UNITED STATES DISTRICT COURT - -./,:-,,,t.:- EARL …securities.stanford.edu/.../2005211_r01c_04CV1685.pdf3. Shaw's primary business has historically been as a provider of piping systems

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UNITED STATES DISTRICT COURT - -./,:-,,,t.:- D n STRtCie OF LAEASTERN DISTRICT OF LOUISIANA

2005 FEB H NI 14: 54

'-) CASE NO. (Consolidat d) Of 105 .

EARL THOMPSON, ) SECTION "C"/MAG. DIV. (6 ' 1CLERKWH(TEPlaintiff, )

VS. ) CONSOLIDATED CLASS ACTION) COMPLAINT FOR VIOLATIONS OF

THE SHAW GROUP, INC., TIM BARFIELD, ) FEDERAL SECURITIES LAWSJR., J.M. BERNHARD, JR., RICHARD F. GILL )AND ROBERT BELK, ) JURY TRIAL DEMANDED

)Defendants. ) THIS DOCUMENT RELATES TO:

) ALL CASES

INTRODUCTION

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

The Shaw Group, Inc. ("Shaw" or the "Company") between October 19, 2000 and June 10, 2004

inclusive (the "Class Period"), against Shaw, J.M. Bernhard, Jr. ("Bernhard"), Tim Barfield, Jr.

("Barfield"), Richard F. Gill ("Gill") and Robert L. Belk ("Belk"), each of whom was a senior

officer and/or director of Shaw during the time the fraud complained about herein was

committed and Shaw's stock was artificially inflated (Shaw, Bernhard, Barfield, Gill and Belk

are hereinafter sometimes collectively referred to as "Defendants"), seeking to pursue remedies

under the Securities Exchange Act of 1934 (the "Exchange Act") as a result of numerous

fraudulent acts undertaken by the Defendants.

2. Indeed, as detailed throughout this Consolidated Complaint (the "Consolidated

Complaint"), Bernhard, Gill and Belk (sometimes hereinafter referred to with Barfield, as the

"Individual Defendants") collectively pocketed more than $54 million as a result of their sales of

Shaw stock at artificially inflated prices as high as between $29.65 and $42.47 per share. In

addition, each of the Individual Defendants, at various times during the Class Period, obtainede 0 ._./

C, t c- : ril i ).-Ip

cash payouts of between 65% and 212% of their salaries for causing Shaw to report artificially

inflated performance metrics which further motivated the Individual Defendants to participate in

Defendants' scheme and wrongful course of business.

3. Shaw's primary business has historically been as a provider of piping systems and

engineering procurement and construction ("EPC") services to the power generation industry.

Between 1990 and 2002, demand for domestic electricity generation increased substantially

while capacity remained relatively flat. This imbalance, coupled with deregulation of the power

industry and decommissioning of nuclear plants, resulted in a surge in domestic construction of

power plants and resulted in the rapid growth of Shaw's business.'

4. Throughout the course of the investigation of Defendants' fraud, many

confidential former insiders provided information regarding the various methods employed by

Defendants in furtherance of their scheme to defraud shareholders. Indeed, among those

confidential former insiders interviewed in the course of the investigation of the fraudulent

scheme and wrongful business practices complained of herein were a president of one of Shaw's

subsidiaries, vice-presidents of various departments, a vice-president and director of

construction, senior accountants, project accountants, project controls managers in Baton Rouge,

Denver, California and Mississippi, a director of Fossil Operations and Maintenance, directors of

project controls, division managers, project managers, engineers, a regional controller, internal

auditors, a financial department manager, a superintendent, program managers, an assistant

treasurer and senior manager, an assistant engineer and scientist in Shaw's Baton Rouge

headquarters, a lead programmer analyst, project control staff members, consultants, a materials

Shaw has, at various times, also provided services in the petrochemical, chemical,refining and environmental sectors.

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manager, estimating assistants, financial analysts, an assistant treasurer, cost control analysts,

external consultants and purchasing agents, among others. The information provided by many of

these confidential former insiders paints a picture of egregious manipulation of earnings

designed to obfuscate the truth — that Shaw's "earnings" were a result of accounting and business

sleights of hand, rather than solid growth and a successful business strategy.'

5. For example, unbeknownst to investors, the Company's reported earnings were

artificially inflated through the improper manipulation of reserve accounts established in

connection with two large acquisitions — Stone & Webster, Inc. ("Stone & Webster") (in July

2000) and The IT Group ("The IT Group") (in June 2002). More specifically, Defendants

abused the "purchase" method of accounting for these acquisitions by overstating reserves and

goodwill and then using these accounts to pad earnings.

6. Shaw further inflated its earnings through the premature recognition of revenues

in violation of its own purported polices and Generally Accepted Accounting Principles

("GAAP"). Specifically, Shaw recognized income by asking, coercing and, if necessary, forcing

its project managers to lie about the percentage of completion of their projects.' End-of-quarter

telephone calls by Shaw's senior finance and accounting employees from Baton Rouge,

including vice presidents in the accounting department, to Shaw's project managers to coerce the

project managers to lie about the percentage of completion became so prevalent during the Class

Period that project managers accepted the calls as routine. Even when project managers refused

2 The Defendants' scheme was apparently so "successful" that between fiscal year 2000and fiscal year 2002, Shaw's reported annual net income supposedly increased more than 300%.

3 For example, if a $500 million project was 51% complete, but Shaw lied and claimed thatit was 55% complete, Shaw would increase its revenue recognition by $2,000,000 (i.e. 55% -51% =4% x $500M = $2M).

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to cooperate and arbitrarily bump-up percentages of completion, Shaw's accounting decision-

makers would do it anyway.

7. As discussed more fully in 1149 through 53 and V1230 through 249 below, the

practice of inflating the percentage of completion was so widespread that it is clear that the

Defendants knew about it or, at the very least, were severely reckless regarding its obvious

existence. In fact, Bernhard discussed the necessity of inflating the percentages of completion

with several of his high-level executives at a restaurant in Baton Rouge called "J. Alexander's"

during the early part of the Class Period. J. Alexander's was located close to Shaw's corporate

offices in Baton Rouge. During that conversation, Bernhard told his dinner companions that

"We have got to show more progress" on Shaw's construction projects. This choice of words by

Bernhard was deliberate as he could have said that they had to actually make more progress on

the projects. The other attendees responded to Bernhard in a guarded fashion, and everyone at

the table seemed tense. Undoubtedly, Bernhard was telling the others at the table that Shaw had

to report more completion on its projects than Shaw had actually achieved. Based on what was

said and the reactions of Bernhard's dinner companions, Bernhard was directing his dinner

companions to falsely inflate the percentage of completion that Shaw reported on its projects.

8. In addition, during the Class Period, Shaw spent in excess of $20M attempting to

develop a program called "Shaw-Trac" that was touted as being able to provide highly accurate

tracking of the rate of completion of projects in real-time by, among other things, providing up-

to-the minute reporting. In reality, Defendants used Shaw-Trac as a marketing tool to convince

potential customers that Shaw-Trac would allow Shaw to bring projects to completion more

quickly and efficiently than its competitors. Unfortunately for Shaw's customers and

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shareholders, Shaw-Trac was a great marketing tool, but a lousy and ineffective internal control

program.

9. The truth was that, by mid-2001, Defendants were well aware that Shaw-Trac was

an unmitigated disaster on every level. First, Shaw-Trac was so complicated and practically

inapplicable to Shaw's business that it caused numerous Shaw projects, including, but not

limited to the Covert, Harquahala, and Marcus Hook projects, to fail to meet time and budget

constraints, resulting in millions of dollars in lost fees and profits. In fact, while Shaw mandated

use of Shaw-Trac on all of its EPC projects, most, if not all, of Shaw's project managers and

accountants either refused to use it at all or maintained back-up systems, like Excel, in order to

attempt to at least minimally track how their projects were proceeding. Nobody trusted Shaw-

Trac because it did not work. This lack of internal controls and the inability to accurately track

its projects paved the way for Defendants to cause Shaw to overstate its reported revenue, in

violation of GAAP and Shaw's own internal accounting policies.

10. Further, Shaw misled the market by overstating the amount of its customer

backlog by, for example, including contingent potential projects as part of its calculation of

backlog. This had the intended effect of contributing to the artificial inflation of Shaw's stock by

contributing to the skewed picture of Shaw's upcoming business prospects and, consequently, its

future earnings.

11. Defendants' scheme and wrongful course of business was designed to and did

artificially inflate Shaw's reported performance and the price of its stock causing it to reach a

Class Period high of $62.37 on April 25, 2001. 4 Shaw stock continued to trade at artificially

inflated levels until August 5, 2003 when the Company announced that a major customer had

4 All stock prices are adjusted to account for a two-for-one stock split on December 18, 2000.

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missed a $32 million milestone payment, at which time the stock fell to $16.00. Undeterred,

Shaw continued to issue false and misleading statements to attempt to shore-up its stock price.

Following Shaw's June 10, 2004, announcement of a SEC inquiry purportedly relating to Shaw's

abuse of the "purchase" method of accounting for its acquisitions, Shaw's stock dropped another

12.4% to close at $10.75.

12. As a result of Defendants' fraud, Shaw's shareholders suffered more than $110

million in losses.

JURISDICTION AND VENUE

13. 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 10b-5 promulgated thereunder by

the SEC [17 C.F.R. § 240.10b-5].

14. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

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

U.S.C. § 1391(b). Many of the acts charged herein, including the preparation and dissemination

of materially false and misleading information, occurred in substantial part in this District and

Shaw conducts business in this District.

16. 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.

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PARTIES

17. Lead Plaintiffs Hawaii Laborers Pension Plan, Carpenters Pension Fund of

Baltimore, Maryland, Indiana Electrical Workers Pension Trust Fund IBEW, and Plumbers and

Pipefitters Local Union No. 630 Pension-Annuity Trust Fund purchased Shaw securities at

artificially inflated prices during the Class Period and have been damaged thereby.

18. Shaw is a corporation organized under the laws of Louisiana with its principal

executive offices located at 4171 Essen Lane, Baton Rouge, Louisiana. At all relevant times,

Shaw described itself as "a leading global provider of comprehensive services to the power,

process, and environmental and infrastructure industries."

19. Bernhard was, at all relevant times, Chairman of the Board and Shaw's Chief

Executive Officer. Bernhard also served a Shaw's President until September 2003. During the

Class Period, Bernhard sold 1,255,000 shares of Shaw stock for proceeds of approximately $50.5

million.

20. Barfield was, at all relevant times since September 2003, a Shaw Director, Shaw's

Chief Operating Officer and President.

21. Gill was, at all relevant times until September 2003, Shaw's Executive Vice

President and Chief Operating Officer, and President of Stone & Webster. During the Class

Period, Gill sold 60,000 shares of Shaw stock for proceeds of approximately $2.28 million.

22. Defendant Belk was, at all relevant times, Shaw's Chief Financial Officer.

During the Class Period, Belk sold 35,000 shares of Shaw stock for proceeds of approximately

$1.46 million.

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THE INDIVIDUAL DEFENDANTS'ACCESS TO CRITICAL INFORMATION

23. During the Class Period, the Individual Defendants, as senior executive officers

and directors of Shaw, were privy to confidential and proprietary information concerning Shaw,

its operations, finances, financial condition, and present and future business prospects. The

Individual Defendants also had access to material adverse non-public information concerning

Shaw, as discussed in detail below. Because of their positions with Shaw, the Individual

Defendants had access to non-public information about its business, finances, products, markets

and present and future business prospects via access to internal corporate documents,

conversations and connections with other corporate officers and employees, attendance at

management and board of directors meetings and committees thereof and via reports and other

information provided to them in connection therewith. Because of their possession of such

information, the Individual Defendants knew or were severely reckless in disregarding the fact

that adverse facts specified herein had not been disclosed to, and were being concealed from, the

investing public.

24. More specifically, the Individual Defendants monitored the progress of its

numerous projects through monthly reports known within Shaw as "One-Page Reports." These

One-Page Reports provided a snapshot of a project's financial performance and contained

information on gross margins, profit margins, cost incurred to date, budget comparisons, monthly

comparisons and projections. With this information, the Individual Defendants could and did

continuously monitor and evaluate the financial progress of each project.

25. The One-Page Report was an automated report that summarized numerous pages

of financial information culled from the Company's various databases by project controls

employees. In particular, information on budgeted or "earned values" was derived from Shaw-

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Trac, while actual values came from Shaw's ERP software.' The comparison of budgeted

amounts to actual amounts in the One-Page Reports demonstrated and measured a project's

productivity, which assisted in forecasting future costs. However, as described below, because

Shaw-Trac did not work, any data obtained from Shaw-Trac and any reports created by Shaw-

Trac, including the One-Page Reports, were corrupt and inherently unreliable. Furthermore, the

Defendants knew or were severely reckless in disregarding that Shaw-Trac was useless, as it was

universally regarded by Shaw employees from top to bottom as a disaster.

26. Project control employees often had to wait for the Company's books to close

before they could start entering information into the One-Page Report application. Anytime

there was a significant change in any of the figures from one month to the next, the One-Page

Report application would require a detailed explanation for the change. Completed One-Page

Reports were sent via e-mail to the Company's headquarters by the 12th or 15th of each month.

If management was not satisfied with a detailed explanation regarding a significant change,

additional information would be sought from the project employees.

27. The One-Page Reports and other information would be used to prepare monthly

Executive Summary Reports, which detailed the status of all of the construction projects Shaw

had in progress. The Executive Summary Reports were distributed to all of the top Shaw

executives, including the Individual Defendants, in book format on the 15th or 20th of each

month. These reports were also distributed to Shaw's "Financial Accounting Group" to assist

with revenue recognition and for setting reserves.

5 A former project controls manager in Shaw's Baton Rouge and Denver offices described"earned value" as tracking procurement and utilization/consumption of everything and anythingfor a project, including non-essential personnel, other labor, trucks and building materials.

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28. The Executive Summary Report contained a One-Page Report for each project

and also included an analysis that compiled the information from all of the One Page Reports to

allow Shaw executives to see how the Company's projects were doing collectively. In addition,

the Executive Summary Report included a cost report, which detailed the budgets that had been

expended to date and was used to track costs.

29. Throughout the Class Period, once the Executive Summary Reports were

distributed, Shaw executives, including the Individual Defendants, attended a monthly review

meeting usually held in the 12th floor conference room of the Company's Baton Rouge

headquarters. During the monthly review meetings, Shaw executives reviewed five to seven

"key" projects in order to assess the current status of a project, its future challenges and

opportunities for improvement. The participants at the meetings would specifically address the

information contained in the Executive Summary Reports, including the project's budgets,

schedules, actual costs incurred, projections and any other relevant information, and evaluate

whether a project was on track to meet anticipated earnings. Internally, these monthly review

meetings were dubbed "Rip Your Heart Out" meetings because Bernhard, who was known to

have a quick temper, would verbally abuse any executive who brought him negative financial

information. Indeed, during the Class Period, Shaw's rapidly declining financial condition,

caused in large measure by mounting losses and completion date problems with respect to

Shaw's EPC construction projects as well as a lack of new EPC projects (contrary to the bright

picture painted by the Defendants) was a frequent topic of discussion at monthly review

meetings.

30. In addition, Shaw executives, including the Individual Defendants, often attended

project review meetings at the individual project sites. Project review meetings were held when

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specific issues arose, and the discussions would focus on the status of the project and any issues

involving project execution, vendors, subcontractors or customers.

31. Further, after the close of each quarter, Shaw executives, including the Individual

Defendants received a bound quarterly report of approximately 30-40 pages that contained

information on the quarterly financial performance of each of Shaw's "operations centers"

located in, among other places, Denver, Houston, Boston, and London. More specifically, these

quarterly reports contained information on, among other things, gross margin, profit margin,

expenses and income, and comparisons of these measures to previous quarter's results.

32. The Individual Defendants were also heavily involved in the Company's

budgeting and planning processes, particularly of the EPC business. In particular, the Individual

Defendants all reviewed and approved the EPC Division Business Plan, which was produced on

a yearly basis and contained EPC's anticipated revenues and other pertinent information used to

determine backlog for the coming year. In addition, the Individual Defendant spent considerable

time working on the Company's annual budgets. In reviewing the budgets, the Individual

Defendants focused on what work had been booked, what work Shaw anticipated booking in the

coming year, and the anticipated revenue stream for the coming year. During either July or

August, before the annual budget was finalized, the Individual Defendants and other members of

the Company's management team attended a company-wide budget review meeting where they

discussed the Company's budget and backlog, usually with the aid of presentations by each

division within the Company.

33. A former project controls manager and a former director of Fossil Operations and

Maintenance recalled that Bernhard was known throughout Shaw as an extremely hands-on

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CEO, who was responsible for making all significant decision concerning Shaw's EPC business.

In fact, Bernhard bragged that, "there is nothing in this company that I don't know."

34. The Individual Defendants are liable as direct participants and co-conspirators

with respect to the wrongs complained of herein. In addition, the Individual Defendants, by

reason of their status as senior executive officers and/or directors, were "controlling persons"

within the meaning of Section 20 of the Exchange Act and had the power and influence to cause

the Company to engage in the unlawful conduct complained of herein. Because of their positions

of control, the Individual Defendants were able to and did, directly or indirectly, control the

conduct of Shaw's business.

35. The Individual Defendants, because of their positions with the Company,

controlled and/or possessed the authority to control the contents of its reports, press releases and

presentations to securities analysts and through them, to the investing public. The Individual

Defendants were provided with copies of the Company's reports and press releases alleged

herein to be misleading, prior to or shortly after their issuance and had the ability and

opportunity to prevent their issuance or cause them to be corrected. Thus, the Individual

Defendants had the opportunity to commit the fraudulent acts alleged herein.

36. As senior executive officers and/or directors and controlling persons of a publicly

traded company whose common stock and other securities were, and are, registered with the SEC

pursuant to the Exchange Act, and whose shares traded on the New York Stock Exchange

("NYSE") and governed by the federal securities laws, the Individual Defendants had a duty to

disseminate promptly accurate and truthful information with respect to Shaw's financial

condition and performance, growth, operations, financial statements, business, products, markets,

management, earnings and present and future business prospects, to correct any previously

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issued statements that had become materially misleading or untrue, so that the market price of

Shaw's common stock would be based upon truthful and accurate information. The Individual

Defendants misrepresentations and omissions during the Class Period violated these specific

requirements and obligations.

37. The Individual Defendants are liable as participants in a fraudulent scheme and

wrongful course of business which operated as a fraud or deceit on purchasers of Shaw common

stock by disseminating materially false and misleading statements and/or concealing material

adverse facts. The scheme deceived the investing public regarding Shaw's business accounting

practices, operations and management and the intrinsic value of Shaw common stock and caused

plaintiff and members of the Class to purchase Shaw's common stock and other securities at

artificially inflated prices.

CLASS ACTION ALLEGATIONS

38. Plaintiff brings 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 the

securities of Shaw between October 19, 2000 to June 10, 2004, inclusive (the "Class Period")

and who were damaged thereby. Excluded from the Class are Defendants, the officers and

directors of the 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.

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

impracticable. Throughout the Class Period, Shaw common shares and other securities were

actively traded on the NYSE. While the exact number of Class members is unknown to plaintiff

at this time and can only be ascertained through appropriate discovery, plaintiff believes that

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

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Class may be identified from records maintained by Shaw 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.

40. Plaintiff's claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by Defendants' wrongful conduct in violation of

federal law that is complained of herein.

41. Plaintiff 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.

42. 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 Defendants implemented the manipulative devices or engaged in

the wrongful scheme alleged herein;

(b) whether Defendants' statements omitted material facts necessary to make

the statements made, in light of the circumstances under which they were made, not misleading;

(c) whether Defendants misrepresented material facts;

(d) whether the 1934 Act was violated by Defendants' acts as alleged herein;

(e) whether Defendants knew or were severely reckless in disregarding that

the statements made by them were false and misleading;

(0 whether the prices of Shaw's publicly traded securities were artificially

inflated; and

(g) the extent of damage sustained by Class members and the appropriate

measure of damages.

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43. 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.

CONTEXT OF SHAW'S FALSE AND MISLEADING STATEMENTS

Shaw Used Cookie Cutter Reserves toBoost Profit Margins and Earnings

44. On July 7, 2000, Shaw announced that it was the successful bidder in the auction

for the business of Stone & Webster in a proceeding under Chapter 11 of the U.S. Bankruptcy

Code with a purchase price of $38 million in cash, and approximately 2.5 million shares of Shaw

common stock (valued at approximately $105 million), and assumed liabilities of approximately

$450 million. The transaction, in which Shaw acquired most of Stone & Webster's operating

assets, closed on July 14, 2000. Stone & Webster was a holding company, operating through

various affiliates that provided full-service, value-added engineering, procurement, construction,

consultation and environmental services to the power, process, governmental and industrial

markets.

45. In its Annual Report for the fiscal year ended August 29, 2000, on Form 10-K

filed with the SEC on November 29, 2000, the Company stated that it had acquired from Stone

& Webster a large number of contracts with either inherent losses or lower-than-market

remaining profit margins due to the effect of the financial difficulties experienced by Stone &

Webster on negotiating and executing the contracts. The Company further stated that it had

"adjusted" these contracts to their fair value at acquisition date by establishing a reserve of

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approximately $83.7 million to reduce contract costs incurred in future periods and adjust the

gross margins recognized on the contracts. In addition, Shaw recorded accrued losses on

assumed contracts of approximately $36.3 million. The total amount was recorded on the balance

sheet as a gross margin reserve of $120 million. Shaw did this in order to create a piggybank

from which it could manipulate its earnings, regardless of actual performance. These "reserves"

were, in reality an insurance policy against poor earnings and they were used to mask Shaw's

inability to grow its business without cheating. Shaw's creation of these "reserves" together with

the numerous and substantial violations of GAAP their creation caused are set forth in detail in

1N1151 through 216, below.

46. Not content with the "cookie cutter" reserves it manufactured in connection with

the Stone & Webster Acquisition, in May 2002, Shaw acquired substantially all of the operating

assets of The IT Group and its subsidiaries in order to give itself another opportunity to create

phantom reserves. The IT Group was a provider of diversified environmental consulting,

engineering, construction, remediation and facilities management services. The IT Group and

one of its wholly-owned subsidiaries, Beneco, were subject to separate chapter 11 bankruptcy

reorganization proceedings and the acquisition was completed pursuant to the bankruptcy

proceedings. The acquisition of The IT Group assets was completed on May 3, 2002 and the

acquisition of Beneco's assets was completed on June 15, 2002. The purchase price included $53

million in cash, 1,671,336 shares of Shaw common stock valued at approximately $52,463,000,

and the assumption of the outstanding balances of $51,789,000 debtor-in-possession financing

provided to The IT Group and Beneco by the Company.

47. Throughout the Class Period, the Company drew on the gross margin reserve

account, which bore no discernable relationship to the true fair market value of the Stone &

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Webster and IT Group assets at the time the assets were acquired, to reduce costs and thereby

increase reported profit margins and earnings.

48. Unbeknownst to investors, the contract reserves were not based on a reliable or

reasonable analysis of the actual fair market value of the contracts acquired from Stone &

Webster and The IT Group, but rather, were "cookie cutter" reserves upon which the Company

drew as needed to falsely and misleadingly reduce operating expenses and thereby represent

earnings growth as being materially greater than it actually was. These "reserves" were the

mechanism by which Defendants managed Shaw's earnings as opposed to reporting Shaw's true

financial condition and results.

Shaw Prematurely Recognized Revenue in Violation of its OwnPurported Policies and Generally Accepted Accounting Principles

49. On November 29, 2001, the Company filed its Form 10-K for the year ended

August 31, 2001 in which it set forth its purported revenue recognition policy. In this regard, the

Form 10-K stated, in pertinent part, as follows:

For project management, engineering, procurement, and construction services, theCompany recognizes revenues under the percentage of completion methodmeasured primarily on contract costs incurred to date, excluding the costs of anypurchased but uninstalled materials, compared with total estimated contract costs.Revenues from cost-plus-fee contracts are recognized on the basis of costsincurred during the period plus the fee earned. Profit incentives are included inrevenues when their realization is reasonably assured.

50. Defendants knew or were severely reckless in disregarding that this statement was

materially false and misleading because the Company routinely reported revenue in excess of the

contract costs incurred to date as a percentage of the total estimated contract costs at completion

and, in the case of cost-plus-fee contracts, before the fee was earned and its realization

reasonably assured.

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51. As noted above, Shaw's revenue recognition policy was to record revenues using

the percentage-of-completion method of accounting by relating contract costs incurred to date to

total estimated contract costs at completion. Under this method, an estimate of total contract

costs (which consist of internal costs, including salaries and wages, and external costs, including

subcontractor costs) must be reasonably estimated for each contract. At the end of each

accounting period, the percentage to which each of the Company's contracts is complete must be

computed based on production costs incurred to date as a percentage of total estimated

production costs. This percentage must then be multiplied by the contract's total value to

calculate the sales revenue to be recognized, as follows:

PRODUCTION COSTSINCURRED TO DATE X TOTAL = RECOGNIZABLE

CONTRACT VALUE SALES REVENUETOTAL ESTIMATED

PRODUCTION COSTS

52. As set forth more specifically in I1J230 through 249, below, contrary to its

publicly stated policy of revenue recognition, and contrary to GAAP, Shaw improperly

overstated the Company's apparent revenue and income growth by inflating the costs expended

on fixed-price contracts (thereby increasing the "numerator" in the percentage-of completion

formula), leading to improperly inflated revenues and earnings. This happened for two reasons.

First, it happened because Shaw's project managers were pressured, coerced and outright ordered

to lie and increase (or permit Shaw's accountant to increase) the percentages of completion by

material amounts. In fact, even when project managers refused to agree to increase the levels of

completion, Shaw's accountants would often increase them anyway.

53. Second, it happened because Shaw lacked the necessary and adequate corporate

controls to insure the accuracy of its percentage of completion estimates because Shaw-Trac,

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despite Shaw's consistent representations to the contrary, was an abject failure. The lack of

internal controls made it vastly easier for Shaw to conceal its manipulation of revenue

recognition and artificially inflate the price of Shaw's stock.

Shaw-Trac, Shaw's ProjectManagement Software, Did Not Work

54. In its public filings throughout the Class Period, Shaw touted that it "employs its

technology and intellectual property to reduce costs and to better serve its customers." More

particularly, the Company developed its Shaw-Trac proprietary computer software to aid in

project and process management. As stated in the Company's Form 10-K for the year ended

August 31, 2002:

SHAW-TRAC is a web-based, proprietary earned value application that enablesthe Company to effectively manage and integrate the many phases of a capitalproject, from estimating to engineering through construction and start-up. Usersfrom around the world consistently access Shaw-Trac through public networks inorder to update and understand the real-time financial position of respectiveproj ects.

55. Despite investing over $20 million in the development and implementation of

Shaw-Trac, numerous former Shaw employees have confirmed that by mid-2001, the software

program was a "disaster."

56. Shortly after the Stone & Webster acquisition, Shaw brought in two top

consultants, Ralph Wilson ("Wilson") and Joe St. Julian ("St. Julian") to develop the Shaw-Trac

software. Shaw-Trac was designed to be a one-of-a-kind internet-based, real-time project

management and project control software program through which Shaw could accurately track

projects costs and, in turn, provide a reasonable basis for assessing percentage of completion

contracts. In fact, a former director of project controls out of Shaw's Baton Rouge office, stated

that despite its inability to properly manage and track the status of Shaw's projects, Shaw-Trac,

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by order of Bernhard, became the primary tool used by the Company to determine percentage of

completion on a project.

57. A former project controls manager, who assisted Wilson and St. Julian in

designing Shaw-Trac, confirmed that problems with Shaw-Trac arose from the start of its

development because Wilson and St. Julian failed to prepare detailed plans for all the functions

and interface specifications that Shaw-Trac was supposed to have.'

58. Another former project controls manager and a former director of Fossil

Operations and Maintenance concurred, stating that problems arose with Shaw-Trac because the

software was not designed properly.

59. Nonetheless, despite the fact that the software was not fully functional, Shaw

began rolling out Shaw-Trac in mid-2001, and Shaw mandated that Shaw-Trac be used on all of

its EPC projects. A former project controls manager who helped Wilson and St. Julian design

and attempt to implement Shaw-Trac said the decision to roll-out the software was not based on

whether it was ready for use in the field (which it was not), but instead was based on Bernhard's

desire to use Shaw-Trac as a marketing tool to lure potential clients to Shaw. In reality,

Bernhard knew that Shaw-Trac was not functional, but insisted that it be implemented so that he

could promote the software as a means to differentiate Shaw from other EPC contractors that did

not possess proprietary project control software.

60. A former director of project controls out of Shaw's Denver office concurred that

Shaw would sell potential customers on the fact that Shaw-Trac provided extremely accurate

real-time information concerning the status of a project, which prevented cost and time overruns.

6 Shaw's project controls department was charged with the responsibility of trackingprogress and expenditures on each of Shaw's EPC power plant construction projects.

- 20 -

61. Not surprisingly, Shaw's implementation of the Shaw-Trac software at the project

job-sites was a complete failure because, quite simply, Shaw-Trac did not work. In fact, it was

common knowledge around the Company that Shaw-Trac was useless. A former director of

project controls went as far as to say that "anyone that says that Shaw-Trac works is lying."

62. A former Baton Rouge project controls manager confirmed that nothing worked

in Shaw-Trac and identified numerous EPC projects that experienced substantial problems once

Shaw-Trac was implemented, including Shaw's Covert, Harquahala, LSP-Pike, Mint Farm,

Apex and SCR projects. One former Baton Rouge project controls manager who oversaw the

use of Shaw-Trac on the SCR project explained that he constantly flew to Shaw's Toronto office

during the summer of 2001 to deal with problems with the Shaw-Trac software. Despite his

efforts, Shaw-Trac never worked properly. Many of Shaw's project controls managers and

customers spoke frequently during the Class Period and everybody agreed that they had

insurmountable problems using Shaw-Trac.

63. A former Baton Rouge project controls manager added that Shaw-Trac's

problems were universally known and included:

(a) Shaw-Trac failed to correctly download information on material and labor

estimates inputted in the project database by the project estimators. As a result, Shaw could not

accurately capture the breakdown of labor hours budgeted for various tasks and the budgets for

various materials.

(b) Shaw-Trac failed to interface properly with Shaw's other software

programs, including Primavera P3 scheduling software, which was used to track the schedule

and progress towards completing a project, and Oracle's payroll software, which tracked actual

- 21 -

labor hours expended on a project. Data provided by the Primavera and Oracle programs would

not properly feed into Shaw-Trac.

(c) Shaw treated early estimates derived from engineering plans as if they

were the final construction plans rather than ballpark figures subject to constant revision as work

on the project progressed. In so doing, using Shaw-Trac became unworkable because any

deviation from the engineering plans as they stood on the day construction started would require

change notices to be input into Shaw-Trac. On projects the size that Shaw was constructing,

there were simply too many changes to track in the manner required by Shaw-Trac, rendering the

program virtually useless.

64. Due to all of its failings, Shaw-Trac could not provide a reasonable basis for

assessing percentage of completion on projects, and Shaw-Trac did not provide Shaw with

accurate information about productivity to see if the costs actually incurred on the job were in-

line with the budget.

65. A former project controls manager and director of Fossil Operations and

Maintenance concurred with other former project controls managers and confirmed that Shaw-

Trac simply could not track progress and budgets on Shaw's power plant construction projects.

Using Shaw-Trac was like "flying blind" because Shaw-Trac did not provide any useful

information and the results it produced could not be trusted. Shaw-Trac made faulty calculations

that did not produce accurate or predictable results regarding how much money had been spent,

how much of various materials still needed to be used and the remaining costs for materials and

construction. Due to the unreliability of the results produced by Shaw-Trac, Shaw could not

predict project completion costs. Further, because Shaw-Trac was incapable of interfacing with

Shaw's ERP and scheduling software, it was unable to retrieve important financial and

- 22 -

administrative information. Consequently, Shaw-Trac did not accurately roll-up the work that

had been performed to date to arrive at an accurate percentage of completion result. The fact that

Shaw-Trac did not work was even reported to the Company's outside auditor, Arthur Anderson.

66. A former director of project controls stated that "Shaw-Trac was a total piece of

[expletive] that doesn't work." On a typical EPC project, Shaw would need about 5 project

control employees in the field at the project site to collect and input project status information.

Once Shaw-Trac was introduced, Shaw would typically need to hire 3 to 5 times that number of

employees and, even with this increased manpower, Shaw-Trac still did not work. In many

instances, data inputted into Shaw-Trac would disappear or the system would crash. As such,

Shaw-Trac never had reliable information about a job's progress costs, profit or other

information that Shaw assured the customer it would know.

67. A former director of project controls reported that Shaw lost tens of millions of

dollars on the Covert project because it was badly over-budget and behind schedule due to the

failure of Shaw-Trac. Further, Shaw had dispatched Wilson and St. Julian to the Covert project

site to take over the project controls and fix Shaw-Trac, but they were unable to get the software

to work and deliver a project on time and on budget. A former Baton Rouge project controls

manager added that the lead project controls employee on the Covert project, Shannon Chapman,

could never get Shaw-Trac to work right.

68. In fact, virtually every project that had implemented the Shaw-Trac software had

ending up costing Shaw money, including Covert, Harquahala, Wolf Hollow, Apex,

Ravenswood and LSP-Pike. Former project controls managers estimated that Shaw likely lost

$100 million or more on these projects due to costs overruns and delays attributable to the fact

that Shaw-Trac did not work. Despite these universally known failures of Shaw-Trac, Shaw

- 23 -

management was not focused on completing projects, but instead were focused on generating

positive quarterly results. According to one former director of Fossil Operations and

Maintenance, "Shaw was a marketing machine and an execution disaster."

69. A former project controls manager in Baton Rouge and Denver confirmed that

Shaw-Trac was unable to function with the Company's "Work Breakdown Structure" or "WBS."

The WBS is a set of codes used by Shaw to identify every type of expenditure on a project site.

Shaw's estimators determined how much of various materials the project required and entered

that information into the WBS. Although Shaw-Trac was supposed to automatically pull the

quantities and WBS information from the estimating program, Shaw-Trac was unable to perform

this function. Instead, all of the information had to be entered manually from the estimating

program into Shaw-Trac, which was an extremely time-consuming process. These various

problems were detailed in a May 2002 letter to senior Shaw insiders responsible for Shaw-Trac's

development.

70. A former project control analyst in Shaw's Denver office corroborated that Shaw

mandated that Shaw-Trac be used on the Apex project, even though it was widely known

throughout the Company that Shaw-Trac did not work properly. On the Apex project, Shaw-

Trac generated results that made no sense and the software was plagued with many "bugs." As a

result, the project control employees on the Apex project used spreadsheets and other parallel

systems in order to attempt to off-set and minimize the problems caused by using Shaw-Trac.

71. Belk was specifically informed, in great detail, by a former Baton Rouge project

controls manager, of all the problems associated with the use of Shaw-Trac. As a result, Belk

knew that Shaw-Trac did not work despite the millions of dollars Shaw poured into the project.

- 24 -

72. By 2003, because Shaw-Trac did not work, Shaw began to move away from the

Shaw-Trac software. Bernhard relieved Wilson and St. Julian of their responsibilities for

overseeing Shaw-Trac, and hired Patrick Thompson as their replacement. However, because

Bernhard had spent so much money developing Shaw-Trac and had promised the Board of

Directors so much regarding its benefits, he could not let Shaw-Trac die, even though it was a

disaster. As a result, Shaw's IT department, at Bernhard's direction, developed "Shaw-Trac

Lite," which a former Denver director of project controls said was nothing more than a stripped

down version of the Shaw-Trac software whereby Shaw eliminated a significant portion of the

functionality of the software in an effort to get it to finally work. Despite these changes, the

software still did not work.

Shaw Overstated Its Project Backlog

73. As part of Defendants' scheme, they manipulated the calculation of Defendants'

business "backlog." This "backlog" was intended to and did give the market a snapshot of the

amount of business that Shaw had in its inventory of projects to be completed. In other words, it

said to investors "this is the amount of work that we have in the pipeline."

74. Shaw's backlog was an important indicator of future earnings and Shaw and the

Individual Defendants knew that the "backlog" was closely examined by investors. Shaw

inflated the calculation of its "backlog" in order to give the market a false and misleading

impression that its pipeline was extraordinary, thus implicitly implying that demand for Shaw's

services were high and that Shaw's future earnings would reflect the high level of demand. This

was referred to internally as "engineering its backlog."

75. For example, one customer of Shaw wanted Shaw to build three one-thousand

megawatt power plants for $500 million each. The customer wanted Shaw to engineer and build

one power plant and then utilize that engineering and design as the basis for a second and third

- 25 -

plant. Even though the possibility of Shaw's building the second and third plants was theoretical

only, with no binding commitment from the customer, Shaw increased its "backlog" by $1.5

billion for the three projects, even though Shaw knew or was severely reckless in disregarding

that it had no binding commitment for construction of the second and third projects. As

problems mounted on existing projects concerning the same customer, Shaw knew that the

subsequent projects discussed by that client were not going to happen. Nevertheless, Shaw did

not delete the phantom $1 billion from its "backlog."

Shaw's "Slow or No Pay" Practices

76. Another practice employed by Defendants during the Class Period to boost its

numbers was to "slow or no pay" its vendors. This practice was pervasively employed at the end

of each quarter in order to artificially inflate its operating cash flow during the Class Period and

position Shaw to artificially inflate its end-of-quarter numbers.

77. A former division manager of Shaw's property management division located in

Denver stated that Shaw engaged in this practice so that it could retain money as long as possible

to give the appearance that the Company's financial situation was better than it was. Based on

this insider's first hand experience, although most vendors invoiced Shaw on a net 30 basis,

Shaw's general practice was to pay those vendors up to five months late, if at all.

78. A former director of project controls corroborated that he constantly heard from

project managers and project control employees that management instructed them to "slow or no

pay" vendor invoices, especially toward the end of each quarter. This practice, however, often

placed project managers in untenable positions because they had to tell vendors that Shaw would

not pay outstanding invoices, yet insist that the vendors continue to work hard to meet project

deadlines. This consistent manipulation of end-of-quarter results through the business practice

- 26 -

of carrying outstanding invoices while artificially inflating Shaw's operating cash flow

substantially contributed to Shaw's millions of dollars of losses on its EPC construction projects

by slowing construction of the projects when unpaid vendors refused to work.

79. A former purchasing agent out of Shaw's Boston office confirmed that Shaw

engaged in this "slow or no pay" practice, but attributed the existence of this practice to Shaw's

precarious financial situation. According to this former employee, Shaw had significant cash

flow problems in part because Shaw's backlog was publicly overstated and, as a result,

anticipated profits never materialized. In fact, at Shaw's Stoughton, Massachusetts office, during

late 2001, there were regular meetings held by Shaw's Human Resource department and various

Vice Presidents to discuss Shaw's worsening financial condition. At this time, Shaw sent e-

mails requesting volunteers to work 4-day weeks in order to save costs.

80. Shaw's former purchasing agent out of Shaw's Boston office received regular

calls from Shaw's vendors complaining that Shaw was not paying its bills in a timely manner.

As a result, certain vendors simply stopped doing business with Shaw, while others required that

that they be paid cash prior to any delivery. The former employee's office would prepare lists of

outstanding invoices, sometimes totaling 20 pages of single-spaced text, that would be sent to

Shaw's headquarters for payment approval. Invariably, the corporate office would slash the list

of vendors who would be paid, although the payments owed to many of the vendors were long

overdue.

Shaw Failed to Disclose Material IssuesAffecting the Viability of the LSP-Pike Project

81. On September 27, 2001, Shaw announced that it had signed an agreement with

NRG Energy, Inc. ("NRG") to construct a power plant in Holmesville, Mississippi, which was

known at Shaw as the LSP-Pike project. At the time, NRG granted Shaw a limited notice to

- 27 -

proceed, which meant that Shaw was only authorized to do limited initial work, such as clearing

the project site and other preparatory work, until NRG granted the full notice to proceed with

construction in earnest.

82. A former controls manager for the LSP-Pike project explained that, in this case,

NRG granted the limited notice to proceed because NRG was experiencing funding problems for

the project. Thus, even as Shaw began preliminary work on the project, Defendants were keenly

aware that NRG had been experiencing significant financial difficulties.

83. Despite their knowledge of NRG's precarious financial condition, Defendants

disregarded the effect of the limited notice to proceed and intentionally continued construction

on the project beyond the initial preparatory stages.

84. According to the former controls manager, NRG's financial situation continued to

worsen, and NRG refused to grant Shaw a full notice to proceed with construction on the project.

In April 2002, the former controls manager convened a special meeting at the Company's Baton

Rouge headquarters to discuss the serious problems with the LSP-Pike project concerning

millions of dollars of outstanding invoices and NRG's failure to grant Shaw a full notice to

proceed. At this point in time, only a few short months after initial construction commenced,

Defendants knew or were severely reckless in disregarding that the project would not be

completed because NRG did not have the financial resources to fund the project. In May 2002,

the former controls manager instructed the site manager that Shaw should halt further work on

the project because NRG was in arrears for $9 million for work performed (even though much of

the work was unauthorized).

85. Rather than halt work, however, Shaw did the opposite. Shaw sought to incur as

many costs as possible as quickly as possible because Defendants believed that NRG would pay

- 28 -

all invoices for all costs incurred or, at a minimum, they would recover payment through legal

action if and when the project was halted. The former controls manager disclosed that he was

pressured by his superiors to inflate the percentage of completion calculations for the project to

demonstrate that Shaw had incurred more costs than it actually had incurred.

86. The problem with this course of action, however, was that Shaw had performed

unauthorized work that was beyond the scope of the limited notice to proceed for which Shaw's

chances of recoupment were minimal. As a result, the former controls manager stated that Shaw

began reclassifying costs on the project to justify payment of as much of its costs as possible.

Costs relating to unauthorized mechanical and structural work were thus shifted to the civil

engineering and foundational budgets. To assist in this cost shifting process, Defendants

instructed project estimators to recalculate the budget for the civil engineering and foundational

work by as much as $20 to $30 million dollars because the larger this budget was, the more

revenue Shaw could claim on those portions of the project. The former controls manager

explained that changes in estimates during the construction phase broke construction protocols

because the estimating process should have been long completed and the dollar amount of the

estimation changes were unjustifiable.

87. At the end of May 2002, the former controls manager learned from his supervisor

that Shaw intended to lock the project gates within a few weeks. Shaw decided to take this

action without notifying vendors or subcontractors who would have equipment on the project

site.

88. By the time he left the Company in June 2002, the former controls manager's

records indicated that NRG owed Shaw approximately $9.8 million. The former controls

manager concluded that he was forced to leave the Company because he resisted Defendants'

- 29 -

attempts to manipulate the project's percentage of completion calculations. Within two weeks

after his departure, the former controls manager learned that Shaw did, in fact, lock the gates of

the project site, thereby halting all construction on the project, because NRG failed to pay any

outstanding invoices or grant the full notice to proceed.

89. Thus, by the time that NRG notified Shaw of its intention not to pay a scheduled

$32 million milestone billing that had become due, on August 5, 2002, Defendants knew or were

severely reckless in disregarding that construction had been halted on the project, Shaw had not

been paid for millions of dollars of work legitimately performed, and it was unlikely to recover

the total amount of costs incurred, including costs incurred for unauthorized work. Despite this

pre-existing knowledge, Defendants never disclosed to the investing public the potential effect

that the failure of the LSP-Pike project would have on the Company's earnings.

90. On August 5, 2002, the Company finally revealed the true nature of its financial

vulnerability due to the collapse of the LSP-Pike project. After discussing NRG's failure to pay

the $32 million milestone, the Company further disclosed that, if Shaw and NRG could not work

out an agreement by which Shaw would purchase the half-finished power plant, "there could be

a material adverse effect to Shaw's ability to meet its current earnings expectations for the

quarter." On this news, the price of Shaw dropped by 26% from a closing price of $21.76 on

August 2, 2002 to a low of $16.02 on August 5, 2002, the next trading day.

MATERIALLY FALSE AND MISLEADING STATEMENTS

91. False Statement: The Class Period begins on October 19, 2000. On that date,

Shaw issued a news release over the Business Wire in which it announced its financial results

for the fourth quarter and fiscal year ended August 31, 2000. The release was headlined, "The

Shaw Group Announces Increases in Sales and Earnings For Fourth Quarter and Fiscal Year

2000." In the release, the Company reported 4th fiscal quarter net income of $9.6 million, or

-30-

$0.59 per share, up 77 percent from earnings of $5.75 million, or $0.49 per share, in the 4th

fiscal quarter of 1999. For the full fiscal year, the Company reported net income of $29.5

million, or $1.99 per share, compared to earnings of $18.1 million, or $1.52 per share in fiscal

year 1999.

92. False Statement: With respect to the purported strength of the Company's

financial results, the October 19, 2000 release stated as follows:

J. M. Bernhard, Jr., Shaw's Chairman, President and Chief Executive Officer,stated, "This has been an exceptional year to add to our solid track record ofgrowth. Our management team was at its best, and our employees at every levelshould be commended for their commitment to our success. The integration ofStone & Webster is progressing as we had hoped, and we expect to begin addingprojects from EntergyShaw into our backlog by the end of the calendar year. Aswe move into fiscal 2001, we will continue to act strategically andopportunistically, with an inherent focus on bringing additional value to ourshareholders."

93. False Statement: On November 29, 2000, Shaw filed its annual report with the

SEC on Form 10-K for the fiscal year ended August 31, 2000 incorporating the financial results

released by Shaw on October 19, 2000. The Form 10-K was signed by Bernhard and Belk. The

Form 10-K contained the following statement with respect to contracts acquired from Stone &

Webster:

The Company acquired a large number of contracts with either inherent losses orlower than market remaining margins due to the effect of the financial difficultiesexperienced by Stone & Webster on negotiating and executing the contracts.These contracts were adjusted to their fair value at acquisition date by establishinga reserve of approximately $83.7 million which will reduce contract costsincurred in future periods and adjust the gross margins recognized on thecontracts. In addition, the amount of the accrued losses on assumed contracts wasapproximately $36.3 million. Since the date of acquisition of Stone & Webster,the Company reflected a $13.5 million net reduction of contract costs as a resultof these accrued contract losses and reserves.

94. The statements referenced above in ¶J91 through 93 were each materially false

and misleading when made as they misrepresented and/or omitted adverse facts which then

-31 -

existed and disclosure of which was necessary to make the statements not false and/or

misleading. The true facts, which were then known to each of the Individual Defendants, based

upon their access to and review of internal Shaw data, were:

• The $83.7 million reserve that purportedly adjusted contracts acquiredfrom Stone & Webster to fair value, and the accrued losses of $36.3million, were not based upon a reliable or reasonable analysis of the actualfair market value of the contracts but rather, were "cookie cutter" reservesupon which the Company drew as needed to keep reporting earnings inline or in excess of analysts' estimates. In fact, the reserves bore noreasonable relationship to the fair market value of the acquired assets, asreflected by Shaw's near immediate and ever-changing manipulation ofthe unsubstantiated reserves to prop-up its earnings;

• There was, therefore, no reasonable basis for the $13.5 million netreduction of contract costs based on these accrued losses and reserves;

• As a result of this practice, the Company's reported earnings wereartificially inflated and its income statements were, at all relevant times,inherently unreliable;

• The Stone & Webster acquisition was not accretive to 4th quarterearnings;

• The Company improperly reported revenue and earnings in violation of itspurported revenue recognition policy. Shaw's senior financial andaccounting employees pressured and coerced Shaw's project managers toinflate the percentage levels of completion of their projects so that Shawcould prematurely recognize income equal to the amount of the artificialincrease in the percentage of completion. Because of the size of theseprojects, even minimal percentage increases caused material overstatementof Shaw's income. If project managers balked at lying about thepercentage of completion of their projects, the accountants often ignoredtheir refusals and increased the percentages of completion unilaterally;

• The Company lacked internal controls necessary to properly reportrevenue and earnings. Shaw-Trac, which was supposedly Shaw's internalcontrol program that allowed real-time review and analysis of percentageof completion of its EPC power construction projects, did not work.Shaw-Trac was useless and failed to provide any reasonable basis bywhich Shaw could estimate the percentages of completion of its projects.Rather than correcting this problem, Shaw mandated the use of Shaw-Tracon all EPC projects, thus laying the groundwork necessary to obfuscate itsintentional overstatement of the revenues calculated through percentage ofcompletion; and

- 32 -

• Defendants abused the "purchase" method of accounting for its acquisitionby artificially inflating recorded reserves and goodwill, and then usingsuch accounts to pad Shaw's earnings. Moreover, Defendants misused the"allocation period" to make contract adjustments relating to post-acquisition contingencies and otherwise fail to properly describe thenature of such contingencies, as required by GAAP.

95. False Statement: On January 11, 2001, Shaw issued a news release over the

Business Wire in which it announced its financial results for the first 2001 fiscal quarter ended

November 30, 2000. With respect to the results, the release stated, in pertinent part, as follows:

Baton Rouge, Louisiana, January 11, 2001 - The Shaw Group Inc.(NYSE: SGR) ("Shaw" or "the Company') today announced a 109% increasein earnings to $12.2 million, or $0.31 per diluted share, for the first quarterended November 30, 2000. This compares to $5.8 million in earnings before achange in accounting principle, or $0.22 per diluted share, for the three monthsended November 30, 1999. These results reflect a two for-one common stock splitthat was effective on December 15, 2000. The Company also announced anincrease in sales for the first quarter of fiscal 2001 to $418.8 million, representinga 178% increase over the prior year's first quarter sales of $150.8 million.

J. M. Bernhard, Jr., Shaw's Chairman, President and Chief Executive Officer,stated, "With solid results posted for the first quarter, we have embarked onanother exciting year for our employees, customers and shareholders. Recentevents in California's power market reinforce the urgent need to bring poweronline quickly and efficiently. We expect to see heightened activity over the nextseveral months as developers finalize project sites, negotiate contracts and movequickly into the construction phase of the project cycle." [Emphasis added]. . .

96. False Statement: On January 16, 2001, Shaw filed its Form 10-Q for its first

2001 fiscal quarter with the SEC, which was signed by Belk, and stated as follows:

The Company acquired a large number of contracts with either inherent losses orlower than market remaining margins primarily due to the effect that the financialdifficulties experienced by Stone & Webster had on negotiating and executing thecontracts. These contracts were adjusted to their fair value at acquisition date byestablishing a liability of approximately $83,700,000 which will adjust the grossmargins recognized on the contracts as the work is performed. The amount of theaccrued losses on assumed contracts was approximately $36,300,000. Theseadjustments will result in a net reduction of contract costs incurred in futureperiods. During the quarter ended November 30, 2000, cost of sales was reducedby $41,114,000 as these reserves were reduced. During the quarter endedNovember 30, 2000, the Company provided additional contract reserves of

- 33 -

approximately $7,800,000 as adjustments to the fair value of the contractsacquired in the acquisition.

97. On January 16, 2001, Jeffries & Company Research, Inc. issued an update on

Shaw that focused on the Company's reported earnings growth. The update was headlined,

"Raising Price Target to $53" and stated, in pertinent part:

Shaw's Earnings Exceed Expectations Again - Shaw reported 1Q01 BPS of$0.31, better than both our estimate of $0.27 and the First Call consensus ofestimate of $0.28. SGR's earnings were better than expected as the Companyposted increased revenues and significantly stronger margins due to an increase inhigh-margin fabrication work and a decrease in low-margin construction work.

98. The statements referenced above in 11195 and 96 were each materially false and

misleading when made as they misrepresented and/or omitted adverse facts which then existed

and disclosure of which was necessary to make the statements not false and/or misleading. The

true facts, which were then known to each of the Individual Defendants, based upon their access

to and review of internal Shaw data, were:

• The $83.7 million reserve that purportedly adjusted contracts acquiredfrom Stone & Webster to fair value, and the accrued losses of $36.3million, were not based upon a reliable or reasonable analysis of the actualfair market value of the contracts but rather, were "cookie cutter" reservesupon which the Company drew as needed to keep reporting earnings inline or in excess of analysts estimates. In fact, the reserves bore noreasonable relationship to the fair market value of the acquired assets, asreflected by Shaw's near immediate and ever-changing manipulation ofthe unsubstantiated reserves to prop-up its earnings;

• There was, therefore, no reasonable basis for the $41.1 million reductionof the reserves or the $7.8 million increase in the reserves;


• The Company improperly reported revenue and earnings in violation of itspurported revenue recognition policy. Shaw's senior financial andaccounting employees pressured and coerced Shaw's project managers toinflate the percentage levels of completion of their projects so that Shawcould prematurely recognize income equal to the amount of the artificial

- 34 -

increase in the percentage of completion. Because of the size of theseprojects, even minimal percentage increases caused material overstatementof Shaw's income. If project managers balked at lying about thepercentage of completion of their projects, the accountants often ignoredtheir refusals and increased the percentages of completion unilaterally;



99. False Statement: On April 11, 2001, Shaw issued a news release over the

Business Wire in which it announced its financial results for the second 2001 fiscal quarter

ended February 28, 2001. The release was headlined: "The Shaw Group Announces Solid

Results For The Second Quarter Of Fiscal 2001 Backlog Exceeds $3 Billion." With respect to

the results, the release stated, in pertinent part:

Baton Rouge, Louisiana, April 11, 2001 - The Shaw Group Inc. (NYSE: SGR)("Shaw" or "the Company') today announced a 68% increase in earningsbefore an extraordinary item to $11.8 million, or $0.28 per diluted share, for thethree months ended February 28, 2001. This compares to earnings of $7.0million, or $0.22 per diluted share, for the three months ended February 29, 2000.Sales increased 97% for the second quarter of fiscal 2001 reaching $340.3million, compared to $173.0 million for the second quarter of fiscal 2000.

"With a backlog exceeding $3 billion and consistent financial results, we areextremely pleased with our current position," stated J. M. Bernhard, Jr., Shaw'sChairman, President and Chief Executive Officer. "In the tremendously robustmarket that we are experiencing today, we have the utmost confidence in the

- 35 -

success of our business model, and the value that it brings to all of ourstakeholders." [Emphasis added.]

100. After this representation, Shaw's common stock increased to over $60 per share.

101. False Statement: On April 16, 2001, Shaw filed its Form 10-Q for the second

quarter of fiscal year 2001 with the SEC. The Form 10-Q was signed by Belk, and reiterated the

financial results contained in the April 11, 2001 press release. In addition, the Form 10-Q stated

as follows:

The Company acquired a large number of contracts with either inherent losses orlower than market remaining margins primarily due to the effect that the financialdifficulties experienced by Stone & Webster had on negotiating and executing thecontracts. These contracts were adjusted to their fair value at acquisition date anda liability (gross margin reserve) of approximately $83,700,000 was established.This reserve is utilized to adjust the gross margins recognized on the contracts asthe work is performed. The amount of the accrued losses on assumed contractswas estimated to be approximately $36,300,000 and a liability (contract lossreserve) of such amount was established at the time of acquisition. These reservesare reduced as work is performed on the contracts and such reduction in thereserves results in a reduction in cost of sales. Since August 31, 2000, theCompany has further adjusted its initial estimates of these contract reserves.These adjustments, as well as the decreases in the cost of sales for the periodsindicated, are as follows (in thousands):

November 30, February 28,2000 Reserve Cost of Sales 2001

Balance Increase Decrease Balance

Three Months endedFebruary 28, 2001

Gross margin reserves $ 47,390 $ 25,487 $ (18,870) $ 54,007Contract loss reserves 25,561 18,497 (7,924) 36,134

Total $ 72,951 $ 43,984 $ (26,794) $ 90,141

August 31, February 28,2000 Reserve Cost of Sales 2001


Six Months endedFebruary 28, 2001

- 36 -

Gross margin reserves 75,764 $ 25,487 $ (47,244) $ 54,007Contract loss reserves 30,725 26,310 (20,901) 36,134

Total 106,489 $ 51,797 $ (68,145) $ 90,141

The foregoing reserve adjustments increased goodwill recorded for the acquisition.

102. False Statement: During the Class Period, in May 2002, Shaw sold $490 million

in convertible zero coupon liquid yield option notes ("Lyons"). After the LYONS offering,

between May 1, 2001 and June 20, 2001, the Company's share price dropped from $58 to

$37.10. In response to this decline, and to shore up the Company's share price, on June 20, 2001

the Company issued a news release over the Business Wire in which it stated that it expected

continued earnings growth. In this regard, the release stated:

The Shaw Group Inc. (NYSE:SGR) ("Shaw") announced today that it knows ofno specific reason internal to the Company for the recent decline in stock priceover the past several days. Additionally, the Company noted continued strengthin margins and growing backlog. Shaw expects to report third quarter results for2001 on July 10. For the third quarter as well as the year ended August 31, 2001,the Company remains comfortable with current analysts' estimates for earnings,backlog and margins. [Emphasis added.]

103. False Statement: On July 10, 2001, the Company issued a news release over the

Business Wire in which it announced its financial results for the third fiscal quarter ended May

31, 2001. The release was headlined: "The Shaw Group Announces Record Results for the Third

Quarter of Fiscal 2001: Backlog exceeds $3.6 billion" and, with respect to earnings, stated as

follows:

Baton Rouge, Louisiana, July 10, 2001- The Shaw Group Inc. (NYSE: SGR)("Shaw" or "the Company') today announced a 142% increase in earnings to$17.9 million, or $0.42 per diluted share, for the three months ended May 31,2001. This compares to earnings of $7.4 million, or $0.23 per diluted share, forthe three months ended May 31, 2000. Third quarter fiscal 2001 sales increased125% reaching $394 million, compared to $175 million for the third quarter offiscal 2000. [. . . ]

- 37 -

For the nine months ended May 31, 2001, the Company reported an increase inearnings before an extraordinary item to $41.9 million, or $1.00 per diluted share.This compares to earnings before a change in accounting principle of $20.2million, or $0.67 per diluted share, for the nine months ended May 31, 2000.Sales for the nine months ended May 31, 2001 increased 131% to $1.2 billion,compared to $499 million in sales for the nine months ended May 31, 2000.[Emphasis added.] .

104. False Statement: On July 16, 2001, the Company filed its Form 10-Q with the

SEC, which was signed by Belk, and repeated the financial results set forth above and stated the

following with respect to contract reserves:

The Company acquired a large number of contracts with either inherent losses orlower than market remaining margins primarily because Stone & Webster'sfinancial difficulties had negatively affected the negotiation and execution of thecontracts. These contracts were adjusted to their fair value at acquisition date anda liability (gross margin reserve) of approximately $83,700,000 was established.This reserve is utilized to adjust the gross margins recognized on the contracts asthe work is performed. The amount of the accrued losses on assumed contractswas estimated to be approximately $36,300,000 and a liability (contract lossreserve) of such amount was established at the time of acquisition. These reservesare reduced as work is performed on the contracts and such reduction in thereserves results in a reduction in cost of sales.

These cost of sales reductions increase gross profit. Since August 31, 2000, theCompany has further adjusted its initial estimates of these contract reserves. Thisincludes adjustments made during the third quarter to reduce the reservesestablished for anticipated cash losses on one project and increase the reservesrelated to gross margin adjustments for certain projects based on the amount andtiming of the future cash contract costs related to these projects. Theseadjustments, as well as the decreases in the cost of sales for the periods indicated,are as follows (in thousands):

March 1, Reserve May 31,2001 Increase Cost of Sales 2001Balance (Decrease) (Decrease) Balance

Three Months ended May 31, 2001 Gross margin reserves $ 54,007 $ 12,631 $ (13,550) $ 53,088Contract loss reserves 36,134 (15,166) (4,146) 16,822

Total $ 90,141 $ (2,535) $ (17,696) $ 69,910

September 1, May 31,2000 Reserve Cost of Sales 2001Balance Increase (Decrease) Balance

- 38 -

Three Months ended May 31, 2001 Gross margin reserves $ 75,764 $ 38,118 $ (60,794) $ 53,088Contract loss reserves 30,725 11,144 (25,047) 16,822

Total $ 106,489 $ 49,262 $ (85,841) $ 69,910

105. The statements referenced above in 1199 and '1111101 through 104 were each

materially false and misleading when made as they misrepresented and/or omitted adverse facts

which then existed and disclosure of which was necessary to make the statements not false

and/or misleading. The true facts, which were then known to each of the Individual Defendants,

based upon their access to and review of internal Shaw data, were:


• There was, therefore, no reasonable basis for the further adjustments(since August 31, 2000), made in the third quarter to reduce the reservesfor anticipated cash losses on one project and increase the reserves relatedto gross margins adjustments for other projects. Instead, these adjustmentsto the reserves were based upon Shaw's need to pad earnings andartificially inflate its stock price;


• Shaw's calculation of backlogs were inflated to include projects that werecontingent, potential, uncommitted and not documented in order to make itappear that Shaw's backlog was much more substantial than it actuallywas. For example, Shaw added $1.5 billion to its purported backlog forthree $500 million projects even though its customer had committed toonly one of the three projects. Thus, at least $1 billion of its "backlog"was contingent, potential work for which no customer had committed.Shaw referred to this as "backlog engineering;"

- 39 -




106. False Statement: On September 5, 2001, Shaw issued a news release over the

Business Wire in which it announced that it expected diluted earnings per share for its fiscal year

ending August 31, 2002 to be in the range of $2.15 to $2.25, exceeding the then-current First

Call consensus estimate of $1.83 per diluted share, and reaffirmed its "comfort" with analysts'

First Call earnings consensus estimate of $0.44 per diluted share for the fourth quarter of fiscal

2001.

107. False Statement: On October 9, 2001, the Company issued a news release over

the Business Wire in which it announced its financial results for the fourth quarter and 2001

fiscal year ended August 31, 2001. The release was headlined: "The Shaw Group Inc.

- 40 -

Announces Record Results for Fiscal Year 2001: Backlog Reaches $4.5 billion." With respect to

earnings, the release stated, in pertinent part:

Baton Rouge, Louisiana, October 9, 2001 - The Shaw Group Inc. (NYSE: SGR)("Shaw" or "the Company") today announced an 89% increase in earnings to$19.3 million, or $0.45 per diluted share, for the three months ended August 31,2001. This compares to earnings of $10.2 million, or $0.30 per diluted share,before an extraordinary item, for the three months ended August 31, 2000. Fourthquarter fiscal 2001 sales increased 46%, reaching $385.7 million, compared to$263.8 million for the fourth quarter of fiscal 2000.

For the year ended August 31, 2001, the Company reported a 101% increase inearnings to $61.2 million, or $1.46 per diluted share, before an extraordinary item.This compares to earnings of $30.4 million, or $0.99 per diluted share, before anextraordinary item and cumulative accounting change, for the year ended August31, 2000. Sales for the year ended August 31, 2001 increased 102% to $1.5billion, compared to $763 million in sales for the year ended August 31, 2000. [. ..]

This has been an extraordinary year of achievement and growth for ourCompany," stated J. M. Bernhard, Jr., Shaw's Chairman, President and ChiefExecutive Officer. "Our employees are to be commended for their success inplacing us in a position to win. Beyond our record financial results, we are verypleased with the relationships we have formed with our customers and we areconfident that they will provide a means for increasing shareholder value as theycontinue to develop and unfold over the next year."

108. False Statement: On November 29, 2001, the Company filed its Form 10-K with

the SEC in which it repeated its previously released financial results. The Form 10-K was signed

by Bernhard and Belk. With respect to contract reserves, the Form 10-K stated, in pertinent part,

as follows:

Additionally, the Company acquired a large number of contracts in the Stone &Webster acquisition with either inherent losses or lower than market rate marginsdue to the effect of the financial difficulties experienced by Stone & Webster onnegotiating and executing contracts prior to the acquisition. These contracts wereadjusted to their fair value at acquisition date by establishing a gross marginreserve that reduces costs of sales for contracts as they are completed. Costs ofsales was reduced by approximately $70.1 million during fiscal 2001 through theutilization of this reserve, which is a non-cash component of income. Costs ofsales was also reduced by approximately $29.2 million due to the utilization of thereserve which represents net cash losses on contracts acquired in the Stone &Webster acquisition. The utilization of these reserves resulted in a corresponding

- 41 -

increase in gross profit during fiscal 2001. See Note 3 of Notes to ConsolidatedFinancial Statements. [. . .]

The Company acquired a large number of contracts with either inherent losses orlower than market rate margins primarily because Stone & Webster's previousfinancial difficulties had negatively affected the negotiation and execution of thecontracts. These contracts were adjusted to their estimated fair value at acquisitiondate (July 14, 2000) and a liability (gross margin reserve) of $121,815,000 wasestablished, including adjustments of $38,118,000 recorded during the one-yearallocation period. The adjustment during the allocation period resulted from amore accurate determination of the actual contract status at acquisition date. Theamount of the accrued future cash losses on assumed contracts with inherentlosses (contract loss reserve) was estimated to be approximately $41,700,000(including adjustments totaling approximately $5,400,000 recorded during theallocation period), and a liability of such amount was established. Both reservesare reduced as work is performed on the contracts and such reduction in thereserves results in a reduction in cost of sales and a corresponding increase ingross profit. Goodwill and deferred tax assets for the Stone & Webster acquisitionwere adjusted by $43,518,000 due to the revisions to the original reserveestimates identified during the allocation period. These reserves and adjustmentsduring the allocation period, as well as the decreases in the cost of sales for theperiods indicated, are as follows (in thousands):

July 14, Cost of August 31,2000 Reserve Sales 2000Balance Increase (Decrease) Balance

Year ended August 31, 2000

Gross margin reserves $ 83,697 $ -- $ (7,933) $ 75,764

Contract loss reserves 36,300 -- (5,575) 30,725

Total $ 119,997 $ -- $ (13,508) $ 106,489

September 1, Cost of August 31,2001 Reserve Sales 2001Balance Increase (Decrease) Balance


Gross margin reserves $ 75,764 $ 38,118 $ (60,794) $ 53,088

Contract loss reserves 30,725 (11,144) (25,047) 16,822

Total $ 106,489 $ 49,262 $ (85,841) $ 69,910

- 42 -

109. The statements referenced above in 111106 through 108 were each materially false

and misleading when made as they misrepresented and/or omitted adverse facts which then

existed and disclosure of which was necessary to make the statements not false and/or

misleading. The true facts, which were then known to each of the Individual Defendants, based

upon their access to and review of internal Shaw data, were:


• There was, therefore, no reasonable basis for the further adjustments toreduce the reserves by tens of millions of dollars. Instead, theseadjustments were based upon Shaw's need to pad earnings and artificiallyinflate its stock price;



• The Company lacked internal controls necessary to properly reportrevenue and earnings. Shaw-Trac, which was supposedly Shaw's internalcontrol program that allowed real-time review and analysis of percentageof completion of its EPC power construction projects, did not work.Shaw-Trac was useless and failed to provide any reasonable basis bywhich Shaw could estimate the percentages of completion of its projects.Rather than correcting this problem, Shaw mandated the use of Shaw-Trac

-43 -

on all EPC projects, thus laying the groundwork necessary to obfuscate itsintentional overstatement of the revenues calculated through percentage ofcompletion; and


110. False Statement: Between December 7, 2001 and December 12, 2001, the price

of Shaw shares fell from $27.50 to as low as $20. The Company immediately thereafter issued a

news release over the Business Wire to shore up its share price in which it announced that it had

suffered no deterioration in its current business or backlog that would account for the recent

decline in the stock price and that the Company remained "comfortable" with current analysts'

estimates for earnings, backlog and margins for fiscal years 2002 and 2003.

111. False Statement: On January 14, 2002, the Company issued a news release over

the Business Wire in which it announced its financial results for its fiscal year 2002 first quarter

ended November 30, 2001. The release was headlined: "The Shaw Group, Inc. Announces

Increases In Sales and Earnings for the First Quarter of Fiscal 2002." With respect to earnings,

the release stated, in pertinent part, as follows:

Baton Rouge, Louisiana, January 14, 2002 - The Shaw Group Inc. (NYSE: SGR)("Shaw" or "the Company") today announced a 56% increase in earnings to $19.0million, or $0.45 per diluted share, for the first quarter ended November 30, 2001.This compares to $12.2 million in earnings, or $0.31 per diluted share, for thethree months ended November 30, 2000. The Company also announced anincrease in sales for the first quarter of fiscal 2002 to $453.6 million, representingan 8% increase over the prior year's first quarter sales of $418.8 million. [. . . ]

"The results of the first quarter are impressive given the events which occurred inSeptember and the negativity that has saturated the power generation industryover the past several months," stated J. M. Bernhard, Jr., Shaw's Chairman,President and Chief Executive Officer. "We are confident that the need foradditional power plants remains and that our customers will continue with theirbuilding plans. Furthermore, with the Company's diversity in other markets, such

- 44 -

as process and environmental and infrastructure, Shaw is positioned to quicklycapitalize on new opportunities."

112. False Statement: The financial results were repeated in the Company's Form 10-

Q, also filed on January 14, 2002 (signed by Belk) and, with respect to margin reserve utilization

stated:

The Company acquired a large number of contracts with either inherent losses orlower than market rate margins primarily because Stone & Webster's previousfinancial difficulties had negatively affected the negotiation and execution of thecontracts. These contracts were adjusted to their estimated fair value as ofacquisition date (July 14, 2000) and a liability (gross margin reserve) of$121,815,000 was established, including adjustments of $38,118,000 recordedduring the allocation period. The amount of the accrued future cash losses onassumed contracts with inherent losses (contract loss reserve) was estimated to beapproximately $41,700,000 (including approximately $5,400,000 of allocationperiod adjustments), and a liability of such amount was established. Theadjustments to these reserves during the allocation period resulted from a moreaccurate determination of the actual contract status at acquisition date.Commencing with the initial recording of these reserves in the year endedAugust 31, 2000, the reserves have been reduced as work is performed on thecontracts and such reduction in the reserve balances results in a reduction in costof sales and a corresponding increase in gross profit. The reserve adjustments aswell as the decreases in the cost of sales for the periods indicated, are as follows(in thousands):

September 1, Cost of Nov. 30,2000 Reserve Sales 2001Balance Increase (Decrease) Balance

Three Months Ended Nov. 30, 2001

Gross margin reserves $ 43,801 $ -- $ (8,058) $ 35,743

Contract loss reserves 6,906 -- (1,203) 5,703

Total $ 50,707 $ -- $ (94261) $ 41,446

September Cost of August 31,1, 2001 Reserve Sales 2001Balance Increase (Decrease) Balance


Gross margin reserves $ 75,764 $ 38,118 $ (70,081) $ 43,801

- 45 -

Contract loss reserves $ 30,725 $ 5,400 $ (29,219) $ 6,906

Total $ 106,489 $ 43,518 $ (99,300) $ 50,707

113. On January 16, 2002, the Company issued a news release over the Business Wire

in which announced that it had signed a letter of intent to acquire all of the assets and businesses

of The IT Group, a provider of diversified, value-added consulting, engineering and construction

and remediation and facilities management services, for a cash and stock.

114. A Merrill Lynch report on January 16, 2002 stated in part:

• Under this preliminary agreement, Shaw would pay about $105 million incash and stock, plus assume some operating liabilities (but no debt). Shawalso plans to give IT up to a $75 million DIP loan during reorganization.That appears to be around 2x trailing EBITDA.

• At this price, the transaction would appear to be significantly accretive.

* * *

• We view this environmental market as slow-growth but also relativelysteady, cash-cow sort of market with only modest operating risks. Most ofthe growth companies here do exhibit, as far as we've seen, larger playerstaking market share from smaller ones — which is one reason the industryhas consolidated as much as it has.

115. False Statement: On April 15, 2002, the Company issued a news release over

the Business Wire in which it announced its financial results for the fiscal year 2002 second

quarter ended February 28, 2002. The release was headlined: "The Shaw Group Inc. Announces

Increases In Sales And Earnings For The Second Quarter of Fiscal 2002" and stated, in pertinent

part, as follows:

Baton Rouge, Louisiana, April 15, 2002 - The Shaw Group Inc. (NYSE: SGR)("Shaw" or "the Company") today announced an 81% increase in earnings to$21.3 million, or $0.51 per diluted share, for the second quarter ended February28, 2002. This compares to earnings before an extraordinary item of $11.8million, or $0.28 per diluted share, for the three months ended February 28, 2001.The Company also announced an increase in sales for the second quarter of fiscal

- 46 -

2002 to $566.2 million, representing a 66% increase over the prior year's secondquarter sales of $340.3 million. [. . .]

"Our results for the first six months of fiscal 2002 position us for another recordyear, " stated J. M. Bernhard, Jr., Shaw's Chairman, President and ChiefExecutive Officer. "Our backlog remains firm, and upon the successfulcompletion of the acquisition of The IT Group, we look forward to a majorexpansion into the environmental, infrastructure and homeland security sector thatwill diversify our business and bring even greater certainty to our growth goingforward."

For the six months ended February 28, 2002, the Company reported a 68%increase in earnings to $40.3 million, or $0.95 per diluted share. This compares toearnings before an extraordinary item of $24.0 million, or $0.58 per diluted share,for the six months ended February 28, 2001. Sales for the six months endedFebruary 28, 2002 increased 34% to $1.0 billion, compared to $759.0 million insales for the six months ended February 28, 2001.



financial results contained in the April 15, 2002 press release. In addition, the Form 10-Q stated

as follows:

The Company acquired a large number of contracts with either inherent losses orlower than market rate margins primarily because Stone & Webster's previousfinancial difficulties had negatively affected the negotiation and execution of thecontracts. These contracts were adjusted to their estimated fair value as ofacquisition date (July 14, 2000) and a liability (gross margin reserve) of$121,815,000 was established, including adjustments of $38,118,000 recordedduring the allocation period. The amount of the accrued future cash losses onassumed contracts with inherent losses (contract loss reserve) was estimated to beapproximately $41,700,000 (including approximately $5,400,000 of allocationperiod adjustments), and a liability of such amount was established. Theadjustments to these reserves during the allocation period resulted from a moreaccurate determination of the actual contract status at acquisition date.Commencing with the initial recording of these reserves in the year ended August31, 2000, the reserves have been reduced as work is performed on the contractsand such reduction in the reserve balances results in a reduction in cost of salesand a corresponding increase in gross profit. The reserve adjustments, as well asthe decreases in the cost of sales for the periods indicated, are as follows (inthousands):

- 47 -

NOVEMBER 30, FEBRUARY 28,2001 RESERVE COST OF SALES 2002

Three months ended BALANCE INCREASE (DECREASE) BALANCEFebruary 28, 2002

Gross margin reserves $ 35,743 $ -- $ (5,997) $ 29,746Contract loss reserves 5,703 -- (769) 4,934

Total $ 41,446 $ -- $ (6,766) $ 34,680

AUGUST 31, FEBRUARY 28,2001 RESERVE COST OF SALES 2002

Six months ended BALANCE INCREASE (DECREASE) BALANCEFebruary 28, 2002

Gross margin reserves $ 43,801 $ -- $ (14,055) $ 29,746Contract loss reserves 6,906 -- (1,972) 4,934

Total $ 50,707 $ $ (16,027) $ 34,680

NOVEMBER 30, FEBRUARY 28,2000 RESERVE COST OF SALES 2001

Three months ended BALANCE INCREASE (DECREASE) BALANCEFebruary 28, 2001


Total $ 72,951 $ 43,984 $ (26,794) $ 90,141

AUGUST 31, FEBRUARY 28,2000 RESERVE COST OF SALES 2001

Six months ended BALANCE INCREASE (DECREASE) BALANCEFebruary 28, 2001


Total $ 106,489 $ 51,797 $ (68,145) $ 90,141

The increases to the contract loss reserves and gross margin reserves during the three and sixmonth periods ended February 28, 2001 were recorded during the allocation period.

117. The Form 10-Q further disclosed:

- 48 -

In January 2002, the Company signed a definitive agreement with The IT Group,Inc. ("IT Group") to acquire substantially all of IT Group's assets and businessesfor approximately $105,000,000 and the assumption of certain liabilities. Theagreement allows either party to elect to have up to 50% of the purchase pricepaid in shares of the Company's Common Stock. IT Group is a provider ofdiversified consulting, engineering, and construction, remediation and facilitiesmanagement services.


the Business Wire in which it announced that it had received bankruptcy court approval to

acquire The IT Group and that in conjunction with the acquisition of The IT Group, the

Company expected to issue approximately 1.8 to 2.5 million shares of its common stock. To

further bolster the price of its stock, in anticipation of The IT Group acquisition, the Company

revised its guidance for earnings per share for its fiscal year ending August 31, 2002 to increase

in the range of $0.05 to $0.08, from its previous guidance of $2.15 to $2.25 per diluted share.

The Company revised its earnings per share guidance for fiscal 2003 to increase in the range of

$0.25 to $0.33 from its previous guidance of $2.65 to $2.85 per diluted share.

119. On May 3, 2002, the Company issued a news release over the Business Wire in

which it announced that it had completed the acquisition of substantially all of the assets of The

IT Group in exchange for approximately $52.5 million in cash, approximately 1.67 million

shares of Shaw common stock, and the assumption of certain liabilities.

120. False Statement: On July 11, 2002, the Company issued a news release over the

Business Wire in which it announced its financial results for the fiscal year 2002 third quarter

ended May 31, 2002. The release was headlined: The Shaw Group Announces Solid Results for

the Third Quarter of Fiscal 2002 and stated, in pertinent part, as follows:

Baton Rouge, Louisiana, July 11, 2002 - The Shaw Group Inc. (NYSE: SGR)("Shaw" or "the Company") today announced a 49% increase in earnings to $26.7million, or $0.61 per diluted share, for the three months ended May 31, 2002. Thiscompares to earnings of $17.9 million, or $0.42 per diluted share, for the three

- 49 -

months ended May 31, 2001. Third quarter fiscal 2002 sales increased 129%reaching $902.6 million, compared to $394.2 million for the third quarter of fiscal2001.

"We are very pleased to report solid financial results on a consistent basis," statedJ. M. Bernhard, Jr., Shaw's Chairman, President and Chief Executive Officer."Our strong balance sheet, project execution skills and ongoing strategy todiversify our portfolio of work have all played a key role in allowing Shaw tomaintain its track record of growth.

Additionally, the integration of our newly acquired assets in the environmental &infrastructure sector is progressing better than expected. We look for this divisionto be a major contributor to our success going forward."

For the nine months ended May 31, 2002, the Company reported an increase inearnings to $67.0 million, or $1.56 per diluted share. This compares to earnings of$41.7 million, or $1.00 per diluted share, for the nine months ended May 31,2001. Sales for the nine months ended May 31, 2002 increased 67% to $1.9billion, compared to $1.2 billion in sales for the nine months ended May 31, 2001.

121. False Statement: On July 15, 2002, Shaw filed its Form 10-Q for its third


financial results contained in the July 11, 2002 press release. The Form 10-Q reiterates certain

financial information relating to The IT Group acquisition previously disclosed by the Company

in a Form 8-K filed on May 16, 2002 and an amended Form 8-K filed on July 12, 2002. 7 In

addition, with respect to the acquisition of The IT Group, the Form 10-Q stated as follows:

The Company acquired with The IT Group purchase certain contracts with lowerthan market rate margins primarily because IT Group had entered into some lowermargin contracts to improve its cash flow. These contracts were adjusted to theirestimated fair value as of the acquisition date (May 3, 2002) and a liability (grossmargin reserve) of approximately $30,000,000 was established. As discussedabove, the Company has not completed the process of obtaining informationabout the fair value of the acquired assets and assumed liabilities including thefair value of the assumed contracts. Therefore, the amount of the gross marginreserves is preliminary and subject to revision. Commencing with the initialrecording of these reserves on May 3, 2002, the reserves are reduced as work isperformed on the contracts and such reduction in the reserve balance results in a

7 The text of those Form 8-Ks will not be restated here.

- 50 -

reduction in cost of sales and a corresponding increase in gross profit. Thereduction of these reserves for the period ended May 31, 2002 is not material. Theactivity in these reserves is included in the table at the end of this Note 4.

122. False Statement: Regarding the Stone & Webster acquisition, the Form 10-Q

stated as follows:

The Company acquired a large number of contracts with either inherent losses orlower than market rate margins primarily because Stone & Webster's previousfinancial difficulties had negatively affected the negotiation and execution of thecontracts. These contracts were adjusted to their estimated fair value as of theacquisition date (July 14, 2000) and a liability (gross margin reserve) of$121,815,000 was established, including adjustments of $38,118,000 recordedduring the allocation period. The amount of the accrued future cash losses onassumed contracts withinherentlosses(contractlossreserve)was estimated to beapproximately $41,700,000 (including approximately $5,400,000 of allocationperiod adjustments), and a liability of such amount was established. Theadjustments to these reserves during the allocation period resulted from a moreaccurate determination of the actual contract status at acquisition date.Commencing with the initial recording of these reserves in the year ended August31, 2000, the reserves have been reduced as work is performed on the contractsand such reduction in the reserve balances results in a reduction in cost of salesand a corresponding increase in gross profit. The reserve adjustments, as well asthe decreases in the cost of sales for the periods indicated, are included in thetable at the end ofthisNote4.

123. False Statement As indicated, the FcnTn 104) provided a table presenting the

addition as to and utilization of the gross margin reserves for both Men. Chmtp and Stone 8L

Webster acquisitions

on a combined basis for the periods indicated (in thousands):

February 28, Cost of May 31,2002 Reserve Sales 2002

Three months ended Balance Increase (Decrease) BalanceMay 31, 2002

Gross margin reserves 29,746 30,000 (5,527) 54,219Contract loss reserves 4,934 (949) 3,985

Total 34,680 30,000 (6,476) 58,204

August 31, Cost of May 31,

-51 -

2001 Reserve Sales 2002Nine months ended Balance Increase (Decrease) BalanceMay 31, 2002

Gross margin reserves $ 43,801 $ 30,000 $ (19,582) $ 54,219Contract loss reserves 6,906 -- (2,921) 3,985

Total $ 50,707 $ 30,000 $ (22,503) $ 58,204

February 28, Reserve Cost of2001 Increase Sales May 31, 2001

Three months ended Balance (Decrease) (Decrease) BalanceMay 31, 2001

Gross margin reserves $ 54,007 $ 12,631 $ (13,550) $ 53,088Contract loss reserves 36,134 (15,166) (4,146) 16,822

Total $ 90,141 $ (2,535) $ (17,696) $ 69,910

August 31, Cost of2000 Reserve Sales May 31, 2001

Nine months ended Balance Increase (Decrease) BalanceMay 31, 2001


Total $ 106,489 $ 49,262 $ (85,841) $ 69,910

124. The statements referenced above in 7110 through 112, 115, 116, 118 and 120

through 123, were each materially false and misleading when made as they misrepresented

and/or omitted adverse facts which then existed and disclosure of which was necessary to make

the statements not false and/or misleading. The true facts, which were then known to each of the

Individual Defendants, based upon their access to and review of internal Shaw data, were:

• The $83.7 million reserve that purportedly adjusted contracts acquiredfrom Stone & Webster to fair value, and the accrued losses of $36.3million, were not based upon a reliable or reasonable analysis of the actualfair market value of the contracts but rather, were "cookie cutter" reservesupon which the Company drew as needed to keep reporting earnings inline or in excess of analysts estimates. In fact, the reserves bore no

- 52 -

reasonable relationship to the fair market value of the acquired assets, asreflected by Shaw's near immediate and ever-changing manipulation ofthe unsubstantiated reserves to prop-up its earnings;

• There was, therefore, no reasonable basis for the further adjustments toreduce the reserves by tens of millions of dollars. Instead, theseadjustments were based upon Shaw's need to pad earnings and artificiallyinflate its stock price;





125. False Statement: On August 5, 2002, the Company issued a news release over

the Business Wire in which it disclosed that the Company had been in discussions with NRG

with respect to NRG's ability to make a $32 million milestone payment on the required date of

- 53 -

August 4, 2002 on the $340 million LSP-Pike electric power plant project, and that NRG would

not make the next scheduled payment. The release further stated that NRG and the Company

had reached an agreement for Shaw to acquire substantially all the assets of NRG in exchange

for forgiveness of current sums owed the Company, and the payment of $43 million by Shaw to

NRG. However, the agreement was subject to the approval of NRG's parent Company, Xcel

Energy, and certain of NRG's lenders. On this news, the price of Shaw's shares dropped by 26%

from a closing price of $21.76 on August 2, 2002 to a low of $16.02 on August 5, 2002, the next

trading day.

126. The statements contained in 11125 were materially false and misleading when

made, as they misrepresented and/or omitted adverse facts which then existed and disclosure of

which was necessary to make the statements not false and/or misleading. The true facts, which

were then known to each of the Individual Defendants, based upon their access to and review of

internal Shaw data were:

• Defendants were well aware of NRG's dire financial condition and thematerial effect of such financial difficulties on Shaw's earnings longbefore August 5, 2002.

• Defendants knew or were severely reckless in disregarding that, from theoutset of the project, NRG had been experiencing financial problems, asevidenced by NRG's failure to provide anything more than a limitednotice to proceed with construction and its failure to pay Shaw'soutstanding invoices, which called into question the viability of theproject.

• At least a month prior to the August 5, 2002 disclosure, Defendants hadcaused the gates of the project site to be locked, thereby haltingconstruction of the project. Despite their knowledge of these issues,Defendants caused the Company to incur substantial costs that wouldprove difficult, if not impossible, to recover.


Business Wire in which it announced a 61% increase in earnings to $98.4 million, or $2.26 per

- 54 -

diluted share, compared to earnings of $61.0 million, or $1.46 per diluted share for the year

ended August 31, 2001, and a 106% increase in revenue to $3.2 billion, compared to $1.5 billion

in revenue for the year ended August 31, 2001. However, recognizing that its gross margin and

contract loss reserves were being depleted, such that the Company would no longer be able to

rely on them to bolster earnings, Shaw slashed its 2003 earnings estimate from $2.90 to $3.18

per share to $1.92 to $2.08 per share. In the release, Defendants claimed that Shaw's balance

sheet was strong and that the reduced earnings guidance resulted from a "downturn in the power

generation market."

"Our strong balance sheet and project execution skills have allowed us to producerecord results for another fiscal year," stated J. M. Bernhard, Jr., Shaw'sChairman, President and Chief Executive Officer. "Shaw's diversified portfolio,including our process and environmental & infrastructure operations, as well asour nuclear and other power services, provides a recurring revenue base and levelof stability to our operations going forward." Shaw has completed the repurchaseof approximately $100 million of its common stock, authorized by its Board ofDirectors on September 14, 2001, totaling approximately 5.3 million shares. Thisincludes approximately 3.2 million shares purchased in the first of quarter offiscal 2003, 1.0 million shares in the fourth quarter of fiscal 2002 and 1.1 millionshares purchased in previous quarters.

To reflect the downturn in the domestic power generation market, including thepotential loss of future profits in connection with the LSP-Pike Energy LLC("Pike") project, and the PG&E National Energy Group ("NEG"), a subsidiary ofPG&E Corporation (NYSE: PCG), Harquahala and Covert projects, Shaw isrevising its earnings guidance for fiscal year 2003 to a range of $1.92 to $2.08 perdiluted share, from its previous earnings guidance in the range of $2.72 to $3.00per diluted share. Accordingly, the Company expects revenue to be in the range of$2.8 to $2.9 billion for its fiscal year 2003. Previous revenue guidance for fiscalyear 2003 was in the range of $3.3 billion to $3.8 billion.

128. False Statement: On November 12, 2002, the Company filed its annual report

on Form 10-K for the fiscal year ended August 31, 2002 which reiterated the results announced

in its October 14, 2002 news release. The Form 10-K was signed by Bernard and Belk, and

contained required Sarbanes-Oxley certifications.

- 55 -

129. False Statement: On January 13, 2003, Shaw Group announced its results for

the first quarter of fiscal 2003 in a release which stated in part:

The Shaw Group Inc. today announced earnings of $16.5 million, or $0.42 perdiluted share, for the first quarter ended November 30, 2002. This compares toearnings of $19.0 million, or $0.45 per diluted share, for the three months endedNovember 30, 2001. Revenue for the first quarter of fiscal 2003 increased 120%reaching $996.9 million, compared to $453.6 million for the first quarter of fiscal2002.

Shaw's backlog totaled $5.0 billion at November 30, 2002. This represents an11% increase over the $4.5 billion backlog reported at November 30, 2001.Contributing to this backlog was approximately $457 million in new awardsbooked during the quarter, including approximately $220 million from theCompany's environmental and infrastructure division. Approximately 47% of thetotal backlog, or $2.4 billion, is expected to be worked off during the next 12months. Eighty-eight percent of Shaw's backlog is for projects in the UnitedStates.

"Strong bidding activity and steady bookings of new work highlight our firstquarter operations and bring our fiscal year off to a good start," stated J. M.Bernhard, Jr., Shaw's Chairman, President and Chief Executive Officer. "Ourfinancial results for the quarter are solid, and we hope to continue this trend as wework off what we believe to be a stable and profitable backlog of projects.Furthermore, our environmental and infrastructure business is progressing at animpressive pace with significant new awards that help to confirm a successfulintegration effort."

130. False Statement: On January 14, 2003, Shaw filed its Form 10-Q for the first

quarter of fiscal year 2003 with the SEC. The Form 10-Q was signed by Belk, with Sarbanes-

Oxley certifications signed by Bernhard and Belk, and reiterated the financial results contained

in the January 13, 2003 press release. In addition, regarding the acquisition of The IT Group, the

Form 10-Q stated as follows:

The Company acquired a large number of contracts in progress and contractbacklog for which the work had not commenced at the acquisition date. UnderSFAS 141, construction contracts are defined as intangibles that meet the criteriafor recognition apart from goodwill. These intangibles, like the acquired assetsand liabilities, are required to be recorded at their fair value at the date ofacquisition. The Company recorded these contracts at fair value using a marketbased discounted cash flow approach. Related assets of approximately$10,607,000 and liabilities of $53,096,000 (reduced by allocation period

- 56 -

adjustments recognized as of November 30, 2002) have been established that areamortized to contract costs over the estimated lives of the underlying contractsand related production backlog. The amountofthe accrued future cash losses onassumed contracts with inherent losses (accrued contract loss reserves) wasestimated to be approximately $9,860,000 (including allocation periodadjustments recognized as of November 30, 2002) and a liability of such amountwas established. Commencing with the fififial recording of these liabilities andreserves in the year ended August 31, 2002, the assets and liabilities are amortizedas work is performed on the contracts. The net amortization recognized during thethree months ended November 30, 2002 was approximately $3,024,000 and hasbeen reflected as a reduction in the cost of revenues, which resulted in acorresponding increase in gross profit. The activity related to these contract assetsand liabilities is includedinthetable at the endofNote 11.

131. FalseStatement:11wRnma10-Qfurtherprovides:

The Company's intangible assets include construction contract adjustmentsestablished in purchase accounting, (related to the acquisition of The IT Groupand Stone & Webster), accrued contract loss reserves and its proprietary ethylenetechnology acquired in the Stone & Webster transaction, which is being amortizedover 15 years on a straight line basis. The Company is still evaluating a customerrelationship intangible and patents acquired in The IT Group acquisition. TheCompany has also established accrued contractlossreserves,primarily related tocontracts acquired from IT Group and Stone & Webster.

The following table presents the additions to and utilization/amortization ofintangible assets and accrued contract loss reserves for the periods indicated (inthousands):

ASSET OR COST OFSEPTEMBER 1, LIABILITY REVENUES NOVEMBER 30,2002 INCREASE/ INCREASE/ 2002

Three months ended BALANCE DECREASE (DECREASE) BALANCENovember 30, 2002

Contract (asset) adjustments (12,150) $ 3,236 1,597 (7,317)Contract liability adjustments 69,140 (4,998) (7,330) 56,812Accrued contract loss reserves 11,402 3,400 (903) 13,899

Total contract related items 68,392 1,638 (6,636) 63,394Ethylene technology (24,788) 477 (24,311)

Total 43,604 1,638 (6,159) $ 39,083

ASSET OR COST OFSEPTEMBER 1, LIABILITY REVENUES NOVEMBER 30,2001 INCREASE/ INCREASE/ 2001

Three months ended BALANCE DECREASE (DECREASE) BALANCE

- 57 -

November 30, 2001

Contract liability adjustments $ 43,801 -- $ (8,058) $ 35,743Accrued contract loss reserves 6,906 -- (1,203) 5,703

Total contract related items 50,707 -- (9,261) 41,446Ethylene technology (26,694) -- 477 (26,217)

Total 24,013 $ (8,784) $ 15,229

The Company previously referred to the fair value of the acquired contractliability adjustments resulting from the Stone & Webster acquisition as grossmargin reserves. The decreases in the contract (asset) and contract liabilityadjustments for the three months ended November 30, 2002 represent allocationperiod adjustments made with respect to The IT Group acquisition, The contract(asset) adjustments are included in other current assets in the accompanyingcondensed consolidated balance sheets. The $3,400,000 increase in the accruedcontract loss reserve was comprised of a $2,400,000 allocation period adjustmentfor The IT Group acquisition and a $1,000,000 reserve established for anticipatedlosses on current contracts.

132. False Statement: On April 14, 2003, Shaw Group announced its results for the

second quarter of fiscal 2003 in a release which stated in part:

The Shaw Group Inc. today announced a loss of $7.9 million, or $0.21 per dilutedshare, for the second quarter ended February 28, 2003 after recording a $19million after-tax charge relating to the settlement of claims with PG&E NationalEnergy Group ("NEG") for the completion of the Harquahala and Covert powerplant projects, the details of which were provided in a separate announcementreleased today. Earnings for the three months ended February 28, 2002 were$21.3 million, or $0.51 per diluted share.

Revenues for the second quarter of fiscal 2003 increased 27% to $720.5 millioncompared to the prior year's second quarter revenues of $566.2 million.

Shaw booked over $960 million in new awards during the second quarter, 50% ofwhich were from the Company's environmental and infrastructure business.Backlog for the second quarter totaled $5.0 billion, compared to $4.5 billionreported at February 28, 2002, with approximately 90% of the total backlogrelating to projects for the domestic market. Approximately $2.0 billion, or 40%,of total backlog is expected to be worked off during the next 12 months.

J. M. Bernhard, Jr., Shaw's Chairman, President and Chief Executive Officer,commented, "In addition to our healthy bookings in the quarter, we continue to beencouraged by the level of bidding activity across all business segments, which

- 58 -

allows us to remain optimistic about our operations going forward. Furthermore,through the continued integration of our businesses we are realizing greateroperational efficiencies and also leveraging our capabilities to broaden ourcustomer base and bring greater value to our stakeholders."




in the April 14, 2003 press release. In addition, with respect to the acquisition of The IT Group,

the Form 10-Q stated as follows:

The Company acquired a large number of contracts in progress and contractbacklog for which the work had not commenced at the acquisition date. UnderSFAS 141, "Business Combinations", construction contracts are defined asintangibles that meet the criteria for recognition apart from goodwill. Theseintangibles, like the acquired assets and liabilities, are required to be recorded attheir fair value at the date of acquisition. The Company recorded these contractsat fair value using a market based discounted cash flow approach by recordingcontract asset and liability adjustments to the balance sheet. As of February 28,2003 related assets of approximately $9,934,000 and liabilities of $43,908,000 (asadjusted by allocation period adjustments recorded as of February 28, 2003) havebeen established that are amortized to contract costs over the estimated lives ofthe underlying contracts and related production backlog. As of February 28, 2003the amount of the accrued future cash losses on assumed contracts with inherentlosses (accrued contract loss reserves) was estimated to be approximately$22,110,000 (including allocation period adjustments). Commencing with theinitial recording of these contract adjustments and reserves in the year endedAugust 31, 2002, the assets and liabilities are amortized as work is performed onthe contracts. The net amortization of the contracts adjustments recognized duringthe three months and six months ended February 28, 2003 was approximately$7,031,000 and $10,055,000 respectively, and has been reflected as a reduction inthe cost of revenues, which resulted in a corresponding increase in gross profit.The activity related to these contract assets and liabilities is included in the tableat the end of Note 11.

134. False Statement: The Form 10-Q further provides:

The Company's intangible assets include construction contract adjustments andcontract loss reserves established in purchase accounting, (related to theacquisitions of The IT Group and Stone & Webster) and its proprietary ethylenetechnology acquired in the Stone & Webster transaction, which is being amortizedover 15 years on a straight-line basis. The Company is still evaluating a customer

- 59 -

relationship intangible acquired in The IT Group acquisition - see Note 4 to Notesto Condensed Consolidated Financial Statements.


ASSET OR COST OF

DECEMBER 1, LIABILITY REVENUES FEBRUARY 28,Three months ended 2002 INCREASE/ INCREASE/ 2003February 28, 2003 BALANCE DECREASE (DECREASE) BALANCE

Contract (asset) adjustments $ (7,317) $ (1,020) $ 759 $ (7,578)Contract liability adjustments 56,812 (4,790) (9,715) 42,307

Accrued contract loss reserves 13,899 11,250 (811) 24,338

Total contract related items 63,394 5,440 (9,767) 59,067Ethylene technology (24,311) -- 477 (23,834)

Total $ 39,083 $ 5,440 $ (9,290) $ 35,233

ASSET OR COST OF

SEPTEMBER 1, LIABILITY REVENUES FEBRUARY 28,Six months ended 2002 INCREASE/ INCREASE/ 2003February 28, 2003 BALANCE DECREASE (DECREASE) BALANCE

Contract (asset) adjustments $ (12,150) $ 2,216 $ 2,356 $ (7,578)Contract liability adjustments 69,140 (9,734) (17,099) 42,307Accrued contract loss reserves 11,402 14,650 (1,714) 24,338


Total $ 43,604 $ 7,132 $ (15,503) $ 35,233

ASSET OR COST OF

DECEMBER 1, LIABILITY REVENUES FEBRUARY 28,Three months ended 2001 INCREASE/ INCREASE/ 2002February 28, 2002 BALANCE DECREASE (DECREASE) BALANCE

Contract liability adjustments $ 35,743 $ -- $ (5,997) $ 29,746Accrued contract loss reserves 5,703 -- (769) 4,934


Total $ 15,229 $ -- $ (6,289) $ 8,940

- 60 -

ASSET OR COST OF

SEPTEMBER 1, LIABILITY REVENUES FEBRUARY 28,Six months ended 2001 INCREASE/ INCREASE/ 2002February 28, 2002 BALANCE DECREASE (DECREASE) BALANCE

Contract liability adjustments 43,801 -- (14,055) $ 29,746Accrued contract loss reserves 6,906 -- (1,972) 4,934


Total 24,013 -- (15,073) $ 8,940

The Company previously referred to the fair value of the acquired contractliability adjustments resulting from the Stone & Webster acquisition as grossmargin reserves. The increases/decreases in the contract (asset) and contractliability adjustments for the six months ended February 28, 2003 representallocation period adjustments made with respect to The IT Group acquisition. Thecontract (asset) adjustments are included in other current assets in theaccompanying condensed consolidated balance sheets. The $14,650,000 increasein the accrued contract loss reserves for the six months ended February 28, 2003was comprised of a $13,650,000 allocation period adjustment for The IT Groupacquisition and a $1,000,000 expense to accrue for anticipated losses on currentcontracts not related to purchase accounting.

135. False Statement: On July 11, 2003, Shaw Group announced its financial results

for the third quarter of fiscal 2003 in a release which stated in part:

The Shaw Group Inc. today announced earnings of $3.1 million or $0.08 perdiluted share for the third quarter ended May 31, 2003 after recording an after-taxcharge of $8.3 million. Excluding the charge, earnings for the period were $11.4million or $0.30 per diluted share compared to $26.7 million, or $0.61 per dilutedshare for the three months ended May 31, 2002.

The charge relates to the after-tax write-off of investments in marketablesecurities and accounts and claims receivable from Orion Refining Corporation(Orion) of $7.8 million and other receivables of approximately $500,000. Shawprovided construction services at Orion's Norco, Louisiana refinery in 1998.Orion declared bankruptcy on May 13, 2003. Given the bankruptcy filings, Shawbelieves there is a minimal chance of recovery.

Revenues for the third quarter of fiscal 2003 were $824.0 million versus $902.6million in the prior year's third quarter. The decline in revenues for the quarter isprimarily due to a downturn in the market for the construction of gas-fired power

- 61 -

plants, partially offset by an increase in revenues generated by the Company'sEnvironmental and Infrastructure division.

Shaw booked approximately $500 million in new awards during the third quarter.Backlog for the third quarter totaled approximately $5.0 billion, comparable withthe second quarter ended February 28, 2003, with approximately 91% of totalbacklog relating to projects for the domestic market. Approximately 40% of thecompany's backlog is expected to be completed within 12 months beginning May31, 2003.

J. M. Bernhard, Jr., Shaw's Chairman, President and Chief Executive Officer,commented, "Weak demand for new power plant capacity in the U.S. has createda highly competitive marketplace, which has resulted in a more selective approachto securing work in this sector. We have identified numerous opportunities in airemissions and in nuclear maintenance and modifications. Additionally, we arepursuing the new EPC power projects including grassroots facilities in certainmarkets where capacity is needed. Our strong competitive position andperformance track record in these segments bode well for our ability to capitalizeon these projects."

"We are also pleased with the robust bidding and booking activity for ourEnvironmental and Infrastructure segment across all business lines, especially thegrowing federal services platforms of Facilities Management and MilitaryHousing Privatization," Bernhard concluded.

136. In the release, Shaw also reduced estimates for the fourth quarter of fiscal 2003

and fiscal 2004.

137. False Statement: On July 15, 2003, Shaw filed its Form 10-Q for the third



in the July 11, 2003 press release. In addition, with respect to the acquisition of The IT Group,

the Form 10-Q stated as follows:

The Company acquired a large number of contracts in progress and contractbacklog for which the work had not commenced at the acquisition date. UnderSFAS 141, "Business Combinations," construction contracts are defined asintangibles that meet the criteria for recognition apart from goodwill. Theseintangibles, like the acquired assets and liabilities, are required to be recorded attheir fair value at the date of acquisition. The Company recorded these contractsat fair value using a market-based discounted cash flow approach by recordingcontract asset and liability adjustments to the balance sheet. The Company

- 62 -

recorded related assets of approximately $9,900,000 and liabilities of $46,700,000(as adjusted by allocation period adjustments recorded as of May 31, 2003) thatare being amortized to contract costs over the estimated lives of the underlyingcontracts and related production backlog. As of the acquisition date, the amountof the accrued future cash losses on assumed contracts with inherent losses(accrued contract loss reserves) was estimated to be approximately $21,300,000(including allocation period adjustments). Commencing with the initial recordingof these contract adjustments and reserves during the year ended August 31, 2002,the assets and liabilities are amortized as work is performed on the contracts.Through The IT Group acquisition, the Company also acquired a customerrelationship intangible valued at $1,500,000, which is being amortized over fiveyears. The activity related to these contract assets and liabilities and intangible isincluded in the table at the end of Note 11.

138. False Statement: The Form 10-Q further provides:

The Company's intangible assets include construction contract adjustments andcontract loss reserves established in purchase accounting (related to theacquisitions of The IT Group and Stone & Webster) which are amortized as workis performed on the related contracts, its proprietary ethylene technology acquiredin the Stone & Webster acquisition, which is being amortized over 15 years on astraight-line basis, and a customer relationship intangible acquired in The ITGroup acquisition, which is being amortized over 5 years on a straight-line basis(see Note 4).


ASSET OR COST OF

MARCH 1, LIABILITY REVENUES MAY 31,2003 INCREASE/ INCREASE/ 2003

Three months ended BALANCE DECREASE (DECREASE) BALANCEMay 31, 2003

Contract (asset) adjustments $ (7,578) _ _ $ 1,450 $ (6,128)Contract liability adjustments 42,307 (6,759) 35,548Accrued contract loss reserves 24,338 (860) (7,839) 15,639

Total contract related items 59,067 (860) (13,148) 45,059Ethylene technology (23,834) 477 (23,357)Customer relationshipintangible asset (1,500) 325 (1,175)

Total $ 35,233 $ (2,360) $(12,346) $ 20,527

ASSET OR COST OF

- 63 -

SEPTEMBER 1, LIABILITY REVENUES MAY 31,2002 INCREASE/ INCREASE/ 2003

Nine months ended BALANCE DECREASE (DECREASE) BALANCEMay 31, 2003

Contract (asset) adjustments $(12,150) $ 2,216 $ 3,806 $ (6,128)Contract liability adjustments 69,140 (9,734) (23,858) 35,548Accrued contract loss reserves 11,402 13,790 (9,553) 15,639

Total contract related items 68,392 6,272 (29,605) 45,059Ethylene technology (24,788) 1,431 (23,357)Customer relationshipintangible asset -- (1,500) 325 (1,175)

Total $ 43,604 $ 4,772 $(27,849) $ 20,527

ASSET OR COST OFMARCH 1, LIABILITY REVENUES MAY 31,2002 INCREASE/ INCREASE/ 2002

Three months ended BALANCE DECREASE (DECREASE) BALANCEMay 31, 2002

Contract liability adjustments $ 29,746 $ 30,000 $ (5,527) $ 54,219Accrued contract loss reserves 4,934 (949) 3,985


Total $ 8,940 $ 30,000 $ (5,999) $ 32,941

ASSET OR COST OFSEPTEMBER 1, LIABILITY REVENUES MAY 31,

2001 INCREASE/ INCREASE/ 2002Nine months ended BALANCE DECREASE (DECREASE) BALANCEMay 31, 2002

Contract liability adjustments $ 43,801 $ 30,000 $(19,582) $ 54,219Accrued contract loss reserves 6,906 -- (2,921) 3,985

Total contract related items 50,707 30,000 (22,503) 58,204Ethylene technology (26,694) -- 1,431 (25,263)

Total $ 24,013 $ 30,000 $(21,072) $ 32,941

The Company has previously referred to the fair value of the acquired contractliability adjustments resulting from the Stone & Webster acquisition as grossmargin reserves. The increases/decreases in the contract (asset) and contract

- 64 -

liability adjustments for the nine months ended May 31, 2003 represent allocationperiod adjustments made related to The IT Group acquisition. The contract (asset)adjustments are included in other current assets in the accompanying condensedconsolidated balance sheets. The $13,790,000 increase in the accrued contractloss reserves for the nine months ended May 31, 2003 resulted from allocationperiod adjustments related to The IT Group acquisition.


the Business Wire in which it announced a substantial down turn in earnings. In the release, the

Company reported that, for the year ended August 31, 2003, earnings were $20.9 million, or

$0.54 per diluted share, compared to earnings of $98.4 million, or $2.26 per diluted share for the

year ended August 31, 2002. Once again, the Company blamed the relatively poor showing on

weakness in the power generation market, stating, in this regard, as follows:

"There is no question that the protracted weakness in the power generation marketand the subsequent financial instability of some of our energy clients presentedchallenges never before faced by our company," stated J.M. Bernhard, Jr.,Chairman and Chief Executive Officer of The Shaw Group Inc. "However, I amextremely satisfied with the manner in which our organization has responded tothese difficulties. We are pleased to report that with the near completion of theNEG projects and our recent settlement with NRG, we have made great strides inputting these negative issues behind us." Mr. Bernhard continued, "Furthermore,we have kicked off our new fiscal year with several major awards and we areexperiencing strong booking and bidding activity, especially for fossil and nuclearpower EPC and maintenance work."

140. False Statement: On November 12, 2003, the Company filed its amended annual

report for the fiscal year ended August 31, 2003 in which it reiterated the results announced in its

October 16, 2003 press release. The amended Form 10-K was signed by Bernhard, Belk and

Barfield.,

141. False Statement: On January 14, 2004, Shaw Group announced its results for

the first quarter of fiscal 2004 in a release which stated in part:

The Shaw Group Inc. today announced financial results for its first quarter endedNovember 30, 2003. The Company reported a net loss of $49.6 million or ($1.07)per diluted share versus earnings of $16.5 million or $0.42 per diluted share for itsfirst quarter ended November 30, 2002. Results reflect $74.2 million in pre-tax

- 65 -

charges taken during the quarter, including $44.8 million related primarily toincreased costs on three power projects and a $29.4 million depreciation chargerelated to legacy software systems, which were successfully replaced by a newintegrated systems platform.

Shaw's backlog totaled $5.1 billion at November 30, 2003, at 7% increase overthe $4.8 billion recorded at August 31, 2003. Contributing to backlog during thequarter was over $1 billion in new awards and increases in scope to existingcontracts. Maintenance contracts were $1.4 billion or 27% of total backlog andprocess work under contract expanded over 34% to $710 million at quarter end.Approximately 36% of total backlog, or $1.8 billion, is expected to be worked offduring the next 12 months.

"We are disappointed with our operational performance, primarily from our ECMdivision, and with the fact that we had to take additional project-related write-downs during the quarter. However, we believe we have laid the groundwork forimproved operational performance in the second half of 2004 and well into fiscal2005," stated J. M. Bernhard, Jr. Shaw's Chairman and Chief Executive Officer."Our confidence is supported by the healthy booking and bidding activity weexperienced across all business segments during the quarter, including over $600million in bookings by our Environmental and Infrastructure division and ourMaintenance group, both of which provide a stable stream of revenues andearnings for the Company."

142. False Statement: On January 14, 2004, Shaw filed its Form 10-Q for the first



in the January 14, 2004 press release. In addition, with respect to the acquisition of The IT

Group and Stone & Webster, the Form 10-Q stated as follows:

The construction contract adjustments (included in our intangible assets) andcontract loss reserves established in purchase accounting (related to The IT Groupand Stone & Webster transactions) are amortized as work is performed on therelated contracts.

The following table presents the additions to and utilization/amortization ofcontract adjustments and accrued contract loss reserves for the periods indicated(in thousands):

- 66 -

Asset or Liability Cost of Revenues

Three Months Ended September 1, 2003 Increase/ Increase/ November 30, 2003

November 30, 2003 Balance Decrease (Decrease) Balance

Contract (asset) adjustments $ (3,210) $ — 449 $ (2,761)Contract liability adjustments 32,551 (3,822) 28,729Accrued contract loss reserves 9,858 (7,161) 2,697Total $ 39,199 $ — $ (10,534) $ 28,665

Asset or Liability Cost of Revenues

Three Months Ended September 1, 2002 Increase/ Increase/ November 30, 2002

November 30, 2002 Balance Decrease (Decrease) Balance

Contract (asset) liability $ (12,150) $ 3,236 $ 1,597 $ (7,317)adjustments

Contract liability 69,140 (4,998) (7,330) 56,812adjustmentsAccrued contract loss 11,402 3,400 (903) 13,899reservesTotal $ 68,392 $ 1,638 $ (6,636) $ 63,394

The increases/decreases in the contract (asset), contract liability adjustments andaccrued contract loss reserves for the three months ended November 30, 2003 and2002 represent the utilization of allocation period adjustments related to The ITGroup transaction.

143. On February 20, 2004, Shaw Group announced it had filed a shelf registration

statement with the SEC to offer and sell up to $500 million of common stock, preferred stock or

debt securities. The net proceeds generated from any future sale of securities would "be used for

general corporate purposes." The release stated in part:

"With our existing shelf nearly exhausted, we made this filing to continue to havethe necessary mechanisms in place for facilitating the sustained growth of ourcompany," stated Robert L. Belk, Executive Vice President and Chief FinancialOfficer. "It is our practice to maintain a shelf registration to give us the flexibilityto effectively manage and expand our global operations and to pursue variousopportunities essential for executing our strategic plan and increasing shareholdervalue."


the Business Wire in which the Company reported net income of $2.2 million, or $0.04 per

diluted share, for the second fiscal quarter ended February 29, 2004 compared to a net loss of

$7.9 million, or $(0.21) per diluted share, for the same period ended February 28, 2003. With

respect to projected third-quarter earnings, the Company stated as follows:

- 67 -

Primarily due to delays in the startup of two major EPC projects, the Companyalso announced that third quarter fiscal 2004 earnings are expected to be at thelower end of the range of its previously issued guidance, approximately $0.18 perdiluted share, while fourth quarter earnings are expected to be below priorguidance, at approximately $0.28 per diluted share.




in the April 14, 2004 press release. In addition, with respect to the acquisition of The IT Group

and Stone & Webster, the Form 10-Q stated as follows:

The construction contract adjustments and contract loss reserves established inpurchase accounting (related to The IT Group and Stone & Webster transactions)reduce direct costs as costs are incurred on the related contracts.

The following table presents the additions to and utilization of contractadjustments and accrued contract loss reserves for the periods indicated (inthousands):

Asset or Cost ofDecember 1, Liability Revenues February 29,

Three Months Ended 2003 Increase/ Increase/ 2004

February 29, 2004 Balance Decrease (Decrease) BalanceContract (asset) adjustments $ (2,761) $ — $ 449 $ (2,312)

Contract liability adjustments 28,729 — (4,203) 24,526Accrued contract loss reserves 2,697 — (1,430) 1,267Total $ 28,665 $ — $ (5,184) $ 23,481

Asset or Cost of

September 1, Liability Revenues February 29,Six Months Ended 2003 Increase/ Increase/ 2004February 29, 2004 Balance Decrease (Decrease) Balance

Contract (asset) adjustments $ (3,210) $ — $ 898 $ (2,312)

Contract liability adjustments 32,551 (8,025) 24,526Accrued contract loss reserves 9,858 — (8,591) 1,267Total $ 39,199 $ — $ (15,718) $ 23,481

Asset or Cost of

December 1, Liability Revenues February 28,

Three Months Ended 2002 Increase/ Increase/ 2003February 28, 2003 Balance Decrease (Decrease) Balance

Contract (asset) adjustments $ (7,317) $ (1,020) $ 759 $ (7,578)

Contract liability adjustments 56,812 (4,790) (9,715) 42,307

- 68 -

Accrued contract loss reserves 13,899 11,250 (811) 24,338Total $ 63,394 $ 5,440 $ (9,767) $ 59,067

Asset or Cost ofSeptember 1, Liability Revenues February 28,

Six Months Ended 2002 Increase/ Increase/ 2003February 28, 2003 Balance Decrease (Decrease) Balance

Contract (asset) adjustments $ (12,150) $ 2,216 2,356 $ (7,578)

Contract liability adjustments 69,140 (9,734) (17,099) 42,307Accrued contract loss reserves 11,402 14,650 (1,714) 24,338Total $ 68,392 $ 7,132 $ (16,457) $ 59,067

The increases and decreases in the contract liability (asset) adjustments andaccrued contract loss reserves for the three and six months ended February 29,2004 and February 28, 2003 represent allocation period adjustments related to theStone & Webster and IT Group transactions. Contract asset adjustments areincluded in other current assets in the accompanying condensed consolidatedbalance sheet.

146. The statements referenced above in 7[127 through 135, 137 through 142, and 144,

were each materially false and misleading when made as they misrepresented and/or omitted

adverse facts which then existed and disclosure of which was necessary to make the statements

not false and/or misleading. The true facts, which were then known to each of the Individual

Defendants, based upon their access to and review of internal Shaw data, were:

• The Company's steadily declining earnings was not a result solely of thedownturn in the domestic power generation market, including the potentialloss of future profits in connection with the LSP-Pike project, if at all, butrather, it was also a result of the depletion of the "cookie cutter" grossmargin reserves that the Company had previously used to bolster earnings.Indeed, Shaw had gone to the well of artificially created reserves such thatthe reserves could no longer sustain (albeit artificially) the earnings Shawneeded in order to avoid the collapse of its stock price;

• The Company improperly reported revenue and earnings in violation of itspurported revenue recognition policy and in violation of GAAP;


• The Company lacked internal controls necessary to properly reportrevenue and earnings. Shaw-Trac, which was supposedly Shaw's internalcontrol program that allowed real-time review and analysis of percentage

- 69 -

of completion of its EPC power construction projects, did not work.Shaw-Trac was useless and failed to provide any reasonable basis bywhich Shaw could estimate the percentages of completion of its projects.Rather than correcting this problem, Shaw mandated the use of Shaw-Tracon all EPC projects, thus laying the groundwork necessary to obfuscate itsintentional overstatement of the revenues calculated through percentage ofcompletion; and


The Truth EmerEes

147. After the market closed on June 10, 2004, Shaw issued a news release over the

Business Wire in which it announced that, on June 1, 2004, it had been notified by the SEC that

the SEC was conducting an informal inquiry and, with respect to the scope of the investigation,

stated as follows:

The SEC has not advised the Company as to either the reason for the inquiry or itsscope. However, the request for information appears to primarily relate to thepurchase method of accounting for acquisitions, as presented in Shaw's Form 10-K for the fiscal year ended August 31, 2003.

148. On this news, shares of the Company's stock, which had closed at $12.28 on

June 10, 2004, dropped more than 12.4% to close at $10.75 on June 11, 2004, the day the market

opened again after the long weekend, on more than four times normal volume.

SHAW'S FINANCIAL STATEMENTS DURING THE CLASSPERIOD WERE MATERIALLY FALSE AND MISLEADING

149. During the Class Period, Shaw repeatedly represented that the financial

statements it issued to investors were each prepared in accordance with GAAP and the

accounting and disclosure rules and regulations of the SEC. These representations were

materially false and misleading because Defendants knowingly or recklessly employed deceptive

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accounting practices which falsely inflated the Company's Class Period operating results during

the Class Period. Defendants then masked Shaw's improper accounting practices by making

false and misleading disclosures during the Class Period concerning the Company's operating

results.

150. By failing to file financial statements with the SEC which conformed to GAAP,

Defendants repeatedly disseminated financial statements of Shaw that were presumptively

misleading and/or inaccurate.' As a result of the Defendants' accounting manipulations during

the Class Period, Shaw's financial reporting is now under investigation by the SEC.

Shaw's False and MisleadingAccounting for Its Acquisitions

151. During the Class Period, Shaw entered into several acquisition transactions.

Shaw deceptively accounted for these transactions by understating the value it assigned to assets

it acquired and by overstating liabilities and/or accounting reserves established in accounting for

its acquisitions. In so doing, Shaw overstated its reported goodwill in an equal amount.

152. Generally, the establishment of accounting reserves results in a charge against

earnings. However, since Shaw inflated reserves in connection with its acquisitions, no charge

against earnings was recorded. Rather, Shaw's inflated accounting reserves in connection with

its acquisitions resulted in an equal inflation in its reported goodwill, which is an asset and not an

expense.

153. Shaw then used the excess reserves it established in accounting for its acquisitions

of Stone & Webster and The IT Group to improperly inflate its post-acquisition earnings. Shaw

8 Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with theSEC that are not prepared in conformity with GAAP are presumed to be misleading andinaccurate.

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accomplished this by understating its then current period expenses, by offsetting them against the

reserves and/or by reversing the overstated reserves and improperly reporting a corresponding

amount as a reduction of Shaw's cost of revenue.

154. In fact, the improper practices employed by Shaw in accounting for Shaw's

acquisitions provided Defendants with the opportunity to artificially inflate Shaw's post

acquisition financial results by hundreds of millions of dollars during the Class Period. For

example, Shaw assigned an artificially low value to inventory that it acquired from Stone &

Webster and The IT Group. Thereafter, when Shaw sold such inventory, its profits were falsely

inflated because the cost of the sold inventory was artificially understated at the time of the

acquisition. Similarly, Shaw's depreciation and amortization expense during the Class Period

was understated because Defendants assigned artificially low valuations to tangible and

intangible assets acquired in acquisitions.

155. In addition, after the consummation of acquisitions, Shaw systematically reduced

overstated reserves it established in accounting for acquisitions, which had the intended effect of

lowering the Company's costs and inflating its income during the Class Period.

156. Two of the more significant Shaw acquisitions that impact the Class Period

transactions involved Stone & Webster and The IT Group. Shaw used the "purchase" method to

account for such acquisitions. The "purchase" method, as set forth in GAAP's Accounting

Principles Board ("APB") Opinion No. 16 and FASB's Statement of Financial Accounting

Standards ("SFAS") No. 141, provides that the cost of an acquisition is to be allocated to

individual assets acquired and liabilities assumed. This allocation is to be made based on the

respective "fair" values of the acquired assets and assumed liabilities at the time of the

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acquisition. Any difference between the cost of the acquisition and the sum of the fair values of

the acquired assets less any assumed liabilities is recorded as goodwill.

157. For example, Company A acquires Company B for $100 when the fair value of

Company B's assets and liabilities total $90 and $15, respectively. In using the purchase method

of accounting for the acquisition, Company A's financial statements will report the individual

assets acquired from Company B at $90 and liabilities it assumed at $15. The difference

between the cost of Company B ($100) and the fair value of its assets and liabilities (totaling $90

and $15, respectively) is recorded as goodwill in the amount of $25 ($100-($90-$15)).

158. If, in the above example, Company A understates Company B assets by $10,

Company A will report $35 in goodwill on the acquisition ($100-($80-$15)). Since accounting

reserves are reported as liabilities or contra—asset accounts, an overstatement of accounting

reserves will similarly increase the amount of reported goodwill on a transaction.

The Stone & Webster Transaction

159. As Defendants noted during the Class Period, Stone & Webster was a major

acquisition by Shaw. In fact, the acquisition of substantially all of the operating assets of Stone

& Webster effectively doubled the size of the Company. Indeed, Defendants were motivated to

consummate the Stone & Webster acquisition because, as noted in Shaw's Proxy Statement filed

with the SEC in December 2000 and as discussed below, "a substantial portion" of the stock

options covering more than 2 million shares of Shaw's common stock were awarded to the

officers and key employees of Shaw in connection with the Company's acquisition of Stone &

Webster. In addition, cash bonuses were paid to Shaw executives and key officers to "reward"

them for their contributions associated with the Stone & Webster acquisition.

160. On or about July 28, 2000, Shaw filed a Form 8-K with the SEC which provided

the following disclosure about the Stone & Webster acquisition:

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Effective as of July 14, 2000, The Shaw Group Inc. ("Shaw") purchasedsubstantially all of the assets of Stone & Webster, Incorporated ("S&W") and itssubsidiaries for approximately $38 million in cash and approximately 2.2 millionshares of Shaw's common stock, no par value per share (the "Common Stock").The assets acquired include, among other things, certain contracts in progress,accounts receivable, equipment, certain real estate and the net assets of S&W'scold storage business, which business S&W had previously announced was forsale. The total amount of the assets acquired by Shaw exceeds $600 million bookvalue. In connection with the acquisition of such assets, Shaw assumed certainliabilities of S&W, including (i) obligations of S&W arising out of performanceof contracts assumed by Shaw on and after the closing; (ii) liabilities underS&W's outstanding bank indebtedness (including amounts outstanding pursuantto existing standby letters of credit); (iii) certain unpaid accounts payable; and (iv)the other liabilities specifically described in the Purchase Agreement (as definedbelow). Shaw believes that the total value of such assumed liabilities exceeds$400 million. [Emphasis added]

161. Just prior to Shaw's acquisition of Stone & Webster, the staff of the SEC, in June

2000, issued the following statement to public companies concerning the accounting for business

combinations:

If a registrant accounts for its acquisition of another company using the purchasemethod of accounting, the target's assets and liabilities are recorded in theregistrant's financial statements at their fair values. The target's historicalaccounting for many liabilities often is premised on its estimates of the amountsto be paid. Fair value amounts recorded for those items by the registrant may beexpected to differ from the target's carrying amounts due, at least, to the effects ofdiscounting and changes in interest rates. The staff would not expect largedifferences between the undiscounted amounts previously estimated by thetarget and those recognized by the registrant upon the acquisition unless theregistrant's plans regarding settlement of the liability are markedly different fromthose underlying the target's estimates. Except in those circumstances, materiallydifferent amounts would undermine the credibility of both the target's and theregistrant's financial reporting, and indicate the presence of an accountingerror. For example, significant increases to the target's estimated contractlosses in some cases have turned out to be "cushions" or general reservesagainst which subsequent changes in estimates occurring in the ordinarycourse of business were charged, rather than recognized in income.

The Commission has taken a number of enforcement actions because of improperreserves established in connection with purchased businesses, including thefollowing:

AAER No. 598 (September 26, 1994), Meris Laboratories. The Commissionfound that Meris understated its expenses and overstated income in its financial

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statements because provisions for future operating costs were capitalized as aresult of their improper inclusion in the estimated purchase price of certainbusiness acquisitions.

AAER Nos. 778 (May 2, 1996) and 804 (July 24, 1996), Sulcus ComputerCorporation and Peter C. Ferraro, CPA, and William G. Stayduhar, CPA. TheCommission found that Sulcus materially overstated earnings as a result ofimproper accounting employed in connection with a series of acquisitions. Inconnection with each of the acquisitions, Sulcus recorded excess liabilities and/orreserves on its books as of the date of the transaction, and thereafter used theexcess reserves to improve post-acquisition earnings.

AAER No. 1126 (April 20, 1999), Terex Corporation and Randolph W. Lenz.The Commission found that the improper application of purchase accounting to asubsidiary, Fruehauf Trailer Corporation, caused overstatement of its pre-taxearnings by approximately $77.3 million. [Emphasis added]

162. On or about September 13, 2000, Shaw filed an amendment to its July 28, 2000

Form 8-K with the SEC. Such amendment disclosed additional financial information with

respect to the Stone & Webster acquisition:

Effective as of July 14, 2000, The Shaw Group Inc. (the "Company" or "Shaw")purchased substantially all of the operating assets of Stone & Webster,Incorporated, a Delaware corporation ("S&W"), and its subsidiaries for $37.6million in cash, 2,231,773 shares of Shaw's common stock, no par value pershare, and the assumption of approximately $450 million of liabilities. S&W isa leading global provider of full-service, value-added engineering, procurement,construction, consultation and environmental services to the power, process,governmental and industrial markets. [Emphasis added]

163. The amended Form 8-K disclosed that the purchase price of the acquisition

(excluding liabilities assumed) totaled $148.6 million, consisting of $37.6 million in cash,

$105.0 million in Shaw common stock, and $6.0 million in transaction costs. The amended

Form 8-K also revealed that Shaw deemed the 'fair" value of the net assets it acquired from

Stone & Webster to be worth less than $5.2 million; accordingly, Shaw allocated $143.4

million, or 96.5% of the $148.6 million Stone & Webster purchase price, to goodwill.

164. Indeed, the amount of goodwill Shaw reported on the Stone & Webster

acquisition was grossly inflated because Shaw assigned artificially low values to the assets it

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acquired from Stone & Webster and because it established artificially inflated reserves in

accounting for the Stone & Webster acquisition. Defendants knew, or were severely reckless in

ignoring, that the goodwill value it attributed to the Stone & Webster acquisition was grossly

inflated.

165. For example, on May 2, 2000, just a few months prior to the Stone & Webster

acquisition, CBS Market Watch, reported that the market value of the entire Stone & Webster

enterprise totaled only $51.4 million. In fact, on July 14, 2000, the date of the Stone & Webster

acquisition, the market valued the entire Stone & Webster organization at only $42.79 million.

Nonetheless, Shaw's September 13, 2000 Form 8-K reported that the goodwill on the Stone &

Webster transaction totaled an amount which exceeded the value the market placed on the entire

Stone & Webster entity on the date of the acquisition by almost three times.

166. Two months later, on or about November 29, 2000, Shaw filed its fiscal 2000

Form 10-K filed with the SEC. Such Form 10-K included Shaw's financial statements for the

year ended August 31, 2000, which disclosed:

On July 14, 2000, the Company purchased substantially all of the operating assetsof Stone & Webster, Incorporated ("Stone & Webster") for $37,600,000 in cash,2,231,773 shares of Common Stock (valued at approximately $105,000,000 atclosing) and the assumption of approximately $685,000,000 of liabilities, subjectto adjustment pending the resolution of certain claims arising from the Stone &Webster bankruptcy proceedings. The Company also incurred approximately$6,000,000 of acquisition costs. Stone & Webster is a global provider ofengineering, procurement, construction, consulting and environmental services tothe power, process, environmental and infrastructure markets. The Companybelieves that, pursuant to the terms of the acquisition agreement, it assumed onlycertain specified liabilities. The Company believes that it did not assume, amongother liabilities, liabilities associated with certain contracts in progress, completedcontracts, claims or litigation that relate to acts or events occurring prior to theacquisition date, and certain employee benefit obligations, including Stone &Webster's U.S. defined benefit plan (collectively, the excluded items). TheCompany can, however, provide no assurance that it will have no exposure withrespect to such excluded liabilities.

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The acquisition agreement contains an adjustment provision that requires theconsideration paid by the Company to be increased or decreased by the amount ofthe net assets or liabilities, as determined by the agreement, of the excluded items.In addition, $25,000,000 of the acquisition proceeds were placed in escrow by thesellers to secure certain indemnification obligations of the sellers in theagreement. Subsequent to August 31, 2000, the parties entered into discussions toamend the agreement to return substantially all of the escrow funds to theCompany and waive the adjustment provision in exchange for the Company'sassumption of a previously excluded item. The Company believes that a finalresolution will be reached regarding this amendment which would result in anet reduction of the Company's purchase price and goodwill. Such adjustmentis not expected to exceed the amount held in escrow. Such an agreement, even ifreached among the parties, would also require bankruptcy court approval.

The Company acquired a large number of contracts with either inherent losses orlower than market remaining margins primarily due to the effect that the financialdifficulties experienced by Stone & Webster had on negotiating and executing thecontracts. These contracts were adjusted to their fair value at acquisition dateby establishing a liability of approximately $83,700,000 which will adjust thegross margins recognized on the contracts as the work is performed. Theamount of the accrued losses on assumed contracts was approximately$36,300,000. These adjustments will result in a net reduction of contract costsincurred in future periods. For the period from the acquisition of Stone &Webster (July 14, 2000) through August 31, 2000, cost of sales were reduced by$13,508,000 as these reserves were reduced.

The acquisition was concluded as part of a proceeding under Chapter 11 of theU.S. Bankruptcy Code. The bankruptcy court has not finalized its validation ofclaims filed with the court. As a result, the final amount of assumed liabilitiesmay change, although the Company believes, based on its review of claims filed,that any adjustment to the assumed liabilities will not be material.

* * *

The purchase method was used to account for the acquisition of Stone & Webster.Goodwill and other purchased intangibles are being amortized over 20 years usingthe straight-line method. The purchase price was allocated to acquired assets andliabilities based on estimated fair value as of July 14, 2000, as follows (inthousands):

Accounts receivable $139,720Cost and estimated earnings in excessof billings on uncompleted contracts 49,113Inventories 34,800Assets held for sale 116,501Patents, licenses and other intangible assets 50,000

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Property and equipment 48,779Deferred income taxes 65,765Other Assets 35,025Goodwill 251,462Accounts payable and accrued liabilities (326,768)Billings in excess of cost andestimated earnings on uncompleted contracts (131,966)Accrued contract losses and adjustments (119,997)Debt and bank loans (92,497)Other liabilities (13,498)

Purchase Price (net of cash received of $42,194) $106,439=======

[Emphasis added]

167. As the above-noted filings reveal, between the time that Shaw filed its pro-forma

financial information of the Stone & Webster acquisition with the SEC (on or about September

13, 2000) and the time Shaw filed its August 31, 2000 Form 10-K with the SEC (on or about

November 29, 2000), the Company materially changed its assessment of the value of assets it

acquired and the liabilities it assumed/or accounting reserves it established in accounting for the

Stone & Webster acquisition. In fact, during this time frame, Shaw increased the amount of

liabilities it assumed on the Stone & Webster transaction from "approximately $450 million" to

"approximately $685 million."

168. As a result of the changes in values that Shaw ascribed to the assets and liabilities

it acquired from Stone & Webster, the amount of goodwill Shaw reported on the Stone &

Webster acquisition increased by more than $108.1 million, or 75%, from $143.4 million to

$251.5 million. Accordingly, in an approximate ten week period, Shaw, which originally

deemed the value of the net assets it acquired from Stone & Webster to be worth approximately

$5.2 million, significantly changed its position and reported that the value of the liabilities it

assumed from Stone & Webster was $102.9 million greater than the assets it acquired from

Stone & Webster. As result, Shaw allocated $251.5 million, or 169.3% of the $148.6 million

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Stone & Webster purchase price, to goodwill when, just weeks prior, it reported goodwill on

the transaction of approximately $143.4 million.

169. Defendants knew, or were severely reckless in ignoring, that the $251.5 million

goodwill value it attributed to the Stone & Webster acquisition was grossly inflated. In fact, the

amount of goodwill Shaw reported on the Stone & Webster acquisition in its August 31, 2000,

financial statements exceeded the value the market placed on the entire Stone & Webster

entity on the date Stone & Webster was acquired by almost six times. Indeed, the amount of

goodwill Shaw recorded on the Stone & Webster acquisition indicated to Defendants, that the

reserves it established in accounting for the Stone & Webster acquisition were grossly inflated

and/or the "fair" values it attributed to Stone & Webster's assets were materially understated.

170. For example, when Shaw acquired long term construction contracts from Stone &

Webster, it established an $83.7 million accounting reserve on the contracts to adjust them to

their purported "fair" values on the date of the acquisition. In addition, Shaw established a

$36.3 million reserve to account for "accrued losses on [the] assumed contracts" purportedly

because Shaw "acquired a large number of contracts with either inherent losses or lower than

market rate margins."

171. Shaw's August 31, 2000, annual financial statements reveal that its estimated

earnings on the Company's most significant uncompleted contracts totaled $76.3 million.'

However, the $76.3 million in estimated profit on Shaw's uncompleted contracts as of

August 31, 2000, did NOT include the accrued contract losses or the reserves the Company

recorded on Stone & Webster's uncompleted contracts at the time of the acquisition. After

9 A significant majority of such uncompleted contracts were acquired from Stone &Webster.

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giving effect to the $120.0 million in reserves that Shaw recorded on the contracts it acquired

from Stone & Webster, Shaw purportedly anticipated recording a $43.7 million loss on its

uncompleted contracts as of August 31, 2000.10

172. Indeed, if it is to be believed that the amount of the reserves Shaw recorded in

accounting for the contracts it acquired from Stone & Webster was reasonable, then one must

also believe that Defendants expected that Shaw's entire portfolio of uncompleted contracts at

August 31, 2000, generated tens of millions of dollars of losses, a conclusion that defies

credulity given the purchase price of Stone & Webster and the fact that Stone & Webster's

business generated a gross profit margin of approximately 6.6% in the quarter immediately

preceding its acquisition by Shaw.

173. GAAP expressly prohibits the manipulation of accounting reserves described

above. For, example, GAAP, in SFAS No. 5, precludes the use of reserves for general or

unknown business risks, including excess reserves, because they do not meet the accrual

requirements of SFAS No. 5. In addition, systematic or timed releases of excess reserves into

income also violate GAAP. See, e.g., In re Rush, SEC Exchange Act of 1934, Release No.

44501 (July 2, 2001); SEC v Dunlap, No. 01-8437-Civ, SEC Litig. Release No. 17710 (Sept. 4,

2002); Xerox Settles SEC Enforcement Action, SEC Press Release No. 2002-52 (Apr. 11, 2002).

174. In fact, the manipulation of accounting reserves employed by Defendants in

accounting for Shaw's acquisitions is one that the SEC specifically indicated was improper. For

10 The $120.0 million contract reserves total is equal to the sum of the $83.7 millionaccounting reserve on the contracts to adjust them to their purported "fair" values and the $36.3million reserve to account for "accrued losses" on the assumed contracts. In addition, the $43.7million loss total is equal to the estimated $76.3 million profit minus contract reserves of $120.0million.

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example, the SEC's Staff Accounting Bulletin ("SAB") No. 100, issued in 1999, addresses asset

reserves and liabilities associated with acquisitions. SAB No. 100 provides:

The staff believes that purchase price adjustments necessary to record liabilitiesand loss accruals at fair value are required, while merely adding an additional"cushion" of 10 or 20 or 30 percent to such account balances is not appropriate.[Emphasis added]

175. Defendants' improper accounting for Shaw's acquisition of Stone & Webster is

otherwise evidenced by its improper application of SFAS No. 38." SFAS No. 38 allows entities

an "allocation period" for the discovery and quantification of pre-acquisition contingencies

because information associated with such contingencies may not be available at the time of the

acquisition.' Accordingly, during the "allocation period," entities may adjust the values it

originally assigned to such contingencies. As noted in SFAS No. 38 by reference to SFAS No. 5

the mere fact that an estimate is involved does not, of itself mean that a pre-acquisition

contingency exists.

176. With respect to the allocation period, SFAS No. 38 provides that:

[The allocation period is] the period that is required to identify and quantify theassets acquired and the liabilities assumed. The "allocation period" ends whenthe acquiring enterprise is no longer waiting for information that it hasarranged to obtain and that is known to be available or obtainable. Thus, theexistence of a pre-acquisition contingency for which an asset, a liability or an

11 SFAS No. 38 was superseded by SFAS No. 141 for business combinations initiated afterJune 30, 2001. However, SFAS No. 141 carries forward the guidance from SFAS No. 38without reconsideration.

i 2 SFAS No. 38 states that SFAS No. 5 defines a contingency "as an existing condition,situation or set of circumstances involving an uncertainty as to possible gain or loss to anenterprise that will be resolved when on or more future events occur or fail to occur." As notedin SFAS No. 5, "not all uncertainties inherent in the accounting process give rise tocontingencies as that term is used in this statement [and as used in SFAS No. 38 by reference toSFAS No. 5]. Estimates are required in financial statements for many on going and recurringactivities on an enterprise. The mere fact that an estimate is involved does not of itselfconstitute the type of uncertainty referred to in the definition...."

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impairment of an asset cannot be estimated does not, of itself, extend the"allocation period." Although the time will vary with circumstances, theallocation period should usually not extend one year from the consummation ofthe business combination. [Emphasis added]

177. Accordingly, the allocation period exists only for those "contingencies" for which

an entity is awaiting information that it has arranged to obtain and that is known to be available

or obtainable. Thus, the mere fact that an asset or a liability cannot be estimated does not, of

itself, extend the allocation period. In addition, a decline in the value of assets acquired in a

business combination occurring subsequent to the date of an acquisition that is not attributable to

specific economic events occurring before the acquisition date for which information concerning

such events is available or obtainable by the acquiring company is to be charged against the post-

acquisition earnings of the combined entity.

178. During the Class Period, Shaw abused the provisions established by SFAS No. 38

when it accounted for the decline in the value of acquired assets occurring subsequent to an

acquisition as adjustments to the purchase price rather than a charge against earnings. As a result

of such improper accounting, losses that Shaw should have charged against its post-acquisition

earnings were surreptitiously reported as retroactive increases in goodwill at the time the

acquisition. This improper practice was accomplished under the guise that such declines were

bona-fide adjustments that were allowed by SFAS No. 38 during the allocation period. In truth

and in fact however, Shaw wrongfully adjusted the values of assets, reserves and liabilities which

did not meet the definition of "pre-acquisition contingencies" during an allocation period that it

wrongfully extended the to the maximum one year period allowed by SFAS No. 38.

179. Indeed, the staff of the SEC issued guidance to limit the abuses of SFAS No. 38.

For example, in a 1996 AICPA conference on then current SEC developments, the staff of the

SEC noted the following:

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The staff described an example of a registrant that recorded an inventory write-down in its fourth quarter as a purchase price adjustment for a purchase businesscombination completed at the beginning of the year. The correspondingadjustment resulted in an increase in goodwill. The staff noted that the registrantwas asked to restate its financial statements to reflect the write-down as acharge to current period earnings. The key points made by the staff are asfollows:

The staff does not believe that broad disclosures indicating the purchaseprice allocation has not been finalized provide a sufficient basis forasserting that the allocation period is still open. The staff noted that itwould have expected the registrant to have been providing interimdisclosures since the acquisition date that described the uncertaintieswith respect to the valuation of the inventory.

The staff also indicated that registrants often disclose that purchase priceallocations are preliminary without explaining why. The staffrecommends that registrants disclose why the allocation is preliminary,what events or activities must occur for it to be final, when managementexpects it to be finalized, and the potential impact on the financialstatements of any purchase cost reallocation.

The staff believes that FAS 38 clearly distinguishes between risksassumed at the acquisition date and gains or losses that result fromsubsequent economic events. In the registrant's fact pattern, the evidencesuggested that the decline in value of the acquired inventory wasattributable to events occurring subsequent to the purchase date. Thestaff apparently rejected the registrant's assertion that the operation of theproduct line subsequent to the acquisition date was the means by whichthe registrant obtained information about the inventory's value at theacquisition date. [Emphasis added]

180. Despite the foregoing, Shaw improperly attributed post-acquisition declines in the

value of the assets acquired from Stone & Webster as being attributable to events occurring prior

to the purchase of Stone & Webster.

181. For example, certain of the assets Shaw acquired from Stone & Webster included

"various license patents, technology and related processes pertaining to the design and

construction of plants which produce ethylene." At the time of the acquisition, Shaw ascribed a

$50 million valuation to such assets. Shaw's financial statements for the year ended August 31,

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2001, reveal that Shaw lowered its original $50 million estimate of such assets to $28.6 million

during the purported allocation period.

182. Shaw wrongfully accounted for the decline in the value of the above assets as an

increase in its reported goodwill on the Stone & Webster transaction rather than as a charge

against its post-acquisition earnings. Indeed, Shaw's estimate of such assets was not a "pre-

acquisition contingency" as contemplated by GAAP. In addition, Shaw reduced the value of

such assets by more than 42% from its original estimate.

183. As noted in SFAS No. 38:

In examining the nature of a pre-acquisition contingency, the [FASB] concludedthat an estimate that can be made soon after the purchase likely wouldapproximate the amount by which the purchase price reflected that contingency.If the eventual outcome of that contingency is significantly different, it is likelythat the acquiring enterprise assumed a risk that turned out differently thanexpected. As indicated in paragraphs 19-21 above, the [FASIII believes that it isappropriate for the result of a risk assumed by an enterprise to be accounted fordifferently than the transaction that resulted in the assumption of the risk.[Emphasis added]

184. Given the fact that Shaw's estimate of the licenses patents, and technology assets

it acquired from Stone & Webster was not a "pre-acquisition contingency" as contemplated by

GAAP and the fact that Shaw adjusted value of such assets by more than 42% during the

purported allocation period, the $28.6 million the reduction in the value of such assets was

required to charged against Shaw's post-acquisition earnings rather than as an increase in its

reported goodwill on the Stone & Webster transaction.

185. Similarly, Shaw lowered its original estimate of the inventory it acquired from

Stone & Webster from $34.8 million to $11.5 million during the allocation period. This

represented a more than 67% decline in its original estimate of such assets. In addition, Shaw

lowered its original estimate of property, plant and equipment it acquired from Stone & Webster

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from $48.8 million to $19.6 million during the allocation period. This reduction represented a

more than 59% decline in its original estimate of such assets.

186. In each of the above instances, Shaw, wrongfully used the pretext that the decline

in the values of the above-noted assets it acquired from Stone & Webster were associated with

"pre-acquisition contingencies," when they were not, and wrongfully reported the decline in the

values of such assets in the one year period following the Stone & Webster transaction as

additional goodwill on the Stone & Webster transaction rather than a charge against the

Company's post-acquisition earnings. In so doing, Shaw violated GAAP and improperly abused

SFAS No. 38 to avoid recording charges against its post-acquisition earnings on decline in the

value of assets it acquired from Stone & Webster. Such accounting allowed Shaw to artificially

inflate its operating results by tens of millions of dollars during the Class Period.

187. For example, a former inside accountant for Stone & Webster and Shaw said that,

"several months after the S&W acquisition," Shaw reduced the value of equipment it acquired

from Stone & Webster from $100 million to its "salvage value" purportedly because the project

it was purchased for in Indonesia was cancelled. The former accountant questioned the

appropriateness of such write down because the equipment was "new" and because Shaw had

already determined to use such equipment on a project in China.

188. Moreover, with respect the purchase method of accounting for business

combinations, the staff of the SEC, in citing to the SEC's SAB Topic 2A.7, stated in March of

2000 that:

If the registrant is awaiting additional information necessary for the measurementof a contingency of the acquired company during the allocation period specifiedby FAS 38, the registrant should disclose prominently that the purchase priceallocation is preliminary. In this circumstance, the registrant should:

• describe clearly the nature of the contingency;

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• discuss the reasons why the allocation is preliminary (i.e., identify theinformation that the registrant has arranged to obtain);

• indicate when the allocation is expected to be finalized; and

• furnish other available information which will enable a reader to understandthe magnitude of any potential accrual and the range of reasonably possibleloss.

In the absence of such disclosure, investors may assume reasonably that thepurchase price allocation is final and that all future revisions of estimated fairvalues of assets and liabilities acquired will be reflected in income. [Emphasisadded]

189. In furtherance of Defendants' scheme to mislead investors, Shaw's interim 2001

financial statements filed with the SEC during the purported Stone & Webster "allocation

period" failed to disclose the information required by the staff of the SEC and SAB Topic 2A.7.

Indeed, such omission evidences Defendants' attempt to mask its deceptive accounting of the

Stone & Webster acquisition.

190. For example, in Form 10-Q for the quarter ended November 30, 2000, Shaw

disclosed:

On July 14, 2000, the Company purchased substantially all of the operating assetsof Stone & Webster for $37,600,000 in cash, 4,463,546 shares of Common Stock(valued at approximately $105,000,000 at closing) and the assumption ofapproximately $693,000,000 of liabilities, subject to adjustment pending theresolution of certain claims arising from the Stone & Webster bankruptcyproceedings. The Company incurred approximately $6,000,000 of acquisitioncosts. Stone & Webster is a global provider of engineering, procurement,construction, consulting and environmental services to the power, process,environmental and infrastructure markets. The Company believes that, pursuantto the terms of the acquisition agreement, it assumed only certain specifiedliabilities. The Company believes that it did not assume, among other liabilities,liabilities associated with certain contracts in progress, completed contracts,claims or litigation that relate to acts or events occurring prior to the acquisitiondate, and certain employee benefit obligations, including Stone & Webster's U.S.defined benefit plan (collectively, the excluded items). The Company can,however, provide no assurance that it will have no exposure with respect to suchexcluded liabilities.

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The acquisition agreement contains an adjustment provision that requires theconsideration paid by the Company to be increased or decreased by the amount ofthe net assets or liabilities, as determined by the agreement, of the excluded items.In addition, $25,000,000 of the acquisition proceeds was placed in escrow by thesellers to secure certain indemnification obligations of the sellers in theagreement. On December 27, 2000, the parties entered into an agreement thatresulted in the return by the sellers of approximately $22,750,000 of the escrowfunds to the Company and the waiver by the sellers of the purchase priceadjustment provision in exchange for the Company's assumption of threepreviously excluded items. In addition, the Company and the sellers agreed todesignate four contracts as completed contracts and, therefore, not assumed by theCompany. This agreement has been approved by the bankruptcy court and willresult in a net reduction in the Company's purchase price and goodwill whichwill be recorded by the Company in the quarter ended February 28, 2001.

The Company acquired a large number of contracts with either inherent losses orlower than market remaining margins primarily due to the effect that the financialdifficulties experienced by Stone & Webster had on negotiating and executing thecontracts. These contracts were adjusted to their fair value at acquisition date byestablishing a liability of approximately $83,700,000 which will adjust the grossmargins recognized on the contracts as the work is performed. The amount of theaccrued losses on assumed contracts was approximately $36,300,000. Theseadjustments will result in a net reduction of contract costs incurred in futureperiods. During the quarter ended November 30, 2000, cost of sales wasreduced by $41,114,000 as these reserves were reduced. During the quarterended November 30, 2000, the Company provided additional contract reservesof approximately $7,800,000 as adjustments to the fair value of the contractsacquired in the acquisition.


The Company also assumed certain liabilities pursuant to severance and change incontrol agreements of former executives. The Company has contested the validityof at least one significant agreement, and is evaluating others. However, theCompany recorded a liability of approximately $22,400,000 related to theseexecutives who were not retained. No significant amounts related to this liabilitywere paid during the three months ended November 30, 2000.

The Company acquired a cold storage and frozen-food handling operation as partof this acquisition. Stone & Webster had previously reported this operation as adiscontinued operation, and on October 18, 2000, the Company entered into anagreement to sell the assets (other than cash) of this operation for $70,000,000,subject to certain working capital and other adjustments. Accordingly, this

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operation has been reported as an asset held for sale in the accompanying balancesheet. The Company recorded the assets held for sale at the expected sales pricepursuant to the agreement. During the three months ended November 30, 2000,losses of approximately $862,000 from this operation's results, which includesallocated interest expense of approximately $1,365,000, have been excluded fromthe Company's statement of income. The difference between the final dispositionproceeds related to this operation and the estimated proceeds of $70,000,000 willbe reflected as an adjustment to the purchase price during the quarter endedFebruary 28, 2001. In connection with the transaction, the Company acquired anapproximately 19.5% equity interest in the purchaser of the assets for aninvestment of $1,930,000. In addition, the Company completed the sale of theoffice building in Houston, Texas, in December 2000. This sale, after paying offthe mortgage of approximately $19,100,000, resulted in net proceeds ofapproximately $21,100,000. The net proceeds from these asset disposals wereused to pay down the Company's revolving credit facility.

The Company also acquired various licenses, patents, technology and relatedprocesses pertaining to the design and construction of plants which produceethylene. The associated intangible asset has been estimated in the purchase priceallocation at $50,000,000. The Company is in the process of obtaining anappraisal of this asset, which it expects to complete during the quarter endingFebruary 28, 2001. The final amount allocated to this asset will result in anadjustment to the purchase price allocation to the extent the appraisal is differentthan the estimated fair value assigned to it by the Company.

191. The above disclosure reveals that:

(a) Shaw increased its reserve on contracts acquired from Stone & Webster,

from $120.0 million to $127.8 million, further increasing the losses Defendants purportedly

expected on such contracts at the time of the acquisition;

(b) Shaw's liabilities on the Stone & Webster acquisition increased from $685

million to $693 million;

(c) During the quarter ended November 30, 2000, Shaw's operating income

was increased by $41.1 million, from a loss of $15.1 million to a profit of $26.0 million as a

result of the reduction in reserves it artificially inflated when it accounted for the Stone &

Webster acquisition; and

(d) Shaw failed to disclose the information required by SAB Topic 2A. 7.

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192. In Form 10-Q for the quarter ended February 28, 2001, Shaw disclosed:

On July 14, 2000, the Company purchased substantially all of the operating assetsof Stone & Webster for $14,850,000 in cash (net of $22,750,000 of funds returnedfrom escrow), 4,463,546 shares of Common Stock (valued at approximately$105,000,000 at closing) and the assumption of approximately $700,000,000 ofliabilities, subject to adjustment pending the resolution of certain claims arisingfrom the Stone & Webster bankruptcy proceedings. The Company incurredapproximately $12,000,000 of acquisition costs. Stone & Webster is a globalprovider of engineering, procurement, construction, consulting and environmentalservices to the power, process, environmental and infrastructure markets. TheCompany believes that, pursuant to the terms of the acquisition agreement, itassumed only certain specified liabilities. The Company believes that it did notassume, among other liabilities, liabilities associated with certain contracts inprogress, completed contracts, claims or litigation that relate to acts or eventsoccurring prior to the acquisition date, and certain employee benefit obligations,including Stone & Webster's U.S. defined benefit plan (collectively, the excludeditems). The Company, however, cannot provide assurance that it has no exposurewith respect to the excluded items.

The acquisition agreement contains an adjustment provision that requires theconsideration paid by the Company to be increased or decreased by the amount ofthe net assets or liabilities, as determined by the agreement, of the excluded items.In addition, $25,000,000 of the acquisition proceeds was placed in escrow tosecure certain indemnification obligations of the sellers. On December 27, 2000,the parties entered into an agreement which (i) returned approximately 22,750,000of the escrow funds to the Company; (ii) waived the purchase price adjustmentprovision; (iii) excluded four completed contracts from the transaction; and (iv)required the Company to assume three previously excluded items. Thisagreement has been approved by the bankruptcy court and has decreased theCompany's purchase price and goodwill. The Company has and will continue toreview the assets and liabilities acquired in the acquisition. Changes in thevaluations of these assets and liabilities will affect the carrying value ofgoodwill. The Company anticipates to complete this review by July 2001.

The Company acquired a large number of contracts with either inherent losses orlower than market remaining margins primarily due to the effect that the financialdifficulties experienced by Stone & Webster had on negotiating and executing thecontracts. These contracts were adjusted to their fair value at acquisition date anda liability (gross margin reserve) of approximately $83,700,000 was established.This reserve is utilized to adjust the gross margins recognized on the contracts asthe work is performed. The amount of the accrued losses on assumed contractswas estimated to be approximately $36,300,000 and a liability (contract lossreserve) of such amount was established at the time of acquisition. These reservesare reduced as work is performed on the contracts and such reduction in thereserves results in a reduction in cost of sales. Since August 31, 2000, theCompany has further adjusted its initial estimates of these contract reserves.

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These adjustments, as well as the decreases in the cost of sales for the periodsindicated, are as follows (in thousands):

November Cost of February 28,

30, 2000 Reserve Sales 2001


Three Months ended February 28, 2001

Gross margin reserves $47,390 $25,487 $(18,870) $54,007Contract loss reserves 25,561 18,497 (7,924) 36,134 Total $72,951 $43,984 $(26,794) $90,141

August 31, Cost of February 282000 Reserve Sales 2001


Six Months ended February 28, 2001


The foregoing reserve adjustments increased goodwill recorded for theacquisition.


The Company also assumed certain liabilities pursuant to severance and change incontrol agreements of former executives. The Company has contested the validityof one significant agreement. However, the Company recorded a liability uponacquisition of Stone & Webster of approximately $22,400,000 related toexecutives who were not retained. The Company paid approximately $3,600,000to certain of these executives with respect to these agreements during the sixmonths ended February 28, 2001. Any adjustments to the estimated amount offinal payment will be an adjustment to goodwill.

Included in this acquisition was a cold storage and frozen-food handling operationwhich Stone & Webster had previously reported as a discontinued operation. TheCompany classified the operation as assets held for sale until the Company soldall of these assets (other than cash) for $70,000,000 in December 2000. This sale

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is subject to certain working capital and other adjustments that are currently underreview by the Company. Losses of approximately $494,000 from this operation'sresults, which includes allocated interest expense of approximately $966,000,have been excluded from the Company's statement of income for the threemonths ended February 28, 2001. Losses of approximately $1,356,000 from thisoperation's results, which includes allocated interest expense of approximately$2,331,000, have been excluded from the Company's statement of income for thesix months ended February 28, 2001. These losses were included in theCompany's allocation of purchase price to the acquired assets and liabilities. Inconnection with the sale of these assets, the Company also acquired anapproximate 19.5% equity interest in the purchaser of the assets for an investmentof $1,930,000. Additionally, in December 2000, the Company completed the saleof an office building located in Houston, Texas which was acquired in the Stone& Webster acquisition and realized net proceeds of approximately $21,100,000after paying off the mortgage of approximately $19,700,000. The proceeds fromthese asset disposals were used to pay down the Company's revolving creditfacility.

The Company also acquired various licenses, patents, technology and relatedprocesses pertaining to the design and construction of ethylene plants. Theassociated intangible asset has been estimated in the purchase price allocation at$50,000,000. The Company is in the process of obtaining an appraisal of thisasset. The final amount allocated to this asset will result in an adjustment to thepurchase price allocation to the extent the appraisal is different than the estimatedfair value assigned to it by the Company.

193. The above disclosure reveals that:

(a) Shaw failed to disclose the information required by SAB Topic 2A. 7.

Nonetheless, Shaw increased its reserves on contracts acquired from Stone & Webster, by more

than 43%, from $120.0 million at the time of the acquisition to $171.8 million during the six

months ended February 28, 2001. As noted by the staff of the SEC, in the absence of the

disclosure required by SAB Topic 2A.7, investors may assume that all future revisions of

estimated fair values of assets and liabilities acquired in an acquisition will be reflected in

income. Nonetheless, Shaw failed to record such reserve increase as a charge against its post-

acquisition earnings. Rather, the Company improperly accounted for the reserve increase as

additional goodwill. As noted above, in order for such reserve increase not to be charged against

Shaw's post-acquisition earnings, the losses on the acquired Stone & Webster contracts required

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to have been due to "pre-acquisition contingencies" for which information concerning such

events was available or obtainable by Shaw. Defendants' attempt to overstate Shaw's operating

results is evidenced by the fact that Shaw's financial statements, in violation of GAAP, failed to

disclose the nature of the contract contingencies, the reasons why its estimates of contract

losses were considered to be is preliminary (i.e., identifying the information that Shaw had

arranged to obtain), or information which enabled investors to understand the magnitude of any

potential adjustments to its estimate of losses on the uncompleted Stone & Webster contracts.

As a result of this impropriety alone, Shaw's operating income during the six months ended

February 28, 2001, was overstated by more than $51 million.

(b) The increases in Shaw's reserves indicate that Defendants incredibly

expected Shaw's entire portfolio of uncompleted contracts at August 31, 2000 to generate

more than a $95 million loss!'

(c) Shaw's liabilities on the Stone & Webster's acquisition increased from

$693 million to $700 million; and

(d) During the quarter ended February 28, 2001, Shaw's operating income

was increased by $26.8 million, from a loss of $6.8 million to a profit of $20.0 million as a


Webster acquisition.'

13 The loss amount equals the estimated reported profits as of August 31, 2000, in theamount of $76.3 million minus originally establish contract reserves of $120.0 million plus theadditional $51.8 million in reserves recorded during the six months ended February 28, 2001.

14 The figures herein do not give effect to the $51.0 million overstatement noted in item (a)above.

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194. When Shaw filed its Form 10-Q for the next quarter ended May 31, 2001, it

disclosed:

On July 14, 2000, the Company purchased substantially all of the operating assetsof Stone & Webster. The Company funded this acquisition with $14,850,000 incash (net of $22,750,000 of funds returned from escrow) and 4,463,546 shares ofCommon Stock (valued at approximately $105,000,000 at closing). TheCompany also assumed approximately $700,000,000 of liabilities. The price issubject to various adjustments. The Company incurred approximately$12,000,000 of acquisition costs. Stone & Webster is a global provider ofengineering, procurement, construction, consulting and environmental services tothe power, process, environmental and infrastructure markets. The Companybelieves that, pursuant to the terms of the acquisition agreement, it assumed onlycertain specified liabilities. The Company believes that liabilities excluded fromthis acquisition include liabilities associated with certain contracts in progress,completed contracts, claims or litigation that relate to acts or events occurringprior to the acquisition date, and certain employee benefit obligations, includingStone & Webster's U.S. defined benefit plan (collectively, the excluded items).The Company, however, cannot provide assurance that it has no exposure withrespect to the excluded items.

The acquisition agreement required the consideration paid by the Company to beincreased or decreased by the amount of the net assets or liabilities, as determinedby the agreement, of the excluded items. In addition, $25,000,000 of theacquisition proceeds were placed in escrow to secure certain indemnificationobligations of the sellers. On December 27, 2000, the parties entered into anagreement which (i) returned approximately $22,750,000 of the escrow funds tothe Company; (ii) waived the purchase price adjustment provision; (iii) excludedfour completed contracts from the transaction; and (iv) required the Company toassume three previously excluded items. This agreement has been approved bythe bankruptcy court and has decreased the Company's purchase price andgoodwill. The Company has and will continue to review the assets and liabilitiesacquired in the acquisition. Changes in the valuations of these assets andliabilities will affect the carrying value of goodwill. The Company will completethis review in July 2001.

The Company acquired a large number of contracts with either inherent losses orlower than market remaining margins primarily because Stone & Webster'sfinancial difficulties had negatively affected the negotiation and execution of thecontracts. These contracts were adjusted to their fair value at acquisition date anda liability (gross margin reserve) of approximately $83,700,000 was established.This reserve is utilized to adjust the gross margins recognized on the contracts asthe work is performed. The amount of the accrued losses on assumed contractswas estimated to be approximately $36,300,000 and a liability (contract lossreserve) of such amount was established at the time of acquisition. These reservesare reduced as work is performed on the contracts and such reduction in the

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reserves results in a reduction in cost of sales. These cost of sales reductionsincrease gross profit. Since August 31, 2000, the Company has further adjustedits initial estimates of these contract reserves. This includes adjustments madeduring the third quarter to reduce the reserves established for anticipated cashlosses on one project and increase the reserves related to gross marginadjustments for certain projects based on the amount and timing of the future cashcontract costs related to these projects. These adjustments, as well as thedecreases in the cost of sales for the periods indicated, are as follows (inthousands):

March 1, Cost of May 31,2001 Reserve Sales 2001


Three Months ended May 31, 2001

Gross margin reserves $54,007 $12,631 $(13,550) $53,088Contract loss reserves 36,134 (15,166) (4,146) 16,822 Total $90,141 $(2,535) $(17,696) $69,910

August 31, Cost of May 312000 Reserve Sales 2001


Nine Months ended May 31, 2001


The $49,262,000 of reserve adjustments increased goodwill recorded for theacquisition.


The Company also assumed certain liabilities pursuant to severance and change incontrol agreements for certain former Stone & Webster executives and thecompany recorded an acquisition liability of approximately $22,400,000 foramounts due to executives who were not retained. During the quarter ended May31, 2001, the Company reduced this reserve by approximately $5,000,0000 andadjusted goodwill and deferred taxes to reflect the difference between theCompany's initial estimated liability for executive severance payments and thecurrent estimate of its actual payment requirements.

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Included in this acquisition was a cold storage and frozen food handling operationwhich Stone & Webster had previously reported as a discontinued operation. TheCompany classified the operation as assets held for sale until the Company soldall of these assets (other than cash) for $70,000,000 in December 2000. This saleis subject to certain working capital and other adjustments that are currently underreview by the Company. Losses of approximately $1,356,000 from thisoperation's results, which includes allocated interest expense of approximately$2,331,000, have been excluded from the Company's statement of income for thenine months ended May 31, 2001. These losses were included in the Company'sallocation of purchase price to the acquired assets and liabilities. In connectionwith the sale of these assets, the Company also acquired an approximate 19.5%equity interest in the purchaser of the assets for an investment of $1,930,000,which is accounted for under the cost method. Additionally, in December 2000,the Company completed the sale of an office building located in Houston, Texaswhich was acquired in the Stone & Webster acquisition and realized net proceedsof approximately $21,100,000 after paying off the mortgage of approximately$19,700,000. The proceeds from these asset disposals were used to pay down theCompany's primary credit facility. The Company also acquired various licenses,patents, technology and related processes pertaining to the design andconstruction of ethylene plants. The associated intangible asset has been assigneda final value of $28,500,000 based on estimates of the discounted cash flows to begenerated from the existing acquired technology. An adjustment has been made toincrease goodwill by $21,500,000, representing the difference between theoriginal estimated value of the technology at the time of the Stone & Websteracquisition and the current appraisal. The estimated useful life of this intangibleasset is 15 years.

195. Here again, Shaw failed to disclose the information required by SAB Topic 2A.7.

In addition, the above disclosure reveals that during the quarter ended May 31 2000, Shaw's

operating income was increased by $17.7 million, from a $12.7 million to $30.4 million as a


Webster acquisition.

196. In each of the above instances, Shaw, wrongfully using the pretext that the

increase in the reserves associated with the contracts acquired from Stone & Webster were

associated with "pre-acquisition contingencies," when they were not, and wrongfully reported

the losses on such contracts in the one year period following the Stone & Webster transaction as

additional goodwill on the Stone & Webster transaction rather than a charge against the

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Company's post-acquisition earnings. In so doing, Shaw violated GAAP and improperly abused

SFAS No. 38 to avoid recording charges against its post-acquisition earnings on the decline in

the value of assets it acquired from Stone & Webster. Such accounting allowed Shaw to

artificially inflate its operating results by tens of millions of dollars during the Class Period.

197. Indeed, Shaw failed to provide the disclosure required by the SEC in its attempt to

mask the improper accounting alleged herein. As noted above, in the absence of such

disclosure, investors may assume reasonably that the purchase price allocation is final and that

all future revisions of estimated fair values of assets and liabilities acquired will be reflected in

income. Nonetheless, in each of the instances referred to above, Shaw improperly reported the

decline in the values of the assets acquired from Stone & Webster and the increases in

accounting reserves associated with Stone & Webster as additional goodwill rather than as a

charge against the Company's post acquisition earnings.

198. As a result of Defendants' machinations in accounting for the Stone & Webster

acquisition, both at the time of the acquisition and during the purported allocation period, Shaw's

reported goodwill on the Stone & Webster acquisition mushroomed. For example, when Shaw

initially accounted for the Stone & Webster acquisition, the amount of goodwill the Company

reported totaled $143.4 million, or 96.5% of the $148.6 million Stone & Webster purchase

price. Primarily as a result of the reductions Shaw made to Stone & Webster's asset values and

increases accounting reserves during the purported allocation period, the amount of goodwill

Shaw reported in its August 31, 2001 financial statements on the Stone & Webster acquisition

ballooned to $381.0 million, or more than two and one-half times the amount of goodwill it

originally reported. In fact, on July 14, 2000, the date of the Stone & Webster acquisition, the

market valued the entire Stone & Webster organization at only $42.79 million. Nonetheless, in

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its August 31, 2001 financial statements, Shaw incredulously reported goodwill on the Stone &

Webster transaction in the amount of $381 million, or more than 8% times the amount the

market valued the entire Stone & Webster enterprise on the date of the Stone & Webster

acquisition.

199. Indeed, the FASB, in 1998, cautioned companies about being vigilant against

overstating goodwill when accounting for acquisitions:

During its April 29 meeting, the [FASB] agreed that all purchased goodwillcarried as an asset should be subject to an initial review because it is more likelyto be overstated than other assets acquired in a business combination. That'sbecause goodwill is initially measured as the difference between the price paidand the fair value of the net assets required. The [FASB] found that the reviewshould be conducted within approximately one year following the end of theallocation period as defined in FASB Statement 38 on preacquisitioncontingencies. Goodwill that is subject to greater risk of overstatement shouldbe reviewed sooner. [Emphasis added]

200. Nonetheless and as noted in 7217 through 229 below, Shaw, in furtherance of its

deceptive practice of accounting for it acquisitions during the Class Period, failed to timely

write-off its overstated goodwill in accordance with GAAP.

The IT Group Transaction

201. During fiscal 2002, Shaw acquired substantially all of the operating assets of IT

Group. Similar to the Stone & Webster acquisition, Shaw's acquisition of The IT Group

represented a major addition to the Company. Through this acquisition, Shaw substantially

increased the size of its environmental and infrastructive divisions. Shaw employed the same

improper practices in accounting for The IT Group acquisition as it did when it improperly

accounted for the acquisition of Stone & Webster.

202. On or about May 16, 2002, Shaw filed a Form 8-K with the SEC which disclosed

that:

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Effective as of May 3, 2002, The Shaw Group Inc. ("Shaw") through direct andindirect wholly-owned subsidiaries, purchased substantially all of the assets ofThe IT Group, Inc. ("IT Group") and its subsidiaries, other than BenecoEnterprises, Inc., which is the subject of a separate bankruptcy case, and whichwas not part of this transaction. The purchase price for the acquisition wasapproximately $52.5 million in cash and approximately 1.67 million shares ofShaw's common stock, no par value per share (the "Common Stock"). Shaw hadpreviously provided IT Group with debtor-in-possession financing in connectionwith IT Group's Chapter 11 bankruptcy reorganization proceedings. As part ofthe closing, Shaw assumed the outstanding balance of the debtor-in-possessionfinancing, which, at the closing, was approximately $50 million. The assetsacquired include, among other things, certain contracts in progress, accountsreceivable, equipment and certain real property. In connection with theacquisition of such assets, Shaw assumed certain liabilities of IT Group, including(i) obligations of IT Group arising out of performance of contracts assumed byShaw on and after the closing; (ii) certain unpaid accounts payable; and (iii) theother liabilities specifically described in the Purchase Agreement (as definedbelow).

The sale of the assets of IT Group and its subsidiaries (other than BenecoEnterprises) to Shaw was approved by the United States Bankruptcy Court for theDistrict of Delaware in IT Group's Chapter 11 bankruptcy reorganizationproceedings and the Bankruptcy Court approved the sale on April 25, 2002. Theacquisition by Shaw of the assets of IT Group was made pursuant to an AssetPurchase Agreement dated as of January 23, 2002 (as amended) (the "PurchaseAgreement"), a copy of which is attached to this Form 8-K as an Exhibit andwhich is incorporated herein by reference.

203. On or about July 12, 2002, Shaw filed an amendment to its July 28, 2000 Form

8-K with the SEC. Such amendment disclosed additional financial information with respect to

The IT Group acquisition:

Effective as of May 3, 2002, we purchased substantially all of the assets of The ITGroup, Inc. and its subsidiaries, other than Beneco Enterprises, Inc., which issubject to a separate bankruptcy case. The purchase price for the acquisition wasapproximately $52.5 million in cash and 1,671,336 shares of our common stock(the value of this stock was approximately $52.5 million at closing). In addition,we previously provided IT Group with debtor-in-possession financing inconnection with IT Group's Chapter 11 bankruptcy reorganization proceedings.As part of the closing, we assumed the outstanding balance of this debtor-in-possession financing, which, at the closing, was approximately $50 million. Theassets acquired include, among other things, certain contracts in progress,accounts receivable, equipment and certain real property. In connection with theacquisition of these assets, we assumed certain liabilities of IT Group, including(i) obligations of IT Group arising out of performance of contracts assumed by us

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on and after the closing; (ii) certain unpaid accounts payable; and (iii) the otherliabilities specifically described in our purchase agreement with IT Group.

In a separate transaction, on June 15, 2002, we acquired substantially all of theassets and assumed certain liabilities of Beneco Enterprises, Inc., a subsidiary ofIT Group. The Beneco acquisition was completed as part of a separate Chapter11 bankruptcy reorganization proceeding solely for Beneco. The purchase pricefor the Beneco acquisition was (i) cash of approximately $650,000, (ii) ourassumption of the outstanding balance (approximately $1.6 million) of debtor-in-possession financing that we had previously provided to Beneco, and (iii)transaction costs of approximately $1.0 million.

In conjunction with the acquisition of IT Group and Beneco, we entered intoagreements with two surety companies. In exchange for our agreement tocomplete certain of the bonded contracts of IT Group and Beneco, the sureties (i)paid us approximately $13.3 million in cash and (ii) assigned to us their rights todebtor-in-possession financing of approximately $20 million which the suretieshad previously provided to Beneco as part of Beneco's bankruptcy proceedings.

204. Several days later, on or about July 15, 2002, Shaw filed its Form 10-Q for the

quarter ended May 31, 2002. Such Form 10-Q, which included Shaw's financial statements for

the quarter ended May 31, 2002, disclosed:

During fiscal year 2002, the Company entered into a purchase agreement toacquire substantially all of the operating assets of The IT Group, Inc. ("ITGroup") and its subsidiaries, including its wholly-owned subsidiary BenecoEnterprises, Inc. ("Beneco"). IT Group and Beneco are referred to hereincollectively as "IT Group." Both IT Group and Beneco are each subject toseparate Chapter 11 bankruptcy reorganization proceedings.

On May 3, 2002, the Company acquired substantially all of the operating assetsand assumed certain liabilities of The IT Group and its subsidiaries, excludingBeneco. IT Group was a leading provider of diversified environmentalconsulting, engineering, construction, remediation and facilities managementservices. The primary reasons for the acquisition were to diversify and expandthe Company's revenue base into less cyclical industries and to pursue additionalopportunities in the environmental, infrastructure, and Homeland Defensemarkets. The Company formed a new wholly-owned subsidiary, ShawEnvironmental and Infrastructure, Inc. ("Shaw E&I") into which it will combinethe operations of the acquired IT Group businesses and the Company's existingenvironmental and infrastructure operations.

The acquisition was completed as part of a Chapter 11 bankruptcy proceeding forThe IT Group. The purchase price included the following components: (i) cash ofapproximately $40,400,000, net of approximately $12,100,000 cash received at

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closing, (ii) 1,671,336 shares of Common Stock valued at approximately$52,463,000, (iii) assumption by the Company of the outstanding balance($50,000,000) debtor-in-possession financing provided to The IT Group by theCompany, (iv) transaction costs of approximately $10,000,000, and (v) theCompany's receipt of approximately $10,200,000 from a surety for The IT Groupto complete certain IT Group contracts which was reflected as a reduction of thepurchase price.

On June 15, 2002, the Company acquired substantially all of the assets(approximately $32,000,000) and assumed certain liabilities (approximately$17,000,000) of Beneco. Beneco was a wholly-owned subsidiary of The ITGroup whose primary business was facilities management for governmental andmilitary facilities. The Beneco acquisition was completed as part of a Chapter 11bankruptcy proceeding, which is separate and independent of The IT Group'sbankruptcy proceeding. The Beneco purchase price includes (i) approximately$650,000 in cash paid at closing, (ii) assumption by the Company of theoutstanding balance ($1,500,000) debtor-in-possession financing provided toBeneco by the Company, (iii) transaction costs of approximately $1,500,000, and(iv) receipt of $3,300,000 from a surety for the Company to complete certaincontracts, which will be reflected as a reduction of the purchase price. Becausethe Beneco acquisition was completed after May 31, 2002, the Company'sfinancial statements as of May 31, 2002 do not include the acquired assets andassumed liabilities, nor any operating results of Beneco. Upon inclusion ofBeneco's assets and liabilities in the aggregate purchase price allocation ofIT Group, the Company believes its goodwill will be reduced by approximately$15,000,000.

In conjunction with the acquisitions of The IT Group and Beneco, the Companyentered into agreements with two surety companies. In exchange for thecompany's agreeing to complete certain of The IT Group's bonded contracts (i)the sureties paid the Company approximately $13,500,000 in cash, which wasreflected as reductions of the purchase price of IT Group and Beneco, and (ii) thesureties assigned to the Company their rights to Debtor-in-Possession financing ofapproximately $20,000,000 which the sureties had provided to Beneco. Of the$13,500,000 cash received from the sureties, approximately $10,200,000 wasallocated to The IT Group purchase price and $3,300,000 to the Beneco purchaseprice.

The Company believes, pursuant to the terms of both The IT Group and theBeneco acquisition agreements (collectively "the acquisition agreements"), that ithas assumed only certain liabilities ("assumed liabilities") of The IT Group andBeneco as specified in the acquisition agreements. The Company has estimatedthat its total of assumed liabilities are approximately $256,000,000. Further, theacquisition agreements also provide that certain other liabilities of The IT Groupand Beneco, including but not limited to outstanding borrowings, leases, contractsin progress, completed contracts, claims or litigation that relate to acts or eventsoccurring prior to the acquisition date, and certain employee benefit obligations,

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are specifically excluded ("excluded liabilities") from the Company'stransactions. The Company, however, cannot provide assurance that it does nothave any exposure to the excluded liabilities because, among other matters, thebankruptcy courts have not finalized their validation of the claims filed with thecourts.

Additionally, the Company has not completed its review of liabilities that havebeen submitted to the Company for payment. Accordingly, the Company'sestimate of the value of the assumed liabilities may change as a result of thevalidation of the claims by the bankruptcy courts or other factors which may beidentified during its review/processing of liabilities. The IT Group acquisitionwas recorded as a purchase, and accordingly, the Company's results of operationsinclude those of the acquired IT Group businesses from the date of acquisition.The purchase price has been allocated to the acquired assets and liabilities basedon the estimated fair value as of May 3, 2002, as set fourth in the table below (inthousands). The following allocation is preliminary and is subject to revisionduring the allocation period as the Company has not obtained all necessaryappraisals of the property and equipment purchased nor has the Companycompleted the process of obtaining information about the fair value of theacquired assets and assumed liabilities. All of the goodwill from this transactionwill be allocated to the Company's Environmental and Infrastructure segment.

Accounts receivable and costs andearnings in excess of billings on uncompleted contracts 193,510

Property, plant and equipment 27,500Deferred income taxes 35,000Other assets 49,260Goodwill 76,383Accounts payable (189,898)Billings in excess of cost andestimated earnings on uncompleted contracts (8,876)

Gross margin reserves (30,000)Debt and bank loans (7,511)Other liabilities (2,739)

Purchase price (net of cash received atacquisition and from surety of $22,334) $ 142,629

* * *

The Company acquired with The IT Group purchase certain contracts with lowerthan market rate margins primarily because IT Group had entered into some lowermargin contracts to improve its cash flow. These contracts were adjusted to theirestimated fair value as of the acquisition date (May 3, 2002) and a liability(gross margin reserve) of approximately $30,000,000 was established. As

- 101 -

discussed above, the Company has not completed the process of obtaininginformation about the fair value of the acquired assets and assumed liabilitiesincluding the fair value of the assumed contracts. Therefore, the amount of thegross margin reserves is preliminary and subject to revision. Commencing withthe initial recording of these reserves on May 3, 2002, the reserves are reduced aswork is performed on the contracts and such reduction in the reserve balanceresults in a reduction in cost of sales and a corresponding increase in gross profit.The reduction of these reserves for the period ended May 31, 2002 is not material.The activity in these reserves is included in the table at the end of this Note 4.

205. The above noted filings reveal that Shaw materially reduced the values IT Group

reported on its March 29, 2002, balance sheet when it accounted for The IT Group acquisition.

For example, Shaw reduced the value of property, plant and equipment by more than 52%, from

$59.3 million to 28.3 million. In fact, Shaw wrote down the value of IT Group's "inventory of

land" by more than 24%, from $37.0 million to $28.0 million, even though real estate values

appreciated significantly prior to and during the Class Period.

206. In addition, Shaw established a $5 million reserve on IT Group's accounts

receivable even though during the six months ended March 29, 2002, IT Group previously

reduced its accounts receivable by more than one-third, when it wrote off more than $167

million in uncollectible receivables to bring its then current receivables to their net realizable

amount.

207. As a result of Shaw's understatement of the value of IT Group's assets and/or its

overstatement in accounting reserves it established in accounting for The IT Group acquisition,

the goodwill Shaw reported on IT Group totaled $60.0 million, or approximately 32% of IT

Group's purchase price.

208. Thereafter, in a manner similar to its improper accounting for the Stone &

Webster transaction, Shaw exacerbated its false and misleading accounting for IT Group

acquisition during the allocation period.

- 102 -

209. For example, on or about November 27, 2002, Shaw filed its fiscal 2002 Form

10-K with the SEC. Such Form 10-K included Shaw's financial statements for the year ended

August 31, 2002, which disclosed:

During fiscal year 2002, the Company acquired substantially all of the operatingassets and assumed certain liabilities of The IT Group, Inc. ("IT Group") and itssubsidiaries. IT Group and one of it wholly-owned subsidiaries, Beneco, weresubject to separate Chapter 11 bankruptcy reorganization proceedings and theacquisition was completed pursuant to the bankruptcy proceedings. Theacquisition of The IT Group assets was completed on May 3, 2002 and theacquisition of Beneco's assets was completed on June 15, 2002.

The IT Group was a leading provider of diversified environmental consulting,engineering, construction, remediation and facilities management services. Theprimary reasons for the acquisition were to diversify and expand the Company'srevenue base and to pursue additional opportunities in the environmental,infrastructure, and homeland defense markets. The Company formed a newwholly-owned subsidiary, Shaw Environmental & Infrastructure, Inc. ("ShawE&I") into which it has combined the acquired IT Group operations and theCompany's existing environmental and infrastructure operations.

The purchase price included the following components: (i) cash of approximately$39,356,000, net of $13,694,000 of cash received at closing, (ii) 1,671,336 sharesof Common Stock valued at approximately $52,463,000, (iii) assumption by theCompany of the outstanding balances of $51,789,000 debtor-in-possessionfinancing provided to The IT Group and Beneco by the Company, and (iv)transaction costs of approximately $9,519,000.

The Company believes, pursuant to the terms of the acquisition agreements, that ithas assumed only certain liabilities ("assumed liabilities") of The IT Group andBeneco as specified in the acquisition agreements. The Company has estimatedthat its total of assumed liabilities is approximately $353,000,000. Further, theacquisition agreements also provide that certain other liabilities of The IT Group,including but not limited to, outstanding borrowings, leases, contracts in progress,completed contracts, claims or litigation that relate to acts or events occurringprior to the acquisition date, and certain employee benefit obligations, arespecifically excluded ("excluded liabilities") from the Company's transactions.The Company, however, cannot provide assurance that it does not have anyexposure to the excluded liabilities because, among other matters, the bankruptcycourts have not finalized their validation of the claims filed with the courts.Additionally, the Company has not completed its review of liabilities that havebeen submitted to the Company for payment. Accordingly, the Company'sestimate of the value of the assumed liabilities may change as a result of thevalidation of the claims by the bankruptcy courts or other factors which may beidentified during its review/processing of liabilities.

- 103 -

The IT Group acquisition was recorded as a purchase, and accordingly, theCompany's results of operations include those of the acquired IT Group andBeneco businesses from the respective acquisition dates. The purchase price hasbeen allocated to the acquired assets and liabilities based on the estimated fairvalue at the acquisition dates, as set forth in the table below (in thousands). Thefollowing allocation is preliminary and is subject to revision during theallocation period as the Company has not obtained all necessary appraisals ofthe property and equipment purchased nor has the Company completed theprocess of obtaining information about the fair value of the acquired assets andassumed liabilities. All of the goodwill from this transaction will be allocated tothe Company's Environmental & Infrastructure segment.

Accounts receivable and costs andearnings in excess of billings on uncompleted contracts $ 225,133

Contract asset adjustment 13,839Property, plant and equipment 26,964Deferred income taxes 64,223Other assets 63,075Goodwill 113,308

Accounts payable and accrued expenses (196,739)Billings in excess of cost andestimated earnings on uncompleted contracts (83,658)Contract (liability) adjustments (58,094)Accrued contract loss reserves (7,460)Debt and bank loans (7,464)

Purchase price (net of cash received of $13,694) $ 153,127

* * *

The Company acquired a large number of contracts in progress and contractbacklog for which the work had not commenced at the acquisition date. UnderFAS 141, construction contracts are defined as intangibles that meet the criteriafor recognition apart from goodwill. These intangibles, like the acquired assetsand liabilities, are required to be recorded at their fair value at the date ofacquisition. The Company recorded these contracts at fair value using a marketbased discounted cash flow approach. Related assets of approximately$13,839,000 and liabilities of $58,094,000 have been established that will beamortized to contract costs over the estimated lives of the underlying contractsand related production backlog. Commencing with the initial recording of therelated assets and liabilities on May 3, 2002, the assets and liabilities areamortized as work is performed on the contracts. The net amortizationrecognized during the year ended August 31, 2002 was approximately $2,763,000and has been reflected as a reduction in the cost of revenues, which resulted in a

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corresponding increase in gross profit. The activity related to these contractassets and liabilities is included in the table at the end of this Note 4.

210. As the above noted filings reveal, between the time that Shaw filed its pro-forma

financial information on The IT Group acquisition with the SEC (on or about July 15, 2002) and

the time Shaw filed its August 31, 2002 Form 10-K with the SEC (on or about November 27,

2000), the Company materially reduced its assessment of the value of assets it acquired and/or

increased accounting reserves it established or liabilities it assumed on The IT Group acquisition.

As a result of the changes in values that Shaw ascribed to the assets and liabilities it acquired

from IT Group, the amount of goodwill Shaw reported on The IT Group acquisition increased by

48%, from $76.4 million to $113.3 million.

211. Indeed, the amount of goodwill Shaw reported on the Stone & Webster

acquisition was grossly inflated because Shaw assigned artificially low values to the assets it

acquired from IT Group and because it established artificially inflated reserves in accounting for

the Stone & Webster acquisition. For example, Shaw, as noted above, decreased the value of IT

Group's land inventory by more than 24% in accounting for the acquisition of such assets IT

Group even though real estate values appreciated significantly prior to and during the Class

Period.

212. In addition, when Shaw acquired long term construction contracts from IT Group,

it established a $30.0 million accounting reserve on the contracts to adjust them to their

purported "fair" values on the date of the acquisition. Between the time that Shaw filed its pro-

forma financial information on The IT Group acquisition with the SEC (on or about July 15,

2002) and the time Shaw filed its August 31, 2002 Form 10-K with the SEC (on or about

November 27, 2000), the Company increased its reserves on IT Group's uncompleted contracts

by more than 120%, from $30.0 million to $66.6 million.

- 105 -

213. As a result of the improper values Shaw ascribed to the assets it acquired and

accounting reserves it established in accounting for IT Group, the amount of goodwill it reported

on The IT Group acquisition was grossly inflated. As noted above, when Shaw filed its financial

statements for the year ended August 31, 2002, with the SEC, it reported goodwill on The IT

Group acquisition of $113.3 million.

214. Defendant's knew, or recklessly ignored, that the goodwill value it attributed to

The IT Group acquisition was grossly inflated. Prior to The IT Group acquisition, the market

valued the entire IT Group enterprise at only $66 thousand! Nonetheless, Shaw's financial

statements for the year ended August 31, 2002, reported that the goodwill on The IT Group

acquisition totaled more than $100 million.

215. As with the Stone & Webster acquisition, Defendants understated the value of

assets it acquired from IT Group and overstated the liabilities it assumed and/or reserves it

established in accounting for The IT Group acquisition. Thereafter, Defendants improperly

accounted for post-acquisition losses on the contracts it acquired from IT Group as pre-

acquisition contingencies during the purported allocation period.

216. As detailed above, these improper practices by Defendants in accounting for

Shaw's acquisitions during the Class Period, provided them with the opportunity to artificially

inflate Shaw's post-acquisition financial results by hundreds of millions of dollars during the

Class Period.

Shaw's Improper FailureTo Write Off Impaired Goodwill

217. As noted above, during the Class Period, Shaw improperly inflated the value of its

reported goodwill in accounting for the Stone & Webster and IT Group acquisitions. Early in the

Class Period, SFAS No. 121 was the accounting principle governing goodwill impairment.

- 106 -

SFAS No. 121 required that when events or changes in circumstances indicate that the carrying

value of goodwill may be impaired, then: 1) the entity shall estimate the future undiscounted

cash flows resulting from the goodwill, and 2) compare the estimated future cash flows against

the carrying (i.e., the reported) value of the goodwill. If the sum of the expected future cash

flows is less than the carrying value, an impairment loss is to be recorded.

218. In July 2001, SFAS No. 121 was superseded by SFAS No. 142. SFAS No. 142,

provides that goodwill is to be tested for impairment on an annual basis and whenever

indicators of impairment arise. Similar to SFAS No. 121, such indicators include an event or

circumstance that would more likely-than-not reduce the fair value of a reporting unit below

its carrying amount which is unlikely to reverse before the next annual test for impairment.

219. Pursuant to SFAS No. 142, goodwill is tested for impairment using a two-step

approach. The first step is to make a comparison of the fair value of a reporting unit, including

goodwill, to its carrying amount. If the fair value of the reporting unit is greater than its carrying

amount, goodwill is not considered impaired and the second step is not required. However, if the

fair value of the reporting unit is less than its carrying amount, the second step of the impairment

test must be performed to measure the amount of the impairment loss, if any. If the carrying

amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that

excess. 15

220. In its financial statements for the year ended August 31, 2001, Shaw disclosed:

The Company periodically assesses the recoverability of the unamortizedbalance based on expected future profitability and undiscounted future cash

15 The implied fair value of goodwill is calculated in the same manner that goodwill iscalculated in a business combination. In effect, the company must perform another "purchase"accounting computation each time it tests goodwill for impairment. The excess "purchase price"over the amounts assigned to assets and liabilities is the implied fair value of goodwill.

- 107-

flows of the acquisitions and their contribution to the overall operation of theCompany. Should the review indicate that the carrying value is not recoverable,the excess of the carrying value over the undiscounted cash flows would berecognized as an impairment loss.

Through August 31, 2001, the Company has historically conducted impairmentreviews of its goodwill and other intangibles, however, to date the Company hasnot identified any impairment losses. The review of goodwill assessed therecoverability of the unamortized balance based on expected future profitability,undiscounted future cash flows of the acquisitions and their contribution to theoverall operation of the Company. An impairment loss would have beenrecognized for the amount identified in the review by which the goodwill balanceexceeded the recoverable goodwill balance. Subsequent to August 31, 2001, theCompany will perform impairment reviews in accordance with SFAS No. 142(see New Accounting Standards below).

* * *

In July 2001, the Financial Accounting Standards Board (FASB) issued SFASNo. 141 - "Business Combinations," and SFAS No. 142 - "Goodwill and OtherIntangible Assets." The standards significantly changed the Company's priorpractices by: (i) terminating the use of the pooling-of-interests method ofaccounting for future business combinations, (ii) ceasing goodwill amortization,and (iii) requiring impairment testing of goodwill based on a fair value concept.SFAS No. 142 requires that impairment testing of the opening goodwill balancesbe performed within six months from the start of the fiscal year in which thestandard is adopted and that any impairment be written off and reported as acumulative effect of a change in accounting principle. It also requires that anotherimpairment test be performed during the fiscal year of adoption of the standardand that impairment tests be performed at least annually thereafter, with interimtesting required if circumstances warrant. The standards must be implemented forfiscal years beginning after December 31, 2001, but early adoption is permitted.The Company has decided to adopt the new standards for its fiscal year beginningSeptember 1, 2001. Accordingly, the Company will cease to amortize goodwill infiscal 2002. Goodwill amortization was approximately $18.9 million, $3.1million and $1.8 million for the years ended August 31, 2001, 2000 and 1999,respectively. The Company has not completed its initial evaluation of goodwillimpairment that is required with the adoption of the SFAS No. 142. However,based on the preliminary evaluation procedures it has performed, the Companydoes not believe that its existing goodwill balances will be impaired under thenew standards however, no assurances can be given. The initial transitionevaluation is required to be and will be completed by February 28, 2002 which iswithin the six month transition period allowed by the new standard uponadoption. [Emphasis added]

- 108 -

221. Shaw's financial statements for the year ended August 31, 2001 failed to record

an impairment in the value if its goodwill even though the increases it made in it reserves in

accounting for the Stone & Webster acquisition indicated that Defendants expected Shaw's

entire portfolio of uncompleted contracts at August 31, 2000 to generate more than a $95

million loss! Accordingly Shaw's accounting improper for its acquisitions was improper in

two respects: (1) the understatement of assets values and/or the overstatement of accounting

reserves overstated Shaw's post-acquisition operating results, and (2) the understatement of

assets values and/or the overstate in accounting reserves caused an equal overstatement in

Shaw's goodwill, which the Company failed to timely write off These improper practices

evidence the egregiousness of Shaw's financial statement misrepresentations and the

Defendants' intent to mislead investors.

222. Indeed Defendants were, in part, motivated to overstate Shaw's operating results

during the Class Period because, as disclosed in the Shaw 2003 proxy statement, and as

discussed below, Defendants Bernhard, Belk and Gill received millions of dollars in bonuses

for "the achievement by us of specific and pre-established corporate performance goals."

223. On or about April 15, 2002, Shaw filed its February 28, 2002 Form 10-Q with the

SEC. Such Form 10-Q included Shaw's financial statements for the six months ended February

28, 2002, which disclosed:

Effective September 1, 2001, the Company adopted SFAS No. 141 and No. 142.Therefore, the Company has ceased to amortize goodwill in fiscal 2002. For thethree months and six months ended February 28, 2001, goodwill amortization wasapproximately $4,000,000 and $7,900,000, respectively. Additionally, theCompany has determined that its goodwill balances were not impaired as ofSeptember 1, 2001 and accordingly it has made no adjustments to its goodwillbalances as a result of its adoption of SFAS No. 142. Goodwill represents theexcess of the cost of acquired businesses over the fair market value of theiridentifiable net assets. The Company's goodwill balance as of August 31, 2002was approximately $499 million, most of which related to the Stone & Webster

- 109 -

and IT Group acquisitions (see Note 4 and Note 8 of Notes to ConsolidatedFinancial Statements). [Emphasis added]

224. Then, on or about November 27, 2002, Shaw filed its August 31, 2002 Form 10-K

with the SEC. As Shaw financial statements for the six months ended February 28, 2002

revealed, Shaw's financial statements for the year ended August 31, 2002, included in such

Form 10-K, reported almost one-half billion dollars in goodwill on the Stone & Webster and

The IT Group acquisitions. Shaw's financial statements for the year ended August 31, 2002

also disclosed that:

The Company has completed the initial and first annual impairment tests requiredwith the adoption of SFAS No. 142 and has determined that its goodwill was notimpaired. Further, there is no current indication that its goodwill is or will beimpaired. However, the Company's businesses are cyclical and subject tocompetitive pressures. Therefore, it is possible that the goodwill values of theCompany's businesses could be adversely impacted in the future by these or otherfactors and that a significant impairment adjustment, which would reduceearnings, could possibly be required in such circumstances. [Emphasis added]

225. Shaw's financial reporting of its goodwill in its Class Period financial statements

is illustrative of the Defendants' blatant manipulation of the Company operating results during

the Class Period. Indeed, Shaw reported almost a half billion dollars in goodwill on the Stone &

Webster and IT Group acquisitions during the Class Period. Such amount was more than 100

times the combined market capitalizations of Stone & Webster and IT Group at the time of

their respective acquisitions. In fact, the amount that Shaw reported as goodwill at August 31,

2002, represented more than 66% of its enterprise value on the same date!'

16 Enterprise value is a commonly used a measure of what the market believes a company'sentire on-going operations are worth and is defined as an entity's market capitalization plus debtand preferred shares, minus cash and cash equivalents.

- 110 -

226. As noted above, SFAS No. 142 requires that goodwill be tested for impairment on

a reporting unit basis.' On or about October 20, 2003, Shaw filed its August 31, 2003 Form 10-

K with the SEC. Shaw's financial statements, included in such Form 10-K, reveal that the

reportable segment that Shaw assigned $364.5 million in goodwill on the Stone & Webster

acquisition generated a $1.8 million loss during the fiscal year ended August 31, 2003.

Notwithstanding the above facts that indicated that the amount of Shaw's goodwill was grossly

inflated, Shaw's financial statements for the year ended August 31, 2003, disclosed:

Prior to August 31, 2001, we conducted impairment reviews of our goodwill toassess the recoverability of the unamoitized balance based on expected futureprofitability, undiscounted future cash flows of the acquired assets and businesses,and their contribution to our overall operations. An impairment loss would havebeen recognized for the amount identified in the review by which the goodwillbalance exceeded the recoverable goodwill balance. Subsequent to August 31,2001, we performed goodwill impairment reviews by reporting unit based on afair value concept, as required by SFAS No. 142, which indicated that ourgoodwill has not been impaired. We completed our annual impairment test as ofMarch 1, 2003 in accordance with SFAS No. 142 and have determined that ourgoodwill is not impaired. [Emphasis added]

227. In fact, Shaw's reported goodwill on August 31, 2003, totaled more than $511

million. This amount represented more than 77% of the Company's enterprise value and

shareholders' equity on that date. Indeed, Defendants were motivated not to write off Shaw's

grossly inflated goodwill because, as Shaw disclosed in its August 31, 2003 Form 10-K:

We have completed our annual impairment test as of March 1, 2003 in accordancewith SFAS No. 142 and have determined that our goodwill is not impaired.However, our businesses are cyclical and subject to competitive pressures.Therefore, it is possible that the goodwill values of our businesses could beadversely impacted in the future by these or other factors and that a significantimpairment adjustment, which would reduce earnings and affect various debtcovenants, could be required in such circumstances. Our next required annualimpairment test will be conducted as of March 1, 2004. [Emphasis added]

17 SFAS No. 142 defines reporting unit as an operating segment or one level below anoperating segment.

- 111 -

228. Indeed, Defendants knew that the recognition of impairment in the Company's

goodwill would cause Shaw to violate numerous debt covenants and increase the likelihood

that the Company's debt rating would be downgraded by major financial institutions. As

discerned from the Company's disclosure in its 2003 Form 10-K, debt covenants violations

and/or debt rating downgrades would have been proven to be cataclysmic in terms of Shaw's

ability to secure debt and equity financing vital to its ability to continue as a going concern:

The [Company's primary] Credit Facility contains certain financial covenants,including a leverage ratio (which changes after May 1, 2004, representing theinitial date LYONs may be submitted by LYONs holders for repurchase), aminimum fixed charge coverage ratio, defined minimum net worth and definedminimum adjusted earnings before interest expense, income taxes, depreciationand amortization (EBITDA). Further, we are required to obtain the consent of thelenders to prepay or amend the terms of the Senior Notes. As of August 31, 2003,we were in compliance with the covenants contained in the Credit Facility. Themost restrictive of these covenants is the leverage ratio of 3.5x, which is the ratioof outstanding debt to twelve month rolling adjusted EBITDA (as defined in theCredit Facility). As of August 31, 2003, our leverage ratio was 3.48x; however,as of August 31, 2003, we had cash available that could have been used to reduceoutstanding debt in order to improve this ratio. In May 2004, this leverage ratiocovenant requirement will change to 2.75x. Conditioned upon the completion ofour $200.0 million equity offering announced on October 17, 2003, the covenantscontained in this facility are being amended to provide us with additionalflexibility. The most significant of these changes includes:

• a reduction in the minimum adjusted EBITDA covenant from $135.0 million to$120.0 million on a rolling twelve month basis through November 2004; and

• an increase in the total debt to adjusted EBITDA ratio from 2.75x to 3.0x as ofMay 2004.

We have previously used the Credit Facility to provide working capital and tofund fixed asset purchases and subsidiary acquisitions. The Credit Facilitypermits us to repurchase $10.0 million of our LYONs obligations. AdditionalLYONs repurchases are also permitted if, after giving effect to the repurchases,we have the availability to borrow up to $50.0 million under the Credit Facilityand we have the required amounts of cash and cash equivalents. Prior to May 1,2004, $100 million of cash and cash equivalents is required for purposes of thistest and thereafter not less than $75.0 million. Pursuant to our most recentamendment, this requirement will be decreased to $75 million uponconsummation of our proposed equity offering. Cash and cash equivalents for

- 112 -

purposes of this test consist of balances not otherwise pledged or escrowed andare reduced by amounts borrowed under the Credit Facility.

* * *

Our working capital requirements for fiscal 2004 will be impacted by a number offactors including:

• the amount of working capital necessary to support our expanding environmentaland infrastructure operations;

• the timing and negotiated payment terms of our projects;

• our capital expenditures program;

• the timing and resolution of claims receivable on major projects;

• the sale of non-core assets and operations;

• cash interest payments on our $253.0 million principal amount of Senior Noteswhich were sold and issued on March 17, 2003, as discussed below; and

• our obligation to repurchase the remaining LYONs in May 2004 if the holdersof LYONs exercise their right to require us to repurchase the LYONs at that time.

Pursuant to the terms under which the LYONs were issued, we have the ability torepurchase the remaining LYONs in either cash or shares of our common stock,or a combination of common stock and cash on May 1, 2004. We currentlyanticipate funding all of the LYONs repurchase obligations in cash. We believewe have sufficient options in the marketplace to obtain such cash from theproceeds of the issuance of common stock and borrowings of debt. In addition,we may elect to repurchase all or a portion of the LYONs with cash from thesame sources prior to May 1, 2004. However, we also have other options,including issuing stock for a portion of the obligations or other alternatives,including refinancing all or a portion of the obligations. We are currentlyevaluating our options with respect to LYONs that may be submitted to us forrepurchase on May 1, 2004. If we refinance the LYONs with new debtobligations, our working capital requirements for fiscal 2004 will be impacted bycash interest payments due on those obligations.

* * *

In March 2003, we issued $253,029,000 of 10 3/4% Senior Notes Due 2010. TheSenior Notes bear interest at a rate of 10 3/4% and will mature on March 15,2010.The Senior Notes are guaranteed, jointly and severally, on a senior unsecuredbasis, by all of our material domestic restricted subsidiaries.

- 113 -

We may redeem some or all of the Senior Notes beginning on March 15, 2007 atthe redemption prices described in the indenture governing our Senior Notes.Prior to March 15, 2007, we may, at our option, redeem all, but not less than all,of the Senior Notes at a redemption price equal to the principal amount of theSenior Notes plus the applicable premium described in the indenture governingthe Senior Notes and accrued and unpaid interest to the redemption date.

If we experience a change of control as defined in the indenture governing theSenior Notes, we will be required to make an offer to repurchase the notes at aprice equal to 101% of their principal amount, plus accrued and unpaid interest, ifany, to the date of repurchase.

The terms of the Senior Notes place certain limitations on our ability to, amongother things:

• incur or guarantee additional indebtedness or issue preferred stock;

• pay dividends or make distributions to our stockholders;

• repurchase or redeem capital stock or subordinated indebtedness;

• make investments;

• create liens;

• enter into sale/leaseback transactions;

• incur restrictions on the ability of our subsidiaries to pay dividends or to makeother payments to us;

• enter into transactions with our affiliates; and

• merge or consolidate with other companies or transfer all or substantially all ofour assets.

These limitations are subject to a number of exceptions and qualificationsdescribed in the indenture governing the Senior Notes. Many of the covenantswill be suspended during any period when the Senior Notes have an investmentgrade rating from Standard & Poor's, a division of The McGraw-HillCompanies and Moody's Investors Service, Inc.

229. In furtherance of defendant's on-going scheme to inflate it operating results, Shaw

improperly failed to record impairment in the value of its grossly inflated goodwill during the

Class Period. In so doing, Defendants materially overstated Shaw's reported earnings during the

Class Period.

- 114 -

Shaw's ImproperRecognition of Revenue

230. As noted in Shaw's fiscal 2003 Form 10-K, a substantial portion of the

Company's reported revenue during the Class Period was derived from long-term engineering,

procurement and construction contracts. Indeed by their very nature, each of Shaw's long-term

contracts was unique and extremely complicated. In fact, in certain instances, Shaw's contracts

were performed on a stand-alone basis, and in other instances Shaw combined its contracts (i.e.,

one contract that covers engineering, procurement and construction or a combination thereof).

Accordingly, the nature of and interactions between Shaw's contracts presented the Company

with unique and significant challenges in accounting for such projects.

231. Moreover, the Company's significant acquisitions during the Class Period

exacerbated the Company's difficulties in accounting for its contracts. In fact, Shaw experienced

problems with the integration of the disparate computer and information technology systems

utilized by Stone & Webster and IT Group. Shaw's inability to interface its IT systems with

those of at least, Stone & Webster and IT Group further complicated the record keeping

associated with its long-term contracts. According to a former senior project business

administrator in Shaw's Environmental division who also had worked at Stone & Webster, Shaw

experienced numerous problems transitioning from Stone & Webster's ERP software to the ERP

software utilized by Shaw.

232. As a result such internal control deficiencies, Shaw, in many instances, was

forced to maintain accounting, billing and reporting systems on a contract-by-contract basis.

Such decentralized and disparate methodologies and systems of accounting increased the

difficulty Shaw experienced generating timely and accurate financial reports. In addition the

- 115 -

Company's project record keeping required the coordination of many different departments

within Shaw and its acquired entities.

233. In addition and as alleged in detail above, numerous former Shaw employees have

recounted how Shaw-Trac, the Company's primary tool for assessing percentage of completion

on its contracts, was an unmitigated disaster. In fact, former Shaw employees described Shaw-

Trac as a system that could not accurately account for project costs, unworkable and riddled with

insurmountable problems. In fact, a former project control employee stated that using Shaw-

Trac was like "flying blind" because its calculations were faulty and because data input into the

system would disappear. Despite the fact that Shaw-Trac's unreliability was widely known

throughout the Company, Bernhard mandated that Shaw-Trac be used on all EPC projects as the

primary tool to determine the extent to which projects were complete for purposes of revenue

recognition.

234. The combination of the factors noted above, coupled with Shaw's dysfunctional

Shaw-Trac system, led to a situation where Shaw was unable to accurately account for its project

costs. As noted in Generally Accepted Auditing Standards, "the accumulation of relevant,

sufficient and reliable data" is needed to formulate reasonable accounting estimates. Shaw's

inability to account for its project costs impaired its ability to reasonably estimate its project-

related costs and the extent to which projects were complete.

235. For example, the internal control deficiencies noted herein resulted in numerous

and significant construction delays, which, in turn, resulted in material cost overruns and tripped

contractual penalty provisions. Indeed, the numerous and material increases in Shaw's

project-related accounting reserves noted herein evidence the Company's inability to

reasonably estimate its project costs during the Class Period.

- 116 -

236. In its fiscal 2003 Form 10-K, Shaw disclosed that a material amount of its

reported revenue is based on the "percentage-of-completion" method of accounting. Accounting

Research Bulletin ("ARB") No. 45 provides guidance which respect to the "percentage-of-

completion" method of accounting.' ARB No. 45 establishes a preference for the use of

"percentage-of-completion" accounting when estimates of costs to complete a project and the

extent to which a project is complete are reasonably dependable. In those cases when an entity

cannot generate reasonably dependable estimates of project costs or the extent to which a project

is complete, the "completed contract" method is to be used.

237. Under the "percentage-of-completion method," financial statements report

revenue and expenses on a project to the extent to which a project is complete. For example, if a

$100 project with estimated costs of $60 is 50% completed during year one, then the financial

statements reporting on year one will report revenues of $50 and costs of $30 on the project.

238. Under the "completed contract" method, all contract revenue and expenses on

projects in process is deferred until the project is completed, at which time the financial

statements for the period covering the project completion date will report the total revenue and

expenses on the project. For example, if the $100 project with estimated costs of $60 is

completed during year two, then the financial statements covering year one will not report any

revenue or expenses on the project and the financial statements covering year two will report

revenue of $100 and costs of $60 on the project.

239. Accordingly, the percentage of completion method results in accelerated revenue

and income recognition when compared to the completed contract method.

18 The AICPA's Statement of Position ("SOP") No. 81-1 provides more detailed guidanceon the application of ARB No. 45.

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240. In its financial statements for the year ended August 31, 2003, Shaw disclosed its

revenue recognition policy as follows:

For project management, engineering, procurement, rem ediation, andconstruction services under fixed-price or target price contracts, we recognizerevenues under the percentage-of-completion method measured primarily bythe percentage of contract costs incurred to date to total estimated contract costsfor each contract. Revenues from cost-reimbursable or cost-plus contracts arerecognized on the basis of costs incurred during the period plus the fee earned.Profit incentives are included in revenues when their realization is reasonablyassured. Cancellation fees are recognized when received.

The effect of other changes to estimated profit and loss, including those arisingfrom contract penalty provisions, final contract settlements and reviewsperformed by customers, are recognized in the period in which the revisions areidentified. Claims and change orders being negotiated with customers areincluded in total estimated revenue to the extent costs attributable to such claimsand change orders have been incurred, and collection is probable and the amountcan be reasonably estimated. Profit from claims and change orders is recorded inthe period such amounts are finalized. Contract adjustment allowances are basedon management's estimates of the net amounts to be realized from chargesdisputed or costs questioned by customers (see Note 20).

Revenue is recognized from consulting services as the work is performed.Consulting services work is primarily performed on a reimbursable basis.

Revenues related to royalty use of our performance enhancements derived fromour process technologies are recorded in the period earned based on theperformance criteria defined in the related contracts. For running royaltyagreements, we recognize revenues based on customer production volumes at thecontract specified unit rates. For paid-up license agreements, revenue isrecognized using the percentage-of-completion method, measured primarily bythe percentage of costs incurred to date to total estimated costs at completion.Revenue available for recognition on a percent complete basis is limited to theagreement value less a liability provision for contractually specified processperformance guarantees.

We recognize revenues for pipe fittings, manufacturing operations and otherservices primarily at the time of shipment or upon completion of the services.

For unit-priced pipe fabrication contracts, we recognize revenues uponcompletion of individual spools of production. A spool consists of pipingmaterials and associated shop labor to form a prefabricated unit according tocontract specifications. Spools are generally shipped to job site locations whencomplete. During the fabrication process, all direct and indirect costs related tothe fabrication process are capitalized as work in progress. For fixed-price

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fabrication contracts, we recognize revenues based on the percentage-of-completion method, measured primarily by the cost of materials for whichproduction is complete to the total estimated material costs of the contract.[Emphasis added]

241. As noted above, GAAP provides that companies may use the "percentage-of-

completion method" to recognize revenue as work on contracts progresses toward completion so

long as the company can reasonably estimate the extent of progress toward completion, the

amount of contract revenues and the amount of contract costs. When reasonably dependable

estimates cannot be made or when inherent hazards make such estimates doubtful, revenue is to

be deferred until the contract is completed. See SOP 81-1, 111.04, .25. When current estimates

indicate an overall loss on a contract, a provision for the entire loss should be made in the period

in which they become evident. See SOP 81-1, ¶.85.

242. Shaw's recognition of revenue during the Class Period utilizing the "percentage-

of-completion method" violated GAAP because, as alleged herein, Shaw could not produce

reasonably dependable estimates of its project costs or the extent to which its projects were

complete. As detailed herein, pervasive material internal control deficiencies existed at Shaw

during the Class Period. As Defendants knew, or were severely reckless in ignoring, these

deficiencies precluded the Company from making reasonably dependable estimates of its cost to

complete contracts and/or determine costs it incurred on such contacts.

243. In fact, under intense pressure from management to report favorable operating

results, Shaw project control managers and construction superintendents intentionally inflated

the extent to which projects were complete during the Class Period so that Shaw could report a

greater percentage of revenue and income on various projects.

244. Indeed, a former independent contractor who worked for Stone & Webster prior

to its acquisition by Shaw and who worked for Shaw after its acquisition of Stone & Webster

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heard Wilson, head of project controls for Shaw in its Baton Rouge headquarters, telling

Wilson's subordinates, including Gaye Lynn Webre ("Webre") and Gil Craft ("Craft") that they

had to get the percentage of completion numbers up for Shaw's projects. This former insider

understood from what Wilson told Webre and Craft that Shaw was going to report higher

percentages of completion than Shaw's projects were actually currently showing, and that

Wilson and his subordinates had to do whatever it took to provide the numbers Shaw needed.

Wilson's conversation with Webre and Craft took place in Shaw's Baton Rouge headquarters.

245. This was consistent with this confidential witness' observations in the field.

According to this confidential witness, every construction superintendent on every project was

inflating their percentage of completion numbers. For instance, a superintendent would report

200 feet of pipe had been installed, but when the witness walked the job-site with the

superintendent to verify that figure, the witness saw that only 120 feet of pipe was actually

installed. The former independent contractor said that for every project he reviewed the

superintendents were falsely inflating percentage of completion. The project schedules also left

vital and time-consuming aspects of the projects off their schedules because, if the item was not

scheduled, it would not be figured into Shaw's percentage of completion analysis. These

omissions were so consistent from project to project and so glaring that they had to be

intentional.

246. The former independent contractor visited the Harquahala, Cordova and Covert

projects and called the level of false reporting at these projects "staggering."

247. The former insider independent contractor has thirty years of experience, and

believes that the fact that every Shaw job site was inflating its percentage of completion was a

strong indication that management was involved. According to this confidential witness, the

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percentage of completion numbers being reported were consistently "completely fictional" and

"Bernhard must have known about the practice because it was so pervasive."

248. Another former confidential insider, in or about June 2002, heard Bernhard

screaming at Scott Rouse11, one of Shaw's financial analysts (who joined Shaw after having

worked for Arthur Andersen) ("Rouse11"). Bernhard berated Rouse11 because Shaw's revenue

numbers were too low and told Rouse11 that he "needed to do something to fix that." This

confidential witness then heard Rouse11 call various operation centers in order to get them to

increase their percentages of completion on Shaw's projects to "help with the numbers."

249. To the detriment of unsuspecting investors, Defendants directed or knowingly

condoned and encouraged the alleged abuses of Shaw's publicly disclosed revenue recognition

policy during the Class Period. As a result of these accounting manipulations noted above,

Shaw's financial results during the Class Period were falsely inflated and presented in violation

of GAAP and the Company's publicly disclosed accounting policies.

False and Misleading Internal and DisclosureControl Statements and Management Certifications

250. Congress enacted the Sarbanes-Oxley Act of 2002 ("SOX"), in part, to heighten

the responsibility of public company senior managers and directors associated with the quality of

financial reporting and disclosures made by their companies. For example, Section 906 of SOX,

in pertinent part, provides:

a) CERTIFICATION OF PERIODIC FINANCIAL REPORTS - Eachperiodic report containing financial statements filed by an issuer with theSecurities Exchange Commission pursuant to section 13(a) or 15(d) of theSecurities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) shall beaccompanied by a written statement by the chief executive officer and chieffinancial officer (or equivalent thereof) of the issuer.

b) CONTENT - The statement required under subsection (a) shall certify thatthe periodic report containing the financial statements fully complies with therequirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15

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U.S.C. 78m or 78o(d) and that information contained in the periodic reportfairly presents, in all material respects, the financial condition and results ofoperations of the issuer.

c) CRIMINAL PENALTIES - Whoever

(1) certifies any statement as set forth in subsections (a) and (b) of thissection knowing that the periodic report accompanying the statement does notcomport with all the requirements set forth in this section shall be fined not morethan $1,000,000 or imprisoned not more than 10 years, or both; or

(2) willfully certifies any statement as set forth in subsections (a) and(b) of this section knowing that the periodic report accompanying the statementdoes not comport with all the requirements set forth in this section shall be finednot more than $5,000,000, or imprisoned not more than 20 years, or both.(Emphasis added.)

251. In addition, SEC promulgated Item 307 of Regulation S-K [17.C.F.R. §229.307]

which provides that businesses like Shaw generally disclose:

a) The conclusions of the registrant's principal executive and principalfinancial officers, or persons performing similar functions, regarding theeffectiveness of the small business issuer's disclosure controls and procedures (asdefined in Rule 13a 14(c) or Rule 15d 14(c) of this chapter) based on theirevaluation of these controls and procedures as of a date within 90 days of thefiling date of the quarterly or annual report that includes the disclosure requiredby this paragraph; and

b) Disclose whether or not there were significant changes in the registrant'sinternal controls or in other factors that could significantly affect these controlssubsequent to the date of their evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

252. As a result of the foregoing requirements, Shaw's fiscal 2002 Form 10-K filed

with the SEC on November 26, 2002, falsely disclosed:

Within the 90 day period prior to the filing date of this Annual Report on Form10-K, the Company's management, including the Company's Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of the design andoperation of the Company's disclosure controls and procedures. Based on thatevaluation, the Company's Chief Executive Officer and Chief Financial Officerbelieve that:

•• the Company's disclosure controls and procedures are designed to ensure

that information required to be disclosed by the Company in the reports it

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files or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified inthe SEC's rules and forms; and

• the Company's disclosure controls and procedures operate such thatimportant information flows to appropriate collection and disclosurepoints in a timely manner and are effective to ensure that such informationis accumulated and communicated to the Company's management, andmade known to the Company's Chief Executive Officer and ChiefFinancial Officer, particularly during the period when this Annual Reporton Form 10-K was prepared, as appropriate to allow timely decisionregarding the required disclosure.

There have been no significant changes in the Company's internal controls or inother factors that could significantly affect the Company's internal controlssubsequent to their evaluation, nor have there been any corrective actions withregard to significant deficiencies or material weaknesses.

253. These false and misleading representations were then falsely certified by

Bernhard and Belk and included in Shaw's fiscal 2002 Form 10-K:

CERTIFICATIONS

I, ..., certify that:

1. I have reviewed this Annual Report on Form 10-K of The Shaw GroupInc.;

2. Based on my knowledge, this Annual Report does not contain anyuntrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisAnnual Report;

3. Based on my knowledge, the financial statements, and other financialinformation included in this Annual Report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of and for, the periods presented in this Annual Report;

4. The registrant's other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a. designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this Annual Report is being prepared;

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b. evaluated the effectiveness of the registrant's disclosure controlsand procedures as of a date within 90 days prior to the filing date of this AnnualReport (the "Evaluation Date"); and

c. presented in this Annual Report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluation asof the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based onour most recent evaluation, to the registrant's auditors and the audit committee ofregistrant's board of directors (or persons performing the equivalent functions):

a. all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant's ability to record, process,summarize and report financial data and have identified for the registrant'sauditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant's internalcontrols; and

6. The registrant's other certifying officers and I have indicated in thisAnnual Report whether or not there were significant changes in internal controlsor in other factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses. (Emphasis added.)

CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Shaw Group Inc. (the"Company") on Form 10 Q for the period ended ... as filed with the Securities andExchange Commission on the date hereof (the "Report"), I, ..., certify, pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a)or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in allmaterial respects, the financial condition and result of operations of theCompany.

254. The above representations and defendant certifications, which were repeated in

Shaw's subsequent Class Period Forms 10-K and 10- Q, were materially false and misleading

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when made because, as Defendants knew, or were severely reckless in disregarding, Shaw's

financial statements were not prepared in accordance with GAAP and Shaw's internal and

disclosure controls were not operating effectively during the Class Period, because, as noted

herein:

(a) Shaw employed improper, false and misleading practices in connection

with its acquisitions;

(b) Shaw improperly delayed the recognition of an impairment in the value of

its overstated goodwill;

(c) Shaw improperly recognized revenue under the percentage of completion

method;

(d) As described more fully in 1154 through 72 above, Shaw-Trac,

Defendants' primary tool for assessing percentage of completion on its EPC projects, failed to

produce accurate or predictable results and, as such, was a complete "disaster" on every project

in which it was implemented; and

(e) Shaw falsely "engineered" its reported backlog to give the false

impression that its business prospects were healthier than reported.

Shaw's Other Financial Reporting Violations

255. As a result of the foregoing financial reporting violations, Shaw's financial results

were materially misstated during the Class Period. Nonetheless, Defendants have continued their

deceptive financial reporting by failing to restate Shaw's erroneous Class Period financial

statements.19

19 GAAP, in APB Opinion No. 20, provides that previously issued financial statements thatare erroneous due to the misapplication of accounting principles are to be retroactively restated.

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256. Pursuant to law, Defendants had the responsibility to select generally accepted

accounting principles that were appropriate to reflect the business activities of the entity. More

particularly, Section 13 of the Exchange Act of 1934 requires that:

Every issuer which has a class of securities registered pursuant to Section 12 ofthis title and every issuer which is required to file reports pursuant to Section15(d) of this title shall:

A. make and keep books, records, and accounts, which, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of theissuer; and

B. devise and maintain a system of internal accounting controls sufficient toprovide reasonable assurances that:

i. transactions are executed in accordance with management'sgeneral or specific authorization;

ii. transactions are recorded as necessary (a) to permit preparation offinancial statements in conformity with generally accepted accountingprinciples or any other criteria applicable to such statements, and (b) tomaintain accountability for assets;

iii. access to assets is permitted only in accordance withmanagement's general or specific authorization; and

iv. the recorded accountability for assets is compared with the existingassets at reasonable intervals and appropriate action is taken with respectto any differences.

257. Nonetheless, Defendants participated in a scheme which allowed Shaw to issue

financial statements that violated numerous provisions of GAAP and the SEC's accounting rules

and regulations during the Class Period. In addition to the accounting violations noted above,

Shaw presented Class Period financial statements in a manner that also violated at least the

following provisions of GAAP:

(a) The principle that interim financial statements are to include disclosures

sufficient so as to make the financial information presented not misleading (SAB Topic 10(a));

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(b) The principle that financial statements disclose contingencies when it is at

least reasonably possible that a loss may have been incurred (SFAS No. 5);

(c) The principle that financial reporting should provide information about

how management of an enterprise has discharged its stewardship responsibility to owners

(stockholders) for the use of enterprise resources entrusted to it. To the extent that management

offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general (FASB Concepts Statement

No. I, IT 50);

(d) The principle that financial reporting should be reliable in that it

represents what it purports to represent. The notion that information should be reliable as well as

relevant is central to accounting (FASB Concepts Statement No. 2, TT 58-59);

(e) The principle of completeness, which means that nothing is left out of the

information that may be necessary to ensure that it validly represents underlying events and

conditions (FASB Concepts Statement No. 2, iir 80);

(f) The principle that conservatism be used as a prudent reaction to

uncertainty to try to ensure that uncertainties and risks inherent in business situations are

adequately considered. The best way to avoid injury to investors is to try to ensure that what is

reported represents what it purports to represent (FASB Concepts Statement No. 2, 195, 97);

and

258. In failing to file financial statements with the SEC which conformed to the

requirements of GAAP, Shaw repeatedly disseminated financial statements that were

presumptively misleading and inaccurate. Indeed, the numerous accounting machinations

employed by Shaw evidences the defendant's intent to deceive investors during the Class Period

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and misrepresent the truth about the Company and its business, operations and financial

performance to the detriment of those who relied on them.

259. The Company's Class Period Forms 10-K and 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 SK.

UNDISCLOSED ADVERSE INFORMATION

260. The market for Shaw's common stock was open, well-developed and efficient at

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

disclose, Shaw common stock traded at artificially inflated prices during the Class Period. The

artificial inflation continued at least until June 10, 2004. Plaintiff and other members of the Class

purchased or otherwise acquired Shaw's common stock relying upon the integrity of the market

price of the Company's common stock and market information relating to Shaw, and have been

damaged thereby.

261. During the Class Period, Defendants materially misled the investing public,

thereby inflating the price of Shaw common stock, 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.

262. 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

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

statements about Shaw's earnings. These material misstatements and omissions created in the

market an unrealistically positive assessment of Shaw and its prospects and operations, thus

causing the Company's common stock 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 Class purchasing the Company's common stock at artificially

inflated prices, thus leading to their losses when the illusion was revealed, and the market was

able to accurately value the Company.

ADDITIONAL SCIENTER ALLEGATIONS

Defendants' Issuance of Stock asTransaction Currency And Insider Stock Sales

263. While Shaw's officers and directors were issuing false and misleading statements

about Shaw's business, Shaw raised $490 million through the sale of LYONS at artificially

inflated prices and used 1.75 million shares of artificially inflated Shaw common stock as

currency to pay, in part, for The IT Group. Such transactions using Shaw stock as currency

constitute insider trading on a massive scale.

264. The artificial inflation of Shaw's stock price, which resulted from Defendants'

materially false and misleading accounting manipulations, also enabled the Individual

Defendants to sell shares of Shaw stock which they owned for total proceeds of in excess of

$54M while in possession of material nonpublic information, and to profit from the artificial

inflation of Shaw's stock price Defendants' fraud created.

265. Specifically, Defendants Bernhard, Belk and Gill cashed in on Shaw Group's

artificially inflated stock and collectively unloaded 1.35 million shares of their holdings at

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inflated prices ranging from $29.65 to $42.47, and pocketed more than $54 million in illegal

insider trading proceeds as follows:

Name Date Shares Price Value

Bernhard 1/16/01 125,200 $41.69 5,219,462.80

1/17/01 304,800 42.47 12,945,770.40

1/18/01 570,000 42.26 24,087,459.00

7/24/01 75,000 29.65 2,223.750.00

7/25/01 75,000 33.75 2,531,250.00

7/26/01 75,000 33.25 2,493,750.00

7/27/01 30,000 35.02 1,050,600.00

TOTALS 1,255,000 $50,552,042.20

Belk 1/16/01 35 000 41.82 $1,463,836.50

Gill 1/17/01 40,000 42.00 1,680,000.00

4/16/02 20,000 30.25 604,956.00

TOTALS 60 000 $2,284,956.00

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Class Period Grand Total 1,350,000 $54,300,834.70

266. These Defendants' stock sales were unusual and suspicious for various reasons.

First, the sales were dramatically out of line with prior trading practices (or lack thereof). In fact,

Bernhard who sold 1,255,000 million shares, or 46% of his holdings, had only sold

approximately 500,000 shares of stock cumulatively during the five years prior to the Class

Period. Belk's sale of 35,000 shares, which represented 57% of his holdings, marked only the

second time during his tenure at the Company that he sold stock.

267. Also, during the Class Period, Gill sold approximately 56% of his stock holdings

during 2001 and 18% of his stock holdings during 2002.

268. Second, these Defendants' stock sales were also executed at times calculated to

maximize their personal benefit from the artificial inflation of Shaw's stock price. For example,

their January 2001 stock sales were made within a week after the Company falsely announced,

inter alia, a 109% increase in earnings for the first quarter of fiscal year 2001. Similarly,

Bernhard's July 2001 stock sales were made within weeks of the false announcement that the

Company had achieved "record" financial results for the third quarter of fiscal year 2001.

Lastly, Gill's April 2002 stock sale was made a day after the Company falsely announced that it

had increased earnings by 81% for the second quarter of fiscal year 2002, and shortly before the

Company announced that it had received bankruptcy court approval to acquire The IT Group.

269. The Individual Defendants were further motivated to report false revenues and

earnings because their compensation packages were tied into the Company's performance. By

falsely inflating the Company's financial results, the Individual Defendants were able to reap

substantial salary raises, cash bonuses and stock options during the Class Period.

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270. More specifically, during fiscal 2000, Bernhard received a significant salary raise

and a discretionary bonus of $1 million, or approximately 136% of his reported fiscal 2000

salary and $625,000 more than his reported fiscal 1999 bonus, that, according to the Company,

was paid "to recognize and reward his contributions to the Company's record performance in

fiscal 2000, as well as his contributions to the Stone & Webster acquisition and the

Entergy/Shaw joint venture." In addition, Bernhard received options covering 400,000 shares of

common stock from the Company during fiscal 2000, a significant portion of which were

awarded in connection with the acquisition of Stone & Webster.

271. During fiscal 2001, the Company approved a $2 million bonus for Bernhard,

which was "subject to the attainment by the Company of a specified performance goal for fiscal

year 2001" relating to earnings per share, net income, certain return measures, earnings, share

price, gross revenues, working capital measures or backlog. According to the Company,

Bernhard received the $2 million bonus, which was approximately 212% of his reported fiscal

2001 salary, because the Company had achieved certain undisclosed performance goals. In

addition, during fiscal 2001, Bernhard entered into a new 10-year employment agreement with

the Company through which his annual base salary was raised to a minimum of $950,000, and he

would continue to receive performance-based bonuses and other corporate perquisites.

272. In fiscal 2002, the Company paid Bernhard a $1 million bonus based upon the

Company's attainment of pre-established, yet undisclosed performance goals. In awarding this

substantial bonus, which was approximately 105% of his reported fiscal 2002 salary, the

Company stated that Bernhard had "contributed substantially to (i) the record operating results

attained by the Company during fiscal 2002 and (ii) the successful acquisition of IT Group."

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273. In addition to Bernhard, Gill, Belk and Barfield, as top executives of the

Company, similarly received huge salary raises, substantial cash bonuses and stock options

during the Class Period based on the Company's "record" operating results and as a reward for

their contribution to the Company's acquisition of Stone & Webster and The IT Group.

274. More specifically, from fiscal 2000 through fiscal 2002, Gill received

discretionary bonuses that on average were approximately 79% of his reported salaries for those

years. For the same period, Belk received discretionary bonuses that on average were

approximately 85% of his reported salaries, and Barfield received discretionary bonuses that on

average were approximately 65% of his reported salaries.

275. In addition, similar to Bernhard, Gill and Belk received stock options of 160,000

and 150,000, respectively, during fiscal 2000 to reward them for, among other things, their

participation in the acquisition of Stone & Webster.

276. Lastly, in addition to the personal benefits reaped by the Individual Defendants,

Shaw used its artificially inflated stock as currency to make the acquisitions during the Class

Period. In particular, Shaw acquired The IT Group for, inter alia, 1,671,336 shares of common

stock valued at approximately $52.4 million. In addition, Shaw acquired Scott, Sevin &

Schaffer, Inc. and Technicomp, Inc. for 170,033 shares of common stock valued at $6.2 million.

APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE

277. At all relevant times, the market for Shaw's securities was an efficient market for

the following reasons, among others:

(a) Shaw common stock met the requirements for listing, and was listed and

actively traded on the NYSE, a highly efficient and automated market;

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(b) As a regulated issuer, Shaw filed periodic public reports with the SEC and

the NYSE;

(c) Shaw 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) Shaw 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.

278. As a result of the foregoing, the market for Shaw securities promptly digested

current information regarding Shaw from all publicly available sources and reflected such

information in the price of Shaw stock. Under these circumstances, all purchasers of Shaw

securities during the Class Period suffered similar injury through their purchase of Shaw

securities at artificially inflated prices and a presumption of reliance applies.

NO SAFE HARBOR

279. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as "forward-looking

statements" when made. To the extent there were any forward-looking statements, there were no

meaningful cautionary statements identifying important factors that could cause actual results to

differ materially from those in the purportedly forward-looking statements. Alternatively, to the

extent that the statutory safe harbor does apply to any forward-looking statements pleaded

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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 Shaw who knew that those statements were false

when made.

FIRST CLAIM

Violation Of Section 10(B) OfThe Exchange Act Against And Rule 10b-5

Promul2ated Thereunder Against All Defendants

280. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

281. During the Class Period, Shaw and the Individual Defendants, and each of them,

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) artificially inflate and maintain the market price of Shaw securities; (iii)

enable Defendants to sell thousands of shares of Shaw stock at artificially prices for proceeds of

hundreds of millions of dollars; and (iv) cause plaintiff and other members of the Class to

purchase Shaw 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.

282. 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 Shaw securities in violation of Section 10(b) of the

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Exchange Act and Rule 10b-5. All Defendants are sued either as primary participants in the

wrongful and illegal conduct charged herein or as controlling persons as alleged below.

283. In addition to the duties of full disclosure imposed on Defendants as a result of

their making of affirmative statements and reports, or participation in the making of affirmative

statements and reports to the investing public, Defendants had a duty to promptly disseminate

truthful information that would be material to investors in compliance with the integrated

disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. Sections

210.01 et seq.) and Regulation S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC

regulations, including accurate and truthful information with respect to the Company's

operations, financial condition and earnings so that the market price of the Company's securities

would be based on truthful, complete and accurate information.

284. Shaw and the Individual 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 continuous course of conduct to conceal adverse material

information about the business, operations and future prospects of Shaw as specified herein.

285. 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 Shaw'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 Shaw 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

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business which operated as a fraud and deceit upon the purchasers of Shaw securities during the

Class Period.

286. 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; (ii) the Individual Defendants were privy to

and participated in the creation, development and reporting of the Company's internal budgets,

plans, projections and/or reports; and (iii) the Individual Defendants were aware of the

Company's dissemination of information to the investing public which they knew or were

severely reckless in disregarding was materially false and misleading.

287. The Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or were severely reckless in disregarding 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 with severe

recklessness and for the purpose and effect of concealing Shaw'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 severely reckless in

failing to obtain such knowledge by deliberately refraining from taking those steps necessary to

discover whether those statements were false or misleading.

288. 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 Shaw securities was

artificially inflated during the Class Period. In ignorance of the fact that market prices of Shaw

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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

severely 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 Shaw

securities during the Class Period at artificially high prices and were damaged thereby.

289. 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 of the true financial condition and

business prospects of Shaw, which were not disclosed by Defendants, plaintiff and other

members of the Class would not have purchased or otherwise acquired their Shaw 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.

290. By virtue of the foregoing, Defendants have violated Section 10(B) of the

Exchange Act, and Rule 10b-5promulgated thereunder.

291. 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.

SECOND CLAIM

Violation of Section 20(a) ofthe Exchange Act Against the Individual Defendants

292. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

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293. The Individual Defendants acted as a controlling person of Shaw 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

Company's operations and/or intimate knowledge of the 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.

294. In particular, the Individual Defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, are 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.

295. As set forth above, Shaw and the Individual Defendants each violated Section

10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their

position each as a controlling person, the Individual Defendants are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of Shaw's and the Individual

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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(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 plaintiffs' 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.

Dated: February /

Respectfully submitted,

WALTZER & ASSOCIATES

(

Joel R./ alizer 67 1920/ I"14349 Ch4Menteur 'highway, Suite DNew stlelans, LA 701(2/)Telephone: (504) 254-4400

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Local Counsel

LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

David J. GeorgeDouglas Wilens197 S. Federal Highway, Suite 200Boca Raton, FL 33432-4946(561) 750-3000 Phone(561) 750-3364 Fax

LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

William S. LerachDarren J. Robbins401 B. Street, Suite 1600San Diego, CA 92101(619) 231-1058 Phone(619) 231-7423 Fax

Counsel for Plaintiff

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that a copy of the above and foregoing pleading has been mailed,

postage prepaid, to all counsel of record on this llth/ day of February, 2005..----/

/

/

Joel R. Walter

/

/

G \dgeorge\Shaw Group \Complaintv12 doc

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Documents

UNITED STATES DISTRICT COURT - -./,:-,,,t.:- EARL …securities.stanford.edu/.../2005211_r01c_04CV1685.pdf3. Shaw's primary business has historically been as a provider of piping systems