Greenberg announced

that McDonald's currently expected "significant improvement" in the Company's 2002 earrings

performance resulting in "5% to 10% projected growth"over 2001's estimated share earnings of

$1.38. Defendants based the positive earnings growth primarily on "6 - 7 0/6" projected growth in

"systemwide" sales during 2002. Furthermore, Defendants repeatedly issued earnings estimates

throughout the Class Period as follows:

• on January 24, 2002, McDonald's issued a press release announcing itsFourth Quarter 2001 and full year 2002 earnings. The Company confirmedplans to open at least 1,300 new restaurants (most overseas) and reiteratedearnings forecasts of $1.47 to $1.54 per share;

• on March 22, 2002, Defendants Paull and Roberts participated in aconference call with analysts discussing the Company's First Quarter 2002financial results. During the call, Defendants confirmed that "McDonald'swas still well within range of what were our [2002 earnings] expectations; "

• on April 18, 2002, Defendant Greenberg, citing "strong European sales"again confirmed McDonald's 2002 share earnings of "$1.47 to $1.50;"

• on June 17, 2002, McDonald's pre-announced Second Quarter 2002 shareearnings of $0.38 to $0.39, exceeding analysts consensus forecasts andreversing a trend that had seen earnings decline for six consecutive quarters,Defendant Greenberg increased 2002 share earnings guidance to "$1.47 to$1.52;"

• on July 24, 2002, McDonald's reported Second Quarter 2002 share earningsof $0.39, a 15% increase compared to the prior year. Following the report,Defendant Greenberg again increased McDonald's share earnings guidanceto "$1.47 to $1.53;" and

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• on October 22, 2002, McDonald's issued earnings guidance for thefourth quarter of 2002 of $0.35 per share and $1.43 per share forfiscal 2002.

39. Defendants' earnings projections were lacking in a reasonable basis at all times and,

therefore, materially false and misleading when issued for the following reasons:

(a) McDonald's domestic and international operations were suffering from a host of

serious adverse factors, as detailed above and herein, which were causing the Company to experience

declining financial results and declining growth. Indeed, according to numerous former employees

of McDonald's, as detailed below, Defendants had no basis for their earnings projections and, in fact,

internal reports indicated that McDonald's was performing poorly and the earnings Defendants had

promised to investors for fiscal year 2002 could not be met;

(b) McDonald's was artificially inflating its financial results by failing to properly

account for technology costs related to the Company's "Innovate Project" — an information

technology system that the Company was developing to help manage its business. As detailed

herein, in IN 91-113, McDonald's improperly capitalized the research and development costs

associated with the Innovate Project as an asset as opposed to expensing those costs as they were

incurred. As a result, McDonald's materially overstated its financial results during the Class Period.

In addition, the Innovate Project was plagued with delays, numerous bugs and was grossly over-

budget. Ultimately, at the end of the Class Period, McDonald's abandoned the Innovate Project and

wrote off more than $170 million in costs;

(c) McDonald's was artificially inflating its reported financial results by failing to

timely record asset impairment charges related to hundreds of underperforming restaurants in each

ofthe Company's market segments including the United States, Europe, Asia/Middle East and Latin

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America. As detailed herein in IN 115-132, given the multitude of negative economic developments

in many of McDonald's international markets, McDonald's should have written down the value of

its investments in those countries, but did not. Instead, Defendants delayed the write-down for more

than a year; and

(d) McDonald's failed to establish loss/write-offreserves for uncollectible franchisee

"receivables" for rents and other charges, especially in McDonald's international markets such as

Argentina, Brazil, and Venezuela. At the end of the Class Period, McDonald's wrote off $14 million

of certain "Venezuelan receivables" and hundreds of millions of dollars more in asset impairment

charges related to its international operations.

40. As shown above, Defendants issued false earnings estimates and projections on

numerous occasions during the Class Period when they knew that sales and earnings were, in fact,

declining. When McDonald's subsequently reported its actual financial results for 2002, the sales

and earnings shortfall compared to the Company's Class Period guidance was monumental.

McDonald's reported 2002 systemwide sales of $41.5 billion a shortfall of more than $1.9 billion

when compared to sales growth projection of "6 - 7 0/o" forecast by Defendants during the Class

Period. Moreover, the Company's reported share earnings of $1.32 for fiscal 2002, excluding

extraordinary charges of $853 million, fell short of Defendants share guidance of $1.54 issued at the

start of the Class Period by hundreds of millions of dollars.

41. According to several former McDonald's employees, who were employed at the

Company during the Class Period, Defendants knew that their publicly stated earnings guidance

falsely portrayed sales and earnings growth when, in fact, the Company's internal forecasts actually

projected sales and earnings growth declines in 2002 compared to 2001.

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42. A former accounting and financial reporting executive, CI 1 stated that by December

2001, at the latest, Defendants Greenberg and Paull were aware of McDonald's internal forecasts that

projected declining systemwide sales growth in 2002 when compared to 2001. The former employee

stated that declining sales trends were widespread throughout McDonald's restaurants in the U.S.

and abroad due primarily to continued deterioration of customer service/quality and flat or declining

sales growth in all of the Company's major overseas markets. According to CI 1, Defendants

Greenberg and Paull based their growth projections on " what Wall . Street wanted" and there was

no actual data that could justify the growth figures. In this regard, CI 1 further stated:

[... I] n 2001 and 2002, Greenberg was only focused on meeting the proj ected earningsfor the current quarter and took his eye off the ball by letting customer servicedeteriorate significantly. The mindset was to pull out the quarter, and that WallStreet wanted double digit growth rates, which had been coming from theinternational markets, but the overseas stores weren't able to continue growingearnings and in fact began declining. Everyone knew we couldn't meet double digitgrowth, but defendants Greenberg and Paull]just keptprom"Ing Wall Street thatwe'd have double digit growth. " [Emphasis added.]

43. CI 1's statements concerning the disparity between Defendants' pubic statements and

McDonald's internal forecasts concerning the Company's 2002 sales and earnings growth are

corroborated by other former McDonald's employees. According to a former human resources

executive employed by McDonald's during the Class Period, CI 2, stated that at the latest — by June

2002, McDonaid's internal projections forecasting declining "system wide " sales growth for 2002

was openly discussed at executive staff meetings, regularly attended by each of the Individual

Defendants. A former communications executive, CI 3, stated that based on comments made by the

Individual Defendants as well as McDonald's divisional presidents, systemwide sales declines in the

Company's US operations f rst became apparent in Fourth Quarter of 2001 or at the latest "very

early" in the First Quarter of 2002.

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McDonald's Engaged In Improper AccountingPractices In Order To Meet `Wall Street' Estimates

44. During the Class Period, McDonald's purportedly "met" consensus analyst estimates

when it reported First Quarter 2002 share earnings of $0.34 and purportedly "exceeded" analysts

estimates by reporting share earnings $0.39 for the Second Quarter of 2002. Unbeknownst to

investors, however, McDonald's earnings during both quarters had been manufactured to meet or

exceed Wall Street estimates through various improper accounting practices.

45. Improper Accounting For Software Development Costs. As detailed below, in

IM 92-114, during the Class Period, McDonald's was artificially inflating its reported financial results

during the Class Period by improperly accounting for costs associated with a technology project

known as the "Innovate Project." The Innovate Project was launched in or about January 2001 and

was supposed to, among other things, enable McDonald's management to monitor product sales

information, supply replenishment and other logistical functions for the Company's entire restaurant

system.

46. Unbeknownst to investors, however, McDonald's was improperly capitalizing the

costs associated with the research and development of Innovate as an asset as opposed to expensing

the costs as incurred. As a result, McDonald's Class Period financial results were materially

overstated.

47. Furthermore, by the start of the Class Period, as detailed herein, Innovate was plagued

by delays and bugs as McDonald's was unable to complete the core application in Innovate— Global

Financial Sales Repository ("GFSR" ). Accordingly, by no later than the start of the Class Period,

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 17 of 66• Tfi

any costs that had been capitalized should have been written off, which they were not. As a result,

McDonald's Class Period financial results were artificially inflated.

48. At the end of the Class Period, McDonald's announced that it was abandoning

Innovate and that it would take a charge of approximately $170 million for the costs associated with

the project.

` 49. Failure To Timely Write-Down Impaired Assets. As detailed below, in 54-82,

during the Class Period, McDonald's was artificially inflating its reported financial results by failing

to timely write-down hundreds of underperforming restaurants in each of the Company's market

segments including the United States, Europe, Asia/Middle East and Latin America. As detailed

herein in IN 115-132, given the multitude of negative economic developments in many of

McDonald's international markets and in McDonald's domestic operations, McDonald's should have

written down the value of its investments, but did not. Instead, Defendants delayed the write-down

for more than a year.

50. Improper Manipulation Of Accounting Accruals And Loss Reserves. Finally,

during the Class Period, McDonald's manipulated certain accounting accruals and loss reserves in

an effort to manage earnings and help Defendants meet or exceed analysts' earnings estimates.

51. A former accounting and financial reporting executive employed by the Company

during the Class Period, CI 1 revealed that "there was a lot of managing earnings and financial

engineering going on to meet the numbers. "[Emphasis added]. Cl I explained that McDonald's

did "things like managing accruals and controlling the timing of store sales, " When you have zero

growth but you're generating seven or eight cents per share, you have to be doing something to come

up with that number." Cl I provided a few examples, including drawing from reserves to meet the

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quarterly numbers. "There's an acceptable range for a reserve, for example an insurance reserve,"

said CI 1, "the Company just made sure it stayed within the acceptable range when drawing from a

reserve account to achieve the projected quarterly results."

52. McDonald's improper earnings manipulation practices also extended to transactions

with the Company's franchisees. More than fifty-seven percent of the McDonald's 30,000

restaurants at the end of 2001 were operated by independent franchisees. The Company reported

revenues from franchised and affiliated restaurants of $3.9 billion and $3.8 billion in 2002 and 2001,

respectively. According to CI 1, nearly 50% of the Company's franchise revenues worldwide come

from rent paid by franchise stores, and confirmed that franchise rental payments are tied to a

percentage of gross store sales. CI 1 explained that typically, domestic franchise store rents are

around 4% ofgross revenues, and international rents are much higher and are as high as 10% or more

in some markets. During 2002, as economic conditions continued to deteriorate in certain markets,

such as Brazil, the Company entered into "rent relief' transactions that allowed the Company to

account for franchisee rent obligations as "receivables" even though the Company had verbally

agreed not to collect the rent. According to an article published by the Wall Street Journal ("WSJ")

( by M. Jordan and S. Leung), this allowed McDonald's to avoid losses and carry the obligation as

an asset on its books. The WSJ article stated in pertinent part:

Some [ Brazilian] franchisees say that in return for rent relief, McDonald's askedthem to sign a "debt confession," a document that enables the company to accountfor rent and other overdue payments as receivables rather than a potential loss. "Theywanted to keep saying on paper that I owed them 18% [of sales] in rent, whileverbally agreeing that I would never pay it," says franchisee Antonio Accioly [...].

These "debt confession" transactions have never been disclosed by the Company and in all

likelihood violated GAAP revenue recognition principles as well as criteria for establishing loss

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reserves (SFAS No. 5). At the very least such transactions enabled the Company to report higher

quarterly earnings than would have been reported, in the absence of the "debt confession"

transactions, in order to meet Wall Street estimates.

Materially False And MisleadingStatements Issued During The Class Period

53. The Class Period begins on December 14, 2001. On that date, the Company pre-

announced its fourth quarter 2001 earnings, reporting year-over-year sales increases in both domestic

and foreign restaurants during the first two months of the quarter. The Company reported that its

expected earnings of $0.34 per share were in line with analysts' forecasts for the final quarter of

2001, excluding certain one-time charges. Defendant Greenberg commented on the Company's

seemingly improving sales and future growth prospects, stating in pertinent part as follows:

Our European business is recovering nicely [...]posting positive comparable sales forthe first two months of the fourth quarter. Europe's [ ... ] sales grew 8 percent for thefirst two months of the quarter and 4 percent for the first eleven months of 2001.

In the U.S., sales grew 2 percent quarter-to-date and year-to-date through November.We believe our restructuring, ongoing change initiatives and renewed focus onquality, service, cleanliness and value will help drive improved results going forward.

This year has been challenging for McDonald's. But I am confident that ourstrategies are right and we will see significant improvement in 2002, setting the stagefor stronger growth in 2003 and beyond. We expect 2002 earnings per share of$1.47- $1.54, in constant currencies. This reflects S% to 10 % projected growth over2001's estimated $1.38 earnings per share [...]. [Emphasis added.]

54. On or about January 14, 2002, McDonald's offered $150 million of medium-term

fixed rate notes generating proceeds of more than $149.9 million. The offering was made pursuant

to a registration statement filed with the SEC on or about May 3, 2001, and signed by Defendant

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Greenberg, among others. The registration statement incorporated a prospectus (dated May] 0, 2001)

and prospectus supplement (dated May 24, 2001) (collectively, the "Series G Notes Prospectus").

The Series G Note Prospectus stated that the proceeds of the offering were to be used for general

corporate purposes and incorporated by reference all ofthe Company's filings with the SEC pursuant

to Section 15(d) of the Exchange Act, including each the Company's Class Period earnings press

releases filed on Form 8-K and alleged herein to be materially false and misleading.

55. On or about January 24, 2002, McDonald's issued a press release confirming its

previously announced 2001 fourth quarter and full year financial results. Defendant Greenberg

commented on the Company's results, issuing highly positive statements concerning "comparable"

restaurant sales — a measure of same period sales for restaurants open more than 13 months — and

confirmed plans to open 1300 to 1400 new restaurants during 2002, stating in pertinent part as

follows:

[...] McDonald's served 46 million customers per day, an increase of more than onemillion customers per day compared with 2000. In addition, we added 1,319McDonald's restaurants and 67 Partner Brands' restaurants. In 2002, we expect toadd approximately 1,300 to 1,400 McDonald's restaurants and 100 to 150 newPartner Brands' restaurants.

As previously stated, we expect 2002 annual earnings per share to improvesignificantly over 2001 results and to be in the range of $1.47 to $1.54, excludingthe impact of foreign currency translation."

In the U.S., total sales increased 3% for the fourth quarter and 2% for the year as aresult of expansion and slightly positive comparable sales. Our renewed focus onthe basics- providing consistent quality, service, cleanliness and value - will helpus achieve stronger results going forward. /...I And we believe our serviceimprovement initiatives will encourage customers to visit more frequently,contributing to higher sales and profits.

[ ... ] total European sales increased 9% for the quarter and 5% for the year. We arevery encouraged by the strong European sales posted in the quarter; France,

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s


Germany and the UK all had positive comparable sales. We look forward tosignificantly improved results in 2002. [Emphasis added.]

56. On or about February 22, 2002, McDonald's offered $300 million of medium-term

fixed rate notes pursuant to the Series G Notes Prospectus generating proceeds of more than $299.6

ntillion.

57. The statements referenced above in ¶¶ 53 and 55 were each materially false and

misleading because they failed to disclose and misrepresented the following adverse facts which

were known to Defendants or recklessly disregarded by them:

(a) that McDonald's was experiencing declining demand and growth in both its

domestic and international markets. According to internal Company reports, as detailed herein, the

Company was experiencing declining sales and could not meet the earnings estimates and growth

promised by Defendants to the markets;

(b) that hundreds of the Company's restaurants throughout the world were

underperforming and would have to be closed;

(c) that the Innovate Project was riddled with bugs, delays and was grossly over-

budget. McDonald's was unable to complete the core application in Innovate, the GFSR, and

therefore it was unlikely that Innovate would ever be completed or put in use;

(d) that McDonalds' was materially overstating its financial results through a

variety of improper accounting practices, as detailed in ¶¶ 44-52 and '¶ 89-132; and

(e) as a result of the foregoing, Defendants knew based on then-current

information that Defendants' forecast of 2002 earnings per share of $1.47 - $1.54 was false as it

could not and would not be achieved.

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 22 of 66^L

58. On or about March 22, 2002, McDonald's held a conference call with analysts, pre-

announcing the Company's first quarter 2002 financial results. The Company reported that first

quarter 2002 earnings were $0.29 to $0.30 per share, excluding asset impairment charges of

approximately $140 million related primarily to Latin American restaurants and closing certain

underperforming restaurants in Turkey, as well goodwill impairment charges. During the call,

McDonald's' vice president of investor relations, M. Healy, confirmed that the Company now

expected 2002 earnings to be at "the lower end of our previously announced range of $1.47 to $1.54"

per share. Defendant Paull dispelled any investor concerns regarding the Company's achieving its

2002 earnings projections, pointing to sustainable "comparable" sales growth in Europe --

McDonald's largest overseas market — while downplaying revenue declines in Latin America. A

transcript of the call published by Fair Disclosure Wire, stated in pertinent part as follows:

[DEFENDANT PAULL]: [ ... ] I'm going to update you on the quarter's performance.I'll start with Europe, which contributed more than one--third of worldwide operatingincome. In constant currencies, Europe's sales increased eight percent for the firsttwo months of this quarter reflecting low single-digit positive comparable sales.

France continued its robust performance posting mid-single digit positive comparablesales for the first two months. The market ran a very successful promotion [...].Germany saw relatively flat comparable sales for the first two months of 2002.

In Latin America, which accounts for less than two percent of operating income,constant currency sales decreased three percent for the first two months of the year.This reflects the very difficult economic operating environment in this part of theworld.

[ANALYST]: [... Clan you just walk us through the underlying assumptions in termsof how we go from sort of three percent in the first two months in systemwide

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sales to your target for the full year of six to seven? Just in terms of which regionsdo we really need to turn and where does the incremental growth come from?

[DEFENDANT PAULL]: Sure, I think we can give you some guidance on that. Youknow first I think we're expecting, as we noted in the release and in our comments,we're expecting improvement certainly in Asia Pacific as move throughout the year.We are hopeful that the consumer concerns in Japan will ease and we also have easiercomparisons in that part of the world as we move throughout the year.

We are also expecting stronger sales in the U.S. for the full year than we are for thefirst quarter. As we indicated, sales in the U.S. we expect to be up in low single digitsfor the first quarter, but for the full year we expect them to be up in the mid-singledigits. Think as Mike touched on and you know could add to this, but a lot of theinitiatives that we have in place are kind of at the early stages.

We're seeing some encouraging results, but we know that a lot of the QSCimprovements initiatives aren't going to happen overnight. Europe I would say weexpect to continue strong probably at least at these levels that we're seeing right now.As we commented on much of Europe's strength in the first quarter has been drivenby France through the first two months, but now we're starting to see someimprovement in Germany and the UK and that also makes us optimistic.

So I think it's a combination of all of those factors and might even throw in Canadathere probably we expect somewhat stronger results.

[DEFENDANT PAULL]: When we gave guidance for the year, we didn't break itout quarter by quarter. But the last call that we did in January, we indicated weexpected the first quarter to be the most challenging quarter of the year for a varietyof reasons. So, you know, I would say that we're on track where we expected to be.

[DEFENDANT PAULL]: [... C]learly, when we set our expectations for earnings forthe year, it was a range of expectations. So I think, you know, the first quarter weknew would be tough based on those results. (inaudible) we expect to be towards thelower end of that range, but we're still well within a range of what were ourexpectations. [Emphasis added.]

59. On or about April 9, 2002, McDonald's offered $250 million of medium-term fixed

rate notes pursuant to the Series G Notes Prospectus generating proceeds of more than $248.6

million.

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60. On or about April 18, 2002, McDonald's issued a press release announcing its

financial results for the first quarter ended March 31, 2002. The Company reported share earnings

of $0.31, before certain non-cash asset impairment and goodwill charges, just slightly ahead of the

Company's earnings pre-announcement the previous month. Defendant Greenberg commented on

the Company's results, stating in pertinent part as follows:

[ ... ] Europe's performance was strong. In constant currencies, Europe's salesincreased 10% and operating income increased 13% for the quarter. Comparablesales increased in France, Germany and the U.K. We are encouraged by these resultsand look forward to continued strong performance throughout the year.

In the U.S., sales increased 2% for the quarter. U.S. operating income declined 2%for the quarter, due to payments to owner/operators to facilitate a new front counterteam service system. Excluding these payments, U.S. operating income increased4% for the first quarter reflecting higher combined operating margin dollars andlower selling, general and administrative expenses. We expect our restaurantoperations improvement process, along with menu and value initiatives, to boost topline sales and help us achieve improved results as the year progresses.

We expect 2002 annual earnings per share to improve significantly over 2001results. Consistent with our previous guidance, this equates to 2002 earningsper share of $1.47-$1.50, excluding the impact of foreign currency translationand the $142 million of [asset impairment and goodwill] charges [...]. [Emphasisadded.]








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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 25 of 66-s







variety of improper accounting practices, as detailed in 1M 44-52 and 1M 89-132; and




62. On or about May 10, 2002, McDonald's filed its quarterly report Form 10-Q with the

SEC, for the three months ended March 31, 2002. The report, signed by Defendant Pauli,

incorporated the Company's previously announced financial results and included the following

representation concerning the Company's financial statements reported therein:

The accompanying condensed consolidated financial statements should be read inconjunction with the consolidated financial statements contained in McDonald'sCorporation (the "Company" or "McDonald's") Annual Report on Form 10-K for theyear ended December 31, 2001. In the opinion of the Company, all adjustments(consisting of normal recurring accruals) necessary for a fair presentation for theinterim period presented have been included. The results for the quarter ended March31, 2002 do not necessarily indicate the results that maybe expected for the full year.

63. The statements referenced above in 162 were each materially false and misleading

for the reasons set forth above in ¶ 61. In addition, as detailed in ¶¶ 89-132, the financial statements

contained in the Form 10-Q were materially false and misleading as they were not prepared in

accordance with Generally Accepted Accounting Principles ("GAAP").

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 26 of 66r

64. On or about June 17, 2002, McDonald's issued a press release pre-announcing its

Second Quarter 2002 financial results. The Company reported that quarterly share earnings were

expected to be $0.38 to $0.39 compared with $0.34 in 2001, excluding certain charges. McDonald's

also reported that full year 2002 share earnings estimates were increased to a range of "$1.47 to

$1.52." Defendant Greenberg again cited strong "European sales" as the primary driver of

McDonald's seemingly improved earnings, stating in pertinent part as follows:

Our European business is performing well. [...] We are pleased with the progress inEurope and expect its constant currency sales and operating income to increase inhigh-single digits in the second quarter. For the year, Europe's constant currencysales are expected to increase in high-single digits while its constant currencyoperating income is expected to increase in high-single to low-double digits(excluding special charges of $45.8 million in 2001).

65. On or about July 24, 2002, McDonald's issued a press release announcing the

Company's financial results for the second quarter ended June 30, 2002. The Company reported

earnings of $0.39 per share, a 15% increase compared to the prior year. Defendant Greenberg

commented on the Company's results, stating in pertinent part:

We expect 2002 annual earnings per share of $1.47 to $1.53, excluding $142 millionof charges in the first quarter. including the charges, we expect annual earnings pershare to be $1.35 to $1.41. This expectation reflects a foreign currency translationimpact of neutral to up 3 cents for the year.

Systemwide sales for the second quarter were $10.4 billion, up 2% in constantcurrencies. Year-to-date, Systemwide sales were $20.1 billion, also up 2% inconstant currencies. We expect constant currency Systemwide sales to increase inmid-single digits for the year.

In Europe, sales increased 7% and operating income increased 8% in constantcurrencies for the quarter. Our largest markets in the segment all achieved positivecomparable sales, with especially good results in France. Year-to-date, Europe's salesincreased 9% in constant currencies. We are excited about the opportunities inEurope and expect continued strong performance for the year.

-26-


U.S. sales increased I% and U.S. operating income increased 7% for the quarter. Weare pleased with this increase in profits, which was driven by highercompany-operated margins and effective cost controls. Year-to-date, U.S. salesincreased 2%. We are intent on increasing top-line sales performance through ourrestaurant operations improvement process, everyday value and drive-thru initiativesas well as our successful New Tastes Menu [...].














variety of improper accounting practices, as detailed in ¶¶ 44-52 and I¶ 89-132; and




-27-

A

Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 28 of 66Y ,

67. On or about August 13, 2002, McDonald's filed its quarterly report Form 10-Q with

the SEC, for the six months ended June 30, 2002. The report, signed by Defendant Paull,

incorporated the Company's previously announced financial results and included the following


The accompanying condensed consolidated financial statements should be read inconjunction with the consolidated financial statements contained in the Company'sDecember 31, 2001 Annual Report on Form 10-K. In the opinion of management,all adjustments (consisting of normal recurring accruals) necessary for a fairpresentation have been included. The results for the quarter and six months endedJune 30, 2002 do not necessarily indicate the results that may be expected for the fullyear.

68. The statements referenced above in $ 67 were each materially false and misleading

for the reasons set forth above in 166 In addition, as detailed in I¶ 89-132, the financial statements

contained in the Form 10-Q were materially false and misleading as they were not prepared in

accordance with Generally Accepted Accounting Principles ("GAAP").

69. On or about August 18, 2002, McDonald's offered $200 million of of medium-term

fixed rate notes generating proceeds of more than $199.3 million. The offering was made pursuant

to a registration statement filed with the SEC on or about July 10, 2002, and signed by defendants

Greenberg and Paull, among others. The registration statement incorporated a prospectus (dated July

22, 2002) and prospectus supplement (dated August 6, 2002) (collectively, the "Series H Notes

Prospectus"). The Series H Note Prospectus stated that the proceeds of the offering were to be used

for general corporate purposes and incorporated by reference all ofthe Company's subsequent filings

with the SEC pursuant to Section 15(d) of the Exchange Act, including the Company's Class Period

earnings press releases filed on Form 8-K and alleged herein to be materially false and misleading.

-28-


70. On September 17, 2002, McDonald's . issued a press release announcing that the

Company was lowering its 2002 share earnings guidance to $1.43 per share from $1.52 per share,

reflecting weak sales in both Europe and the U.S. Defendant Greenberg commented on the

Company's reduced earnings outlook stating in pertinent part as follows:

The U.S. marketplace continues to be extremely competitive and customers havemany choices. This is why we have recently announced an acceleration of our plansto give customers even better value, service, menu choice and experience. Inaddition, the U.S. system will feature a more focused, consistent national advertisingmessage. These actions are designed to move our U.S. business to a higher level,strengthen our competitive position and increase restaurant sales and profits for thecompany and our franchisees. However, it will take time before we see the fullbenefit of these initiatives in our earnings. We will launch our national valueadvertising in October as we continue to enhance restaurant-level training and servicesystems.

In connection with this plan, beginning in 2003, we will further enhance customers'experience through targeted investments in sales building initiatives over the next 18to 24 months. As part of this plan, we expect to invest $300 million to $400 millionin existing U.S. franchised restaurants in 2003. The funding decisions will be madeon an individual restaurant basis for those restaurants meeting specified standardsand will be based on return on investment criteria. To fund the additional capitalexpenditures related to U.S. initiatives, we expect to moderate share repurchases toapproximately $500 million in 2003 as well as reduce global new restaurantopenings.

In Europe, sales were weaker than expected, particularly in Germany where theeconomy continues to contract and in the U.K, where retail sales have slowed. Inaddition, our marketing messages in these countries did not resonate as well withconsumers as we had hoped. Therefore, we are making adjustments and areoptimistic that sales in these countries will improve in the fourth quarter as ouraggressive marketing plans feature new tastes and value. France continued toperform well in the first two months of the quarter.

71. The market's reaction to Defendants' disclosure was swift and severe. Over the next

three trading days, on extremely heavy volume, the price of McDonald's common shares fell more

than 18% from $21.69 per share on September 16, 2002, to $17.85 per.share on September 19, 2002.

-29-


Defendants continued, however, to conceal the scope and magnitude of the Company's problems and

Defendants' forecast of $1.43 per share for fiscal 2002 was false when made for the reasons stated

herein.

72. On September 27, 2002, AFXNews Limited reported that Moody's Investor Services

("Moody's") had downgraded McDonald's' credit rating outlook to "Negative." The downgrade in

the rating outlook to negative was based directly on the Company's disclosure of weaker earnings

guidance, among other things.

73. On October 22, 2002, McDonald's issued a press release announcing the Company's

financial results for the third quarter ended September 30, 2002. The Company reported earnings

of $0.3 8 per share, and Defendant Greenberg announced that the Company's operating plan for fiscal

2003 reflected sharply lower capital expenditures for new store openings. The Company maintained

its earnings guidance of $35 per share for the fourth quarter and $1.43 per share for fiscal 2002.

Defendant Greenberg stated in pertinent part:

[...] we are taking significant actions to optimize our business in the current operatingenvironment. First, we will dramatically reduce restaurant openings in 2003 andfocus more of our considerable financial resources on our existing business in orderto drive comparable sales growth, increase cash from operations and improve returns.Second, we are currently reviewing our G&A spending and are committed to limitingG&A growth to a rate less than half that of Systemwide sales growth in 2003. Thisis notable, as we plan to achieve this while increasing G&A spending on technologythat is designed to further leverage our size in order to increase efficiency andeffectiveness, while supporting future growth.

We expect total capital expenditures of approximately $1.9 billion in 2003, which isabout $100 million less than expected in 2002. This reflects a reduction in capitalspent on new restaurant openings around the world of almost $500 million. We planto invest nearly $100 million of this capital savings in new buildings for U.S.franchised restaurants in 2003, in order to give our best owner/operators additionalfinancial flexibility to purchase more restaurants as well as to reinvest in theirexisting restaurants. This is in contrast to the past few years when U.S.

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P


owner/operators had the option to own new restaurant buildings. As a result of thischange, the Company will collect additional rent and earn a good return. In addition,we plan to reallocate approximately $300 million of the $500 million in capitalsavings primarily to increase reinvestments in existing restaurants.

In 2003, we expect to add about 600 net traditional McDonald's restaurants globally,450 fewer than this year, and down dramatically from a high of nearly 2,000traditional restaurant additions in 1996. In addition, we plan to add 150 to 175 netPartner Brand restaurants in 2003. In 2002, we expect to add approximately 1,300net McDonald's restaurants, including 250 satellites, and about 90 net Partner Brandrestaurants. The increase in Partner Brand additions in 2003 includes a doubling ofChipotle restaurant openings, as the concept continues to deliver strong comparablesales and excellent returns and has impressive customer brand loyalty.

During 2003, we will continue to concentrate McDonald's restaurant openings inmarkets with solid returns and will significantly reduce the amount of capital weinvest in Asia/Pacific/Middle East/Africa (APMEA) and Latin America, wherereturns have been pressured in recent years by weak economies. At the same time,we plan to significantly reduce traditional McDonald's restaurant openings in theU.S., and somewhat in Europe, and to increase investments in existing U.S.restaurants to boost comparable sales.

74. The statements referenced above in ¶¶ 70 and 73 each materially false and misleading

because they failed to disclose and misrepresented the following adverse facts which were known

to Defendants or recklessly disregarded by them:







-31-





(d) that McDonalds was materially overstating its financial results through a

variety of improper accounting practices, as detailed in In 44-52 and ¶R 89-132, and


information that Defendants' forecast of 2002 earnings per share of $1.43 was false as it could not

and would not be achieved.

75. On November 8, 2002, McDonald's announced that it would incur "restructuring"

charges of $350 million to $425 million which included: (1) closing approximately 175

underperforming restaurants in about 10 countries; (2) extinguishing the Company's investment in

at least seven other countries by "transferring" ownership of approximately 200 restaurants to local

licensees or ceasing certain restaurant operations in their entirety; and (3) eliminating 400-600 job

positions. The Company also announced that a vast majority of the charges were associated with

restaurant closings and "transfers." Defendant Greenberg commented on the Company's

restructuring plans, stating in pertinent part:

[...] we were targeting stronger results for the month as well as the entire fourthquarter. Given the charges described above and recent sales performance, we will notachieve our previously announced 2002 earnings per share target Yet, I believethe decisions we've made over the past month will better enable us to focus on ourexisting assets, grow cash from operations and improve returns for shareholders. Asa result, I remain very confident in our strategies, our brand, and our futureprospects." [Emphasis added.]

Defendants, however, continued to conceal the true extent of the problems at McDonald's.

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76. Following this announcement, the price of McDonald common stock dropped from

$19.31 per share to $17.79 per share on extremely heavy trading volume.

77. On November 11, 2002, Standard & Poor's ("S&P') placed McDonald's' long-term

credit rating on "Credit Watch" — with negative implications. On November 2002, Bloomberg

News reporting on the S&P downgrade noted that lower credit ratings would increase the Company's

borrowing costs.

78. On or about November 19, 2002, McDonald's filed its quarterlyreport Form 10 -Q/A

with the SEC, for the nine months ended September 30, 2002. The report, signed by defendant

Paull, incorporated the Company's previously announced financial results and included the following


The accompanying condensed consolidated financial statements should be read inconjunction with the consolidated financial statements contained in the Company'sDecember 31, 2001 Annual Report on Form 10-K. In the opinion of management, alladjustments (consisting of normal recurring accruals) necessary for a fairpresentationhave been included. The results for the quarter and nine months ended September 30,2002 do not necessarily indicate the results that may be expected for the full.

79. On December 5, 2002, McDonald's announced that Defendant Greenberg was being

forced into retirement effective December 31, 2002 and that Jim Cantalupo, formerly McDonald's

Vice Chairman and President, would succeed him.

80. On December 17, 2002, the Company announced that it now expected to miss fourth

quarter 2002 earnings guidance — lowering its 2002 earnings guidance to $1.33 per share, excluding

the "restructuring" charges described above. This marked the second cut in McDonald's earnings

estimates in just two months and represented an earnings shortfall of hundreds of millions of dollars

compared to guidance of $1.54 — issued by Defendants at the start of the Class Period. The

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 34 of 66VA

Company also reported that its "restructuring" charges would exceed Defendants' previously

disclosed range by at least $l0 million — totaling more than $435 million. The press release stated

in pertinent part as follows:

The Company expects to record pretax charges of approximately $435 million ($390million after tax or $31 per share) in conjunction with the plans announced lastmonth to restructure certain markets, close underperforming restaurants, andeliminate positions to control costs and reallocate resources. Including the $435million of charges, the Company expects a fourth quarter loss per share of 5 to 6cents. Also, as a result of recently announced management changes, the Companywill review additional areas to sharpen its focus and improve results. This reviewcould result in additional fourth quarter charges. Excluding charges, the Companyexpects fourth quarter earnings per share to be 25 to 26 cents, including a foreigncurrency benefit of one to two cents.

81. Following this announcement, the price of McDonald common stock dropped from

$17.38 per share to $15.99 per share on extremely heavy trading volume.

82. On or about December 21, 2002, Moody's announced that M cDonald's' credit ratings

on about $9 billion in debt maybe lowered by Moody's Investors Service following the Company's

announcement of its first quarterly loss since going public in 1965.

The Truth Is Revealed

83. On January 23, 2003, McDonald's reported a staggering fourth quarter net loss of

$343.8 million, or $.27 per share, reflecting over $810 million in losses related to restaurant closures

and asset write-offs of improperly capitalized technology costs, among other things. The press

release announcing the losses, stated in pertinent part as follows:

In December, the Company announced $435 million of charges and indicated thepossibility of additional fourth quarter charges pending management's review ofadditional areas designed to sharpen focus and improve results. Following thisreview, management decided to close an additional 517 restaurants and terminatea long-term technologyproject. In total, the Company recorded significantchargesof 5810.2 million ($656.9 million after tax) in fourth quarter 2002 and $252.1

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 35 of 66•r

million of charges ($171.5 million after tax) in fourth quarter 2001. For, the year,the Company recorded $853.2 million ($699.9 million after tax) of significantcharges in 2002 and $252.9 million ($142.5 million after tax) of significant items in2001. All significant items for both years were recorded in other operating expense,except as noted in the discussion following.

According to the Company's press release, the $810 million in fourth quarter 2002 charges were

comprised of

[ ... ] $26&9 million of pretax charges ($243.6 after tax) related to restructuring[McDonald's] ownership in four countries in Asia PacificJMiddle East/Africa(APMEA) and Latin America, the ceasing of operations in three countries in LatinAmerica and the reallocation of resources and consolidation of certain home officefacilities to control costs. These charges consisted primarily of asset writedowns andother exit costs related to the market restructurings plus employee severance andoutplacement costs.

[...] $359.4 million of pretax charges ($292.8 million after tax) consisting of:$292.2 million related to management's decision to close 719 underperformingrestaurants (202 were closed in 2002 and 517 will close throughout 2003), primarilyin the U.S. and Japan, and $67.2 million primarily related to the impairment of assetsfor certain existing restaurants in Europe and Latin America.

[...] $183.9 million of pretax charges ($120.5 million after tax) consisting of:$170.0 million related to management's decision to terminate a long-termtechnology project [...].

84. Following this announcement, the price of McDonald's common stock declined to

$15.00 per share, a decline of more than fifty-one percent from a Class Period high of $30.65 per

share reached on or about May 22, 2002..

85. On or about January 31, 2002, Fitch Ratings downgraded the Company's long-term

senior notes to "A" from "A+" and revised the Company's rating outlook to "negative" from "stable"

citing the Company's disclosures of weakened operating performance and expectations of high

leverage, among other things.

Undisclosed Adverse Information

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86. The market for McDonald's securities was open, well-developed and efficient at all

relevant times. As a result of these materially false and misleading statements and failures to

disclose, McDonald's' common stock traded at artificially inflated prices during the Class Period.

Plaintiff and other members of the Class purchased or otherwise acquired McDonald"s securities

relying upon the integrity of the market price of McDonald's' securities and market information

relating to McDonald's, and have been damaged thereby.

87. During the Class Period, defendants materially misled the investing public, thereby

inflating the price of McDonald's securities, by publicly issuing false and misleading statements and

omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not

false and misleading. Said statements and omissions were materially false and misleading in that

they failed to disclose material adverse information and misrepresented the truth about the Company,

its business and operations, as detailed herein.

88. At all relevant times, the material misrepresentations and omissions particularized

in this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by plaintiff and other members of the Class. As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleading

statements about McDonald's' business, prospects and operations. These material misstatements

and omissions had the cause and effect of creating in the market an unrealistically positive

assessment of McDonald's and its business, prospects and operations, thus causing the Company's

securities to be overvalued and artificially inflated at all relevant times. Defendants' materially false

and misleading statements during the Class Period resulted in plaintiff and other members of the

-36-


Class purchasing the Company's securities at artificially inflated prices, thus causing the damages

complained of herein.

McDonald's False And MisleadingFinancial Statements And Financial Disclosures

89. As set forth in Financial Accounting Standards Board ("FASB") Statements of

Concepts ("Concepts Statement") No. 1, a fundamental objective of financial reporting is to

provide accurate and reliable information concerning an entity's financial performance during the

period being presented. Concepts Statement No. 1, paragraph 42, states:

Financial reporting should provide information about an enterprise's financialperformance during a period. Investors and creditors often use information aboutthe past to help in assessing the prospects of an enterprise. Thus, althoughinvestment and credit decisions reflect investors' and creditors' expectationsabout future enterprise performance, those expectations are commonly based atleast partly on evaluations of past enterprise performance.

90. At all relevant times during the Class Period, Defendants represented that

McDonald's financial statements were prepared in conformity with GAAP, which are recognized

by the accounting profession and the SEC as the uniform rules, conventions and procedures

necessary to define accepted accounting practice at a particular time.' The representations that

the Company's financial statements were prepared in accordance with GAAP were materially

false and misleading because Defendants knew, or recklessly ignored that McDonald's employed

improper accounting practices, in violation of GAAP and the SEC's financial reporting

requirements, to falsely overstate and misrepresent its financial performance during the Class

Period.

' SEC Regulation S-X states that financial statements filed with the SEC that arenot prepared in compliance with GAAP are presumed to be misleading and inaccurate. 17 C.F.R.§ 210.4-01(a)(] ).

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91. McDonald's Class Period financial statements were materially false and

misleading and presented in violation of GAAP because the Company: (a) improperly capitalized

research and development costs associated with a technology project as an asset when they

should have been expensed as a cost; (b) improperly failed to disclose its policy of accounting for

its software development costs; and (c) improperly failed to timely record an impairment in the

value of its long-lived assets.

McDonald's ImproperAccounting For Software Development Costs

92. As revealed in the Company's January 23, 2003 press release, McDonald's wrote-

off more than $170 million in software and project development costs associated with the

Company's "Innovate Project" when it decided to cancel the project. Unbeknownst to investors,

however, most if not all of these Innovate costs had been improperly deferred, in violation of

GAAP, in order to avoid any negative impact on the Company's periodic earnings during the

Class Period. Both prior to and during the Class Period, Defendants violated GAAP (as detailed

immediately below) by improperly deferring the expense impact of these costs by capitalizing

them as assets on McDonald's balance sheet. GAAP requires that all costs associated with

software/system development be expensed during the "preliminary project stage" and that all

"research and development" costs be expensed as incurred. Defendants violated these GAAP

standards by improperly capitalizing as assets preliminary project stage and/or research and

development costs incurred in connection with the Innovate Project. As a result the Company's

assets, earnings and stockholders' equity were materially overstated throughout the Class Period.

-38-


t

93. Prior to and during the Class Period, stores throughout McDonald's world-wide

organization employed disparate IT systems. For example, Cl 6 explained that the Company-

owned and franchise-owned stores used different systems of varying ages. Cl 6 stated that the

Innovate Project was intended to remedy these deficiencies and to allow for more "tactical"

decision making. After the end of the Class Period, McDonald's disclosed that it invested

hundreds of millions of dollars on the Innovate Project.

94. With respect to accounting for such costs, GAAP, in the AICPA's Statement of

Position ("SOP") 98-1, Accounting for Costs of Computer Software Developed or Obtained for

Internal Use specifies that internal-use software has the following characteristics: (a) the

software is acquired, internally developed or modified solely to meet the entity's internal needs

and (b) during the software's development or modification, no plan exists to market the software

externally. If either of these two characteristics is not met, then FASB's SFAS No. 86,

Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed is be

utilized in accounting for the software.

95. GAAP, in 112 of Accounting Principles Board ("APB") Opinion No. 22, also

provides that financial statements "identify and describe" accounting policies followed by the

entity when those accounting principles and methods involved "[a] selection from existing

acceptable alternatives."

96. In violation of GAAP, McDonald's financial statements during the Class Period

failed to disclose information about its accounting for software development costs. In fact,

GAAP, in APB Opinion No. 22, 17, provides that the usefulness of financial statements in

making economic decisions depends significantly upon the user's understanding of the

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 40 of 66,_.

accounting policies followed by a company. In addition, GAAP states that information about

the accounting policies adopted by a reporting company is "essential" for financial statement

users. (APB Opinion No. 22,$ 8)

97. Indeed, not only did McDonald's f nancial statements fail to describe the

Company's policy of accounting for its software development costs, they failed to disclose the

existence of such costs. As a result, investors were blind-sided at the end of the Class Period

when McDonald's disclosed it was writing off hundred of millions of dollars in costs associated

with the abandoning of the Innovate Project.

98. Since McDonald's did not plan to externally market the Innovate Project, it was

required to follow guidance provided in SOP 98-1 in accounting for it.'

99. Pursuant to SOP 98-1, internal-use software under development is required to

classified into: (a) preliminary project stage, (b) application development stage and (c)

post-implementation/operation stage. During the preliminary project stage, software

development costs are to be expensed as incurred.' Capitalization of costs are to begin only

2 McDonald's employees [CI 61 did state that the Company's independentfranchisees "signed up" for and helped fund the development of Innovate Project. In so doing,

the independent franchisees and McDonald's entered into a cost-sharing arrangement associatedwith the development the Innovate Project software. Pursuant to SOP 98-1, arrangementsproviding for the joint development of software for mutual internal use (for example, cost-sharing arrangements) are not substantive plans to market the software.

3 SOP 98-1 defines the preliminary project stage as the point in time when entities

will likely:

a. Make strategic decisions to allocate resources between alternative projects;

b. Determine the performance requirements and systems requirements for thecomputer software project it has proposed to undertake;

C. Invite vendors to perform demonstrations of how their software will fulfill anentity's needs;

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,r Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 41 of 66-u

after: (l) the preliminary project stage is completed; (2) management, with the relevant authority,

implicitly or explicitly authorizes and commits to funding a computer software project; (3) it is

probable that the project will be completed; and (4) the software will be used to perform the

function intended. General and administrative costs and overhead costs are not to be capitalized

as costs of internal-use software.

100. Concerning the impairment of capitalized software development costs, SOP 98-1

dictates that when it is no longer probable that the computer software project will be completed

and placed in service, no additional costs are to be capitalized and an impairment analysis is to be

applied to existing balances.

101. Pursuant to SOP 98-1, when it is no longer probable that computer software being

developed will be completed and placed in service, the asset should be reported at the lower of

the carrying amount or fair value, if any, less costs to sell.' Indications that the software may no

longer be expected to be completed and placed in service include:

a. A lack of expenditures budgeted or incurred for the project;

b. Programming dif culties that cannot be resolved on a timely basis,

C. Significant cost overruns,

d. Explore alternative means of achieving specified performance requirements;e. Determine that the technology needed to achieve performance requirements

exists;f. Select a vendor if an entity chooses to obtain software; andg. Select a consultant to assist in the development or installation of the software.

4 The rebuttable presumption is that such uncompleted software has a fair value ofzero.

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d. Information has been obtained indicating that the costs of internallydeveloped software will significantly exceed the cost of comparablethird-party software or software products, so that management intends toobtain the third-party software or software products instead of completingthe internally developed software;

e. Technologies are introduced in the marketplace, so that managementintends to obtain the third-party software or software products instead ofcompleting the internally developed software; and

£ Business segment or unit to which the software relates is unprofitable orhas been or will be discontinued.

102. During the Class Period, Individual Defendants caused or acquiesced in

McDonald's failure to timely write down the value of its impaired (and undisclosed) costs

associated with the Innovate Project.

103. For example, a former McDonald's IT consultant employed by the Company

during the Class Period, was directly involved in the implementation of the Oracle 11 i

application, a key component of the Innovate Project. CI 4 stated that the Innovate Project was

riddled with significant technical issues that resulted in inconsistent results, significant delays,

data omissions, and cost overruns.

104. CI 4 was responsible for developing and implementing a custom Oracle module

known as Global Financial Sales Repository ("GFSR") that served as a data collection system or

"repository" for restaurant critical data including product and non-product sales and ancillary

sources of financial information. According to Cl 4, McDonald's envisioned GSFR to be the

cornerstone of the Innovate Project.

105. Cl 4 stated that the GFSR application was "riddled" with technical difficulties

which caused significant problems for the Company's Innovate Project managers. For example,

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the Company received "very inconsistent" results and "data omissions" from the GFSR

application as it was being tested in stores around the country. In fact, Cl 4 stated that

McDonald's was never able to resolve the technical issues/problems associated with GFSR

before the entire Innovate Project was terminated

106. According to CI 4, the Company established specific budgets for each individual

element of the Innovate Project. CI 4 said that as a result of the technical problems with GFSR,

its implementation budget had been "blown out of the water." Moreover, the technical problems

associated with the GFSR application had a direct impact on the Company's inability to

effectively implement other elements of the Innovate Project.

107. As a result, CI 4 said the GFSR application was "way behind" schedule which

caused the entire Innovate Project to fall behind schedule.

108. During the Class Period, Innovate Project encountered significant programming

difficulties that could not, and were not, resolved on a timely basis. These difficulties resulted in

significant cost overruns. Indeed, SOP 98-1 identified such occurrences as indicators that it was

not probable, as contemplated under GAAP, that the Innovate Project would be completed and

placed in service. As such, GAAP, required that McDonald's account for the Innovate Project

during the Class Period at the lower of the carrying its amount (which McDonald's financial

statements failed to disclose) or fair value, less costs to sell. As noted above, GAAP states that

when its no longer probable that the internal use software under development will be completed

as placed in service, the rebuttable presumption is that such uncompleted software has a fair

value of zero.

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 44 of 66♦ y

109. Nonetheless, Defendants improperly delayed the write down of the Innovate

Project until the end of the Class Period. In fact, numerous McDonald's employees confirmed

the problems McDonald's experienced with the Innovate Project and stated that independent

franchisees rebelled against the Company's technology upgrade initiatives because of the

technological difficulties and exorbitant costs associated the Innovate Project.

110. Moreover, such difficulties were routinely made known to the Individual

Defendants. For example, CI 3 stated defendant Greenberg showed "considerable" interest in the

Innovate Project and that defendant Greenberg was a "control freak" that wanted to know about

every aspect of the Company's business operations in the periodic management meetings she

attended with the individual defendants. When asked, the witness confirmed that the challenges

with the Innovate Project were addressed in considerable detail in many of the executive staff

meetings during 2001 and 2002.

111. Similarly, CI 2 stated defendant Greenberg was very focused on the Company's

efforts to upgrade its IT infrastructure in general and in the innovate Project in particular. In fact,

CI 2 said that defendant Greenberg followed the progress of the Innovate Project on a daily

basis and that he knew this to be the case because he personally attended numerous executive

staff meetings in which nearly all of the Company's activities and problems were discussed.

CI 2 stated such meetings, which were attended by the Company's most senior managers and

executives, took place on a "regular basis," and that problems with the Innovate Project were

addressed in considerable detail in many of the executive staff meetings they attended during

2001 and 2002. In addition, Cl 2 recalled that defendant Greenberg was actively engaged the

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discussions about the progress of the Innovate Project in these meetings and that he asked

detailed questions of the project managers that made presentations concerning the initiative.

112. Nonetheless, in violation of GAAP, the defendants improperly delayed the write

down of the Innovate Project until the end of the Class Period.

113. Moreover, in July 2003, after the end of the Class Period, Ziffdavis.com

published an article on McDonald's failed Innovate Project. In that article, McDonald's then

current CIO, Dave Weick stated "most of the $170 million [Innovate Project charge] was

spent on `research and development :"

114. GAAP, in SOP 98-1 and SFAS No. 2, provides that research and development

costs are to be expensed as incurred. As it has now admitted, McDonald's improperly capitalized

research and development costs as software development costs. In so doing, McDonald's

materially inflated its operating results during the Class Period.

McDonald's FailureTo Timely Write Off-Impaired Assets

115. GAAP generally provides that circumstances involving possible losses "shall be

accrued by a charge to income" if. (i) information 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 the loss can be reasonably estimated. FASB's Statement of Financial Accounting

Standards ("SFAS") No. 5, 18.

116. With respect to long-lived assets, GAAP, in FASB's SFAS No.144, establishes

three categories of assets for purposes of determining whether assets are impaired: 1) assets that

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are to be held and used; 2) assets that are to be disposed of other than through sale; and 3) assets

that are to be disposed of through sale.'

117. During, at least, interim fiscal 2002, McDonald's failed to timely writedown the

value of its impaired long-lived assets that it classified as for accounting purpose as "to be held

and used,"

118. Pursuant to SFAS No. 144, long-lived assets classified as to be held and used are

required to be tested for impairment when events or changes in circumstances indicate that the

carrying value of such assets may not be recoverable. The following are cited in SFAS No. 144

as being examples of such events or changes in circumstances:

a. A significant decrease in the market price of a long-lived asset(asset group),

b. A significant adverse change in the extent or manner in which along-lived asset (asset group) is being used or in its physicalcondition;

C. A significant adverse change in legal factors or in the businessclimate that could affect the value of a long-lived asset (assetgroup), including an adverse action or assessment by a regulator;

' Pursuant to FASB'S SFAS No. 144, long-lived assets to be disposed of other thanby sale (i.e., by abandonment, exchange or spinoff) should continue to be classified as held forsale and used until disposal. Long-lived assets to be sold shall be classified as held for sale untilthe period in which all of the following criteria are met: 1) Management, having the authority toapprove the action, commits to a plan to sell the assets; 2) The assets are available for immediatesale in its present condition subject only to terms that are usual and customary for sales of suchassets; 3) An active program to locate a buyer and other actions required to complete the plan tosell the assets have been initiated; 4) The sale of the assets is probable and transfer of the assetsis expected to qualify for recognition as a completed sale, within one year, except as permitted bySFAS No. 144; 13 1; 5) The assets are being actively marketed for We at a price that isreasonable in relation to its current fair value; and 6) Actions required to complete the planindicate that it is unlikely that significant changes to the plan will be made or that the plan will bewithdrawn.

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d. An accumulation of costs significantly in excess of the amountoriginally expected for the acquisition or construction of along-lived asset (asset group);

e. A current period operating or cash flow loss combined with ahistory of operating or cash flow losses or a projection orforecast that demonstrates continuing losses associated with theuse of a long-lived asset (asset group);

f. A current expectation that, more likely than not (meaning a levelof likelihood greater than SOY), a long-lived asset (assetgroup)will be sold or otherwise disposed of significantly before the endof its previously estimated useful life.

119. If any such conditions exist, GAAP requires that long-lived assets be tested for

impairment. In testing long-lived assets for impairment, if the projected future cash flows of the

assets are less than the carrying (or reported) value of such assets, an impairment loss is recorded

based on the fair value of the assets.'

120. Since it is frequently necessary to group assets in order to make projections of

future cash flows associated with the assets, SFAS No. 144 requires that, for purposes of

recognition and measurement of an impairment loss, long-lived assets are to be grouped with

other assets and liabilities at the lowest level of largely independent, identifiable cash flow&

SFAS No. 144, 110.

121. Pursuant to McDonald's 2001 Form 10-K, the Company adopted the provisions of

FASB's SFAS No. 144 as of January 1, 2002. In its financial statements for year ended

December 31, 2002, McDonald's disclosed:

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets, long-lived assets are reviewed for impairment annually and

' SFAS No. 144 defines fair value as the amount at which the assets could bebought or sold in current transaction between willing parties.

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Case 1:04-cv-02422 Document 21 Filed 1 1/02/04 Page 48 of 66

whenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. For purposes of annually reviewingMcDonald's restaurant assets for potential impairment, assets are initially groupedtogether at a television market level in the U.S. and at a country level for each ofthe international markets. For Partner Brands, assets are grouped by eachindividual brand. if an indicator of impairment (e.g., negative operating cashflows for the most recent trailing twelve-month period) exists for any grouping ofassets, an estimate of undiscounted future cash flows produced by each restaurantwithin the asset grouping is compared to its carrying value. If an asset isdetermined to be impaired, the loss is measured by the excess of the carryingamount of the asset over its fair value as determined by an estimate of discountedfuture cash flows.

Losses on assets held for disposal are recognized when management hasapproved and committed to a plan to dispose of the assets, and the assets areavailable for disposal. Generally, such losses relate to either restaurants that haveclosed and ceased operations or businesses or restaurants that are available forsale.

122. First, with respect to the Company's policy of assessing long-lived assets

impairment, McDonald's violated GAAP because it did not group such assets at the lowest level

of largely independent, identifiable cash flows. For example, when McDonald's tested its U.S.

long-lived assets on a "television market basis" and its international long-lived assets on a

country-wide basis, certain of its impaired assets within those groups escaped being tested for

impairment because the values of the non-impaired assets within the group more than offset the

decline in the value of the groups impaired assets. As a result of not grouping its long-lived

assets at the lowest level of cash flows, McDonald's improperly blended the values of those

assets that were underperforming and impaired (and should have been charged against earnings)

with those which were not. In so doing, McDonald's was able to improperly delay the

recognition of its impaired assets during the Class Period.

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 49 of 66i,

123. Former. McDonald's employees stated that while the Company's IT systems were

disparate, the Company was able to track performance of the Company's restaurants on an

individual basis. As a result, McDonald's assessment of impairment on "television market" and

country-wide bases were not at the lowest level of largely independent, identifiable cash flows.

124. During the Class Period, Individual Defendants caused or acquiesced in

McDonald's failure to timely write down the value of its impaired long-lived assets.

125. For example, a former McDonald's financial analyst employed by the Company

during the Class Period [CI 5] responsible for collecting profit and loss ("P&L"} statements from

individual restaurants and submitting them to defendant Paull's department for approval, stated

that when the f nal and approved P&L statements were returned to hisAier office, the numbers

on the reports he/she submitted were changed. When CI 5 asked the personnel in defendant

Paull's office why the numbers had been changed, he/she was told that it was done to

"balance out" the financial performance of individual stores and to create more consistent

regional results.

126. Cl 5 stated that the P&L statements he/she received back from defendant Paull's

were frequently changed by increasing sales/revenue figures and reducing expenses in certain

districts and regions. According to CI 5, there was little or no uniformity to the changes made by

the personnel in defendant Paull's office.

127. Indeed, McDonald's engaged in the practice of "balancing" out the results of its

restaurants in order to the delay the recognition of an impairment in the value of its

underperforming restaurants during the Class Period. McDonald's was able to perpetrate this

financial manipulation because its policy of accounting for impaired long-lived assets, in

-49-


violation of GAAP, did not group such assets at the lowest level of largely independent,

identifiable cash flows.

128. Based on factors existing as of December 14, 2001, an impairment analysis would

have shown that hundreds of McDonald's domestic and international restaurants were impaired

by that date if not earlier and the belated write-off of $402 million in impaired assets for

restaurant closings should have been recorded by the start of the Class Period. The following

factors clearly indicate that these assets were not recoverable:

• The Company's Latin American market was plagued by severe andpersistent economic difficulties as Argentina, Brazil and Venezula weremired in a deepening recession and had been for sometime;

• Argentina broke convertibility — the link between the Argentine Peso andthe U.S. dollar -- in January 2002, thereby causing a dramatic decline in thevalue of Argentine investments. Argentina was the "flagship" for theCompany's Latin American operations. The dramatic decline in assetvalues in Argentina extended to the other Latin American markets;

• The European markets were also mired in a recession and the Company'ssales were still being negatively impacted by the Mad Cow scare whichhad caused beef consumption in that region to decrease dramatically if notcompletely cease;

• The Company's Japanese operations were being negatively affected by the MadCow scare and Severe Acute Respiratory Syndrome; and

• the Company's U.S. operations were plagued by inadequate customerservice, many of the stores were in disrepair and required substantialcapital improvement.

129. Indeed, according to a former employee [add paragraph on schellberger],

McDonald's was failing to write down the value of its investments in Argentina.

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130. McDonald's improper policy of accounting for impaired long-lived assets

afforded the Company a means of improperly delaying the recognition of the impairment in the

value of its long-lived assets stemming from the above noted difficulties.

13.1. By failing to file financial statements with the SEC which conformed with the

requirements of GAAP, the defendants disseminated financial statements of McDonald's which

violated numerous provisions of GAAP and were presumptively misleading and inaccurate. In

addition to the violations of GAAP noted above, the Company presented its financial results and

statements in a manner which also violated at least the following provisions of GAAP:

a. The principal that errors in previously issued financial statements due to

mistakes in the application of accounting principles or due to an oversight or misuse of facts that

existed at time the financial statements were prepared are to be corrected via restatement of the

previously issued financial statements, rather than by charges recorded in the financial statements

of current period. (APB Opinion No. 20);

b. The principal that companies establish reserves for identifiable, probable

and estimable risks and precludes the use of reserves for general or unknown business risks,

including excess reserves. (SFAS No. 5);

C. The principal that a "cushion" accounting reserves is not appropriate.

(SEC's Staff Accounting Bulletin No. 100);

d. The principal that financial statements disclose significant risks and

uncertainties associated with an entity's operations. (American Institute of Certified Public

Accountant's Statement of Position No. 94-6);

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 52 of 66^ •y

e. The concept 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 (Concepts Statement No. 1, 134);

f. The concept 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

(Concepts Statement No. 1, 140);

g. The concept 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 (Concepts

Statement No. 1, 150);

h. The concept 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

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 (Concepts Statement No. 1, 142);

i. The concept 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 (Concepts Statement No. 2, x¶58-59);

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 53 of 66a

j. The concept 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 (Concepts Statement No. 2, $79); and

k. The concept 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 (Concepts Statement No. 2, ¶¶95, 97).

132. The Company's Class Period Forms 10-K and Forms 10-Q filed with the SEC

were also materially false and misleading in that they failed to disclose known trends, demands,

commitments, events, and uncertainties that were reasonably likely to have a materially adverse

effect on the Company's liquidity, net sales, revenues and income from continuing operations, as

required by Item 303 of Regulation S-K.

Additional Scienter Allegations

133. As alleged herein, Defendants acted with scienter in that Defendants knew that the

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced

in the issuance or dissemination of such statements or documents as primary violations of the

federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their

receipt of information reflecting the true facts regarding McDonald's, their control over, and/or

receipt and/or modification of McDonald's' allegedly materially misleading misstatements

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and/or their associations with the Company which made them privy to confidential proprietary

information concerning McDonald's, participated in the fraudulent scheme alleged herein.

134. While McDonald's insiders were issuing false and misleading statements about

McDonald's and its business, the Individual Defendants, together with other high-level

McDonald's insiders, directly or indirectly, disposed of more than $26 million worth of

personally-held stock, benefitting from the artificial inflation in McDonald's' stock price their

fraudulent scheme had created. The Individual Defendants and other insiders sold shares during

the Class Period as follows:

Insider Date of Sale Shares Price ProceedsDavid M. Poiman, Officer 1131102 ' 2,400 , $27.06 $64,944.00

James R. Cantalupo, Former Vice

Chairman 2112102 30,279 $26.78 $810,871.62

Jack M. Greenberg, Vice Chairman 2115102 14,000 $26.75 $374,500.00

2122102 22,669 $26.52 $601,181.86

4111102 22,116 $27.94 $617,921.04

4119102 14,000 $28.60 $400,400.00

1213102 3,005 $18.74 $56,313.70 Total 75,790, $2,050,316.62

James A. Skinner, Vice Chairman 2119102 11,289 $26.20 $295,771.80 2120102_ 48,857 $26.25 $1,282,496.25

8123102 3,837 $24.40 $93,622.80

8127102 34,401 $23.85 $820,463.8

10/28/02 1,826 $18.49 $33,762.74

Total 100,210 $2,526,117.44

Stanley R. Stein, Executive VP 2121102 12,978 $26.97 $350,016.66

8123102 45,094 $24.40 $1,100,293.60

Total 58,072 $1,450,310.264

4/19/02-

Gloria Santona, Senior VP 4122102 32,000 $28.51 - $28.73 $912,320.00

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 55 of 66L

Michael R. Quinlan, Director 4119102 600,000 $28.52 $17,112,000.00

Fred L. Turner, Chairman 4124102 26,961 $28.64 $772,163.04

Matthew H. Paull, CFO 517102 10,000 $29.78 $297,800.00

Michael J. Roberts, President 10/29/02 3 046 $18.31 $55,772.26

Eduardo Sanchez, Officer 11/14/02 $6,568.45

135. In addition, Defendants' fraudulent scheme, as alleged herein, facilitated the

Company's successful offering of at least $900 million in fixed rate debt securities generating

proceeds of more than $897.4 during the Class Period as follows:

(a) on or about January 14, 2002, McDonald's offered $150 million of

medium-term fixed rate Series G notes generating proceeds of more than $149.9 million;

(b) on or about February 22, 2002, McDonald's offered $300 million of

medium-term fixed rate Series G notes generating proceeds of more than $299.6 million;

(c) on or about April 9, 2002, McDonald's offered $250 million of medium-term

fixed rate Series G notes generating proceeds of more than $248.6 million; and

(d) on or about August 18, 2002, McDonald's offered $200 million of

medium-term fixed rate Series H notes generating proceeds of more than $199.3 million.

136. Moreover, each of the debt offerings were completed prior to any of the

Company's adverse disclosures concerning the true state of the Company's operations and

weakened growth prospects and therefore benefitted from artificially boosted credit ratings which

in turn lowered the Company's borrowing costs during 2002. Immediately following the

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Company's series of negative announcements beginning in September 2002, each of the major

credit rating agencies downgraded the Company's long-term credit outlook to `negative.'

137. Defendant Greenberg was further motivated to issue the false and misleading

statements alleged herein in order to avoid or forestall his termination as the Company's CEO.

A former McDonald's employee, CI 1, revealed that in May 2002, there was a "coup" led by

McDonald's co-founder and Board Member Fred Turner to oust defendant Greenberg as CEO

and give the position to Jim Cantalupo. Cl 1 stated that the Board did in fact take a vote in May

2002 on whether to oust Greenberg and bring in Cantalupo, but the required votes in favor of the

change fell short. Instead, the Board gave Greenberg six to eight months to turn things around.

Significantly, subsequent to the May "coup" attempt defendant Greenberg went to the market on

at least two occasions increasing McDonald's 2002 earnings forecasts. On June 17, 2002,

McDonald's pre-announced Second Quarter 2002 share earnings of $0.38 to $0.39, exceeding

analysts consensus forecasts and reversing a trend that had seen McDonald's earnings decline for

six consecutive quarters. In conjunction with this earnings announcement, defendant Greenberg

increased the upper range of McDonald"s 2002 share earnings guidance to from $1.50 to $1.52

and on July 24, 2002, the Company reported Second Quarter 2002 share earnings of $0.39, a

15% increase compared to the prior year. Following the report, defendant Greenberg again

increased the upper range of McDonald's share earnings guidance from $1.52 to $1.53. The

former employee also stated that when Greenberg's resignation became official on December 5,

2002, Cantalupo decided to "stop or reverse" many of Greenberg's initiatives, including

canceling the Innovate Project and closing underperforming stores. CI Istated, "Cantalupo

wanted to get all the bad news out at once and start with a clean slate."

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Applicability Of Presumption Of Reliance:Fraud-On-The-Market Doctrine

138. At all relevant times, the market for McDonald's' securities was an efficient

market for the following reasons, among others:

(a) McDonald's' stock met the requirements for listing, and was listed and

actively traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, McDonald's filed periodic public reports with the SEC

and the NASD;

(c) McDonald's 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

(d) McDonald's 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.

139. As a result of the foregoing, the market for McDonald's' securities promptly

digested current information regarding McDonald's from all publicly available sources and

reflected such information in McDonald's' stock price. Under these circumstances, all purchasers

of McDonald's' securities during the Class Period suffered similar injury through their purchase

of McDonald's' securities at artificially inflated prices and a presumption of reliance applies.

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No Safe Harbor

140. 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.

141. In fact, despite the immense magnitude of the problems that immediately lay

before McDonald's, Defendants failed to provide any meaningful discussion of the risks which

throughout the Class period were materially and adversely impacting the Company's operations.

For example, at the start of the Class Period, the Company's December 14, 2001 press release

included the following boiler-plate language related to certain unidentified "forward looking"

statements:

Certain forward-looking statements are included in this release. They use suchwords as "may," "will," "expect," "believe," "plan" and other similar terminology.These statements reflect management's current expectations regarding futureevents and operating performance and speak only as of the date of this release.These forward-looking statements involve a number of risks and uncertainties.The following are some of the factors that could cause actual results to differmaterially from those expressed in or underlying our forward-looking statements:

[a] the effectiveness of operating initiatives andadvertising and promotional efforts,

[b] the effects of the Euro conversion, as well aschanges in:

[c] global and local business and economic conditions;

[d] currency exchange and interest rates-,

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[e] food, labor and other operating costs;

[f]political or economic instability in local markets;

[g]competition;

[h] consumer preferences, spending patterns anddemographic trends;

[i] legislation and governmental regulation; and

[j] accounting policies and practices.

The foregoing list of important factors is not exclusive.

The Company undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, future eventsor otherwise.

142. Indeed, McDonald's did not see fit to change in any substantive manner any of the

language describing the purported risks that "could cause actual results to differ materially" from

the Company's earnings projections and forecasts, either prior to or during the Class Period.'

Accordingly, its risk disclosures were nothing more than boilerplate and were not meaningful.

143. 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 McDonald's who knew that

those statements were false when made.

COUNT I

' Substantially identical "forward looking statement disclosures were made in theCompany's SEC filings and quarterly press release announcements throughout the Class Period.

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Violation Of Section 10(b) OfThe Exchange Act And Rule lOb-5

Promulp-ated Thereunder Against All Defendants

144. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

145. During the Class Period, defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

public, including plaintiff and other Class members, as alleged herein; (ii) reduce McDonald's

borrowing costs on more than $900 million of U.S. debt offerings during 2002; (iii) enable the

Individual Defendants and other McDonald's insiders to sell more than $26 million worth of

their personally-held shares of McDonald's common stock at artificially inflated prices; and (iv)

cause plaintiff and other members of the Class to purchase McDonald's' securities at artificially

inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants,

and each of them, took the actions set forth herein.

146. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made

untrue statements of material fact and/or omitted to state material facts necessary to make the

statements not misleading; and (c) engaged in acts, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of the. Company's securities in an effort to

maintain artificially high market prices for McDonald's' securities in violation of Section 10(b)

of the Exchange Act and Rule l Ob-5. All defendants are sued either as primary participants in

the wrongful and illegal conduct charged herein or as controlling persons as alleged below.

147. Defendants, individually and in concert, directly and indirectly, by the use, means

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

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continuous course of conduct to conceal adverse material information about the business,

operations and future prospects of McDonald's as specified herein.

148. These defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a

course of conduct as alleged herein in an effort to assure investors of McDonald's' value and

performance and continued substantial growth, which included the making of, or the

participation in the making of, untrue statements of material facts and omitting to state material

facts necessary in order to make the statements made about McDonald's and its business

operations and future prospects in the light of the circumstances under which they were made,

not misleading, as set forth more particularly herein, and engaged in transactions, practices and a

course of business which operated as a fraud and deceit upon the purchasers of McDonald's

securities during the Class Period.

149. Each of the Individual Defendants' primary liability, and controlling person

liability, arises from the following facts: (i) the Individual Defendants were high-level executives

and/or directors at the Company during the Class Period and members of the Company's

management team or had control thereof; (ii) each of these defendants, by virtue of his

responsibilities and activities as a senior officer and/or director of the Company was privy to and

participated in the creation, development and reporting of the Company's internal budgets, plans,

projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and

familiarity with the other defendants and was advised of and had access to other members of the

Company's management team, internal reports and other data and information about the

Company's finances, operations, and sales at all relevant times; and (iv) each of these defendants

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Case 1:04-cv-02422 Document 21 Filed 11/02/04 Page 62 of 66,y

was aware of the Company's dissemination of information to the investing public which they

knew or recklessly disregarded was materially false and misleading.

150. The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

defendants' material misrepresentations and/or omissions were done knowingly or recklessly and

for the purpose and effect of concealing McDonald's' operating condition and future business

prospects from the investing public and supporting the artificially inflated price of its securities.

As demonstrated by defendants' overstatements and misstatements of the Company's business,

operations and earnings throughout the Class Period, defendants, if they did not have actual

knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain

such knowledge by deliberately refraining from taking those steps necessary to discover whether

those statements were false or misleading.

151. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of McDonald's'

securities was artificially inflated during the Class Period. In ignorance of the fact that market

prices of McDonald's' publicly-traded securities were artificially inflated, and relying directly or

indirectly on the false and misleading statements made by defendants, or upon the integrity of the

market in which the securities trade, and/or on the absence of material adverse information that

was known to or recklessly disregarded by defendants but not disclosed in public statements by

defendants during the Class Period, plaintiff and the other members of the Class acquired

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McDonald"s securities during the Class Period at artificially high prices and were damaged

thereby.

152. At the time of said misrepresentations and omissions, plaintiff and other members

of the Class were ignorant of their falsity, and believed them to be true. Had plaintiff and the

other members of the Class and the marketplace known the truth regarding the problems that

McDonald's was experiencing, which were not disclosed by defendants, plaintiff and other

members of the Class would not have purchased or otherwise acquired their McDonald's

securities, or, if they had acquired such securities during the Class Period, they would not have

done so at the artificially inflated prices which they paid.

153. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act, and Rule IOb-5 promulgated thereunder.

154. As a direct and proximate result of defendants' wrongful conduct, plaintiff and the

other members of the Class suffered damages in connection with their respective purchases and

sales of the Company's securities during the Class Period.

COUNT II

Violation Of Section 20(a) OfThe Exchange Act Against Individual Defendants

155. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

156. The Individual Defendants acted as controlling persons of McDonald's within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of the

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Company's operations and/or intimate knowledge of the false financial statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had

the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various

statements which plaintiff contends are false and misleading. The Individual Defendants were

provided with or had unlimited access to copies of the Company's reports, press releases, public

filings and other statements alleged by plaintiff to be misleading prior to and/or shortly after

these statements were issued and had the ability to prevent the issuance of the statements or

cause the statements to be corrected.

157. In particular, each of these defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, is presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same.

158. As set forth above, McDonald's and the Individual Defendants each violated

Section 10(b) and Rule lOb-5 by their acts and omissions as alleged in this Complaint. By virtue

of their positions as controlling persons, the Individual Defendants are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct,

plaintiff and other members of the Class suffered damages in connection with their purchases of

the Company's securities during the Class Period.

WHEREFORE, plaintiff prays for relief and judgment, as follows:

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r


(a) Determining that this action is a proper class action, designating plaintiff as

Lead Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federal Rules

of Civil Procedure and plaintiff's counsel as Lead Counsel;

(b) Awarding compensatory damages in favor of plaintiff and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

(c) Awarding plaintiff and the Class their reasonable costs and expenses incurred

in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury on all issues so triable.

Dated: October 18, 2004

LASKY & RIFKIND, LTD.NO' I KIND (61910

NO , 41"ITIMI D

351 W. Hubbard, Suite 406Chicago, IL 60610Telephone: 312/634-0057312/634-0059 (fax)Liaison Counsel

LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS, LLP

SAMUEL H. RUDMANRUSSELL J. GUNYAN200 Broadhollow Road, Suite 406Melville, NY 11747Telephone: 631/367-7100631/367-1173 (fax)Lead Counsel for Plaintiffs

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CERTIFICATE OF SERVICE

The undersigned, an attorney herein, does hereby certify that he caused a copy of Plaintiffs'

Notice of Motion and Motion for a One Day Extension to File his Amended Class Action Complaint

Instanter via US Mail on this 19th day of October, 2004.

Robert J. KopeckyJonathan C. SungeKellye L. FabianJohn A. AmashKirland & Ellis LLP200 East Randolph Drive, Suite 5800Chicago, IL 60601

NO

Documents

Allan Selbst, et al. v. McDonald's Corporation, et al. 04-CV-2422 ...securities.stanford.edu/filings-documents/1030/MCD04-01/2004112_… · Securities and Exchange Commission ("SEC")