In re: SERVICE CORPORATION INTERNATIONAL               Civil Action No. H-99-280

                                                            JURY DEMANDED
                                                            -------------

CONSOLIDATED CLASS ACTION COMPLAINT

Plaintiffs sue individually and on behalf of all those similarly situated. Their allegations are upon personal knowledge as to their own acts. Other matters are alleged based upon the investigation conducted by counsel as detailed below.

This class action against Service Corporation International ("SCI" or the "Company") and certain of its present and former officers and directors is prosecuted on behalf of all members of the class certified by the Court on August 25, 1999 (the "Class") who were damaged by defendants' violations of the federal securities laws.

JURISDICTION AND VENUE

1. This action arises under Sections 11,12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. Sections 77(k), 77(l)(2) and 77(o); Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. Sections 78j(b), 78t(a) and 78t-1, and the rules and regulations promulgated thereunder, including Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. 240.10b-5.

2. Jurisdiction exists under 15 U.S.C. Section 77v, 15 U.S.C. Section 78aa; and 28 U.S.C. Section 1331.

3. Venue is proper in this district under 28 U.S.C. Sections 1391 (b) and (c) as acts, transactions and wrongful conduct alleged herein, including the dissemination to the investing public of the materially false and misleading statements at issue, occurred in substantial part in this District. In addition, the principal offices of SCI are located in this District.

4. Defendants, directly or indirectly, used the mails and instrumentalities of interstate commerce in connection with the acts and conduct alleged in the Complaint.

THE PARTIES

5. Rujira Srisythep, Carl Helwig, and Allan Lisse were appointed as Lead Plaintiffs by this Court's order dated June, 9, 1999. On August 25, 1999, the Court certified them as Class representatives. Each Lead Plaintiff purchased SCI common stock during the Class Period (July 17, 1998 through January 26, 1999) and was damaged thereby.

6. Defendant SCI is a corporation organized and existing under the laws of the State of Texas. Its principal executive offices are at 1929 Allen Parkway, Houston, Texas. SCI purports to be the world's largest provider of death care services. At December 31, 1998, SCI operated 3,442 funeral service locations, 433 cemeteries, and 191 crematoria located in 20 countries on five continents.

7. At all relevant times, defendant R.L. Waltrip ("Waltrip") was SCI's Chairman of the Board and Chief Executive Officer. Waltrip signed the materially false and misleading Amendment No. 1 to Form S-4 Registration Statement containing a Proxy Statement/Prospectus, filed with the SEC on or about November 19, 1998 (the "Registration Statement/Prospectus"). The Registration Statement/Prospectus was declared effective on November 20, 1998. Waltrip

also made numerous materially false and misleading statements to the public via media reports and press releases issued by the Company during the Class Period as alleged herein.

8. At all relevant times, defendant George R. Champagne ("Champagne") was SCI's Senior Vice President and Chief Financial Officer. Champagne signed the materially false and misleading: (i) Form 10-Q Quarterly Report Pursuant to
Section 13 or 15(D) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 10, 1998, filed with the SEC on August 14, 1998 (the "1998 Q2 10-Q"); (ii) Form 10-Q Quarterly Report pursuant to Section 13 or 15 (D) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 1998, filed with the SEC on November 16, 1998 (the "1998 Q3 10-Q"); and Registration Statement/Prospectus. Champagne also made numerous materially false and misleading statements to the public via media reports and press releases issued by the Company during the Class Period as alleged herein.

9. At all relevant times, defendant L. William Heiligbrodt ("Heiligbrodt") was SCI's President and Chief Operating Officer. Heiligbrodt signed the materially false and misleading Registration Statement/Prospectus. Heiligbrodt also made numerous materially false and misleading statements to the public via media reports and press releases issued by the Company during the Class Period as alleged herein. Heiligbrodt left the employment of the Company shorty after the disclosure of the adverse information alleged herein.

10. Defendants Waltrip, Champagne and Helligbrodt are sometimes collectively referred to as the "Individual Defendants."

11. The Individual Defendants, by reason of their stock ownership, management positions, and/or membership on the Company's Board of Directors and committees thereof, had

control over the operations of the Company and had the power and/or ability to control each of the wrongful acts and practices complained of herein. The Individual Defendants exercised such power and control to commit the wrongful acts complained of herein, including making materially false and misleading statements and material omissions in statements to the media, the Company's press releases, quarterly SEC filings, and the Registration Statement/Prospectus. The Individual Defendants were, "control persons" of SCI within the meaning of Section 15 of the Securities Act and Section 20(a) of the Exchange Act.

12. As a result of their positions with SCI, the Individual Defendants had access to undisclosed adverse information throughout the Class Period about SCI's multi-million dollar backlog of unprofitable preneed funeral business and the impact this backlog had, and would continue to have, on SCI's profitability. They had access to such information through: (a) internal corporate documents;
(b) corporate profit/loss information conveyed directly to corporate headquarters from each of the Company's domestic funeral homes on a next-day basis, via, the Company's proprietary "Falcon" computer system; (c) conversations and communications with other corporate officers and employees;
(d) attendance at management and/or meetings of the Board and committees thereof; and (e) daily, weekly and monthly reports such as SCI's "Call In Reports" which provided them with profit and loss information on each of SCI's domestic funeral homes, and other information provided in connection therewith.

13. It is appropriate to treat the Individual Defendants as a group for pleading purposes and to presume that the materially false, misleading and incomplete information conveyed in the company's public filings, press releases and other publications as alleged herein are the collective actions of the Individual Defendants identified above.

14. The Individual Defendants made and were involved in drafting, reviewing and/or disseminating the materially false and misleading statements and information alleged herein. Each of the Individual Defendants was provided with copies of the documents alleged herein to be misleading prior to their issuance and or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is responsible for the accuracy of the public reports, press releases, and statements detailed herein and is therefore primarily liable for the materially false representations and omissions contained therein.

15. As officers and/or directors and controlling persons of a public company whose securities were registered with the SEC and governed by the federal securities laws, the Individual Defendants each had a duty to disseminate promptly accurate and truthful information with respect to the Company's business, operations, financial condition, management, earnings, and present and future business prospects, and to correct any previously issued statements that had become materially false and misleading so that the market price of the Company's publicly traded securities would be based upon truthful, accurate and complete information. The Individual Defendants' material misrepresentations and omissions, and failures to correct, during the Class Period violated these specific requirements and obligations as alleged below.

SUBSTANTIVE ALLEGATIONS

SCI'S FUNERAL HOME CONSOLIDATOR BUSINESS MODEL

16. Throughout the 1990s, thousands of locally-owned family operated independent funeral homes have been acquired by major corporations known in the funeral industry as "funeral home consolidators." The three largest publicly traded funeral home consolidators are SCI,

Loewen Group Inc. ("Loewen"), and Metarie, Louisiana-based Stewart Enterprises Inc. ("Stewart").

17. All funeral home consolidators employ a relatively standard business model. SCI's model consists of acquiring several independently owned and locally managed funeral homes in one geographic area and then sharing labor and equipment among this "cluster" to cut costs. As reported in SCI's Form 10-K for the fiscal year ended December 31, 1998, filed with the SEC on March 31, 1999 (the "SCI 1998 Form 10-K"):

the majority of the Company's funeral service locations and cemeteries are managed in groups called clusters. Clusters are established primarily in metropolitan areas to take advantage of operational efficiencies, including the sharing of [operating expenses such as] service personnel, vehicles, preparation services, clerical staff and certain building facility costs.

18. Once SCI acquires a funeral home, the public often is unaware of any change in ownership. By SCI's own design, the original family owners and employees usually remain and continue to operate the SCI-acquired funeral home under the original family name. This semblance of continuity is essential to SCI retaining the goodwill and future business of a client base largely loyal to the funeral homes' original family owners.

SCI ACQUIRES THOUSANDS OF INDEPENDENT FUNERAL HOMES

19. According to SCI's 1998 Form 10-K, "[SCI] is the largest provider of death care services in the world. At December 31, 1998, the Company operated 3,442 funeral service locations, 433 cemeteries and 191 crematoria located in 20 countries on five continents." However, SCI was not always this large.

20. SCI's funeral empire is a creature of an acquisition campaign SCI has waged since the early 1990s. The following table illustrates the annual growth in the number of funeral homes owned by SCI throughout the 1990s:

                          NUMBER OF FUNERAL HOMES
YEAR                             ACQUIRED

1990                                 45
1991                                164
1992                                 54
1993                                124
1994                                674
1995                              1,263
1996                                210
1997                                294
1998                                308
Total                              2,873

21. In acquiring a funeral home, SCI typically acquires all assets and assumes all liabilities of the acquired funeral home while paying the funeral home owner in cash, SCI securities, or some combination thereof.

PRE-NEED FUNERAL SERVICES

22. The assets purchased by SCI in a typical funeral home acquisition transaction included "preneed" or "guaranteed price" funeral contracts entered into by the independent funeral homes during the years those homes were independently operated. Preneed funeral contracts generally govern an arrangement where individuals purchase their funeral arrangements prior to their death, and funeral homes agree to perform the funeral service in the future for

payment of a fixed sum that is paid at the time the contract is entered into, or over time pursuant to an installment payment schedule. The contractual obligation to perform these guaranteed price funerals in the future was typically reflected as a liability on the books of the independent funeral homes prior to their acquisition by SCI. Once acquired SCI assumed this future liability.

23. In connection with each acquisition, SCI also acquired the mortuary trust assets that eventually are used to pay for the preneed funerals. At the time the preneed funeral contracts were sold to prospective clients, the independent funeral homes typically established mortuary trusts, funded with payments from the prospective clients. The total funds, or trust principal, generally were less than the then-current cost of providing the funeral service because preneed funeral services were often sold at a discount. The trust principal was routinely invested in a certificate of deposit issued by a bank and redeemable only upon the death of the prospective client. To the extent that the principal and income generated by the trust equals or exceeds the ultimate cost of performing the funeral service, the funeral home will either break-even or realize a profit. If, on the other hand, the mortuary trust assets do not grow to equal or exceed the future cost of performing the service, then the funeral service will be performed at the contractually agreed upon price, resulting in a loss for the funeral home performing the service.

24. The practice of selling preneed funeral contracts began to gain increasing acceptance in the late 1980s. At this time and throughout the 1990s, the vast majority of the nation's funeral homes were independently owned and operated and lacked the financial sophistication to perform any meaningful analysis aimed at determining whether the assets invested in the mortuary trusts would generate a real rate of return in excess of the amount necessary to cover future increases in the cost of providing a price guaranteed funeral service. As a result, the

funds invested in these mortuary trusts were often not actively managed - if they were managed at all - and the answer to whether such funds would grow sufficiently to equal or exceed the cost of providing a price guaranteed funeral service at some future date was left to happenstance. Industry sources have confirmed that the financial management of these mortuary trust assets often consisted of little more than opening a certificate of deposit at a local bank and then throwing the preneed contract into a drawer where it remained essentially untouched until the prospective client passed away.

25. While the financial impact of such a laissez-faire approach to mortuary trust asset management may have been relatively insignificant during periods of high prevailing interest rates and relatively low funeral home cost inflation, these practices have had a severely negative impact on funeral home profit margins during the protracted period of declining interest rates and escalating funeral home costs, such as those experienced throughout the 1990s.

26. By way of example, interest rates on 24 month certificates of deposit stood as high as 8.21% in 1990, however, by 1998 they had fallen to as low as 4.22%. Conversely, the costs associated with providing funeral services increased at an average annual rate of 8.5% during this same time period. As a result, funeral homes that entered into guaranteed price funeral contracts, but failed to actively manage their mortuary trust assets during this time period, amassed multi-million dollar preneed funeral backlogs that would eventually be performed at break-even - or a loss - resulting in a drastic, negative impact on profit margins.

SCI FAILS TO DISCLOSE THAT IT HAS AMASSED A MULTI-MILLION DOLLAR BACKLOG OF UNPROFITABLE PRENEED FUNERALS BY ACQUIRING THOUSANDS OF INDEPENDENT FUNERAL HOMES THAT FAILED TO MANAGE THESE PRENEED FUNDS

27. It is well known in the death services industry that the failure to actively manage preneed contract trust funds can have disastrous effects on a company's financial position. As one industry analyst recognized as early as March 1997:

You see there is one basic problem with preneed - the money. Regardless of how you finance prearranged funerals - trusts, insurance or some combination - the amount of the funeral at-need and the amount available to finance it will never be exactly the same. Sometimes the difference may be only a few dollars or it could be several hundred dollars. Trusts and insurance will naturally grow at a different rate than funeral prices. Therefore, there will always be only two possibilities. Either there will be too little money to finance the service at current prices, or there will be an overage.

If there is a shortfall, it is the funeral home that must absorb that shortage. No trust or insurance company will be willing to make up the difference. We can rationalize it in any number of ways, but a shortage is a shortage and must be accounted for somewhere, either through an increase of at-need prices or decreased profit. BUT WHAT WOULD HAPPEN TO YOUR FUNERAL HOME IF EVERY FUNERAL YOU DID THIS YEAR HAD BEEN FUNDED 10 YEARS AGO? THERE IS NO WAY TO RECOVER THE SHORTAGES. HOW WOULD YOU SURVIVE? While it may be unrealistic to think that someday all funerals will be prefunded, isn't that the direction we are encouraging through our preneed marketing efforts? [Emphasis added].

Curtis Rostad, Preneed: Here Today, Gone Tomorrow, The Director (March 1997).

28. The "direction" that Mr. Rostad found the industry "encouraging" is precisely the direction taken by SCI during the 1990s. Significantly, by 1998, SCI had acquired ownership of more than 2,873 independent funeral homes during the preceding eight years. In doing so, SCI amassed a multi-billion dollar backlog of preneed funeral contracts. Indeed, between 1992 and 1998, in just a six-year period, SCI's prearranged funeral contract backlog increased three-fold, from $1.2 billion to $3.7 billion. The chart that follows depicts the explosive growth in the dollar

value of prearranged funeral contracts acquired and sold by SCI, as well as SCI's preneed funeral contract backlog between 1992 and 1998:

                                                               Value of
                                                             Prearranged
            Prearranged Funeral        Prearranged             Funeral
  Year      Contracts Acquired           Funeral          Contracts Backlog
                                      Services-Sold
12/31/92       $ 24 million            $119 million          $1.2 billion
12/31/93       $ 60 million            $159 million          $1.3 billion
12/31/94       $127 million            S245 million          $1.5 billion
12/31/95       $656 million            $371 million          $2.3 billion
12/31/96       $ 72 million            $512 million          $2.7 billion
12/31/97       $102 million            $529 million          $3.3 billion
12/31/98       $138 million            $490 million          $3.7 billion
TOTAL        $1.179 billion          $2.425 billion               --

29. Undisclosed to the Class was the fact that a material number of independent funeral homes acquired by SCI throughout the 1990s were among those that had failed to actively manage their mortuary trust assets to insure that such assets would equal or exceed the cost of providing the guaranteed price funerals in the future. As a result, each time SCI acquired ownership of another independent funeral home, SCI had, unbeknownst to the Class, also acquired countless numbers of unprofitable guaranteed price funeral contracts that had long-ago been entered into by the independent funeral homes. Significantly, all of these unprofitable funerals would eventually have to be performed by SCI.

30. Also undisclosed to the Class throughout the Class Period was the fact that SCI failed to establish any means of actively managing the mortuary trust assets that would eventually be used to pay for these acquired preneed funeral contracts. Defendants never disclosed that SCI's failure to take such measures had already caused, and would continue to cause, SCI to perform a material number of these prearranged funerals unprofitably, and that this ultimately would have a severe adverse impact on SCI's profit margins.

DEFENDANTS CONCEAL THE RESULTS OF THE PRENEED STUDY

31. During 1995 alone, SCI purchased 1,263 independent funeral homes and acquired a staggering $656 million in preneed funeral contracts in connection with these purchases. These purchases resulted in SCI increasing its preneed funeral backlog by more than 40% in a single year and created an unprecedented need to determine the projected profitability - or lack thereof - of these preneed funeral contracts.

32. During 1996, SCI undertook what it termed "a review of the prearranged trust investment process which included an asset/liability study" (the "Preneed Study"). The results of the Preneed Study confirmed that SCI had amassed ownership of a material number of independent funeral homes with significant preneed contract inventories throughout the 1990s. The Preneed Study also confirmed for the defendants that a significant number of the independent funeral homes acquired by SCI had failed to actively manage their mortuary trust assets. As a result, a material number of SCI's funeral services had been, and would continue to be, performed at significant losses.

33. Although defendants publicly disclosed the fact that the Preneed Study had been conducted in the Company's Form 10-K for the fiscal year ended December 31, 1996 filed with

the SEC on March 28, 1997 (the "SCI 1996 Form 10-K"), they never disclosed the clearly material factual findings of the Preneed Study to Class members. In this vein, the SCI 1996 Form 10-K reported only that:

THE COMPANY HAS RECENTLY COMPLETED A REVIEW OF THE PREARRANGED TRUST INVESTMENT PROCESS WHICH INCLUDED AN ASSET/LIABILITY STUDY. This has resulted in a NEW INVESTMENT PROGRAM which entails the consolidation of multiple trustees, the use of institutional managers with differing investing styles and consolidated performance monitoring and tracking.
THIS NEW PROGRAM TARGETS A REAL RETURN IN EXCESS OF THE AMOUNT NECESSARY TO COVER FUTURE INCREASES IN THE COST OF PROVIDING A PRICE GUARANTEED FUNERAL SERVICE AS WELL AS ANY SELLING COSTS. THIS IS ACCOMPLISHED BY ALLOCATING THE PORTFOLIO MIX TO THE APPROPRIATE INVESTMENTS THAT MORE ACCURATELY MATCH THE ANTICIPATED MATURITY OF THE POLICIES. THIS HAS RESULTED IN A NEW ASSET ALLOCATION POLICY OF APPROXIMATELY 65% EQUITY AND 35% FIXED INCOME WHICH THE COMPANY INTENDS TO IMPLEMENT IN THE FIRST HALF OF 1997. [Emphasis added].

34. Defendants again referred to the Preneed Study in the Company's Form 10-K for the fiscal year ended December 31, 1997 filed with the SEC on March 30, 1998 (the "SCI 1997 Form 10-K"). Defendants again failed to disclose the results of the study and instead stated only that:

During 1997, the Company completed a review of the prearranged trust investment process which included an asset/liability study. THIS HAS RESULTED IN A NEW INVESTMENT PROGRAM WHICH ENTAILS THE CONSOLIDATION OF MULTIPLE TRUSTEES, THE USE OF INSTITUTIONAL MANAGERS WITH DIFFERING INVESTMENT STYLES AND CONSOLIDATED PERFORMANCE MONITORING AND TRACKING. THIS NEW PROGRAM TARGETS A REAL RETURN IN EXCESS OF THE AMOUNT NECESSARY TO COVER FUTURE INCREASES IN THE COST OF PROVIDING A PRICE GUARANTEED FUNERAL SERVICE AS WELL AS ANY SELLING COSTS. This is accomplished by allocating the portfolio mix to the appropriate investments that more accurately match the anticipated maturity of the policies. The Company is currently reallocating the portfolio to achieve a new asset allocation of approximately 65% equity and 35% fixed income. [Emphasis added.]

35. While SCI, and the Individual Defendants disclosed the fact that the Preneed Study had been conducted and boasted of the "new [preneed] investment program" that was to be implemented, they misled investors by failing to disclose the material information they had learned

as a result of the Preneed Study - namely that a significant number of independent funeral homes acquired by SCI had failed to actively manage their mortuary trust assets and, as a result, a material number of SCI's funeral services had been, and would continue to be, performed at significant losses to SCI.

36. Equally misleading was SCI's disclosure concerning the steps the Company was purportedly taking in connection with the implementation of its "new investment program." While the Company's public filings proclaim that this program "targets a real rate of return in excess of the amount necessary to cover future increases in the cost of providing a price guaranteed funeral service as well as any selling costs," the filings did not disclose that this "new investment program" would only be utilized to manage preneed assets acquired by SCI in the future. Nor did defendants disclose the absence of any effective program to manage the assets associated with the previously acquired preneed funeral service contracts. Significantly, the vast majority of the preneed assets that SCI had previously acquired in connection with its purchases of independent funeral homes were not, and would not be, invested in accordance with the terms of the "new investment program." This clearly material fact, as well as the reasons why this was so, were not publicly disclosed. By 1998, SCI's failure to actively manage its mortuary trust assets was having an increasingly negative impact on SCI's profit margin as reflected in the following graph:

FUNERAL SERVICE GROSS MARGIN FY 19

[GRAPH]

37. Rather than disclose the fact that SCI's funeral margins had been, and would continue to be, severely negatively impacted as a result of SCI continually having to perform the non-profitable preneed funerals in its backlog, defendants misled the Class by instead blaming the margin contraction throughout 1998 on a number of other factors including "increased costs," "lower funeral service volume," and "higher personnel and facility costs." Defendants did so in hopes that they could execute their plan to conceal the true cause of the margin squeeze by "burying" the impact of these non-profitable funerals in a "one time charge" as discussed in detail below.

SCI'S NEED TO SECRET ITS IDENTITY RESTRICTS THE COMPANY'S ABILITY TO ACTIVELY MANAGE THE PRENEED ASSETS SCI ACQUIRED WHEN IT PURCHASED THOUSANDS OF INDEPENDENT FUNERAL HOMES

38. In order to profit from the goodwill and long standing reputations of the family-owned independent funeral homes, it was necessary for SCI to refrain from advertising its acquisitions to the public. As an article in the August 28, 1995 edition of The Boston Globe reported, large funeral operators, like SCI, were so successful in hiding their ownership of the formerly independent family-run funeral homes from the public that most consumers failed to notice a change in ownership. The August 28 article stated, "chains prefer to keep the owners on, usually with good pay and benefits, to preserve the operation's family image... Most consumers would never even notice that their local funeral home is now owned by an outside firm."

39. The December 8, 1996 edition of The Boston Globe reported that, although SCI handled roughly one in every 10 funeral arrangements in the United States at this time, its expanding presence had generally gone unnoticed by the public. "When it buys a funeral home, SCI keeps the same name and usually the same management in place. What changes are the backroom operations; vehicle fleets, embalming operations, casket purchases and management are all centralized. " While a December 11, 1996 Seattle Times article entitled, "Big Corporations Shove Aside Mom and Pop" reported

SCI and Loewen have been accused of hiding local buyouts hoping to cash in on the good feelings that a locally owned funeral business has accumulated through the years. Thus, with the old name still on the building, family portraits of the founders still in the lobby and the old manager still in his post, many customers won't know they're dealing with a chain.

40. Negative press on the aggressive sales practices engaged in by SCI provided further impetus to conceal SCI's ownership from the local clientele. For example, the July 6, 1996

edition of The Ledger (Lakeland, FL) reported on the abuse of the elderly by an SCI-owned funeral home. According to this report, two months after performing the funeral service for Mr. Russell Carriere, a salesman from the SCI-operated Glen Abbey Memorial Gardens ("Glen Abbey") repeatedly approached Mr. Carriere's 81-year-old widow and cajoled her into purchasing her own prepaid funeral for an astonishing $132,439, which included a $39,000 casket, and a $52,000 mausoleum. As Mrs. Carriere's niece stated, "They truly preyed on a lonely, weak old woman." A civil suit against SCI and Glen Abbey was filed on behalf of Mrs. Carriere, charging them with coercing Mrs. Carriere, who had been disabled by a stroke, into buying burial services she did not want.

41. Included among the myriad examples of negative publicity were:

a. A report in The Arizona Daily Star on January 14, 1996 stated that SCI was singled out by consumers as "providing for minimum disposal without regard for the emotional needs of the family." The report also quoted a source as saying, "Some of the policies put in place locally by SCI decrease the amount of service while maintaining a status quo on cost."

b. In a story in the February 15, 1996 Las Vegas Review Journal, it was reported that an SCI-owned funeral home attempted to bury a prominent local businessman in the mausoleum of an unrelated family because, although there was insufficient space for the businessman to have his own mausoleum, the funeral home operator wanted the publicity of having the prominent businessman buried on the premises.

c. The Chicago Sun Times reported on April 28, 1996 that two SCI-owned funeral homes employed sales personnel who attempted to persuade bereaved consumers

to buy more expensive caskets by describing more affordable caskets as "public aid" caskets, instead of providing the consumer a price list, as required by law. The reference by the salesperson to "public aid" was designed to create the image that only persons with limited or no assets were buried in the public aid caskets and induce the purchase of a higher-priced casket. According to the report, "Psychology plays an important role in choices made by survivors. Many buyers would feel guilty purchasing a less expensive casket."

d. An August 6, 1998 report in The Fort Worth Star Telegram stated that the Texas Funeral Service Commission would consider a recommendation that SCI be fined $450,000 for allowing unsupervised trainees to embalm bodies and failing to advise consumers that the price being charged for embalming was higher than the cost to the funeral home.

42. Because of such criticisms, and SCI's fear of losing clients who learned that the local funeral home was no longer locally owned, SCI's ability to actively manage the preneed trust assets it had acquired was severely hampered. The Company was hampered because it would have been required to disclose its ownership of the funeral homes and control of the preneed trust assets it acquired to future clients in order to advise these clients that these assets would now be actively managed. Doing so meant risking the loss of millions of dollars worth of potentially profitable preneed funeral business.

43. Defendants feared that undertaking such a process would lead to countless contract terminations when customers realized that an organization tarnished by allegations of the outrageous conduct described above was responsible for something as highly sensitive as the customers' future burial services. Moreover, an admission by defendants that customers' funds had long been inactively managed by the local funeral home would serve to criticize the

independent funeral home operators who were well regarded by their clients and thus could lead to even more contract cancellations and loss of business.

SCI Attempts To Conceal its Plunging Profit Margins

44. The undisclosed results of the Preneed Study confirmed for the defendants that a significant number of the independent funeral homes acquired by SCI had failed to actively manage their mortuary trust assets and, as a result, a material number of SCI's future funeral services had been, and would continue to be, performed at significant losses, severely cutting into SCI profit margins.

45. Rather than disclosing this clearly material adverse information, defendants embarked upon a campaign to conceal the truth about increasing number of unprofitable prearranged funerals SCI was performing, the Company's growing backlog of inadequately funded acquired preneed funeral contracts, and the increasingly adverse impact these factors were having, and would continue to have, on SCI's profit margins and earnings. The first step in this campaign was the public dissemination of materially misleading and incomplete information falsely representing that SCI was actively managing its preneed mortuary trust assets to ensure sufficient funds to cover or exceed costs for performing contractually prearranged funerals. In fact, there was no active management by SCI of the vast majority of the preneed trust assets it had amassed through its aggressive acquisitions of funeral homes over the last decade.

46. As part of its scheme to conceal the true facts about the adverse impact of SCI's multi-billion dollar backlog of preneed funeral contracts on SCI profit margins, the defendants misleadingly touted the implementation of their so-called "new investment program," described in detail above, without disclosing that the "new investment program" did not address the

enormous and growing backlog of preneed mortuary trust assets acquired in SCI's purchases of funeral private homes, which were laying virtually dormant in CD's, unable to grow sufficiently to cover the costs to SCI of providing the associated contractually prearranged funeral services.

47. Defendants' false and misleading representations that SCI was, in fact, actively managing its backlog of acquired preneed trust assets was reinforced when, at the beginning of the Class Period in July, 1998, the defendants publicly announced the creation of SCI Financial Services, Inc., a subsidiary which would purportedly actively manage SCI's preneed trust assets.

48. Because defendants could not afford the time and expense involved in building this new subsidiary from the ground up, SCI sought quickly to establish this new organization and did so by purchasing two operating businesses, each of which had extensive experience in preneed asset management. The first acquisition involved SCI's purchase of American Memorial Life Insurance Company ("AML" or "American Memorial") and the second acquisition involved the purchase of Equity Corporation International ("ECI").

49. The purchase of these two organizations provided SCI for the first time with an organizational infrastructure for managing the Company's preneed business.

50. The purchase of ECI is of particular significance because ECI, unlike SCI, already had established, and fully disclosed the existence of, a financial management system which ensured that its customers' preneed investments, or the funeral insurance coverage obtained, would be sufficient to cover adequately the costs of prearranged funeral services. In its Form 10-K for the fiscal year ending December 31, 1997 filed with the SEC on or about March 30, 1998 (the "ECI 1997 Form 10-K"), ECI reported:

Insurance policies intended to fund preneed funeral contracts cover the original contract price AND GENERALLY INCLUDE BUILT-IN ESCALATION CLAUSES DESIGNED TO OFFSET FUTURE INFLATIONARY COST INCREASES.
[Emphasis added.]

Moreover, the ECI 1997 Form 10-K stated:

Earnings on trust funds increase the amount of cash to be received by the Company at the time the funeral service is performed AND HISTORICALLY HAVE ALLOWED THE COMPANY TO ADEQUATELY COVER THE INFLATIONARY INCREASE IN COSTS OF FUNERAL SERVICES. [Emphasis added.]

51. ECI also recognized the high financial risk posed by the preneed funeral business and took protective measures accordingly. In its Form 10-K for fiscal year ending December 31, 1996, filed with the SEC on or about March 27, 1997 (the "ECI 1996 Form 10-K"), ECI succinctly recognized the risk of overextending preneed funeral sales absent careful financial management of the mortuary trusts:

Aggressive preneed funeral sales are frequently associated with highly competitive market areas or are utilized to rapidly build market share and generally require that funeral contracts be sold at a discount to at need sales prices.

52. In response to the risks, ECI employed independent financial institutions to manage this risk. Both the ECI 1996 Form 10-K and ECI's Form 10-K for fiscal year ending December 31, 1995, filed with the SEC on or about March 25, 1996 (the "ECI 1995 Form 10-K") stated that ECI had:

...established a variety of trusts in connection with its funeral home and cemetery operations as required under applicable state law. Such trusts include (i) preneed funeral trusts, (ii) preneed cemetery merchandise trusts and (iii) perpetual care trusts. These trusts are typically administered by independent financial institutions selected by the Company. The Company also uses independent professional managers to advise the Company on investment matters.

53. The lack of disclosure regarding the Preneed Study in SCI's public filings is striking when compared to the disclosures made by ECI. While ECI disclosed that its insurance

policies included "built-in escalation clauses" and that earnings on its trust funds "have allowed [it] to adequately cover the inflationary increase in costs of funeral services," SCI remained silent on these points. The reason for SCI's omissions is clear: the Preneed Study confirmed that SCI's trust funds had not been managed to grow at a rate equal to or greater than the increase in the costs of funeral services.

54. Neither the establishment of SCI Financial Services, Inc. nor the so-called "new investment program," however, addressed SCI's multi-million dollar backlog of unprofitable preneed funeral contracts whose related mortuary trust assets lay virtually dormant in certificates of deposit, and other under-performing investments unable to grow sufficiently to cover the costs of performing funeral services in the future.

55. Defendants had been able to deceive the Class as to the primary - and continuing - reason for SCI's funeral service gross margin contraction during the first three quarters of 1998 by pointing to declining death rates in North America, higher costs and lower volumes of funerals throughout the industry. In addition, defendants were able to carefully "manage" SCI's reported 1998 second and third quarter earnings by, inter alia, their aggressive acquisition program which provided SCI fresh sources of revenue, including, for example, the purchase of American Memorial Life Insurance in the third quarter of 1998. However, defendants knew that SCI's deteriorating funeral service profit margins would inevitably impact reported earnings, the all important indicia of SCI's financial condition for the investing public; and that SCI's fiscal year end would soon bring about a day of reckoning. Accordingly, defendants desperately needed to find and a new way to conceal the impact that the continued performance of these unprofitable funerals was having on the Company's profitability.

56. According to knowledgeable former employees, by November 1998, the Individual Defendants knew that SCI's fourth quarter 1998 earnings would fall at least between $.08 to $.10 below analysts' estimates. The Individual Defendants were also aware, by virtue of their receipt of daily, weekly and monthly profit/loss reports via the Company's "Falcon" system from each of the Company's domestic funeral homes, that this shortfall resulted from SCI's performance of a material number of unprofitable preneed funerals, as well as undisclosed changes in SCI's costs. Other senior executives were also aware of this impending shortfall and the reasons for it, and openly discussed how to hide the shortfall from investors and how they and the Individual Defendants planned to "bury" this shortfall in a one-time charge that SCI planned to take in connection with its acquisition of ECI. All were well aware that the success of their plan hinged on their ability to close the ECI acquisition during the fourth quarter of 1998 so that SCI could take this one-time charge in the fourth quarter and close the ECI transaction without having to disclose the true reasons for the Company's earnings shortfall.

57. Defendants' scheme was foiled, however, when the United States Federal Trade Commission (the "FTC"), which was required to approve SCI's purchase of ECI, refused to allow SCI to close the ECI transaction until SCI had divested itself of certain funeral homes in numerous locations around the country.

58. In particular, the FTC conditioned its approval on SCI's sale of 19 funeral homes and cemetery properties located in 14 markets, primarily in the southern, western and mid-western parts of the United States, to Carriage Service Inc., another Texas-based funeral home consolidator. Under the consent agreement reached with the FTC, SCI would be permitted to acquire ECI, but only after divesting specified properties within seven days of the FTC's order.

59. SCI was unable to divest itself of these properties in time to obtain FTC approval to close the ECI transaction in the fourth quarter of 1998. As a result, SCI was unable to "bury" the earnings shortfall, which by the end of the fourth quarter had nearly doubled to $.19 to $.20 per share, in an acquisition charge as defendants had planned because the Merger did not close until after the end of the fourth quarter.

60. Evidencing the degree of scienter with which defendants acted, defendants nonetheless proceeded to close the ECI transaction without ever disclosing to ECI or the Class that SCI would report a drastic shortfall in its 1998 fourth quarter earnings.

61. Defendants did so despite the fact that the Agreement and Plan of Merger By and Among Service Corporation International, SCI Delaware Funeral Services, Inc. and Equity Corporation International, dated August 6, 1998 (the "Merger Agreement") required SCI to disclose to ECI its poor performance during the fourth quarter of 1998 at any time at which it could reasonably be anticipated that such poor performance could have an adverse financial impact on SCI. Under the Merger Agreement, ECI would have had the right to terminate the Merger Agreement if SCI's poor fourth quarter results had been disclosed prior to the closing of the Merger. The fourth quarter results constituted material adverse information known to defendants which defendants had a duty to disclose in connection with the Merger.

62. The Registration Statement/Prospectus SCI filed with the SEC incorporated the entire executed Merger Agreement. The Registration Statement/Prospectus at page 6 stated: "The Merger Agreement is attached hereto as Appendix A and incorporated herein by reference."

63. Article IV of the Merger Agreement is entitled "Representations and Warranties of Parent and Merger Sub." Section 4.7 of Article IV is entitled "Absence of Certain Changes

Or Events" and provides, with respect to SCI, that "there has not been any event, occurrence, development or state of circumstances or facts which has had, or could reasonably be anticipated to have, individually or in the aggregate, a Material Adverse Effect."

64. Section 10.10 of the Merger Agreement, entitled "Certain Definitions," defines Material Adverse Effect as:

any event, occurrence, fact, condition, change, development or effect that is or could reasonably be anticipated to be materially adverse to the business, assets (including intangible assets), liabilities, financial condition, results of operations, properties (including intangible properties) or business prospects of the Company and all of its Subsidiaries or the Parent and all of its Subsidiaries, as applicable, taken as a whole....

65. Section 8.2 of the Merger Agreement, entitled "Conditions To Obligation Of [ECI] To Effect The Merger," establishes as a condition for consummating the Merger that the representations and warranties made by SCI in the Merger Agreement shall continue to be true up to and including the day on which SCI's shares are exchanged for ECI's shares. Section 8.2(a) provides:

the representations and warranties of [SCI] and Merger Sub contained in this Agreement shall be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made and on and as of the Closing Date as if made at and as of such date, and the Company shall have received a certificate executed on behalf of Parent by the President or a Vice President of Parent and on behalf of Merger Sub by the President and Chief Executive Officer or a Vice President of Merger Sub to that effect.

66. Under the terms of the Merger Agreement, ECI had the right to terminate the Merger Agreement at any time prior to January 19, 1999 if a Material Adverse Event existed at SCI. Article IX of the Merger Agreement, entitled "Termination, Amendment And Waiver," provides:

[t]his Agreement may be terminated at any time prior to the Effective Time, whether before or after approval by the stockholders of the Company...if the representations and warranties of Parent and Merger Sub shall fail to be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) on and as of the date made or, except in the case of any such representations and warranties made as of a specified date, on and as of any subsequent date as if made at and as of subsequent date and such failure shall not have been cured in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) within 30 days after written notice of such failure is given to [SCI] by [ECI].

67. Defendants were well aware that disclosure of the adverse financial conditions at SCI related to its unprofitable preneed business would lead to the termination of the Merger by ECI or to a renegotiation of the transaction so that SCI would potentially have to double the number of shares issued in order to acquire ECI. This was a risk the defendants were not willing to take.

68. Under the terms of the Merger Agreement, SCI would acquire all of ECI's common stock through a stock-for-stock transaction that would result in ECI shareholders receiving $27 per share in SCI common stock. The number of shares of SCI stock to be issued to ECI shareholders was to be determined based on the average trading price of SCI common stock for the ten day trading period ending on the third day prior to the closing of the Merger, provided that such price was not less than $34 and not more than $41.50 per share. The Merger Agreement provided that if the average trading price of SCI's common stock was less than $34 per share, then 0.79412 shares of SCI common stock would be exchanged for each share of ECI common stock. The Merger Agreement provided that if the average trading price of SCI's common stock was greater than $41.50 per share, then 0.65050 shares of SCI common stock would be exchanged for each share of ECI stock declined, provided, however, that if SCI's common stock was trading at

a price above or below the price "collar" identified in the Merger Agreement SCI shares would be exchanged for the outstanding ECI shares at fixed floor and ceiling ratios.

69. The original Merger Agreement provided that if the average trading price for a share of SCI common stock fell below $34, then SCI would exchange
0.79412 SCI shares for each ECI share. In exchange for raising the asset divestiture limit, SCI required an amendment to the Merger Agreement that provided that if the average trading price for a share of SCI stock prior to the closing was below $38 per share, then SCI would exchange 0.71053 SCI shares for each ECI share. This reduced the maximum number of SCI shares payable to ECI shareholders from 17,298,472 to 15,477,614.

70. Defendants' audacity, however, is perhaps best highlighted by the fact that, at some point after the FTC began its review of the Merger, representatives from SCI started to discuss raising the Merger Agreement's limit on assets that SCI would be required to divest as a condition for the Merger. SCI used this opportunity to negotiate for a lower purchase price to be paid to ECI in exchange for agreeing to divest assets having aggregate 1997 revenue of up to $20 million, by demanding that ECI agree to lower the maximum number of SCI shares to be exchanged for ECI's outstanding shares.

71. On December 14, 1998, SCI and ECI amended the Merger Agreement to raise the asset divestiture revenue limit to $20 million and to reduce the maximum SCI shares exchangeable for ECI shares. When the Merger closed on January 19, 1999, the average trading price of a share of SCI was below $38, triggering the re-negotiated maximum exchange ratio. Remarkably, defendants renegotiated the consideration to be received by ECI shareholders with knowledge of SCI's impending earnings shortfall and never disclosed it, despite having warranted that there had

been no such adverse development at the Company. Indeed, December 14 was only 12 business days prior to the end of SCI's fourth quarter for 1998, by which time the Individual Defendants were well aware that SCI's preneed business would lead to a material earnings shortfall for the fourth quarter. They were made aware, in part, by the SCI proprietary computer systems known as the "Falcon" system, which provided profit and loss information for every domestic funeral home owned by SCI directly to SCI corporate headquarters electronically on a next-day basis. However, this information was never disclosed to ECI shareholders and the Class until after the Merger was completed.

DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS AND MATERIAL OMISSIONS DURING THE CLASS PERIOD

72. Throughout the Class Period, defendants acted negligently, recklessly or intentionally by omitting to disclose material information concerning SCI and by issuing a series of materially false and misleading statements concerning the Company's financial condition and preneed funeral business. Defendants' misconduct caused the price of the Company's securities to become and remain artificially inflated (artificially depressed in the case of put options) throughout the Class Period, and ultimately resulted in millions of dollars in damages being incurred by Class members. Defendants' materially false and misleading statements, and the reasons why such statements were materially false and misleading, are set forth below.

73. On July 17, 1998, SCI issued a materially false and misleading press release that bore the headline, Service Corporation International Buys Pre-need Insurance Division of American Annuity Group and Forms New Financial Services Subsidiary. Defendant Champagne was listed as the "contact" person for the press release. The release stated in relevant part:

Service Corporation International (NYSE: SRV) ("SCI"), the world's largest funeral and cemetery company, announced today that it will acquire the pre-need funeral services division of American Annuity Group Inc. (NYSE: AAG) ("AAG") of Cincinnati, Ohio for $164 million cash.

* * *

SCI HAS FORMED A NEW FINANCIAL SERVICES SUBSIDIARY, SCI FINANCIAL SERVICES, INC., TO FACILITATE THE EXPANSION OF SCI'S PRE-NEED BUSINESSES AND FINANCIAL ACTIVITIES WORLDWIDE. The new company's operations will include prearranged funeral marketing, funeral and cemetery trust administration, investment management, life insurance operations and the lending activities of Provident Services, Inc., an existing SCI subsidiary which provides capital financing for independent funeral home and cemetery operations.

SCI FINANCIAL SERVICES WILL COORDINATE THE INVESTMENT OF OVER $3 BILLION OF PRE-NEED FUNERAL TRUST AND INSURANCE ASSETS AND OVER $1 BILLION IN CEMETERY TRUST ASSETS, DIRECT THE MARKETING FOR OVER $700 MILLION IN ANNUAL FACE AMOUNTS OF PREARRANGED FUNERAL SALES, ADMINISTER OVER ONE MILLION PRE-NEED FUNERAL TRUST AND INSURANCE CONTRACTS AND OVERSEE A FINANCE OPERATION WITH A LOAN PORTFOLIO IN EXCESS OF $250 MILLION. [Emphasis added.]

74. The foregoing statements were intended to, and did, misrepresent to the investing public the false and misleading information that the formation of SCI Financial Services, Inc. would result in the active and effective investment of SCI's existing and future pre-need funeral trust assets to ensure SCI's revenues and earnings from its pre-need funeral business, which the statements also falsely implied was financially healthy and profitable. The Company and the Individual Defendants failed, however, to disclose the following facts, known to or recklessly disregarded by the defendants when the press release was issued, that rendered the statements in the press release materially false and misleading when made:

(a) the Individual Defendants knew from the Preneed Study that a material number of the independent funeral homes acquired by SCI throughout the 1990s had failed to actively manage their mortuary trust assets to ensure that such assets would equal or exceed the

cost of providing the prearranged guaranteed price funerals SCI was contractually obligated to provide, and, as a result, a material number of SCI's funeral services had been, and would continue to be, performed at significant losses;

(b) SCI's funeral profit margins were being, and were going to continue to be severely eroded as a result of having to perform prearranged funeral services at costs not covered by the mortuary trust assets dedicated to those funeral services as a result of the failure by SCI to establish any means to actively or effectively invest its existing mortuary trust assets, including those from funeral homes acquired by SCI, to improve the rates of return on or growth of those assets, and, as a result, SCI had performed, and would continue to perform, a material number of prearranged funeral services at significant losses;

(c) far from establishing SCI Financial Services, Inc. "to facilitate the expansion of SCI's pre-need business and financial activities worldwide," as defendants claimed, the creation of this subsidiary marked the first time in SCI's history that the Company had implemented any concrete steps to actively manage at least a portion of its preneed trust assets. Prior to the creation of this subsidiary, and notwithstanding defendants' earlier representations about a "new investment program," no individual or organization at SCI had been responsible for actively managing those assets;

(d) SCI Financial Services, Inc. would not be involved in managing of the vast majority SCI's existing multi-billion dollar backlog of preneed mortuary trust assets acquired in SCI's funeral home acquisitions, which would continue to be invested in dormant, underperforming interest bearing vehicles, such as bank CD's;

(e) American Memorial was being acquired to provide SCI with a vehicle to begin to actively manage preneed assets going forward, in order to blunt the ongoing drastic adverse impact that the under-performance of SCI's preexisting mortuary trust assets was having on SCI's profitability, but

(f) SCI's "new investment program," which was purportedly implemented in 1997 in order to "target a real return in excess of the amount necessary to cover future increases in the cost of providing a price guaranteed funeral service as well as any selling costs," was not actively managing the vast majority of the preneed trust assets SCI had acquired by purchasing independent funeral homes. Indeed, SCI was unable to actively manage these preneed trust assets because doing so would have required SCI to step out of the shadows and identify itself as the true owner of thousands of funeral homes across the country and internationally and would cause existing and future customers to seek out other locally-owned funeral homes when they learned that what they believed was a locally-owned funeral home was actually owned by SCI, the world's largest funeral home conglomerate.

75. On July 18, 1998, the Houston Chronicle published an article entitled, SCI To Get Into Funeral Insurance; Houston Giant To Buy 'Final Expense' Business. This article discussed SCI's acquisition of American Memorial and quoted defendant Waltrip as stating:

"SCI is a world leader in the provision of high-quality funeral and cemetery services," said R.L. Waltrip, SCI chairman and chief executive officer. "This acquisition enables SCI to directly respond to the increased demand for alternative methods for paying for these services."

* * *

"SCI's longstanding relationship with American Memorial makes them the logical choice to drive our expansion into the preneed insurance business," Waltrip said. The way SCI sees it, the acquisition is a way for it to expand its profit

base. Not only will it make money arranging funerals, but it will also collect the insurance premiums people pay for final-expense insurance, Heiligbrodt said. "Our goal is to pick up two profits," he said. "The money we're spending is buying new profits and generating new future profits."

"WE'RE ADDING ANOTHER DIMENSION TO MAKE SURE WE'RE PICKING UP ALL THE
VALUE WE CAN FOR OUR SHAREHOLDERS," Heiligbrodt said.

SCI sells about $700 million of prearranged funerals a year worldwide, he said. [Emphasis added).

76. The foregoing statements were materially false and misleading at the time they were made and were intended to, and did, convey to the investing public the false impression that SCI was in the midst of a profitable "expansion into the pre-need insurance business," and that SCI's acquisition of American Memorial was undertaken to build on and increase the profitability of its existing preneed "profit base." In fact, as defendant Waltrip knew, or recklessly disregarded, SCI's profitability was being severely undercut by its existing backlog of preneed funeral contracts, and the acquisition of American Memorial and planned expansion into preneed insurance was not "a way to expand
[SCI's] profit base," nor an effort to "make sure we're picking up all the value we can for our shareholders." Instead, the acquisition of American Memorial was an attempt to obtain new sources of revenue to mask the growing reductions in SCI's overall profit margins caused by having to provide unprofitable prearranged funerals pursuant to SCI's existing and acquired preneed contracts, and to ensure that going forward SCI would not be saddled with even more dormant and underperforming mortuary trust assets that could not cover the costs of prearranged funerals.

77. The foregoing statements by defendant Waltrip were also false and misleading because of the failure to disclose the facts set forth in Paragraph
74(a)-(f) above, which were necessary to

make the statements Waltrip made about SCI's acquisition of American Memorial and expansion into the preneed insurance business not false and misleading.

78. On July 23, 1998, SCI issued a materially false and misleading press release that bore the headline, Service Corporation International Reports Net Income up 15% and EPS up 13% for Second Quarter. Defendant Champagne was listed as the "contact" person on the press release. The release stated in relevant part:

Service Corporation International (NYSE: SRV) ("SCI"), the world's largest funeral and cemetery company, today reported record second quarter revenues and earnings. For the three months ended June 30, 1998, the company reported revenues of $671.9 million, net income of $90.9 million and diluted earnings per share of $.35 ($.36 basic). This represents a 11.8 percent increase in revenues, a 15.4 percent increase in net income and a 12.9 percent increase in diluted earnings per share (9.1 percent basic) when compared to the second quarter of 1997.

"Strong North American cemetery results contributed impressively to our quarterly earnings growth, MORE THAN OFFSETTING THE EFFECT ON THE FUNERAL SEGMENT OF LOWER THAN EXPECTED NORTH AMERICAN MORTALITY RATES. FUNERAL VOLUMES IMPROVED IN JUNE AFTER EXPERIENCING UNUSUALLY WEAK
VOLUMES IN APRIL AND MAY," said R. L. Waltrip, SCI's Chairman and Chief Executive Officer.

***

Commenting on the results, L. William Heiligbrodt, SCI's President and Chief Operating Officer said, "FLUCTUATIONS IN MORTALITY RATES PRESENT
OPERATIONAL CHALLENGES OVER CERTAIN TIME PERIODS; however, THE FUNDAMENTALS OF THE FUNERAL SERVICE INDUSTRY REMAIN STRONG. Our properties include MANY OF THE PREMIER FUNERAL BUSINESSES IN MAJOR METROPOLITAN MARKETS around the world, providing excellent opportunities for growth. OUR NEWLY FORMED FINANCIAL SERVICES GROUP AND ITS ACQUISITION OF AMERICAN MEMORIAL LIFE INSURANCE COMPANY WILL INCREASE OUR PREARRANGED FUNERAL MARKETING EFFORTS, PROVIDING FOR FUTURE FUNERAL VOLUME TO MAINTAIN OUR CONSISTENT PERFORMANCE."

***

During the second quarter of 1998, sales of prearranged funeral contracts were approximately $138.9 million, WHICH EXPANDED THE BACKLOG OF PREARRANGED

FUNERAL CONTRACTS TO BE SERVICED IN FUTURE PERIODS TO APPROXIMATELY
$3.3 BILLION. [Emphasis added.]

79. The foregoing statements were materially false and misleading at the time they were made because, as defendants SCI, Waltrip, Heiligbrodt and Champagne knew, or recklessly disregarded, and failed to disclose:

(a) the financial results of SCI's funeral segment was being adversely effected by the increasing number of unprofitable prearranged funeral services SCI was performing, not by "lower . . . mortality rates" or "weak volumes;"

(b) the principal operational "challenge" facing SCI was not "[f]luctuations in mortality rates," but the multi-million dollar backlog of passive underperforming preneed mortuary trust assets;

(c) SCI's "newly formed financial services group [SCI Financial Services, Inc.]" was not addressing the known and growing deterioration in SCI's funeral services profit margins caused by its backlog of preneed mortuary trust assets invested in passive, low return bank CDs and similar investment vehicles; and

(d) SCI Financial Services, Inc. and the acquisition of American Memorial were part of SCI's attempt to begin to actively manage the investment of future preneed mortuary assets, not the "expanded ... backlog" of existing preneed funeral contracts, nor was SCI in any manner seeking to "maintain [the] consistent performance" of its multi-billion dollar backlog of preneed funeral contracts, but, to the contrary, was actively concealing the increasingly unprofitable performance of that segment of its business.

80. On August 6, 1998, SCI issued a materially false and misleading press release that bore the headline, Service Corporation International Announces Definitive Agreement for Merger

With Equity Corporation International. Defendant Champagne was listed as a "contact" person on the press release. The release stated in relevant part:

Service Corporation International (NYSE: SRV)("SCI"), the world's largest funeral and cemetery company, announced today that it has reached a definitive agreement with Equity Corporation International (NYSE: EQU)("ECI") to form a business combination between the two companies.

ECI, the nation's fourth largest publicly traded death care company, based in Lufkin, Texas, currently owns and operates 326 funeral homes and 81 cemeteries in 35 states and one Canadian province. The combination would occur through a stock-for-stock transaction that would result in ECI shareholders receiving $27 per share in SCI stock. The actual number of shares of SCI stock to be issued to the ECI shareholders will be determined based on the average SCI stock price for the ten (10) consecutive trading days ending on the third trading day prior to the closing of the merger. The average price of SCI stock used in computing the exchange will not be less than $34.00 and no more than $41.50 per share.

***

In explaining the transaction, Robert L. Waltrip, Chairman of the Board and Chief Executive Officer of SCI said, "The merger will create a combined North American operation with unparalleled resources servicing both the metropolitan and rural markets throughout the country. The addition of ECI and its exceptional revenue growth rate should further enhance SCI's leading domestic market position."

***

L. William Heiligbrodt, President and Chief Operating Officer of SCI noted, "The addition of ECI's properties opens SCI and its newly formed financial services division to the North American rural market, providing an expanded network and infrastructure through which we can better service both out prearranged and at-need families. Additional synergies should result from consolidating our operations and through further leveraging our cost structure."

***

81. The foregoing statements were materially false and misleading at the time they were made because defendants SCI, Waltrip and Heiligbrodt knew, or were reckless in not knowing, and failed to disclose that:

(a) the acquisition of ECI was part of SCI's attempt to establish, belatedly, a means to actively manage its preneed mortuary trust assets in order to ensure that its own future sales of preneed funeral contracts would not result in the kind of unprofitable funeral services increasingly generated by a substantial portion of SCI's existing multi-billion dollar preneed backlog; and

(b) SCI's "leading domestic market position" was largely the result of SCI's acquisition of private funeral homes, and of their poorly invested preneed mortuary trust assets, which, at the time the statements were made, were severely cutting into SCI's profit margins.

82. On August 7, 1999, the Houston Chronicle published an article entitled, SCI Will Buy Rural-Market Equity Corp.; $588 Million Deal a Reunion For The Two Firms. This article discussed SCI's acquisition of ECI, quoted defendants Waltrip and Heiligbrodt, and stated in relevant part:

Service Corporation International, the world's largest funeral company and one of the largest firms in Houston, is buying a Lufkin-based company [ECI] specializing in buying and operating funeral homes in rural areas and small cities.

***

"The merger will create a combined North American operation with unparalleled resources servicing both the metropolitan and rural markets throughout the country," Service Corp. Chairman Robert L. Waltrip said in a written statement. "The addition of ECI and its exceptional revenue growth rate SHOULD FURTHER ENHANCE SCI'S LEADING DOMESTIC MARKET POSITION."

***

"THEY HAVE A VERY GOOD MANAGEMENT TEAM. THEY OPERATE THEIR BUSINESS VERY WELL," Heiligbrodt said. "THEY SEE THINGS LIKE WE DO. THEIR OPERATIONAL SYSTEMS ARE VERY SIMILAR TO OURS. WE KNOW EACH OTHER VERY WELL. IT IS ONE OF THE SAFEST ACQUISITIONS A COMPANY LIKE SCI COULD DO." [Emphasis added.]

83. The foregoing statements were materially false and misleading at the time they were made because defendants SCI, Waltrip and Heiligbrodt knew, or were reckless in not knowing, and failed to disclose:

(a) the facts set forth in Paragraph 81(a) and (b), above; and

(b) that ECI's "operational systems" were fundamentally different from SCI's systems in that ECI, unlike SCI, had an established program to actively manage its preneed mortuary assets to ensure that the funds available from those assets would cover or exceed the cost of providing guaranteed price preneed funeral services in the future.

84. On August 11, 1998, a death care industry journal entitled Death Care Business Advisor published an article entitled SCI Acquires American Annuity Group, Moves Into Preneed Services. This article, which discussed SCI's acquisition of American Memorial, contained extensive quotes from defendant Champagne that echoed many of the false and misleading representations about SCI's business and plans which began with the July 17, 1998 announcement of SCI's acquisition of American Memorial. Defendant Champagne was quoted as commenting on the American Memorial acquisition as follows:

"It's a new focus on our part," confirmed SCI Senior VP/CFO George Champagne. He called the acquisition a "logical fit," citing SCI's history in the prearranged funeral business. "WE'VE LONG BEEN THE LEADERS IN THE PREARRANGED FUNERAL BUSINESS," he claimed.

SCI has been seeking ways, to increase its market share, according to Champagne. "THE MOST COMPELLING WAY TO DO THAT IS TO INCREASE THE LEVEL OF THE PREARRANGED FUNERAL BUSINESS," HE OFFERED. "THE ACQUISITION OF AMERICAN MEMORIAL GIVES US THE ABILITY TO FUND OUR PREARRANGED BUSINESS."

***

"YOU'RE EFFECTIVELY BUILDING YOUR BACKLOG OF FUNDING FOR PREARRANGED
FUNERALS," WHICH HAS THE EFFECT OF EXPANDING OR MAINTAINING SCI'S

PREARRANGED FUNERAL BUSINESS, EXPLAINED CHAMPAGNE. "THAT IS A VERY IMPORTANT ASPECT TO A COMPANY LIKE SCI. THERE IS A LOT OF COMPETITION FOR PREARRANGED FUNERAL BUSINESS." Thus the acquisition of AAG's funeral services division, he said, will allow SCI to better compete for and serve customers. [Emphasis added.]

85. The foregoing statements made by Champagne were materially false and misleading because they failed to disclose facts that Champagne knew or recklessly disregarded, and that were necessary to make the statements accurate and truthful when made, including that:

(a) the acquisition of American Memorial was part of defendants' scheme to conceal the sharply adverse effects on SCI's profit margins caused by the multi-million dollar backlog of inadequately funded and/or dormant and underperforming mortuary trust assets;

(b) SCI's position as a "leader in the prearranged funeral business" was gained through the acquisition of small, private funeral homes that brought with them dormant and underperforming mortuary trust assets that were, and continued to be, inadequate to cover the costs of the related guaranteed price prearranged funerals SCI was obligated to provide;

(c) SCI's acquisition of American Memorial did not, and would not give it "the ability to fund [its] prearranged business" because that business included large numbers of preneed funeral contracts funded by inadequate and/or dormant and underperforming mortuary trust assets; and

(d) SCI's "competition for prearranged funeral business," such as ECI, had taken steps to actively manage their mortuary trust assets and were thus not subject to the drastic decreases in profit margins plaguing SCI.

86. In that August 11, 1998 article, Champagne was also quoted as stating:

Lastly, Champagne reminded that in the early 1980s SCI was in the insurance business. "We owned Family Services Life Insurance Company.... At the time," he continued, "SCI WAS A MUCH

SMALLER COMPANY. WE DID NOT HAVE THE INFRASTRUCTURE OF FUNERAL HOMES
ACROSS THE COUNTRY."

Then, in 1989, SCI made "a strategic decision to exit that portion of the business," said Champagne. "We couldn't support the insurance organization that was predominantly selling insurance for independent funeral homes." TODAY, THOUGH, AS THE DOMINANT FUNERAL SERVICES PROVIDER IN THE INDUSTRY, "WE'VE GOT THE INFRASTRUCTURE ACROSS THE
COUNTRY," Champagne said.

***

Citing the company's record [1998] second-quarter earnings, with net income reportedly up 15 percent and earnings per share up 13 percent, CHAMPAGNE SAID SCI IS PLEASED WITH THE RESULTS "IN THE FACE OF WHAT HAS COME TO BE WEAK FUNERAL VOLUMES CAUSED BY A LOWER DEATH RATE SCENARIO IN NORTH AMERICA IN THE SECOND QUARTER." BUT THE COMPANY DOESN'T EXPECT THAT TREND TO CONTINUE. "WE DON'T THINK IT'S A CONTINUING PHENOMENON," CHAMPAGNE SAID. "THAT'S ONE THING ABOUT THE FUNERAL BUSINESS. IT'S PREDICTABLE, CONSISTENT AND SUSTAINABLE OVER A LONG PERIOD OF TIME. IN ANY THREE-MONTH PERIOD YOU'RE GOING TO HAVE FLUCTUATIONS. THE CHALLENGE IS TO MANAGE THROUGH THOSE FLUCTUATIONS."

***

"OUR ACQUISITION ACTIVITY CONTINUES AT A VERY STRONG PACE RIGHT NOW," SAID CHAMPAGNE. "WE'RE ON TARGET TO ACQUIRE BETWEEN 280 MILLION AND 300 MILLION OF ANNUALIZED REVENUES, of which probably 50 percent to 60 percent of that will be from international sources." [Emphasis added.]

87. These additional statements were also materially false and misleading at the time they were made because defendant Champagne, knew, or was reckless in not knowing, and failed to disclose that:

(a) SCI's "infrastructure of funeral homes around the country" included a material number of formerly privately owned funeral homes that brought with them inadequately funded and/or dormant and underperforming mortuary trust assets;

(b) SCI's position as the "dominant funeral services provider" was obtained through the acquisition of a material number of formerly private funeral homes with inadequately funded and/or dormant and underperforming mortuary trust assets;

(c) SCI's weakness in the second quarter was the result of the unprofitability of prearranged guaranteed price funeral services performed pursuant to inadequately funded and/or dormant and underperforming mortuary trust assets, and not "weak volumes caused by a lower death rate scenario"; and

(d) SCI's acquisition activities were continuing "at a very strong pace" because of the urgent need to "purchase" revenue to disguise the fundamental and growing problems caused by the Company's enormous backlog of inadequately funded and/or dormant and underperforming mortuary trust assets.

88. On August 14, 1998, SCI filed its Form 10-Q for the quarter ended June 30, 1998 with the SEC (the "1998 Q2 Form 1O-Q"). The 1998 Q2 Form 10-Q was also incorporated by reference into the Registration Statement/Prospectus for SCI's acquisition of ECI, filed on November 19, 1998. The 1998 Q2 Form 10-Q was signed by defendant Champagne and contained the following materially false and misleading statements in Note 4 to the Consolidated Financial Statements:

Prearranged Funeral Activities

The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts are generally placed in trust accounts (pursuant to applicable law) or are used to pay premiums on life insurance policies
[issued by third party insurers] ... Trust earnings and increasing insurance benefits are accrued and deferred until the service is performed, at which time these funds are also recognized in funeral revenues

and are intended to cover future increases in the cost of providing a price guaranteed funeral service.... [Emphasis added.]

1998 Q2 Form 10-Q at 7-8.

89. The foregoing statements were materially false and misleading when made because SCI and the Individual Defendants knew, or were reckless or negligent in not knowing, and failed to disclose that:

(a) SCI's backlog of prearranged funeral contracts included a material number of contracts that were not sold "at prices prevailing when the agreements [were] signed," but at discounts to those prices; and

(b) The funds from many of SCI'S mortuary trusts did not "cover" or exceed the cost of their related price guaranteed funeral services, and, as a result, SCI was and would continue to experience drastically deteriorating profit margins in its funeral service business.

90. The 1998 Q2 Form 10-Q also stated in the Management's Discussion and Analysis of Financial Condition ("MD&A") section, that:

Prearranged Funeral Services

The Company has a marketing program to sell prearranged funeral contracts and the funds collected are generally held in trust or are used to purchase life insurance or annuity contracts. The principal amount of each such prearranged funeral contract will be received in cash by a Company funeral service location at the time the funeral is performed. EARNINGS ON TRUST FUNDS AND INCREASING BENEFITS UNDER INSURANCE AND ANNUITY FUNDED CONTRACTS ALSO INCREASE THE AMOUNT OF CASH TO BE RECEIVED UPON PERFORMANCE OF THE FUNERAL AND ARE INTENDED TO COVER FUTURE INCREASES IN THE COST OR PROVIDING A PRICE GUARANTEED FUNERAL SERVICE AS WELL AS ANY SELLING COSTS. DURING 1997, THE COMPANY COMPLETED A REVIEW OF THE PREARRANGED TRUST INVESTMENT PROCESS WHICH INCLUDED AN ASSET/LIABILITY STUDY. THIS HAS RESULTED IN A NEW INVESTMENT PROGRAM WHICH ENTAILS THE CONSOLIDATION OF MULTIPLE TRUSTEES, THE USE OF INSTITUTIONAL MANAGERS WITH DIFFERING INVESTMENT STYLES AND CONSOLIDATED PERFORMANCE MONITORING AND TRACKING. THIS NEW PROGRAM TARGETS A REAL RETURN IN EXCESS OF THE AMOUNT NECESSARY TO COVER FUTURE INCREASES IN THE COST OF PROVIDING A PRICE GUARANTEED FUNERAL SERVICE AS WELL AS ANY SELLING COSTS. ...[Emphasis added.]

1998 Q2 Form 10-Q at 19-20.

91. The foregoing statements were materially false and misleading at the time they were made because SCI and the Individual Defendants knew, or were reckless or negligent in not knowing, and failed to disclose that:

(a) SCI's backlog of prearranged funeral contracts included a material number of contracts that were backed by mortuary trusts that were inadequately funded and/or had assets that were not actively invested to ensure growth adequate to cover "the cost of providing a price guaranteed funeral service";

(b) The Preneed Study showed that a material number of funeral homes acquired by SCI failed to actively manage their mortuary trust assets, and, as a result, a material number of SCI's funeral services had been, and would continue to be, performed at significant losses, resulting in an increasingly sharp erosion in SCI's profit margins for funeral services; and

(c) SCI's "new investment program" was not actively managing the vast majority of the preneed trust assets SCI had acquired by purchasing independent private funeral homes, and was not obtaining "a real return in excess of the amount necessary to cover" the costs to SCI of providing a material number of prearranged guaranteed price funeral services.

92. On September 30, 1998, SCI issued a materially false and misleading press release that bore the headline, Service Corporation International Completes Strategic Acquisition of Pre-need Insurance Division of American Annuity Group. The release stated in relevant part:

Service Corporation International (NYSE: SRV), the world's largest funeral and cemetery company, announced today that it has completed its previously announced acquisition of the pre-need funeral services division of American Annuity Group Inc. (NYSE: AAG) of Cincinnati, Ohio for $164 million cash.

* * *

AMERICAN MEMORIAL WILL BE PART OF A NEW FINANCIAL SERVICES SUBSIDIARY, SCI FINANCIAL SERVICES, INC., FORMED TO FACILITATE THE EXPANSION OF SCI'S PRE-NEED BUSINESSES AND FINANCIAL ACTIVITIES WORLDWIDE. The new company's operations include prearranged funeral marketing, funeral and cemetery trust administration, investment management, life insurance operations and the lending activities of Provident Services, Inc., an existing SCI subsidiary which provides capital financing for independent funeral home and cemetery operations. [Emphasis added.]

93. The foregoing statements were materially false and misleading at the time they were made because SCI and the Individual Defendants knew, or were reckless in not knowing, and failed to disclose that:

(a) the acquisition of American Memorial was an attempt by SCI to conceal its deteriorating funeral service profit margins resulting from its backlog of inadequately funded and/or dormant and underperforming preneed mortuary trust assets; and

(b) SCI Financial Services, Inc. and SCI's acquisition of American Memorial was part of SCI's attempt to begin to actively manage the investments of future preneed mortuary assets, and did not and would not address the continually more acute and drastic deterioration in profit margins caused by the existing backlog of inadequately funded and/or dormant and underperforming assets SCI acquired pursuant to its purchases of privately owned funeral homes.

94. On October 22, 1998, SCI issued a materially false and misleading press release that bore the headline, Service Corporation International Reports 14.4% Increase in Net Income and 14.3% Increase in EPS for Third Quarter 1998. Defendant Champagne was listed as a "contact" person for the press release. The release stated in relevant part:

Strategic Highlights

-- Completed the acquisition of American Memorial Life Insurance Company (AML) for $164 million.

-- Announced the business combination with Equity Corporation International for $830 million, including assumed indebtedness.

-- Formed a new financial services subsidiary, SCI Financial Services, Inc. to facilitate expansion of preneed businesses and financial activities worldwide.

Commenting on the results, Robert Waltrip, Chairman and Chief Executive Officer, said:

"I AM PLEASED TO REPORT ANOTHER QUARTER OF INCREASED PROFITABILITY FOR SCI DESPITE THE WIDELY PUBLICIZED REDUCED NUMBER OF DEATHS REPORTED BY OUR INDUSTRY. WHILE SCI WAS NOT INSULATED FROM THIS EXPERIENCE, THE STRATEGIC ACQUISITIONS AND INITIATIVES ANNOUNCED THIS SUMMER WILL ADD VALUE TO SCI TODAY AND LONG-TERM."

SCI's President and Chief Operating Officer, L. William Heiligbrodt, added:

"SINCE 1990, SCI'S NORTH AMERICAN MARKET SHARE HAS NEARLY DOUBLED TO APPROXIMATELY 11% TODAY, MAINLY THROUGH ACQUISITIONS, NEW CONSTRUCTION AND PREARRANGED FUNERALS. SCI'S MARKET SHARE IS EXPECTED TO INCREASE AS WE ACCELERATE THE SALES OF PREARRANGED FUNERALS. WE PLAN TO DOUBLE THE ANNUAL SALES OF PREARRANGED FUNERALS WITHIN FIVE YEARS...."

Acquisition Activity

Effective July 1, 1998, SCI acquired AML, the pre-need funeral services division of American Annuity Group Inc., for $164 million cash. AML offers a variety of pre-need and final expense life insurance and annuity products to finance prearranged funerals. TO FACILITATE THE EXPANSION OF SCI'S PRE-NEED BUSINESSES AND FINANCIAL ACTIVITIES WORLDWIDE, SCI FORMED A NEW FINANCIAL SERVICES SUBSIDIARY, SCI FINANCIAL SERVICES, INC.

In August, SCI reached an agreement with Equity Corporation International (ECI) to enter into a business combination between the two companies. The combined company will have operations throughout metropolitan and rural North America and will consist of approximately 3,600 funeral homes, 500 cemeteries and 200 crematoria worldwide, with annualized revenues approaching $3 billion. [Emphasis added.]

95. The foregoing statements made by SCI and the Individual Defendants were materially false and misleading at the time they were made because these defendants knew, or were reckless in not knowing, and failed to disclose that:

(a) the profitability of SCI's funeral services business was and continued to deteriorate materially as a result of the increasing number of unprofitable funeral services being performed pursuant to preneed funeral service contracts backed by inadequately funded and/or dormant and underperforming preneed mortuary trusts;

(b) SCI's nearly doubling of its market share since 1990 "mainly through acquisitions, new construction and prearranged funerals" resulted in the accumulation of an enormous backlog of preneed contracts backed by inadequately funded and/or dormant and underperforming mortuary trust assets, resulting in drastically decreasing profits margins;

(c) far from establishing SCI Financial Services, Inc. "to facilitate the expansion of SCI's pre-need business and financial activities worldwide," as defendants claimed, the creation of this subsidiary marked the first time in SCI's history that the Company had implemented any concrete steps to manage actively at least a portion of its preneed trust assets. Prior to the creation of this subsidiary, and notwithstanding defendants' earlier representations about a "new investment program," no individual or organization at SCI had been responsible for actively managing those assets;

(d) SCI's new investment management operations through the establishment of SCI Financial Services, Inc. would not be involved in managing of the vast majority of SCI's existing multi-billion dollar backlog of preneed mortuary trust assets acquired in SCI's funeral home acquisitions, which would continue to be invested in underperforming interest bearing vehicles, such as bank CDs; and

(e) the acquisition of ECI was part of SCI's attempt to establish, belatedly, a means to actively manage its preneed mortuary trust assets in order to ensure that its future sales

of preneed funeral contracts would not result in the kind of unprofitable funeral services increasingly generated by a substantial portion of SCI's existing multi-billion dollar preneed backlog.

96. On November 10, 1998, Death Care Business Advisor published an article entitled SCI Reports 14 Percent Gains in Income, Share Earnings. This article discussed SCI's third quarter 1998 financial results, quoted defendants Waltrip and Champagne, and stated in relevant part:

A slowdown in the number of deaths in North America did not stop Service Corporation International from racking up double-digit gains in net income and earnings per share for the third quarter of 1998 (see detailed results on p4). THE COMPANY USED ITS STRATEGY OF ACQUISITIONS COMBINED WITH A CONSCIOUS EFFORT TO CUT COSTS TO, AS SCI CHAIRMAN ROBERT WALTRIP SAID, "ADD VALUE TO SCI TODAY AND LONG TERM."

Commenting on future plans, SCI, which holds an 11 percent market share in the funeral industry, has aggressive plans to grow its business operations.

* * *

SCI Takes on More Preneed

RESPONDING TO CONCERNS THAT THE DEATH RATE WAS FALLING, SCI TOUTED THE MOVES IT HAS MADE IN THE PRENEED FUNERAL MARKET, INCLUDING THE RECENT ACQUISITION OF AMERICAN MEMORIAL LIFE, THE PRENEED INSURANCE DIVISION OF AMERICAN ANNUITY GROUP, INC. ON JULY 1. THE COMPANY PAID 164 MILLION. TO FACILITATE SCI'S GROWTH IN THIS AREA, THE COMPANY FORMED A NEW SUBSIDIARY, SCI FINANCIAL SERVICES INC. TO HANDLE PRENEED AND OTHER COMPANY FINANCIAL ACTIVITIES.

IN THAT AREA, THE COMPANY SHOWED BOOMING GROWTH, WITH REVENUES GROWING FROM 21.5 MILLION IN THE THIRD QUARTER OF 1997 TO 65.8 MILLION FOR THE THIRD QUARTER OF 1998, INCORPORATING THE ACQUISITION OF AML INTO ITS FINANCIAL RESULTS.

"IN 1997, DOMESTICALLY, JUST OVER 25 PERCENT OF THE ATNEED SERVICES WE PROVIDED WERE THE CULMINATION OF A PRE-ARRANGED CONTRACT. THAT MEANS ONE-QUARTER OF OUR FUNERALS CAME FROM THE BACKLOG, UP TWO PERCENTAGE POINTS FROM 1996," SAID SCI CHIEF FINANCIAL OFFICER GEORGE CHAMPAGNE. "FOR THE FIRST NINE MONTHS

OF 1998, THAT PERCENTAGE IS JUST BELOW 27 PERCENT. PRENEED IS PROVIDING AN INCREASING AMOUNT OF OUR ATNEED SERVICES, AND THERE IS POTENTIAL TO EXPAND MARKET SHARE."

* * *

Expenses Drop in Quarter

DESPITE THE GROWTH THE COMPANY ACHIEVED THROUGH ACQUISITION, THE FLAT DEATH RATE DOMESTICALLY CAUSED IT TO BECOME AGGRESSIVE IN THE AREA OF EXPENSE REDUCTION. For the third quarter of 1998, general and administrative expenses were 15.4 million, a decrease from the 16.7 million SCI spent last year.

Champagne said that SCI has made an effort to reduce those expenses, but they should see a reasonable upswing in the fourth quarter as most executive compensation and bonuses accrue during that time. Following that, he said they can be expected to increase reasonably, as expected, based on expansion and market conditions. [Emphasis added].

97. The foregoing statements made by defendants Waltrip and Champagne were materially false and misleading at the time they were made because these defendants knew, or were reckless in not knowing, and failed to disclose that:

(a) far from enjoying a unique advantage over its competitors in addressing the slowdown in North American deaths by virtue of acquisition and cost cutting, SCI was continuing to experience drastic deterioration in its funeral services profit margins as a result of its backlog of inadequately funded and/or dormant and underperforming preneed mortuary trust assets;

(b) the acquisition of American Memorial and the formation of SCI Financial Services, Inc. did not address SCI's backlog of unprofitable preneed funeral service contracts; and

(c) the "booming growth" and increased revenues from SCI's new financial activities were part of SCI's scheme to mask its increasingly deteriorating profit margins in its preneed funeral services business, and the touted increase in the number of funerals "from the

backlog" of preneed contracts was, in fact, fueling the profit margin deterioration, and was not, as represented, a positive development for SCI.

98. On November 16, 1998, SCI filed its Form 10-Q for the quarter ended September 30, 1998 with the SEC (the "1998 Q3 Form 10-Q"). The 1998 Q3 Form 10-Q was also incorporated by reference into the Registration Statement/Prospectus for SCI's acquisition of ECI, filed on November 19, 1998. The 1998 Q3 Form 10-Q was signed by defendant Champagne and contained the following materially false and misleading statements in Note 4 to the Consolidated Financial Statements:

Prearranged Funeral Activities

The Company sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts are placed in trust accounts (pursuant to applicable law) or are used to pay premiums on life insurance policies. ... TRUST EARNINGS AND INCREASING INSURANCE BENEFITS ARE ACCRUED AND DEFERRED UNTIL, THE SERVICE IS PERFORMED, AT WHICH TIME THESE FUNDS ARE ALSO RECOGNIZED IN FUNERAL REVENUES AND ARE INTENDED TO COVER FUTURE INCREASES IN THE COST OF PROVIDING A PRICE GUARANTEED FUNERAL SERVICE.... The total value of unperformed prearranged funerals at September 30, 1998 was $3,395,916 ($3,163,357 at December 31, 1997). [Emphasis added.]

1998 Q3 Form 10-Q at 7-8

* * *

99. The foregoing statements were materially false and misleading when made because SCI and the Individual Defendants knew, or were reckless or negligent in not knowing, and failed to disclose that:

(a) SCI's backlog of prearranged funeral contracts included a material number of contracts that were not sold "at prices prevailing when the agreements were signed," but at discounts to those prices; and

(b) The funds from many of SCI's mortuary trusts did not "cover" or exceed the cost of their related "price guaranteed" funeral services, and as a result, SCI was and would continue to experience drastically deteriorating profit margins for its funeral service business.

100. The 1998 Q3 Form 10-Q also stated in the MD&A section, that:

Prearranged Funeral Services

The Company has a marketing program to sell prearranged funeral contracts and the funds collected are generally held in trust or are used to purchase life insurance or annuity contracts. The principal amount of each such prearranged funeral contract will be received in cash by a Company funeral service location at the time the funeral is performed. EARNINGS ON TRUST FUNDS AND INCREASING BENEFITS UNDER INSURANCE AND ANNUITY FUNDED CONTRACTS ALSO INCREASE THE AMOUNT OF CASH TO BE RECEIVED UPON PERFORMANCE OF THE FUNERAL AND ARE INTENDED TO COVER FUTURE INCREASES IN THE COST OF PROVIDING A PRICE GUARANTEED FUNERAL SERVICE AS WELL AS ANY SELLING COSTS. During 1997, the Company completed a review of the prearranged trust investment process which included an asset/liability study. THIS HAS RESULTED IN A NEW INVESTMENT PROGRAM WHICH ENTAILS THE CONSOLIDATION OF MULTIPLE TRUSTEES, THE USE OF INSTITUTIONAL MANAGERS WITH DIFFERING INVESTMENT STYLES AND CONSOLIDATED PERFORMANCE MONITORING AND TRACKING. THIS NEW PROGRAM TARGETS A REAL RETURN IN EXCESS OF THE AMOUNT NECESSARY TO COVER FUTURE INCREASES IN THE COST OF PROVIDING A PRICE GUARANTEED FUNERAL SERVICE AS WELL AS ANY SELLING COSTS....

* * *

Prearranged funeral service sales afford the Company the opportunity to both protect current market share and mix as well as expand market share in certain markets. The Company believes this will stimulate future revenue growth. Prearranged funeral services fulfilled as a percent of the total North American funerals performed annually approximates 25% and is expected to grow, thereby making the total number of funerals performed more predictable. [Emphasis added.]

1998 Q3 Form 10-Q at 19-20.

101. The foregoing statements were materially false and misleading at the time they were made because SCI and the Individual Defendants knew, or were reckless or negligent in not knowing, and failed to disclose that:

(a) SCI's backlog of prearranged funeral contracts included a material number of contracts that were backed by mortuary trusts that were inadequately funded and/or had assets that were not actively invested to ensure growth adequate to cover "the cost of providing a price guaranteed funeral service";

(b) The Preneed Study showed that a material number of funeral homes acquired by SCI failed to actively manage their mortuary trust assets, and, as a result, a material number of SCI's funeral services had been, and would continue to be, performed at significant losses, resulting in an increasingly sharp erosion in SCI's profit margins for funeral services;

(c) SCI's "new investment program" was not actively managing the vast majority of the preneed trust assets SCI had acquired by purchasing independent private funeral homes, and was not obtaining "a real return in excess of the amount necessary to cover" the costs to SCI of providing a material number of prearranged guaranteed price funeral services; and

(d) the increasing percentage of "at need" funerals attributable to "prearranged funeral services fulfilled" was, far from being the positive development represented in the 1988 Q3 Form 10-Q, a reflection of the increasing number of unprofitable funeral services being performed pursuant to preneed contracts backed by underfunded and/or dormant and underperforming mortuary trust assets, which was fueling SCI's drastically deteriorating profit margins.

102. On or about November 19, 1998, defendants Waltrip, Champagne and Heiligbrodt, caused SCI to file the materially false and misleading Registration Statement/Prospectus with the SEC in connection with SCI's acquisition of ECI. The Registration Statement/Prospectus was

signed by each of the foregoing defendants, declared effective by the SEC on November 20, 1998, and incorporated SCI's 1998 Q2 Form 10-Q, and 1998 Q3 Form 1O-Q by reference.

103. The Registration Statement/Prospectus contained numerous materially false and misleading statements and omitted to disclose numerous material facts that were required to be disclosed in order to render the statements made therein not materially misleading at the time it was declared effective, including, by incorporation, the materially misleading statements contained in SCI's 1998 Q2 Form 10-Q and in SCI's 1998 Q3 Form 10-Q, which are set forth in detail above.

104. The Registration Statement/Prospectus at pages 40-41 also contained the following materially false and misleading statements:

SCI's strategy is to:

o continue to expand through the acquisition and construction, both domestically and internationally of funeral homes, cemeteries and crematoria in areas with demographics that SCI believes to be favorable;
o increase the operating margins of its existing and acquired facilities by having those facilities share resources pursuant to SCI's cluster strategy;
o increase revenue per location through the merchandising of a broad line of funeral and cemetery products and services, both on a preneed and at-need basis; and
o increase future volume and revenues through the sale of prearranged funeral services.

105. The foregoing statements were materially false and misleading at the time they were made because SCI and the Individual Defendants knew, or were reckless or negligent in not knowing, and failed to disclose that:

(a) SCI had been, and would continue to, suffer from materially deteriorating profit margins as a result of its enormous backlog of preneed funeral service contracts that were backed by inadequately funded and/or dormant and underperforming mortuary trust assets; and

(b) those deteriorating profit margins and the material adverse impact they had on SCI's overall profits and earnings would not be reversed by SCI's touted strategies of: continued expansion through "acquisition and construction"; having facilities "share resources pursuant to SCI's cluster strategy"; increased "merchandising"; or increased sales of "prearranged funeral services."

106. The Merger Agreement, which was made an exhibit to the Registration Statement/Prospectus and incorporated therein by reference, contained the following statement at pages A15-16, in the form of a representation by SCI:

there has not been any event, occurrence, development or state of circumstances or facts which has had, or could reasonably be anticipated to have, individually or in the aggregate, a Material Adverse Effect.

107. The Merger Agreement provided that this statement "shall be true and correct in all material respects... as of the Closing Date" as a condition to the consummation of the merger.

108. On January 19, 1999, the merger was consummated, and, as of that date, SCI, by virtue of, inter alia, its increasingly deteriorating funeral service profit margins, had suffered a Material Adverse Effect, as reflected by its poor earnings per share in the fourth quarter of 1998, which ended almost three weeks prior to the closing of the merger.

109. SCI and the Individual Defendants' failure to disclose the existence of Material Adverse Effects which they knew, or were reckless or negligent in not knowing, at the time that the Registration Statement/Prospectus was filed with the SEC and declared effective and, as a result the Registration Statement/Prospectus was materially false and misleading. Further, on or about January 19, 1999, by announcing in a press release that the merger had been completed, SCI

and the Individual Defendants impliedly told investors that the representation that there had been no material adverse changes was true as of the closing of the merger when, in fact, they knew or recklessly disregarded the true and undisclosed facts regarding the adverse earnings and causes thereof.

ADDITIONAL SCIENTER ALLEGATIONS

DEFENDANTS' MOTIVES TO MISREPRESENT SCI'S FINANCIAL CONDITION

110. Defendants were highly motivated to conceal the true reasons behind SCI's funeral margin contraction and the negative impact that SCI's unprofitable multi-million dollar preneed funeral backlog had already had, and was continuing to have, on SCI's profit margins and earnings. By doing so, defendants were able to cause the market price of SCI's to become and remain materially artificially inflated (artificially depressed in the case of put options) throughout the Class Period. Because the consideration paid by SCI to ECI stockholders was SCI common stock, SCI was able to effectively purchase ECI with "watered stock," thereby saving SCI millions.

111. As alleged above, the ECI acquisition was critical to the Company's ability to turn around its unprofitable preneed business and therefore represented significant motivation to defraud Class members.

112. Under Section 9.1 of the Merger Agreement, ECI had the right to terminate the Merger Agreement "if the representations and warranties of [SCI] shall fail to be true and correct in all material respects...." Thus, prior to negotiating the deal with ECI, SCI was motivated to maintain SCI's stock price in an effort to acquire ECI in a stock-for-stock transaction for less than ECI's true value. After the Merger Agreement was executed, but before the deal closed,

SCI was motivated to conceal the adverse developments from ECI to prevent ECI from terminating the Merger Agreement. Disclosure of SCI's unprofitable preneed business would have constituted a Material Adverse Effect, as contemplated by the Merger Agreement. Had SCI admitted the existence of the Company's problems, ECI would have been able to terminate the Merger Agreement under Section 9.1.

113. In addition, defendants were motivated to conceal the truth concerning SCI's funeral margin contraction in order to obtain and maintain favorable ratings on the debt securities that SCI had registered with the SEC but not yet issued.

114. In particular, in a prospectus filed with the SEC on May 29, 1998, SCI registered to sell up to $1 billion of debt, common stock and warrants to the public from "time-to-time." Similarly, in a prospectus filed with the SEC on October 15, 1998, SCI registered to sell an additional $500 million in SCI preferred stock. The debt and equity securities were issued pursuant to shelf registration statements that were declared effective by the SEC on June 10, 1998 and October 29, 1998, respectively. As a result of filing the shelf registration statements, SCI was able to avail itself of much-needed funds to finance the Company's acquisitions and operations.

115. The omissions concerning SCI's unprofitable preneed business ensured that the debt securities would be priced as attractively as possible to SCI upon issuance. Favorable pricing allowed SCI to save millions of dollars in interest payments that would otherwise have been paid to bondholders had SCI's debt instruments been assigned lower ratings by credit rating agencies such as Standard & Poor's. Also, the omissions would ensure that SCI stock and warrants would be sold to the investing public at the highest possible prices.

116. The defendants' omissions about the unprofitable preneed business had the desired effect on the public, particularly Standard & Poor's ("S&P"). On October 27, 1998, shortly after defendants announced SCI's favorable third quarter results which omitted from disclosure facts about the unprofitable preneed business, S&P issued a press release praising SCI's "well-established and diverse geographic market positions, and strong industry characteristics
[which] should enable the company to generate predictable cash flow." Most importantly, S&P affirmed its triple-B plus corporate credit, unsecured debt, and bank loan ratings as well as its triple B plus subordinated debt rating and it's A-2 commercial paper rating on SCI. S&P also assigned its preliminary triple B plus/triple B rating to the Company's debt registered pursuant to the shelf registration statement.

117. Thus, SCI's ability to sustain growth through continued acquisition activity was intimately tied to its ability to maintain favorable credit ratings and also periodically issue equity for cash flow purposes. By publicly making materially false and misleading statements and omitting from disclosure material facts, defendants had been able to artificially increase and maintain the inflated price of SCI common stock, maintain favorable credit ratings, and increase SCI's shelf registration for a announcement of a combined debt and equity offering of $1.5 billion.

THE INDIVIDUAL DEFENDANTS KNEW THE TRUE FINANCIAL CONDITION OF SCI

118. SCI's earnings shortfall for the fourth quarter 1998 was an extraordinary event in the financial history of SCI. Prior to the fourth quarter of 1998, SCI's management repeatedly forecasted current quarterly financial performance with extraordinary accuracy.

119. SCI's quarterly results are particularly easy for management to estimate prior to a quarter's end because of a number of factors generally applicable to companies in the death care field and because of certain factors particularly applicable to SCI. Initially, death care providers have an extremely high level of recurring, budgeted, fixed costs that generally do not fluctuate greatly with demand for a company's services. Unlike companies in other industries, death care providers cannot respond to increased demand by delaying the period in which a service will be provided; obviously, a death care provider cannot promise to fill an order "in a week or two" and still retain a customer. The SCI 1998 Form 10-K explains, "[t]he funeral business has a high fixed cost structure (approximately 80%-90% of funeral costs) that does not easily lend itself to reduction during periods of slower revenue growth."

120. Additionally, demand for death services is steadier than almost any other industry. Demand for death care services may fluctuate somewhat as a result of disease patterns or seasonal changes, but demand is not affected by changes in consumer taste or technological developments.

121. SCI is also able to accurately measure its current quarterly performance because SCI's Falcon system reports North American cemetery and funeral home sales on a daily basis. This enables SCI to determine accurately the level of funeral and cemetery sales at any point during a quarter.

122. Further, it reasonably could have been anticipated that the declining profitability caused by SCI's undisclosed backlog of inadequately funded and/or dormant and underperforming preneed trust assets would continue into the fourth quarter. Indeed, as a result of the increasingly deteriorating profitability caused by inadequately funded preneed contracts, costs had been steadily increasing as a percentage of revenue throughout the entire 1998 year. In the first quarter 1998,

SCI's costs were approximately 68% of revenue; in the second quarter 1998 costs were approximately 72% of revenue; in the third quarter 1998 costs were approximately 76% of revenue; and in the fourth quarter 1998 costs were approximately 82% of revenue.

THE TRUTH IS REVEALED

123. On January 26, 1999, just five business days after SCI and ECI jointly announced the completion of the Merger, SCI shocked the investment community by issuing a press release which stated:

[SCI], the world's largest funeral and cemetery company, announced today that it expects diluted earnings per share for the fourth quarter of 1998 to be lower than current analyst expectations.

SCI's fourth quarter 1998 gross profits were $141,246,000. This represented a 19% decline from SCI's third quarter 1998 gross profits and a 24% decline from SCI's fourth quarter 1997 gross profits. SCI's earnings per share for fourth quarter 1998 were $.23. This was 28% below EPS for third quarter 1998; 36% below SCI's EPS for the fourth quarter 1997; and 45% below the average forecast or "consensus estimate" for fourth quarter EPS by analysts who followed SCI. These "consensus estimates" were based on misleading information given directly by SCI to professional market analysts. Defendants deceptively failed to disclose to analysts, the market, or to ECI or its shareholders in connection with the negotiation and closing of its acquisition of ECI, the grave and worsening losses in its preneed funeral business.

124. The market's reaction to the January 26, 1999 disclosure was swift and severe. The price of SCI common stock plunged from $34 7/16 on January 25 to $19 1/8 on trading of over 36 million shares, a one-day decline of $15.3125 or 44%. This price decline also effectively cut the consideration paid for each share of ECI common stock in the merger virtually in half.

Pursuant to the Merger Agreement, ECI shareholders received SCI common stock that was worth $25.53 when the deal closed, in exchange for each share of ECI common stock they owned. Following SCI's January 26, 1999 disclosure, that same SCI common stock was worth only $12.79, effectively reducing the total consideration paid for ECI from $556 million to $278 million. As of September 1, 1999, SCI's common stock was trading at or about $14.00 per share.

125. On February 9, 1999, the Company issued a press release purporting to explain the earnings shortfall. The primary reasons cited for the shortfall were decreased revenues and increased costs. However, the true reason for the earnings surprise was revealed later by defendant Heiligbrodt.

126. Indeed, the Company and defendant Heiligbrodt have admitted that the earnings shortfalls reported for fiscal year 1998 resulted from losses on SCI's preneed business which was information known to defendants throughout the Class Period. A story published by the Death Care Business Advisor on February 23, 1999 stated in part:

Because the company said that it is now selling preneed at prices which, combined with its investment strategy should lead to increased at-need earnings, SCI is understandably bullish on preneed. Especially when it estimates that only 30 percent of the people who buy preneed through an SCI facility would be an SCI atneed customer.

For the time being, though, preneed is hurting company profit margins. Because SCI does not count preneed funds in its earnings until services are delivered, many of the 27 percent of SCI calls in 1998 that were the result of a preneed sale were from policies sold 12-15 years ago.

According to SCI, many of those policies were sold by third parties, such as companies later purchased by SCI. ACCORDING TO [DEFENDANT) HEILIGBRODT, THE AT NEED VALUE OF MANY OF THE PRENEED PLANS SOLD IN THE 1980S IS ABOUT 20 PERCENT LESS THAN THE COMPANY PRESENTLY CHARGES FOR ITS SERVICES. [Emphasis added.]

127. Following up on its February 23, 1999 article, Death Care Business Advisor published another story on August 12, 1999 entitled "SCI Looking For Comeback In 2000; Company Results Miss Targets As Expected: Management Expects Flat Earnings in 1999" stating, in part:

SCI has said in the past that it loses money on some of its preneed services because the contract was sold at too low a price by a funeral home or death care company later bought by SCI.

When pursuing preneed, it is worth considering that a large percentage of the contracts still become at-need within 5 years of purchase, not leaving a lot of time to make up the seller's commission and inflationary price increases, to ensure the preneed seller of the same profit ordinarily achieved from an atneed funeral.

While these numbers are not likely to slow the boom in the sale of preneed funeral contract, they are worth looking over. Preneed sales are supposed to ensure a successful future, not serve as a drain on company profit.

PLAINTIFFS' INVESTIGATION

128. Plaintiffs' allegations set forth herein are based on a thorough investigation conducted by and through their attorneys. Such investigation included a review and analysis of:

a. SCI's filings with the SEC both prior to and throughout the Class Period;

b. the Company's Annual Reports to shareholders both prior to and during the Class Period;

c. The Company's press releases and other publicly disseminated statements made by defendants prior to, during, and following the Class Period;

d. reports, articles, and other written materials concerning the Company and the subject matter of this complaint;

e. analyst reports and investor advisory service reports; and

f. consultations with forensic accountants, former company employees and other individuals knowledgeable about the Company's business, operations and services.

INAPPLICABILITY OF STATUTORY SAFE HARBOR

129. The statutory safe harbor provided for forward-looking statements pursuant to 15 U.S.C. Section 78u-5 does not apply to any of the false statements pleaded in this Complaint. The statements alleged to be false and misleading herein all relate to then-existing facts and conditions known to defendants. In addition, to the extent that defendants may claim that certain statements alleged to be false and misleading may be characterized as forward looking, (i) such statements were not identified as "forward-looking statements" when made; (ii) there was no statement made with respect to any of those representations forming the basis of this complaint that actual results "could differ materially from those projected"; and (iii) there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made, the particular speaker had actual knowledge that the particular forward-looking statement was false, and/or the forward-looking statement was authorized and/or approved by an executive officer of SCI who knew that those statements were false when made.

FRAUD ON THE MARKET PRESUMPTION

130. At all relevant times, the market for SCI securities was an efficient market for the following reasons, among others:

a. SCI common stock met the requirements for listing, and was listed and actively traded, on the New York Stock Exchange (the "NYSE"), a highly efficient market;

b. As a regulated issuer, SCI filed periodic public reports with the SEC and the NYSE;

C. SCI was followed by securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace. The securities firms that followed the Company during the Class Period, included, inter alia, Morgan Stanley Dean Witter, ABN AMRO; Merrill Lynch; J.P. Morgan; Nations Banc Montgomery Securities; Wasserstein Perella; and Bear, Stearns; and

d. SCI regularly communicated with public investors by means of established market communication mechanisms, including through regular dissemination 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. Each of these releases was publicly available and entered the public marketplace.

As a result, the market for SCI common stock promptly digested current information with respect to SCI from all publicly-available sources and all such information was reflected in market prices

of SCI common stock. Under these circumstances, all those who purchased or otherwise acquired SCI securities during the Class Period suffered similar injury through their acquisition of such securities at artificially inflated prices and a presumption of reliance applies.

COUNT I

AGAINST ALL DEFENDANTS FOR VIOLATION OF SECTION 11 OF THE SECURITIES ACT

131. Plaintiffs incorporate each of the foregoing paragraphs as if fully set forth herein, except to the extent such allegations charge the defendants with intentional or reckless conduct. For the purposes of this Count, plaintiffs expressly do not allege that any defendant acted with scienter or fraudulent intent, which is not an element of a Section 11 claim.

132. This Count is asserted against all defendants for violations of
Section 11 of the Securities Act, 15 U.S.C. Section 77(k).

133. This count is brought on behalf of those Class members who exchanged shares of ECI common stock for shares of SCI common stock in connection with the Merger or held employee options to purchase ECI common stock under a stock plan of ECI that became options to purchase SCI common stock as a result of the Merger.

134. SCI is the issuer of the stock via the Registration Statement/Prospectus filed with the SEC in connection with the Merger. The Individual Defendants are signatories of the Registration Statement/Prospectus.

135. The Registration Statement/Prospectus contained untrue statements of material fact and/or omitted to disclose material facts required to be stated therein or necessary to make the statements made therein not misleading as alleged herein.

136. Defendants participated in the preparation of, issued, caused to be issued and participated in the issuance of the materially false and misleading Registration Statement/Prospectus, which was inaccurate and misrepresented or failed to disclose, inter alia, material facts concerning SCI's business and prospects, as set forth above.

137. The Individual Defendants as directors and/or officers of SCI and as signatories of the Registration Statement/Prospectus that was filed with the SEC were responsible for the preparation of the Registration Statement/Prospectus and failed to make a reasonable investigation or possess reasonable grounds for believing that the representations contained in the Registration Statement/Prospectus, were true and that they disclosed all material facts.

138. The Individual Defendants are primarily liable under Section 11 of the Securities Act and are also secondarily liable as controlling persons of SCI under Section 15 of the Securities Act.

139. As a direct and proximate result of the false and misleading statements in the Registration Statement/Prospectus, plaintiffs and the Class acquired SCI securities issued pursuant to the defective Registration Statement/Prospectus.

140. Accordingly, plaintiffs and the Class have sustained damages as a result of the violations of Section 11 of the Securities Act by defendants and are entitled to recover damages therefore pursuant to Section 11(e) of the Act.

141. At the time they approved the Merger and acquired SCI common stock, plaintiffs and the class were without knowledge of the untruths and omissions alleged herein.

142. The action was brought within one year after the discovery of the untrue statements and omissions and within three years after SCI stock was offered to the public in the Merger.

COUNT II

AGAINST SCI FOR VIOLATION OF SECTION 12(a)(2) OF THE SECURITIES ACT

143. Plaintiffs incorporate each of the foregoing allegations as if fully set forth herein, except to the extent that such allegations charge the defendants with intentional or reckless misconduct. For the purposes of this Count, plaintiffs expressly do not allege that any defendant acted with scienter or fraudulent intent, which is not an element of a Section 12(a)(2) claim.

144. This count is asserted against SCI for violation of Section 12(a)(2) of the Securities Act, 15 U.S.C. Section 771.

145. This count is brought on behalf of those Class members who exchanged shares of ECI common stock for shares of SCI common stock in connection with the Merger or held employee options to purchase ECI common stock under a stock plan of ECI that became options to purchase SCI common stock as a result of the Merger.

146. SCI was a seller, offeror, and/or solicitor of sales of the SCI common stock for its financial benefit pursuant to the Registration Statement/Prospectus in connection with the Merger.

147. The Registration Statement/Prospectus contained materially false and misleading statements and omitted to state material facts necessary in order to make the statements, in light of the circumstances under which they were made, not misleading.

148. None of the defendants named in this Count made a reasonable investigation or possessed reasonable grounds for the belief that the statements contained in the Registration Statement/Prospectus were true, without omissions of any material facts and were not misleading.

149. Plaintiffs, individually and representatively, hereby elect to rescind and tender to SCI those securities that plaintiffs and other members of the Class continue to own, in return for the consideration paid for those securities together with interest thereon.

150. Plaintiffs and members of the Class who have sold their SCI common stock are entitled to recissory damages.

151. The action was brought within one year after the discovery of the untrue statements and omissions and within three years after SCI common stock was offered to the public.

COUNT III

AGAINST THE INDIVIDUAL DEFENDANTS FOR
VIOLATION OF SECTION 15 OF THE SECURITIES ACT

152. Plaintiffs repeat and reallege each and every allegation contained above as if fully set forth herein, except to the extent that such allegations charge the Individual Defendants with intentional or reckless conduct. For purposes of this Count, plaintiffs do not allege than any Individual Defendant acted with scienter or fraudulent intent, which is not an element of controlling persons' liability under Section 15.

153. Count III is brought pursuant to Section 15 of the Securities Act, 15 U.S.C. Section 77o, against the Individual Defendants. SCI is liable to plaintiffs and the Class as an issuer under Section 11 and as a seller under
Section 12(a)(2) of the Securities Act, as previously set forth in Counts I and II above.

154. This count is brought on behalf of those Class members who exchanged shares of ECI common stock for shares of SCI common stock in connection with the Merger or held employee options to purchase ECI common stock under a stock plan of ECI that became options to purchase SCI common stock as a result of the Merger.

155. The Individual Defendants were controlling persons of SCI by virtue of their positions as senior officers and directors of the Company. As a result, the Individual Defendants are jointly and severably liable with and to the same extent as SCI under Section 15 of the Securities Act for SCI's primary violations of Sections 11 and 12(2)(a) of the Securities Act.

COUNT IV

AGAINST ALL DEFENDANTS FOR
VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5

156. Plaintiffs incorporate the foregoing allegations as if fully set forth herein. This claim is asserted against SCI and the Individual Defendants.

157. These defendants, and each of them, carried out a plan, scheme and course of conduct which was intended to and did: (i) deceive the investing public, including plaintiffs and other Class members, as alleged herein; and
(ii) artificially inflate (artificially deflate in the case of put options) and maintain the market price of SCI securities. In furtherance of this unlawful scheme, plan and course of conduct, these defendants, and each of them, took the actions set forth herein.

158. Defendants employed devices, schemes, and artifices to defraud; made untrue statements of material fact and/or omitted to state material facts necessary to make the statements made not misleading; and engaged in acts, practices and a course of business which operated as a fraud and deceit upon Class members in an effort to maintain artificially high market prices for SCI's common stock in violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. These defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons.

159. 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, the defendants had a duty to promptly disseminate truthful information that would be material to investors so that the market prices of the Company's publicly traded common stock would be based on truthful, complete and accurate information.

160. Defendants, individually and in concert, directly and indirectly, by the use of means and 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 Company's financial results, business, operations, and future outlook as specified herein. 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 mislead purchasers of SCI's securities concerning the Company's business prospects and financial condition, 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 the Company's financial and business operations in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon Class members.

161. Defendants had actual knowledge of the misrepresentation and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and

effect of concealing SCI's operations and business affairs from the investing public and supporting the artificially inflated price of its securities.

162. 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 SCI securities was artificially inflated (artificially deflated in the case of put options) throughout the Class Period. In ignorance of the fact that the market price of SCI's 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 the truth of any representations made to appropriate agencies as the investing public, at the times at which any statements were made, and/or on the absence of material adverse information that was known to or recklessly disregarded by defendants but not disclosed in public statements by defendants, plaintiffs and the other members of the Class purchased SCI's securities at artificially high prices and were damaged thereby.

163. At the time of said misrepresentations and omissions, plaintiffs and the other members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs and the other member of the Class and the marketplace known of the true nature of the operations of the Company and the noncompliance with federal law, which were not disclosed by defendants, plaintiffs and the other members of the Class would not have acquired their SCI securities, or, if they had acquired such securities, they would not have done so at the artificially inflated (artificially deflated in the case of put options) prices which they paid.

164. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated there under.

165. As a direct and proximate result of these defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of SCI securities.

COUNT V

AGAINST THE INDIVIDUAL DEFENDANTS FOR
VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT

166. Plaintiffs incorporate the foregoing allegations as if fully set forth herein. This claim is asserted against the Individual Defendants.

167. The Individual Defendants acted as controlling persons of SCI within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their stock ownership, executive positions and Board membership, as alleged above, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the operations of the Company, and possessed the power and/or ability to control each of the wrongful acts and practices complained of herein, including the content and dissemination of the various statements which plaintiffs contend are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company's internal reports, press releases, public filings and other statements alleged by plaintiffs 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.

168. In particular, the Individual Defendants had direct 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.

169. As set forth above, SCI violated Section 10(b) and Rule l0b-5 by its acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons of SCI, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiffs and the other members of the Class suffered damages in connection with their purchases of SCI securities.

COUNT VI

AGAINST SCI FOR VIOLATIONS
OF SECTION 20A OF THE EXCHANGE ACT

170. Plaintiffs incorporate the foregoing allegations as if fully set forth herein. This claim is asserted against SCI. This count is brought on behalf of those Class members who exchanged shares of ECI common stock for shares of SCI common stock in connection with the Merger or held employee options to purchase ECI common stock under a stock plan of ECI that became options to purchase SCI common stock as a result of the Merger.

171. The exchange of SCI stock for ECI stock pursuant to the Merger Agreement constituted a sale of securities within the meaning of Section 20A of the Exchange Act. 15 U.S.C. Section 78t-1. At the time of the exchange of SCI stock for ECI stock, SCI was in possession of material, non-public information concerning the financial condition of SCI. As a result of SCI's failure to disclose the material, non-public information in its possession, SCI was able to negotiate a higher ratio of exchange of SCI stock for ECI stock.

172. By virtue of the foregoing, SCI has violated Section 20A of the Exchange Act.

173. As a direct and proximate result of SCI's wrongful conduct, members of the Class suffered damages in connection with their exchange of ECI stock and ECI options for SCI stock and SCI options.

PRAYER FOR RELIEF

WHEREFORE, plaintiffs, on their own behalf and on behalf of the other members of the Class. respectfully request that this Court enter judgment in their favor and against defendants as follows:

(a) Awarding plaintiffs and the other members of the Class rescission of their shares and/or the appropriate measure of damages;

(b) Awarding plaintiffs and the other members of the Class prejudgment and post-judgment interest, as well as their reasonable attorneys' fees, expert witness fees and other costs and expenses; and

(c) Awarding such other relief as this Court may deem just and proper.

JURY DEMAND

Plaintiffs demand a trial by jury.

DATED: September 3, 1999

Respectfully submitted,

(713) 627-7057 Fax

Lead Counsel for Plaintiffs

OF COUNSEL:

GREENBERG, PEDEN, SIEGMYER & OSHMAN, P.C.
David E. Sharp
Tenth Floor, 12 Greenway Plaza
Houston, TX 77046
(713) 627-2720
(713) 627-7057 Fax

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ATTORNEYS FOR PLAINTIFFS

Certificate of Service

This document was served on defendants' counsel of record on September 3, 1999 pursuant to the Federal Rules of Civil Procedure.

/s/ David E. Sharp
------------------
    David E. Sharp

EXHIBIT 99.2

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

(
(

IN RE SERVICE CORPORATION (
INTERNATIONAL ( CIVIL ACTION NO. H-99-0280

( (Judge Lynn N. Hughes)

(
(

DEFENDANTS' ANSWER TO THE
CONSOLIDATED CLASS ACTION COMPLAINT

Defendants Service Corporation International ("SCI"), R. L. Waltrip, George R. Champagne and L. William Heiligbrodt file this Answer to the Consolidated Class Action Complaint, and would show the Court as follows:

RESPONSES TO ALLEGATIONS

1. Admit that this is a civil action in which Plaintiffs have brought suit under the various statutes, rules and regulations cited in Paragraph 1 of the Consolidated Class Action Complaint, but deny the truth of any of those allegations and further deny that any factual basis for cognizable claims under such statutes and laws exist as against the Defendants.

2. Admit that this Court has subject matter jurisdiction over this cause based upon application of the laws set out in Paragraph 2 of the Consolidated Class Action Complaint, but deny that the factual basis for such jurisdiction exists.

3. Admit that this Court has venue over this cause based upon application of the laws set out in Paragraph 3 of the Consolidated Class Action Complaint, but deny any factual basis for cognizable claims under such statutes and laws exist as against the Defendants.

4. Deny.

5. Admit the first two sentences of Paragraph 5 of the Consolidated Class Action Complaint; deny the third sentence of Paragraph 5 of the Consolidated Class Action Complaint.

6. Admit.

7. Admit that R.L. Waltrip is SCI's Chairman of the Board and Chief Executive Officer. Admit that the Registration Statement/Prospectus was declared effective on November 20, 1998. Deny the remaining allegations contained in Paragraph 7 of the Consolidated Class Action Complaint.

8. Admit that George Champagne is SCI's Senior Vice President and Chief Financial Officer. Deny the remaining allegations contained in Paragraph 8 of the Consolidated Class Action Complaint.

9. Admit that L. William Heiligbrodt was SCI's President and Chief Operating Officer. Deny the remaining allegations contained in Paragraph 9 of the Consolidated Class Action Complaint.

10. Admit.

11. Deny the first two sentences of Paragraph 11 of the Consolidated Class Action Complaint. Admit the third sentence of Paragraph 11 of the Consolidated Class Action Complaint.

12. Deny.

13. Deny.

14. Deny.

15. Admit that the Individual Defendants had an obligation to comply with applicable federal securities laws. Deny the remaining allegations.

16. Admit.

17. Admit.

18. Admit.

19. Admit.

20. Admit that Paragraph 20 of the Consolidated Class Action Complaint correctly lists the number of funeral homes acquired worldwide by SCI, year by year, from 1990 to 1998. However, Defendants deny that the total number of funeral homes acquired by SCI is 2,873. Plaintiff has made a mathematical error. The correct number should be 3,136.

21. Admit.

22. Deny that the contractual obligations to perform guaranteed price funerals in the future were typically reflected as a liability on the books of the independent funeral homes prior to their acquisition by SCI. Admit the remaining allegations contained in Paragraph 22 of the Consolidated Class Action Complaint.

23. Admit the first, second and fifth sentences of Paragraph 23 of the Consolidated Class Action Complaint. Deny the remaining allegations contained in Paragraph 23 of the Consolidated Class Action Complaint.

24. Admit that the practice of selling preneed funeral contracts began to gain increasing acceptance in the late 1980s. Admit that financial management of some mortuary trust assets consisted of opening a certificate of deposit. Deny the remaining allegations contained in Paragraph 24 of the Consolidated Class Action Complaint.

25. Deny.

26. SCI is without sufficient knowledge to admit or deny the first sentence of Paragraph 26 of the Consolidated Class Action Complaint. Deny the remaining allegations.

27. Admit that the block quotation is contained in the March 1997 issue of The Director. Deny the remaining allegations contained in Paragraph 27 of the Consolidated Class Action Complaint.

28. Admit that SCI acquired ownership of more than 2,873 independent funeral homes from 1990-1998. Admit that between 1992 and 1998, SCI's prearranged funeral contract backlog increased from $1.2 billion to $3.7 billion. Deny that the chart accurately reflects the prearranged funeral services sold.

29. Deny.

30. Deny.

31. Admit that during 1995 SCI purchased 1,263 independent funeral homes and acquired $656 million in preneed funeral contracts. Deny the remaining allegations contained in Paragraph 31 of the Consolidated Class Action Complaint.

32. Admit that during 1996 SCI undertook "a review of the prearranged trust investment process which included an asset/liability study." Deny the remaining allegations contained in Paragraph 32 of the Consolidated Class Action Complaint.

33. Admit that the block quotation is contained in SCI's 10-K for the year ended December 31, 1996. Deny the remaining allegations contained in Paragraph 33 of the Consolidated Class Action Complaint.

34. Admit that the block quotation is contained in SCI's 10-K for the year ended December 31, 1997. Deny the remaining allegations contained in Paragraph 34 of the Consolidated Class Action Complaint.

35. Deny.

36. Admit that the chart in Paragraph 36 of the Consolidated Class Action Complaint accurately reflects SCI's gross profit margins for fiscal year 1998. Deny the remaining allegations contained in Paragraph 36 of the Consolidated Class Action Complaint.

37. Deny.

38. Admit that the August 28, 1995 edition of the Boston Globe included the referenced quotations. Deny the remaining allegations contained in Paragraph 38 of the Consolidated Class Action Complaint.

39. Admit that the December 8, 1996 edition of the Boston Globe and the December 11, 1996 edition of the Seattle Times included the referenced quotations. Deny the remaining allegations contained in Paragraph 39 of the Consolidated Class Action Complaint.

40. Admit that the July 6, 1996 edition of The Ledger included a story about a salesman from the SCI-operated Glen Abbey Memorial Gardens. Admit that a lawsuit was filed against SCI and Glenn Abbey Memorial Gardens on behalf of Mrs. Carriere. Deny the remaining allegations.

41. Admit that the various periodicals cited included stories about SCI. Deny the remaining allegations.

42. Deny.

43. Deny.

44. Deny.

45. Deny.

46. Deny.

47. Admit that SCI announced the creation of SCI Financial Services, Inc. in July, 1988.

Deny the remaining allegations.

48. Deny.

49. Deny.

50. Admit that the block quotations are contained in ECI's 10-K for the year ended December 31, 1997. Deny the remaining allegations contained in Paragraph 50 of the Consolidated Class Action Complaint.

51. Admit that the block quotations are contained in ECI's 10-K for the year ended December 31, 1997. Deny the remaining allegations contained in Paragraph 51 of the Consolidated Class Action Complaint.

52. Admit that the block quotations are contained in ECI's 10-K for the year ended December 31, 1997. Deny the remaining allegations contained in Paragraph 52 of the Consolidated Class Action Complaint.

53. Deny.

54. Deny.

55. Deny.

56. Deny.

57. Deny.

58. Admit.

59. Admit that SCI was unable to divest itself of these properties in time to obtain FTC approval to close the ECI transaction in the fourth quarter of 1998. Deny the remaining allegations contained in Paragraph 59 of the Consolidated Class Action Complaint.

60. Deny.

61. Insofar as the Plaintiffs refer to the Merger Agreement, the document speaks for itself. Deny the remaining allegations contained in Paragraph 61 of the Consolidated Class Action Complaint.

62. Admit.

63. Admit.

64. Admit.

65. Admit that the block quotation is contained in the Merger Agreement. Insofar as the Plaintiffs further refer to the Merger Agreement, the document speaks for itself.

66. Admit that the block quotation is contained in the Merger Agreement. Insofar as the Plaintiffs further refer to the Merger Agreement, the document speaks for itself.

67. Deny.

68. Admit.

69. Admit.

70. Deny.

71. Admit the first two sentences of Paragraph 71 of the Consolidated Class Action Complaint. Deny the remaining allegations contained in Paragraph 71 of the Consolidated Class Action Complaint.

72. Deny.

73. Admit that the block quotation is contained in SCI's July 17, 1998 press release. Deny the remaining allegations contained in Paragraph 73 of the Consolidated Class Action Complaint.

74. Deny.

75. Admit.

76. Deny.

77. Deny.

78. Admit that the block quotation is contained in SCI's July 23, 1998 press release. Deny the remaining allegations contained in Paragraph 78 of the Consolidated Class Action Complaint.

79. Deny.

80. Admit that the block quotation is contained in SCI's August 6, 1998 press release. Deny the remaining allegations contained in Paragraph 80 of the Consolidated Class Action Complaint.

81. Deny.

82. Admit that the block quotation is contained in SCI's August 7, 1998 press release. Deny the remaining allegations contained in Paragraph 82 of the Consolidated Class Action Complaint.

83. Deny.

84. Admit that the block quotation is contained in the August 11, 1998 edition of Death Care Business Advisor. Deny the remaining allegations contained in Paragraph 84 of the Consolidated Class Action Complaint.

85. Deny.

86. Admit.

87. Deny.

88. Admit that the block quotation is contained in SCI's 10-Q for the quarter ended June 30, 1998. Deny the remaining allegations contained in Paragraph 88 of the Consolidated Class Action Complaint.

89. Deny.

90. Admit.

91. Deny.

92. Admit that the block quotation is contained in SCI's September 30, 1998 press release. Deny the remaining allegations contained in Paragraph 92 of the Consolidated Class Action Complaint.

93. Deny.

94. Admit that the block quotation is contained in SCI's October 22, 1998 press release. Deny the remaining allegations contained in Paragraph 94 of the Consolidated Class Action Complaint.

95. Deny.

96. Admit.

97. Deny.

98. Admit that the block quotation is contained in SCI's 10-Q for the quarter ended September 30, 1998. Deny the remaining allegations contained in Paragraph 98 of the Consolidated Class Action Complaint.

99. Deny.

100. Admit.

101. Deny.

102. Deny.

103. Deny.

104. Admit that the block quotation is contained in SCI's Registration Statement/Prospectus. Deny the remaining allegations contained in Paragraph 104 of the Consolidated Class Action Complaint.

105. Deny.

106. Admit.

107. Admit.

108. Deny.

109. Deny.

110. Deny.

111. Deny.

112. Admit the first sentence of Paragraph 112 of the Consolidated Class Action Complaint. Deny the remaining allegations contained in Paragraph 112 of the Consolidated Class Action Complaint.

113. Deny.

114. Admit.

115. Deny.

116. Admit that Standard & Poor's issued a press release on October 27, 1998 that contained the referenced quotations. Deny the remaining allegations contained in Paragraph 116 of the Consolidated Class Action Complaint.

117. Deny.

118. Deny.

119. Deny the first sentence of Paragraph 119 of the Consolidated Class Action Complaint. Admit the remaining allegations contained in Paragraph 119 of the Consolidated Class Action Complaint.

120. Deny.

121. Admit that the Falcon system allows SCI to determine the level of funeral and cemetery sales. Deny the remaining allegations contained in Paragraph 121 of the Consolidated Class Action Complaint.

122. Deny.

123. Admit that SCI issued a press release on January 26, 1999 that contained the referenced block quotation. Insofar as Plaintiffs further refer to the January 26, 1999 press release, the document speaks for itself. Deny the remaining allegations contained in Paragraph 123 of the Consolidated Class Action Complaint.

124. Admit.

125. Admit that SCI issued a press release on February 9, 1999. Deny the remaining allegations contained in Paragraph 125 of the Consolidated Class Action Complaint.

126. Admit that the block quotation is contained in the February 23, 1999 Death Care Advisor. Insofar as Paragraph 126 of the Consolidated Class Action further refers to the February 23, 1999 article, the article speaks for itself.

127. Admit.

128. SCI is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in Paragraph 128 of the Consolidated Class Action Complaint. Therefore, such allegations shall be treated as denied.

129. Deny.

130. SCI is without knowledge or information sufficient to form a belief as to the truth of the allegations contained in Paragraph 128 of the Consolidated Class Action Complaint. Therefore, such allegations shall be treated as denied.

131. Deny.

132. Deny.

133. Deny.

134. Admit.

135. Deny.

136. Deny.

137. Deny.

138. Deny.

139. Deny.

140. Deny.

141. Deny.

142. Deny.

143. Deny.

144. Deny.

145. Deny.

146. Admit.

147. Deny.

148. Deny.

149. Deny.

150. Deny.

151. Deny.

152. Deny.

153. Deny.

154. Deny.

155. Deny.

156. Deny.

157. Deny.

158. Deny.

159. Deny.

160. Deny.

161. Deny.

162. Deny.

163. Deny.

164. Deny.

165. Deny.

166. Deny.

167. Deny.

168. Deny.

169. Deny.

170. Deny.

171. Admit that the exchange of SCI stock for ECI stock pursuant to the Merger Agreement constituted a sale of securities within the meaning of Section 20A of the Exchange Act. Deny the remaining allegations in Paragraph 171 of the Consolidated Class Action Complaint.

172. Deny.

173. Deny.

AFFIRMATIVE DEFENSES

174. The Consolidated Class Action Complaint fails to allege facts sufficient to state a claim upon which relief may be granted.

175. Plaintiffs are not entitled to any recovery from Defendants because the registration statement did not contain any untrue statement of material fact nor did Defendants omit to state any material fact required to be stated or necessary to make the statements made not misleading.

176. Plaintiffs are not entitled to any recovery from Defendants because the documents, filings and announcements quoted did not contain any untrue statement of material fact nor did Defendants omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

177. Plaintiffs are not entitled to any recovery from Defendants because at all relevant times Defendants acted diligently and reasonably and had a good faith belief in the truthfulness of each of the matters alleged in the Consolidated Class Action Complaint to be inaccurate and further

believed that there was no failure to state a material fact alleged in the Consolidated Class Action Complaint to be omitted.

178. Any increase or decrease in the market value of Plaintiffs' stock was the result of market or other factors and not the alleged wrongful conduct on the part of Defendants.

179. Plaintiffs are not entitled to any recovery from Defendants because the substance of the material information that Plaintiffs allege to have been omitted or misrepresented was in fact disclosed in SCI's public filings, prospectuses and other public releases, was otherwise publicly available and/or widely known to the market and to the investing community.

180. Plaintiffs are not entitled to any recovery from Defendants because no act or omission of SCI was the cause in fact or the proximate cause of any damage to Plaintiffs.

181. Plaintiffs are not entitled to any recovery because Plaintiffs did not exercise reasonable care to discover the facts relating to the alleged misstatements or omissions.

182. The Consolidated Class Action Complaint fails to plead fraud against Defendants with the specificity required by Rule 9(b) of the Federal Rules of Civil Procedure.

183. Every act or omission alleged in the Consolidated Class Action Complaint was done or omitted in good faith conformity with the rules and regulations of the Securities and Exchange Commission, and therefore, pursuant to Section 23(a) of the Securities Exchange Act of 1934, there is no liability for any act or omission so alleged.

184. Plaintiffs would have purchased SCI stock even with full knowledge of the facts that they allege were misrepresented or omitted.

185. Defendants lacked the requisite scienter required for liability.

186. Plaintiffs did not rely upon the misrepresentations or misleading statements alleged.

187. The actual facts which Plaintiffs allege were misrepresented or omitted in fact were known to and entered the securities market through credible sources.

188. Plaintiffs fail to satisfy the requirements of the Private Securities Litigation Reform Act of 1995.

WHEREFORE, Defendants pray as follows:

1. That Plaintiffs take nothing by the Consolidated Class Action Complaint;

2. That the complaint be dismissed with prejudice;

3. That Defendants be awarded its costs of suit, including reasonable attorneys' fees;

4. That Defendants have such other, further and different relief as this Court deems just and proper.

Respectfully submitted,

Bracewell & Patterson, L.L.P.

South Tower Pennzoil Place 711 Louisiana, Suite 2900 Houston, Texas 77002-2781 Telephone: (713) 223-2900 Facsimile: (713) 221-1212

Of Counsel:

Andrew M. Edison
State Bar No. 00790629

Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
Telephone: (713) 223-2900
Facsimile: (713) 221-1212

CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of the foregoing document was forwarded by certified mail, return receipt requested, on the 17th day of September, 1999 to all counsel of record:

Mr. Roger E. Greenberg Mr. David E. Sharp Greenberg, Peden, Siegmyer & Oshman, P.C.

12 Greenway Plaza
10th Floor
Houston, Texas 77046

                                        )
                                        )
IN RE SERVICE CORPORATION               )
INTERNATIONAL                           )             CIVIL ACTION NO. H-99-0280
                                        )             (Judge Lynn N. Hughes)
                                        )
                                        )

DEFENDANTS' MOTION TO DISMISS THE
CONSOLIDATED CLASS ACTION COMPLAINT

J. Clifford Gunter III
Andrew M. Edison

Bracewell & Patterson, L.L.P.
South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
Telephone: (713) 223-2900
Facsimile: (713) 221-1212

COUNSEL FOR DEFENDANTS

TABLE OF CONTENTS

                                                                                                                PAGE
                                                                                                                ----
INTRODUCTION......................................................................................................1

NATURE AND STAGE OF PROCEEDINGS...................................................................................3

PLAINTIFFS' ALLEGATIONS...........................................................................................4

STATEMENT OF FACTS................................................................................................5

         I.       GENERAL BACKGROUND..............................................................................5

         II.      THE PRENEED FUNERAL BUSINESS....................................................................6

         III.     THE "PRENEED STUDY."............................................................................7

         IV.      ACQUISITION, EXPANSION AND MERGER...............................................................8

         V.       THE SCI-ECI MERGER CLOSES AND FOURTH QUARTER
                  EARNINGS ARE ANNOUNCED..........................................................................9

ARGUMENT AND AUTHORITIES.........................................................................................10

         I.       THE CONSOLIDATED CLASS ACTION COMPLAINT DOES
                  NOT STATE THE BASIS FOR PLAINTIFFS' INFORMATION
                  AND BELIEF.....................................................................................10

         II.      PLAINTIFFS FAIL TO PLEAD FRAUD WITH PARTICULARITY..............................................13

                  A.       Plaintiffs Do Not Plead Specific Facts Showing That The
                           SCI Defendants' Statements Were False When Made.......................................13

                  B.       Plaintiffs' References to the Preneed Study Are Insufficient to
                           Show That the SCI Defendants' Statements Were False
                           When Made.............................................................................17

                  C.       Allegations Based on Internal Corporate Documents are
                           Insufficient to Satisfy the Reform Act................................................21

         III.     MANY OF THE ALLEGED MISSTATEMENTS ARE NOT
                  ACTIONABLE AS A MATTER OF LAW..................................................................23

                                                                                                                PAGE
                                                                                                                ----
                  A.       General Statements of Optimism Do Not Support a Fraud Claim...........................23

                  B.       Statements of Historical Fact Do Not Support a Fraud Claim............................25

                  C.       The SCI Defendants' Forward-Looking Statements are Protected
                           by The Safe Harbor....................................................................25

         IV.      PLAINTIFFS DO NOT ADEQUATELY ALLEGE SCIENTER...................................................26

                  A.       Under the Reform Act, Plaintiffs Must Allege Specific
                           Facts Creating a Strong Inference of Scienter that the SCI
                           Defendants Acted Knowingly or Recklessly, Not Just That
                           They Had a Motive and Opportunity to Commit Fraud.....................................28

                  B.       Plaintiffs' Allegations Do Not Support a Strong Inference
                           of Scienter...........................................................................32

                           1.       Plaintiffs' Allegations that the SCI Defendants Made
                                    Misstatements to Maintain SCI's Bond Rating Fails
                                    to Create the Required Inference of Scienter.................................33

                           2.       Plaintiffs' Allegation that the SCI Defendants Made
                                    Misstatements to Facilitate Consummation of the
                                    SCI-ECI Merger Fails to Create the Required Inference
                                    of Scienter..................................................................34

                           3.       The Individual Defendants' Lack of Trading in SCI Stock
                                    Negates Any Inference of Scienter............................................35

CONCLUSION.......................................................................................................38

CERTIFICATE OF SERVICE...........................................................................................40

                                                                                                               PAGE
                                                                                                               ----
CASES

Bryant v. Avado Brands, Inc., 1999 WL 688050 (11th Cir. 1999)....................................................31

Duncan v. Pencer, 1996 WL 19043 (S.D. N.Y. 1996).................................................................35

Ernst v. Hockfelder, 425 U.S. 185 (1976).........................................................................27

Ferber v. Travelers Corp., 785 F. Supp. 1101 (D. Conn. 1991).....................................................12

Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42 (D.Mass. 1997)................................................30

Garcia v. United States, 469 U.S. 70 (1984).......................................................................1

Grossman v. Novell, Inc., 120 F.3d 1112 (10th Cir. 1997).........................................................24

Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186 (1974)...........................................................30

Haft v. Eastland Fin. Corp., 772 F. Supp. 1315 (D.R.I. 1991).....................................................12

Harris v. Ivax Corp., 998 F. Supp. 1449 (S.D. Fla. 1998),
         aff'd, 182 F.3d 799 (11th Cir.  1999)...................................................................26

Hausberg v. Comp USA, Inc., 1995 U.S. Dist.
         LEXIS 20333 (N.D. Tex. 1995).............................................................................2

Head v. NetManage, Inc., 1998 WL 917794 (N.D. Cal. 1998).........................................................36

In re 1993 Corning Sec. Litig., 1996 WL 257603 (S.D.N.Y. 1996)...................................................34

In re Advanta Corp. Sec. Litig., 1998 WL 387595 (E.D. Pa. 1998),
         aff'd, 180 F.3d 525 (3d Cir. 1999)......................................................................21

In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999).....................................................31

In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir. 1997)..........................................35

In re Caere Corp. Sec. Litig., 837 F. Supp. 1054 (N.D. Cal. 1993)................................................24

In re Cirrus Logic Sec. Litig., 946 F. Supp. 1446 (N.D. Cal. 1996)...............................................34

In re Comshare Sec. Litig., 1997 WL 1091468 (E.D. Mich. 1997),
         aff'd, 183 F.3d 542 (6th Cir. 1999).....................................................................37

In re Comshare Sec. Litig., 183 F.3d 542 (6th Cir. 1999).........................................................31

In re Convergent Techs, Sec, Litig., 948 F.2d 507 (9th Cir.1991).................................................25

In re Credit Acceptance Corporation Securities Litigation,
         50 F. Supp.2d 662 (E.D. Mich. 1999).....................................................................37

In re Crown Am. Realty Trust Sec. Litig., 1997 WL 599299
         (W.D. Pa. 1997).........................................................................................34

In re Cypress Semiconductor Sec. Litig., 891 F. Supp. 1369
         (N.D. Cal. 1995)........................................................................................25

In re Gleaner Technologies, Inc. Sec. Litig., 1998 WL 915907
         (S.D.N.Y. 1998).........................................................................................37

In re Glenfed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994)....................................................28

In re Health Mgmt. Sys. Sec. Litig., 1998 WL 283286 (S.D.N.Y. 1998)..........................................16, 37

In re Health Management, Inc. Sec. Litig., 970 F. Supp. 192
         (E.D.N.Y.1997)..........................................................................................34

In re Mobile Telecommunication Techs. Corp. Sec. Litig.,
         915 F. Supp. 828 (S.D. Miss. 1995)......................................................................24

In re Oak Tech. Sec. Litig., 1997 WL 448168 (N.D. Cal. 1997).................................................13, 15

In re Paracelsus Corp. Sec. Litig., 1998 WL 1108373
         (S.D. Tex. 1998)....................................................................................29, 32

In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746
         (N.D. Cal. 1997) ...................................................................................10, 12

In re Silicon Graphics Sec. Litig., 183 F.3d 970 (9th Cir. 1999)......................3, 11, 22, 23, 29, 30, 31, 32

In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996),
         cert. denied, 117 S.Ct. 1105 (1997)..................................................................5, 13

In re Stratosphere Corp. Sec. Litig., 1997 WL 581032 (D.Nev. 1997)...............................................13

In re VeriFone Sec. Litig., 784 F. Supp. 1471 (N.D. Cal. 1992),
         aff'd, 11 F.3d 865 (9th Cir.  1993).....................................................................24

In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994),
         cert. denied, 116 S.Ct. 185 (1995)...................................................................4, 38

INS v. Cardoza-Fonseca, 480 U.S. 421 (1987)......................................................................30

L.L. Capital Partners, L.P. v. Rockefeller Center Properties, Inc.,
          939 F. Supp. 294 (S.D.N.Y. 1996).......................................................................33

Leonard v. Netframe Sys., Inc., 1995 WL 798923 (N.D. Cal. 1995)..................................................14

Leventhal v. Tow, 48 F. Supp. 2d 104 (D. Conn. 1999).........................................................34, 35

Lovelace v. Software Spectrum Inc., 78 F.3d 1015 (5th Cir. 1996)..............................................5, 28

Malin v. Ivax, 17 F. Supp.2d 1345 (S.D. Fla. 1998)...............................................................35

McNamara v. Bre-X Minerals Ltd., 1999 WL 507441
         (E.D. Tex. 1999)........................................................................................14

Melder v. Morris, 27 F.3d 1097, 1100 (5th Cir. 1994).................................................13, 17, 29, 33

Northwest Forest Resource Council v. Glickman,
         82 F.3d 825 (9th Cir. 1996)..............................................................................1

Novak v. Kasaks, 997 F. Supp. 425 (S.D.N.Y. 1998)............................................................12, 15

Press v. Chemical Investment Services Corp., 166 F.3d 529
         (2d Cir. 1999)..........................................................................................31

Raab v. General Physics Corp., 4 F.3d 286 (4th Cir. 1993)........................................................24

Robertson v. Strassner, 32 F. Supp.2d 443 (S.D. Tex. 1998).......................................................32

Ronconi v. Larkin, 1998 WL 230987 (N.D. Cal. 1998)...........................................................16, 17

San Leandro Emergency Med. Group Profit Sharing Plan v. Philip
         Morris Companies, 75 F.3d 801 (2d Cir. 1996)........................................................32, 33

Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994)..................................................28

Snowden v. Hughes, 321 U.S. 1 (1944).........................................................................20, 21

Tuchman v. DSC Communications Corp., 14 F.3d 1061 (5th Cir. 1994)................................................27

Wenger v. Lumisys, Inc., 2 F. Supp.2d 1231 (N.D. Cal. 1998)..............................................14, 22, 25

Williams v. WMX Techs., Inc., 112 F.3d 175 (5th Cir.),
         cert. denied, 118 S.Ct. 412 (1997)......................................................................32

Zeid v. Kimberley, 930 F. Supp. 431 (N.D. Cal. 1996).........................................................14, 22


STATUTES/RULES

Fed. R. Civ. P. 9(b)...........................................................................1, 2, 12, 13, 28, 33

Fed. R. Evid. 201(b)..............................................................................................2

15 U.S.C. Section 78u-4(b)(1)................................................................................10, 11

15 U.S.C. Section 78u-4(b)(1)(B).................................................................................11

15 U.S.C. Section 78u-4(b)(2)....................................................................................29

15 U.S.C. Section 78u-4(b)(3)(A)..................................................................................2

15 U.S.C. Section 78u-5(c)(1)(A)(i)..............................................................................25



OTHER

H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 31 (1995),
         reprinted in 1995 U.S.C.C.A.N. 730........................................................1, 2, 28, 29, 30

H.R. Doc. No. 104-150 (1995).....................................................................................30

                                        )
                                        )
IN RE SERVICE CORPORATION               )
INTERNATIONAL                           )            CIVIL ACTION NO. H-99-0280
                                        )            (Judge Lynn N. Hughes)
                                        )
                                        )

DEFENDANTS' MOTION TO DISMISS THE
CONSOLIDATED CLASS ACTION COMPLAINT

Pursuant to Fed. R. Civ. P. 9(b), 12(b)(6) and the Private Securities Litigation Reform Act of 1995, Defendants Service Corporation International ("SCI"), R. L. Waltrip, L. William Heiligbrodt and George R. Champagne (collectively "the SCI Defendants")(1) file this Motion to Dismiss the Consolidated Class Action Complaint.

INTRODUCTION

This securities fraud class action is governed by the Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67 (the "Reform Act"). In enacting the Reform Act, Congress found "significant evidence of abuse in private securities lawsuits." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730.(2) Specifically, Congress noted that these abusive practices included "the routine filing of lawsuits against issuers of securities and others whenever there is a significant change in an issuer's stock price, without regard to any underlying

(1) Waltrip, Heiligbrodt and Champagne are referred to as the "Individual Defendants."

(2) The Conference Report is the "authoritative source for finding the Legislature's intent." Garcia v. United States, 469 U.S. 70, 76 (1984). See also Northwest Forest Resource Council v. Glickman, 82 F.3d 825, 835 (9th Cir. 1996) ("[A] congressional conference report is recognized as the most reliable evidence of congressional intent because 'it represents the final statement of the terms agreed to by both houses'").

culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action[.]" Id. Congress further found that the standard for pleading fraud under Fed. R. Civ. P. 9(b) "has not prevented abuse of the securities laws by private litigants." Id. at 41.

Among other things, the Reform Act requires plaintiffs to state with particularity the facts -- not speculation -- that supports their belief that a fraud really has taken place. Plaintiffs now must convince the court that they have facts to support a fraud action, and not just a vivid imagination and hope that the discovery process will be fruitful. Unlike a traditional Rule 12(b)(6) motion, a motion to dismiss under the Reform Act does not permit a plaintiff to rest on presumptions or require the Court to draw inferences in plaintiffs' favor. The Reform Act authorizes courts to scrutinize complaints for the requisite factual basis at the outset, and requires dismissal of cases that are deficient. 15 U.S.C. Section 78u-4(b)(3)(A).

This securities fraud class action is exactly the type of case that prompted Congress to reform the federal securities laws, for Plaintiffs have brought this action solely on the basis that SCI experienced a significant drop in its stock price during the Class Period, going from a closing price of 43-3/8 on July 17, 1998 to 19-1/2 on January 26, 1999.(3) Although Plaintiffs accuse SCI and its three highest ranking officers of engaging in a fraud of the greatest magnitude, there are no facts to substantiate this serious charge.

Reminiscent of pre-Reform Act pleadings, Plaintiffs simply recite a litany of statements by the SCI Defendants covering all aspects of SCI's business - including operating challenges,

(3) In rendering its decision on a motion to dismiss, the Court may consider matters of public record involving historical stock prices. Fed. R. Evid. 201(b); Hausberg v. Comp USA, Inc., 1995 U.S. Dist. LEXIS 20333, at *31
n.14 (N.D. Tex. 1995).

acquisitions and financial results. The Consolidated Class Action Complaint ("CCAC") then summarily concludes that these statements were false or misleading when made because SCI did not disclose that its preneed funeral business was causing a sharp erosion in its profit margins. This type of pleading simply does not satisfy the Reform Act.

It is noteworthy that Plaintiffs conveniently forget to mention that the Individual Defendants in this case -- the purported masterminds of this fraud -- did not sell any shares of SCI stock during the Class Period. This completely negates any inference of scienter.

The CCAC should be dismissed for the following reasons:

1. The CCAC does not satisfy the Reform Act requirement that allegations made on "information and belief" state with particularity the facts on which the belief is formed;

2. The CCAC does not allege, with the particularity required by the Reform Act, that the SCI Defendants' statements concerning SCI's preneed funeral business were false when made;

3. The statements alleged to be false or misleading were in fact innocuous, non-actionable statements of general optimism or historical fact. Courts have long held that such statements cannot serve as the basis for a securities claim; and

4. The CCAC fails to allege with particularity facts giving rise to a strong inference that the SCI Defendants acted with, at a minimum, deliberate recklessness. See In re Silicon Graphics Sec. Litig., 183 F.3d 970 (9th Cir. 1999) (Silicon Graphics II). Far from meeting that standard, the CCAC even fails to meet lower scienter standards applied by other courts interpreting the Reform Act.

NATURE AND STAGE OF PROCEEDINGS

In January and February 1999, more than 20 virtually identical class action lawsuits were filed in the Southern District of Texas against SCI and certain of its present and former officers and directors. Two class action lawsuits were brought in the Eastern District of Texas and transferred

to the Southern District of Texas. All of these actions have been consolidated before this Court under Cause No. H-99-0280; In Re Service Corporation International.

On June 9, 1999, this Court appointed Rujira Srisythep, Carl Helwig and Allan Lisse to serve as Lead Plaintiffs. This Court also appointed Roger Greenberg to serve as Lead Plaintiffs' Counsel. On August 25, 1999, this Court certified the Lead Plaintiffs as class representatives. The Class Period is from July 17, 1998 to January 26, 1999.

On September 3,1999, Plaintiffs filed the CCAC, alleging claims against the SCI Defendants under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated by the Securities and Exchange Commission ("SEC").(4)

PLAINTIFFS' ALLEGATIONS

The allegations contained in the CCAC focus entirely on SCI's preneed funeral business. According to Plaintiffs, the SCI Defendants were aware that SCI's preneed funeral business was unprofitable but failed to disclose that information to the public. This elaborate ruse is alleged to have been perpetrated so that SCI could inflate its stock price in order to maintain high credit ratings on debt securities and obtain favorable terms in connection with a stock-for-stock transaction.

(4) There can be no violation of Section 15 of the Securities Act of 1933 and Section 20(a) of the Securities Exchange Act of 1934 without a primary violation. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1428 n.9 (9th Cir. 1994), cert. denied, 116 S.Ct. 185 (1995). Because Plaintiffs have not stated a claim under Section 10(b) or Rule 10b-5, they have no claim under Sections 20(a) and 20A. Similarly, because Plaintiffs have not stated a claim under Sections 11 or 12(a)(2), they have no claim under Section 15 either.

STATEMENT OF FACTS

I. GENERAL BACKGROUND.

SCI is a Texas corporation founded in 1962 by R.L. Waltrip. From a single funeral home in the Heights, SCI has grown into the largest provider of death care services and products in the world. See CCAC at Paragraph 19. As of December 31, 1998, SCI and its subsidiary and affiliate companies operated 3,442 funeral service locations, 433 cemeteries and 191 crematoria located in 20 countries on five continents. Id. SCI performs approximately 11 percent of the funeral services in North America, 28 percent of the funeral services in France, 14 percent of the funeral services in the United Kingdom and 25 percent of the funeral services in Australia. See SCI's Form 10-K for the Fiscal Year ended December 31, 1998, attached as Exhibit A, at p. 2.(5) SCI's common stock is listed on the New York Stock Exchange.

Historically, SCI's growth has been largely attributable to acquisitions.(6) During the 1990s alone, SCI added more than 2,800 funeral homes worldwide. See CCAC at Paragraph 20.

During the Class Period, Waltrip served as SCI's Chief Executive Officer, Heiligbrodt served as SCI's Chief Operating Officer and Champagne served as SCI's Chief Financial Officer. Id. at Paragraphs 7-9.

(5) All exhibits attached to this Motion to Dismiss are referenced in the CCAC or are public documents filed with the SEC. It is well-settled that the Court may take judicial notice on a motion to dismiss of those documents which are referenced in the Complaint or are public documents filed with the SEC. See In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 n.4 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105 (1997); Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1018 (5th Cir. 1996).

(6) SCI revolutionized the funeral industry through its innovative "clustering" concept. SCI believed that by sharing facilities, vehicles, equipment and personnel, several funeral homes within a given area or "cluster" could operate more efficiently and lower combined overhead costs, thus achieving economies of scale unavailable to them as independent operators. See CCAC at Paragraph 17.

II. THE PRENEED FUNERAL BUSINESS.

Preneed funeral contracts are arrangements where individuals select and purchase their funeral arrangements prior to their death, and funeral homes agree to perform the funeral services in the future. Id. at Paragraph 22. For SCI, preneed funeral contracts provide an opportunity to protect current market share and lock-in future market share. Id. at Paragraph 126 ("only 30 percent of the people who buy preneed through an SCI facility would be an SCI at need customer"). For consumers, by planning ahead, they avoid forcing family and friends from having to make costly and difficult funeral decisions during a period of peak emotional strain.

SCI's SEC filings fully disclose how its preneed funeral business operates:

SCI sells price guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Payments under these contracts are placed in trust accounts (pursuant to applicable law) or are used to pay premiums on life insurance policies. Earnings on trust funds and increasing benefits under insurance funded contracts also increase the amount of cash to be received upon performance of the funeral.

See SCI's Form 10-K for the Fiscal Year Ended December 31, 1997, attached as Exhibit B, at p. 16.(7) As SCI purchased additional funeral homes, it acquired both the obligation to perform preneed funerals and the mortuary trust assets that eventually are used to pay for the preneed funerals. See CCAC at Paragraph 22.

(7) SCI's SEC filings also note the accounting treatment given to prearranged funerals:

Amounts paid by a customer under a prearranged funeral contract are recognized in funeral revenue at the time the funeral service is performed. Trust earnings and increasing insurance benefits are accrued and deferred until the services are performed, at which times these funds are also recognized in funeral revenues....

See Exhibit A at p.36.

SCI's trust funds are invested to "cover future increases in the cost of providing a price guaranteed funeral service." See Exhibit A at p.18. Recent years have seen SCI's trust funds perform very well. In fact, SCI's "North American prearranged trust portfolio earned a return of 18.0% in 1998 and 12.5% in 1997 (including realized gains)." Id. As of December 31, 1998, the total value of unperformed prearranged funeral contracts expected to be recognized by SCI in future periods was $3.75 billion (up from $3.37 billion as of December 31, 1997).(8) Id.

III. THE "PRENEED STUDY."

To determine how to optimize the performance of trust investments, SCI undertook during 1996 and 1997 a "review of the prearranged trust investment process which included an asset/liability study." See Exhibit B at p.16. The CCAC refers to this review as the "Preneed Study." (9) See CCAC at Paragraph 32.

At the time the Preneed Study was initiated, SCI invested its funeral trust funds approximately 21 percent in equity and 79 percent in fixed income. See Exhibit C-1 at SCI0009. The Preneed Study looked at five different asset allocation mixes available to SCI (including the 21 percent equity/79 percent fixed income asset allocation mix in effect at the time), and found that SCI could increase the trust rate of return through adoption of a new asset allocation mix. See Exhibit C-4 at SCI0062-63. In light of this conclusion, SCI, during 1997, reallocated its trust portfolio to

(8) The total value of unperformed prearranged funeral contracts are trust funded or insurance funded and represent the original contract price plus accumulated trust earnings or increasing insurance benefits. See Exhibit A at p.36.

(9) True and correct copies of the various documents comprising the Preneed Study are attached as Exhibits C-1 to C-7. The Preneed Study is authenticated by the Declaration of Mary Beth Russo, attached as Exhibit C. The "asset/liability" study referred to in SCI's Form 10-K is part of the Preneed Study and is attached as Exhibit C-1. For simplicity sake, all pages of the Preneed Study have been stamped with a "SCI" bates-stamp.

achieve a "new asset allocation of approximately 65 percent equity and 35 percent fixed income." See Exhibit B at p.16. SCI also implemented "a new investment program which entail[ed] the consolidation of multiple trustees, the use of institutional managers with differing investment styles and consolidated performance monitoring and tracking." Id.

The Preneed Study was fully disclosed in SCI's numerous SEC filings. See, e.g., Exhibit B at pp. 16-17; SCI's Form 10-K for the Fiscal Year Ended December 31, 1996, attached as Exhibit D, at p. 17.

IV. ACQUISITION, EXPANSION AND MERGER.

The summer of 1998 was a busy time for SCI. On July 17, 1998, SCI announced that it had acquired American Memorial Life Insurance Company, the preneed funeral services division of American Annuity Group, Inc. See CCAC at Paragraph 73. Also on July 17, 1998, SCI announced that it had formed a new financial services subsidiary, SCI Financial Services, Inc., to facilitate the expansion of SCI's preneed businesses and financial activities worldwide. Id. A week later, SCI announced its second quarter revenues and earnings. Id. at Paragraph 78. For the three months ended June 30, 1998, SCI reported revenues of $671.9 million, net income of $90.9 million and diluted earnings per share of $.35. Id.

On August 6, 1998, SCI announced that it had reached a definitive agreement with Equity Corporation International ("ECI"), the nation's fourth largest publicly traded death care company, to acquire ECI in a merger transaction. Id. at Paragraph 80. In an interesting twist to the merger, urban-oriented SCI and rural-oriented ECI were part of the same company until 1990 when ECI was spun off and relocated its headquarters to Lufkin, Texas. Id.

On October 22, 1998, SCI announced its third quarter revenues. Id. at Paragraph 94. For the three months ended September 30, 1998, SCI reported revenues of $712.5 million, net income of $83.2 million and earnings per share of $.32. Id. These results were significantly higher as compared to the same period for the year before. Id.

V. THE SCI-ECI MERGER CLOSES AND FOURTH QUARTER EARNINGS ARE ANNOUNCED.

The SCI-ECI merger closed on January 19, 1999 with ECI shareholders receiving .71053 of a share of SCI common stock for each share of ECI common stock. Id. at Paragraph 69.

On January 26, 1999, SCI issued a press release, announcing that it expected diluted earnings per share for the fourth quarter of 1998 would be lower than analysts' expectations (10) See Exhibit E. For the three months ended December 31, 1998, SCI said it expected diluted earnings per share in the range of $.22-$.24 as compared to the First Call earnings estimate of $0.42 per share
(11) Id. The stock market reacted swiftly to the news. SCI's stock price dropped from 34 7/16 to 19 1/2, a

o Reduced mortality rates in the Company's major markets resulting in fewer funerals performed at the Company's locations.

o Cemetery revenues below anticipated levels.

o Increased operating costs and field overhead expenses associated with necessary investment in newly acquired operations, information technology systems and training programs.

o Fewer acquisitions during the quarter than were previously expected due to higher than anticipated acquisition pricing.

o Disappointing results from selected foreign operations.

See Exhibit E.

(11) While SCI did not meet analyst's expectations, it should be noted that, for the year ended December 31, 1998, SCI still earned $1.31 a share on net income of $342.1 million. See Exhibit A at p.7.

single day loss of almost 44 percent. See CCAC at Paragraph 124. Today, SCI's common stock trades at around $8.(12)

ARGUMENT AND AUTHORITIES

I. THE CONSOLIDATED CLASS ACTION COMPLAINT DOES NOT STATE THE BASIS FOR PLAINTIFFS' INFORMATION AND BELIEF

The Reform Act adopted several procedural requirements designed to weed out non-meritorious cases at the pleading stage. It forbids conclusory or generalized allegations of fraud, and commands that a complaint "shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. Section 78u-4(b)(1) (emphasis added). A complaint that does not meet these criteria "shall" be terminated at the pleading stage. 15 U.S.C. Section 78u-4(b)(3)(A) (emphasis added).

The Reform Act's information and belief provision is a significant new requirement. In this case, Plaintiffs do not profess to have personal knowledge of their allegations; hence, they are pleading on information and belief. See In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 763 (N.D. Cal. 1997) (Silicon Graphics I) (noting that a complaint based on "investigation of counsel" is the same as a complaint based upon "information and belief"), aff'd, In re Silicon Graphics, Inc.

(12) SCI is not the only company in the death care industry to see its stock tumble in the last year. Operating challenges have severely impacted the funeral industry as a whole. Loewen Group (NYSE: LWN), the nation's second largest death care firm, is now mired in Chapter 11 bankruptcy proceedings. Its stock is currently trading at around 1/2 (52 week high: 15-3/8). Another major force in the industry, Stewart Enterprises, Inc., (NASDAQ: STEI) recently warned of lower than expected earnings for the rest of this year and its stock dropped as well. It is currently trading at around 5-1/32 (52 week high: 24-3/4).

Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999). Plaintiffs must therefore "state with particularity all facts" that support their belief that the SCI Defendants committed fraud. See 15 U.S.C. Section 78u-4(b)(1).

The only attempt to comply with the Reform Act -- other than Plaintiffs' specious reference to the Preneed Study, discussed more fully below -- is a boilerplate paragraph entitled "Plaintiff's [sic] Investigation," which alleges:
Plaintiff's [sic] allegations set forth herein are based on a thorough investigation conducted by and through their attorneys. Such investigation included a review and analysis of:

a. SCI's filings with the SEC both prior to and throughout the Class Period;

b. the Company's Annual Reports to shareholders both prior to and during the Class Period;

c. the Company's press releases and other publicly disseminated statements made by defendants prior to, during, and following the Class Period;

d. reports, articles, and other written materials concerning the Company and the subject matter of this complaint;

e. analyst reports and investor advisory service reports; and

f. consultations with forensic accountants, former company employees and other individuals knowledgeable about the Company's business, operations and services.

See CCAC at Paragraph 128.

Courts applying the Reform Act have held repeatedly that this type of conclusory pleading does not comply with the statutory requirement to "state with particularity all facts" that form plaintiffs' belief that the defendants committed fraud. See 15 U.S.C. Section 78u-4(b)(1)(B). Indeed, complaints with virtually identical "Basis of Allegations" paragraphs have been routinely dismissed. See, e.g., Silicon Graphics II, 183 F.3d 985 (rejecting a rote basis of allegations paragraph, stating that "a plaintiff must provide, in great detail, all the relevant facts forming the basis of her belief");

Novak v. Kasaks, 997 F. Supp. 425, 431 (S.D.N.Y. 1998) (virtually identical "Basis of Allegations" paragraph coupled with allegations of negative internal reports insufficient).

Plaintiffs' assertion that their allegations are based in part on unspecified "consultations with forensic accountants, former company employees and other individuals knowledgeable about the Company's business, operations and services" (CCAC at Paragraph 128) is especially flawed. "If, in fact, these unnamed 'consultants' provided information forming the basis for these allegations, then the consultants should have been named in the complaint." Novak, 997 F. Supp. at 431 (dismissing complaint); see also Silicon Graphics I, 970 F. Supp. at 763 (Reform Act legislative history suggests plaintiffs must identify "confidential informants, employees, competitors, Government employees, members of the media, and others who have provided information leading to the filing of the case"). Plaintiffs do not identify any single discussion with anyone upon which they formed their supposed "belief." There are no facts in the CCAC that would suggest that Plaintiffs' allegations are derived from anything more than their counsel's surmise and speculation.(13)

(13) Plaintiffs cite an August 12, 1999 article from The Death Care Business Advisor that does not even purport to quote SCI executives. Under the Reform Act, such an article does not support a claim for fraud. Ferber v. Travelers Corp., 785 F. Supp. 1101, 1108 (D. Conn. 1991) ("The strictures of Rule 9(b) are not satisfied by indirect quotes taken from a newspaper reporter's notebook"); Haft v. Eastland Fin. Corp., 772 F. Supp. 1315, 1319 (D.R.I. 1991) (news article "fail[ed] to provide the underlying factual support required by Rule 9(b)" because "[i]t is not a direct quote from the defendants, it is merely an analysts' opinion ").

II. PLAINTIFFS FAIL TO PLEAD FRAUD WITH PARTICULARITY

A. PLAINTIFFS DO NOT PLEAD SPECIFIC FACTS SHOWING THAT THE SCI DEFENDANTS' STATEMENTS WERE FALSE WHEN MADE.

Despite its length and complexity, the CCAC does not satisfy the Reform Act's rigorous pleading standard.(14) The CCAC contains no facts detailing when, where, and how the SCI Defendants knew the challenged statements were false when made (15) "Apparently, plaintiffs believe that the sheer volume of their allegations gives credibility to their claims." In re Oak Tech. Sec. Litig., 1997 WL 448168, at *4 (N.D. Cal. 1997).

Plaintiffs' allegations are based on the conclusory assumption that at the time statements were made concerning SCI's financial condition and preneed funeral business, the opposite of what was said was true. This type of conclusory, fraud-by-hindsight pleading was routinely rejected even under the less rigorous pre-Reform Act pleading standard:

Plaintiff's conclusory attempt to plead as "facts" the converse of the positive statements made by defendants does not satisfy [the] requirement that a plaintiff identify particular facts indicating the falsity of defendants' statements. Essentially, plaintiff points to a positive statement by defendants,

(14) As an aside, the CCAC also does not satisfy the requirements of Fed. R. Civ. P. 9(b). See Melder v. Morris, 27 F.3d 1097 (5th Cir. 1994).

(15) These standards apply equally to securities fraud claims brought under Sections 10(b) and 20A of the 1934 Act and Sections 11 and 12(2) of the 1933 Act where, as here, the gravamen of each claim is fraud. See, e.g., In re Stac Elecs. Sec. Litig., 89 F.3d at 1404-05 (holding that "the particularity requirements of Rule 9(b) apply to claims brought under Section 11 when, as here, they are grounded in fraud"); Melder, 27 F.3d at 1100 n.6 (holding that Rule 9(b) applies to 1933 Act claims when they are grounded in fraud rather than negligence, and applying the rule to Section 11 and 12(2) claims). Here, Plaintiffs' Section 11 and 12(2) claims sound in fraud. Plaintiffs' effort to distinguish between negligence and fraud are not successful because Plaintiffs'
Section 11 and 12(2) claims are based on the same predicate facts. See In re Stratosphere Corp. Sec. Litig., 1997 WL 581032 at *7-8 (D.Nev. 1997) (holding that "[p]laintiffs cannot avoid the more stringent requirements of Rule 9(b) by merely inserting boilerplate language into their Complaint stating that claims are based in negligence, not fraud, or try to plead both fraud and negligence by stating Defendants 'knew or should have known' of the alleged falsity").

such as, "We are very pleased with growth through the second quarter and look forward to the opportunities and challenges ahead," and, in a conclusory manner, states the opposite, such as "the Company expected a material decline in its profitability." These are not specific "facts" indicating that the first statement was false; these are simply allegations that the opposite was true without any supporting facts or circumstances. Plaintiff does not specify dates, places, amounts, transactions, etc. Plaintiff does not point to any inconsistent contemporaneous statements or information (such as internal reports) which were made by or available to defendants at the time of the positive statements which would suggest that the positive statements were false or misleading.
. . . Because of this, plaintiff's allegations must be dismissed.

Leonard v. Netframe Sys., Inc., 1995 WL 798923, at *6 (N.D. Cal. 1995) (citations omitted).

Not surprisingly,"post-Reform Act cases have emphasized [that] without references to specific facts demonstrating that the statements at issue were false or misleading when made, allegations regarding adverse information supposedly known to defendants are merely 'speculation and conclusions drawn from hindsight.'" Wenger v. Lumisys, Inc., 2 F. Supp.2d 1231, 1250 (N.D. Cal. 1998) (citation omitted). See also Zeid v. Kimberley, 930 F. Supp. 431, 436 (N.D. Cal. 1996) (conclusory allegations insufficient to support securities fraud claim where complaint did not plead contemporaneous facts tending to show that the allegedly misleading statements were false when made); In re Oak Tech Sec. Litig., 1997 WL 448168, at *5 (insufficient for plaintiffs to merely allege that defendants made certain representations even though they were aware of contrary adverse information; plaintiffs must provide supporting contemporaneous factual allegations, including allegations of when defendants learned of adverse information); McNamara v. Bre-X Minerals Ltd., 1999 WL 507441, at *20 (E.D. Tex. 1999) (same).

Here, Plaintiffs allege that the SCI Defendants "knew" that the independent funeral homes acquired by SCI had failed to actively manage their funeral trust assets (CCAC at Paragraph 44); "knew" that SCI had failed to actively invest its existing mortuary trust assets (Paragraph 74); "knew" that funeral trust

funds were inadequately funded to cover the cost of providing a funeral (Paragraph 91); and "knew" that SCI's preneed funeral business was a drain on SCI's profitability. (Paragraphs 12, 44).

These conclusory allegations are not sufficient to meet Plaintiffs' pleading burden. The CCAC does not plead what specific information the SCI Defendants knew, how they knew it, and why it rendered their statements false. Plaintiffs have failed to point to particular contemporaneous, inconsistent statements by the SCI Defendants or to show specific information available to the SCI Defendants revealed something different than what the SCI Defendants stated or failed to state. Conclusory pleadings that "'adverse material facts were in existence or known by Defendants at the time the allegedly misleading statements were made" are not enough. In re Oak Tech. Sec. Litig., 1997 WL 448168, at *4.

In Novak, 997 F. Supp. 425, the court dismissed plaintiffs' securities fraud action for failing to plead "facts underlying the complaint's allegations as to the information that was available to the individual defendants" or to "direct the Court to where those facts might be found." Id. at 431. Plaintiffs' allegations here, like those in the Novak case, are based on unnamed consultants and other unspecified sources, and do not identify any basis for concluding that any SCI Defendant knew of any adverse fact concerning SCI's preneed funeral business.

Throughout the CCAC's 77 pages, Plaintiffs point to a number of statements made by the SCI Defendants and claim, without providing any factual support, that the opposite of what the SCI Defendants said was true. For example:

o SCI said in public filings that preneed funeral contracts are sold at prices prevailing when the agreements are signed. See CCAC at Paragraph 88.

o Plaintiffs claim this is not true.
Id. at Paragraph 89.

o SCI said that its financial services subsidiary would coordinate the investment of all funeral trust assets. Id. at Paragraph 73.

o Plaintiffs blithely assert this is not true. Id. at Paragraph 74.

o SCI coordinated investments of all of the company's funeral trust funds. Id. at Paragraph 94.

o Plaintiffs claim this is not the case. Id. at Paragraph 95.

o SCI said that the operational systems of SCI and ECI were similar. Id. at Paragraph 82.

o Plaintiffs claim this is not true.
Id. at Paragraph 83.

o SCI said in 1997 that it had implemented a new investment program for its funeral trust funds targeting "a real return in excess of the amount necessary to cover future increases in the cost of providing a price guaranteed funeral." Id. at Paragraph 90.

o Plaintiffs allege this is not true.
Id. at Paragraph 91.

o SCI said it had purchased American Memorial Life Insurance Company to facilitate the expansion of SCI pre-need business and financial activities worldwide.
Id. at Paragraph 92.

o Plaintiffs say this is not true.
Id. at Paragraph 93.

"[T]he conclusory allegation that the opposite of a statement in a press release is true, without further factual elaboration, is insufficient." In re Health Mgmt. Sys. Sec. Litig., 1998 WL 283286, at * 6 (S.D.N.Y. 1998). Without specific factual detail, this type of pleading certainly does not satisfy the Reform Act.

Ronconi v. Larkin, 1998 WL 230987 (N.D. Cal. 1998) is directly on point. In that case, the court dismissed a securities fraud claim based upon purported misstatements made in connection with an announced merger. In an observation applicable to this case, the court noted that "plaintiffs' allegations of falsity really amount to the following: defendants said X. X was false. X was false

because the opposite of X was true. Or X was false because X did not later come true." Id. at *4. The court continued: "While such a syllogism might be a sufficient statement of falsity in ordinary expression, it is not adequate under the standards of law for pleading violations of the Securities Exchange Act of 1934." Id. The same is the case here. Plaintiffs' failure to allege a factual basis for their claims requires a dismissal. This is not a technical defect. This issue prompted securities litigation reform legislation: plaintiffs are no longer allowed to base their claims on guesswork, with the "faint hope" that discovery might prove the guess correct.

B. PLAINTIFFS' REFERENCES TO THE PRENEED STUDY ARE INSUFFICIENT TO SHOW THAT THE SCI DEFENDANTS' STATEMENTS WERE FALSE WHEN MADE.

Plaintiffs attempt to satisfy the Reform Act's strict pleading requirements by alleging that the SCI Defendants were aware through the Preneed Study that SCI's preneed funeral business was unprofitable. Specifically, Plaintiffs claim that the Preneed Study confirmed that:

o a "significant number of independent funeral homes acquired by SCI had failed to actively manage their mortuary trust assets and, as a result, a material number of SCI's funeral services had been and would continue to be, performed at significant losses to SCI, severely cutting into SCI's profit margins." CCAC at Paragraph 44. See also CCAC at Paragraphs 32, 35, 74(a); and

o "SCI's trust funds had not been managed to grow at a rate equal to or greater than the increase in the cost of funeral services." CCAC at Paragraph 53 (emphasis included in original).

The problem with Plaintiffs' reliance on the Preneed Study is twofold. FIRST, THE STATEMENTS IN THE CCAC ABOUT THE ALLEGED CONTENTS OF THE PRENEED STUDY ARE OUTRIGHT FALSEHOODS.(16) The Preneed

(16) As in Melder, 27 F.3d at 1101 fn. 8, "if plaintiffs' counsel had been bound under the same strictures concerning veracity as were the
[defendants] under governing securities law standards, their complaint would have to be labeled misleading."

Study simply does not in any respect say what Plaintiffs claim it says. By way of example, a thorough review of the Preneed Study will not find one sentence, chart or graph supporting Plaintiffs' baseless accusations that a "significant number of independent funeral homes acquired by SCI had failed to actively manage their mortuary trust assets" or that "SCI's trust funds had not been managed to grow at a rate equal to or greater than the increase in the cost of funeral services."

SECOND, THE PRENEED STUDY ACTUALLY REBUTS EACH OF PLAINTIFFS' UNSUBSTANTIATED ALLEGATIONS, COMPLETELY UNDERMINING THE CREDIBILITY OF THE CLAIMS RAISED IN THE CCAC. For example, contrary to Plaintiffs' bald assertion that the Preneed Study demonstrates that "SCI's trust funds had not been managed to grow at a rate equal to or greater than the increase in the cost of funeral services" (CCAC at Paragraph 53), the Preneed Study shows that SCI's return on mortuary trust assets has considerably outpaced inflation. The Preneed Study indicated that the "current actual" return of SCI's mortuary trust assets was 2 percent over inflation. See Exhibit C-4 at SCI0064. The Preneed Study also estimated that a 65 percent equity/35 percent fixed income asset allocation mix would, on an annual basis, return more than five percent over inflation.(17) Id. In 1997, SCI selected the 65 percent equity/35 percent fixed income asset allocation. The fully disclosed results have been even better than expected, as SCI's "North American prearranged trust portfolio earned a return of 18.0% in 1998 and 12.5 % in 1997 (including realized gains)." See Exhibit A at p.18.

Far from showing that "a material number of SCI's funeral services had been and would continue to be, performed at significant losses," the Preneed Study actually demonstrates that the preneed funeral business is profitable. Indeed, the asset/liability study (which was part of the

(17) The 65 percent equity/35 percent fixed income asset allocation mix was mix #2 in the asset/liability study. See Exhibit C-1 at SCI0009.

Preneed Study) conducted by Coopers & Lybrand, L.L.P. looked at three states - Florida, Texas and California -- and established that the preneed funeral contracts in those states alone had a present value of more than $210 million in company net income. See Exhibit C-1 at SCI0020. The Preneed Study also found that "The Five Asset Allocation Mixes Reviewed All Resulted in Significant Net Cash Flow to SCI" and "Given Any Reasonable Time Frame (Longer than One Year), The More Aggressive Asset Mixes Provide Great Upside Potential With No Measurable Downside." See Exhibit C-4 at SCI0063.

The notion that the Preneed Study "confirmed" the unprofitability of SCI's preneed funeral business is belied by the clear and unequivocal charts and graphs of the Preneed Financing Option Report, which was also prepared by Coopers & Lybrand, L.L.P. and is part of the Preneed Study. See Exhibit C-3. This Report looked at the various opportunities available to fund preneed funerals such as trust funds, insurance and bonding. Id. This model forecasted cash flows forward for 40 years and discounted them back to the present using present value techniques. Id. At-need funerals were forecast in the same way in this model as a comparison point. Id. The states of Florida, Texas, California and Missouri were modeled. Id. In all four states, profits generated by preneed contracts were more profitable than the at-need contracts, even using very conservative inflation assumptions. Id. at SCI0040, SCI0051, SCI0054, SCI0056-57.

Not surprisingly, the Preneed Study also demonstrates that many of the other allegations raised by Plaintiffs regarding SCI's preneed funeral business are without any merit whatsoever. For example:

o While Plaintiffs claim that "the vast majority of the preneed assets that SCI had previously acquired in connection with its purchase of independent funeral homes were not, and would not be, invested in accordance with the terms of the "new investment program" (CCAC

at Paragraph 36, 44, 45), the Preneed Study demonstrates this is not the case. The truth is that the "new investment program" included all North American funeral trust assets, whether acquired in a purchase or not. SCI had established procedures in place to quickly move the trust funds it acquired to SCI's preferred trustees for investment in accordance with the new asset allocation mix. See Exhibit C-7 (When SCI acquires a funeral home, it takes steps to "amend the trust agreement or to have the trust adopt the master agreement for that state, assignment of an account number, verification of assets, and transferring of the trust to a new trustee"); Id. ("Once the [trust] assets are moved to the new trustee...the Corporate Investment Department will forward a package reflecting the asset allocation that is designated for the trust funds they hold").

o While Plaintiffs claim that SCI did not have any program to manage the assets associated with preneed funeral trusts prior to the creation of SCI Financial Services, Inc. in 1998 (See CCAC at Paragraph 95), the Preneed Study shows this is not the case. The Preneed Study expressly states that "[a]lthough SCI previously had an overall asset allocation policy for these trusts, the new allocation has been developed based upon on [sic] a more scientific, analytical approach, focused on meeting SCI's financial objectives." See Exhibit C-5 at SCI0070 (emphasis added).

o While Plaintiffs claim that SCI's "backlog of prearranged funeral contracts included a material number of contracts that were not sold at prices prevailing when the agreements were signed" (CCAC at P. 89), the Preneed Study establishes the falsity of Plaintiffs' claim. See Exhibit C-5 at SCI0068 ("At the time the [preneed] contract is signed, the contract's goods and services are priced at the current retail price").

o While Plaintiffs claim that SCI failed to disclose during the Class Period that it had not "establish[ed] any means of actively managing the mortuary trust assets that would eventually be used to pay for these acquired preneed funeral contracts" (CCAC at Paragraph 30), this is

(18) SCI's Form 10-Ks further demonstrate that SCI moved a considerable amount of the trust assets it acquired to its new investment program. In 1996, the year before SCI's new investment program went into effect, $276 million (or 31.8 percent) of the $866 million in funeral trust assets were in cash equivalents. By the end of 1997, after a year of SCI's new investment program, only $134 million (or 12.6 percent) of the $1.070 billion in funeral trust assets were in cash equivalents. See Exhibit B at p. 30.

simply not true. As noted above, in 1997 SCI implemented a "new investment program which entailed the consolidation of multiple trustees, the use of institutional managers with differing investment styles and consolidated performance monitoring and tracking." See Exhibit B at p. 16. The Preneed Study details the components of this "new investment program" in great detail. See Exhibit C-5 at SCI0066-71.

A district court's central task in evaluating a motion to dismiss is to determine whether the complaint alleges facts sufficient to state a cause of action. In conducting that inquiry, the court need not accept a complaint's "bald assertions" or "unsupportable conclusions." See Snowden v. Hughes, 321 U.S. 1, 10 (1944). In this case, the Preneed Study speaks for itself. Plaintiffs should not be permitted to base a complaint solely on disingenuous and false references to the Preneed Study.

C. ALLEGATIONS BASED ON INTERNAL CORPORATE DOCUMENTS ARE INSUFFICIENT TO SATISFY THE REFORM ACT.

Aside from the Preneed Study, the Plaintiffs allege no facts for their claim that SCI encountered troubles in its preneed funeral business.(19) Plaintiffs allege only that SCI's executives had access to unspecified internal adverse information showing the "true" state of affairs. See CCAC at Paragraph
12 (the SCI Defendants were aware of true facts through "internal corporate documents," "conversations and communications with other corporate officers and employees," and "attendance at management and/or meetings of the Board and committees"). Courts across the United States have expressly rejected allegations of fraud based on unspecified allegations of negative "internal

(19) Plaintiffs claim that the Individual Defendants, as a result of their high-ranking positions with SCI, had access to "undisclosed adverse information." This is not sufficient to satisfy the Reform Act's pleading standards. See, e.g, In re Advanta Corp. Sec. Litig., 1998 WL 387595, at *7 (E.D. Pa. 1998), aff'd, 180 F.3d 525 (3d Cir. 1999) (allegations that defendants' positions within the company rendered them knowledgeable about adverse conditions is an "unsupported conclusion;" plaintiffs must point "to specific reports, circulated among defendants, which contained the adverse information defendants are charged with knowing").

company documents." See, e.g., Wenger, 2 F. Supp.2d at 1250-51 (rejecting unsubstantiated allegation that defendants were aware of the "true facts" and had access to "internal corporate documents"); Zeid, 930 F. Supp. at 436 (without any reference to particular corporate documents or other information, the Court can only conclude that Plaintiffs' allegations are based purely on speculation and conclusions drawn from hindsight). If the mere allegation that internal reports were "negative" were sufficient, any public company could be sued for fraud whenever its stock price dropped -- precisely what the Reform Act was intended to prevent.(20)

Silicon Graphics II is instructive. In that case, plaintiffs alleged that the company ("SGI") and six of its top officers made a series of misleading statements, or withheld information, to inflate the value of SGI's stock while they engaged in massive insider trading, realizing nearly $14 million. See 183 F.3d at 982. Plaintiffs alleged that internal memorandum showed: (1) the company's product was not shipping in volume; (2) sales were slow in North America and Europe; and (3) SGI would not meet its revenue and growth targets.
Id. at 984. Plaintiffs contended that these reports notified officers that SGI was suffering, but the officers did not disclose the information to the public.
Id. Rather, according to the plaintiffs' allegations, the officers entered into a "conspiracy of silence" whereby they agreed to downplay the seriousness of SGI's problems while they dumped their SGI stock. Id.

The Ninth Circuit ruled that where plaintiffs rely on such allegations, they must set forth "the sources of [their] information with respect to the
[negative internal] reports," how plaintiffs "learned of the report[s]," "who drafted them," "which officers received them," and "an adequate description

(20) In any event, the Individual Defendants' access to the Preneed Study gave them no reason to believe SCI had encountered troubles of the sort asserted by the Plaintiffs in SCI's preneed funeral business.

of their contents" which should include "specifics." Id. at 985. As the Reform Act requires, a plaintiff must state "with particularity all facts on which
[her] belief is formed." Id.

The CCAC lacks any specific factual allegations. As in Silicon Graphics II, Plaintiffs here rely on the Individual Defendants' positions and allege participation in the day-to-day management and overall direction of the Company allowed them access to "undisclosed adverse information." See CCAC at Paragraph
12. Without such "corroborating details," the Court simply "cannot determine whether there is any basis for alleging that the [Individual Defendants] knew that their statements were false at the time they were made." Silicon Graphics II, 183 F.3d at 985.

Plaintiffs' cursory allegation that the Individual Defendants had access to "undisclosed confidential information" through reports generated by SCI's Falcon computer system and "Call In Reports" is not sufficient. See CCAC at Paragraph 12. The problem with the CCAC is that it fails to provide details such as when these reports were allegedly generated, who prepared them, to whom they were directed, the sources from which Plaintiffs obtained this information or the contents of such reports. See Silicon Graphics II, 183 F.3d at 985.(21) In short, the CCAC does not comply with the Reform Act. It should therefore be dismissed.

III. MANY OF THE ALLEGED MISSTATEMENTS ARE NOT ACTIONABLE AS A MATTER OF LAW

A. GENERAL STATEMENTS OF OPTIMISM DO NOT SUPPORT A FRAUD CLAIM.

The CCAC challenges numerous inactionable, vague statements of puffery and general optimism, a natural consequence of Plaintiffs' decision to include in the CCAC virtually every public statement SCI made during the Class Period. Even before the Reform Act, courts consistently held

(21) Moreover, Plaintiffs' claims are contradicted by the very document which they reference -- The Preneed Study. See Exhibit C.

that general statements of corporate optimism cannot support liability for securities fraud. Raab v. General Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993) (vague statements of opinion are not actionable under the federal securities laws because they are considered immaterial and discounted by the market as mere "puffing"); In re VeriFone Sec. Litig., 784 F. Supp. 1471, 1481 (N.D. Cal. 1992) ("investors . . . know how to devalue the optimism of corporate executives"), aff'd, 11 F.3d 865 (9th Cir. 1993).

As would be expected, SCI made a number of general statements concerning the growth of its business, its acquisition strategy and its potential for profitability in the future. Here are a few examples of the types of vaguely optimistic statements Plaintiffs challenge.

o "The acquisition [of American Memorial Life Insurance Company] is a way for [SCI] to expand its profit base." See CCAC at Paragraph 75.

o The acquisition of American Memorial Life Insurance Company "will allow SCI to better compete for and serve customers." Id. at Paragraph 84.

o "We're adding another dimension to make sure we're picking up all the value we can for our shareholders." Id. at Paragraph 75.

o "The fundamentals of the funeral industry remain strong". Id. at Paragraph 78.

o "We've long been the leaders in the prearranged funeral business." Id. at Paragraph 84.

o SCI "used its strategy of acquisitions...[to] add value to SCI today and long term." Id. at Paragraph 96.

These statements are not actionable because they cannot reasonably be relied upon by an investor making an investment decision. See Grossman v. Novell, Inc., 120 F.3d 1112, 1121-22 (10th Cir. 1997) (dismissing as puffing a statement that the merger presented a "compelling set of opportunities"); In re Mobile Telecommunication Techs. Corp. Sec. Litig., 915 F. Supp. 828, 834 (S.D. Miss. 1995) (dismissing as inactionable the statement that: "[w]e are highly optimistic that we

will be profitable in 1993 as demand for nationwide and international wireless messaging services continues to grow both in the U.S. and in the international countries we serve"); In re Caere Corp. Sec. Litig., 837 F. Supp. 1054, 1057-58 (N.D. Cal. 1993) (dismissing as inactionable the statement that the company was "well-positioned for growth").

Plaintiffs further attack certain public statements that are vague expressions of optimism about the merger between SCI and ECI. Specifically, Plaintiffs seek to hold the SCI Defendants liable for stating that the merger "should further enhance SCI's leading domestic market position" (CCAC at Paragraphs 80, 82), and that the merger "will create a combined North American operation with unparalleled resources" (CCAC at Paragraphs 80, 82). These statements are also not actionable because no reasonable investor would rely upon such obvious "puffery."

B. STATEMENTS OF HISTORICAL FACT DO NOT SUPPORT A FRAUD CLAIM.

Of the statements made by the SCI Defendants, a number report historical facts regarding SCI's business, such as the results of the second and third quarters of 1998. See CCAC at Paragraphs 78, 86, 96. However, Plaintiffs do not allege that these results were false or inaccurate. Moreover, the announcement of past financial results cannot in itself imply that such results will continue. See, e.g., In re Convergent Techs, Sec, Litig., 948 F.2d 507, 512-13 (9th Cir.1991); Wenger, 2 F. Supp. 2d at 1245 ("disclosure of accurate historical data does not become misleading even if less favorable results might be predictable by the company in the future"). Thus, none of these statements are actionable on the grounds they were false or misleading. See, e.g., In re Cypress Semiconductor Sec. Litig., 891 F. Supp. 1369, 1379 (N.D. Cal. 1995) (accurate statements of historical fact are not actionable).

C. THE SCI DEFENDANTS' FORWARD-LOOKING STATEMENTS ARE PROTECTED BY THE SAFE HARBOR.

The Reform Act's safe harbor provides that a person "shall not be liable" for any forward-looking statement accompanied by a "meaningful cautionary statement identifying important factors that could cause actual results to differ materially from those in the forward-looking statement...." 15 U.S.C. Section 78u-5(c)(1)(A)(i). This is true even if the cautionary statement fails "to include the particular factor that ultimately causes the forward-looking statement not to come true . . . ." H.R. Conf. Rep. No. 104-369, at 44.

Plaintiffs have purposefully tried to mischaracterize forward-looking statements as statements of historical fact by alleging that the statements were made with knowledge of their falsity. This disingenuous effort to avoid the safe harbor should be rejected. Statements concerning a strategy yet to be fully implemented and yet to be completed are, by definition, forward looking in nature. Harris v. Ivax Corp., 998 F. Supp. 1449, 1453 (S.D. Fla. 1998) (although couched in present tense, allegations regarding business conditions were forward looking because "[r]epresentations regarding the state of a business' position in a changing market or the soundness of its growth strategies are necessarily forward-looking"), aff'd, 182 F.3d 799 (11th Cir. 1999).

Plaintiffs assert that the SCI Defendants failed to warn investors of various factors -- including an allegedly unprofitable preneed funeral business
- that could have an adverse impact on earnings. However, SCI's August 6, 1998 and October 22, 1998 press releases, both of which Plaintiffs assert contain misleading statements, are accompanied by cautionary statements and specific risk factor disclosures. See Exhibits F and G.(22) Plaintiffs also complain that statements

(continued...)

contained in the Forms 10-Q filed by SCI on August 14, 1998 and November 16, 1998 misled investors about the expected growth in revenues and profitability of SCI. The Forms 10-Q, however, also contained safe harbor language. See Exhibit H at p.21 and Exhibit I at pp.22-23. In light of these ample risk disclosures, the Reform Act's safe harbor provision renders it impossible for Plaintiffs to claim that SCI's forward looking statements were misleading.

IV. PLAINTIFFS DO NOT ADEQUATELY ALLEGE SCIENTER

"Scienter is a crucial element" in claims of securities fraud. Tuchman
v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994).(23) This is so "because not every misstatement or omission in a corporation's disclosures gives rise to a Rule 10b-5 claim." Id. Only when a plaintiff can show that the defendant acted with "a mental state embracing intent to deceive, manipulate, or defraud" does an alleged misstatement or omission raise a legitimate claim of securities fraud. Id. (quoting Ernst v. Hockfelder, 425 U.S. 185, 193 n.12 (1976)).

(22) (...continued)

Certain matters discussed in this release are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the following: The company maintaining its high level of acquisition activity and achieving expected performance from these acquired businesses, and the ability to manage internal growth of existing operations; the economy, competition and death rates in the company's geographic areas of operations; and sufficient availability of capital resources to fund future acquisitions and planned levels of capital expenditures which will depend on prevailing market conditions, interest rates, and the financial condition of the company.

See Exhibits F and G (emphasis added).

(23) To establish a securities fraud claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, a plaintiff must plead and prove a (1) material misstatement or omission (2) of material fact (3) made with scienter (4) on which the plaintiff relied (5) that proximately caused the plaintiff's injury. Tuchman, 14 F.3d. at 1067. Scienter is not an element of Plaintiffs' Section 11 and 12(a)(2) claims.

Plaintiffs attempt to satisfy the heightened scienter requirement of the Reform Act in two ways. First, Plaintiffs contend that the SCI Defendants made false and misleading statements "to obtain and maintain favorable ratings on the debt securities that SCI had registered with the SEC but not yet issued." See CCAC at Paragraph 113. Second, Plaintiffs allege that the SCI Defendants made misstatements to facilitate the consummation of the SCI-ECI merger. See CCAC at Paragraphs 110, 112. As shown below, neither of these scienter allegations pass muster.

A. UNDER THE REFORM ACT, PLAINTIFFS MUST ALLEGE SPECIFIC FACTS CREATING A STRONG INFERENCE OF SCIENTER THAT THE SCI DEFENDANTS ACTED KNOWINGLY OR RECKLESSLY, NOT JUST THAT THEY HAD A MOTIVE AND OPPORTUNITY TO COMMIT FRAUD.

Before the Reform Act, the courts used a range of standards governing the degree of specificity needed to plead a defendant's state of mind for a securities fraud claim. Some circuits found a general allegation of scienter sufficient under Fed. R. Civ. P. 9(b), e.g., In re Glenfed, Inc. Sec. Litig., 42 F.3d 1541, 1545 (9th Cir. 1994), while others, including the Fifth Circuit, held that plaintiffs "must set forth specific facts to support an inference of fraud." Lovelace, 78 F.3d at 1018. The Second Circuit employed a standard requiring plaintiffs to plead specific facts that would support "a strong inference of fraud." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). Under this "strong inference" standard, a plaintiff had to allege specific facts that would either "constitute strong circumstantial evidence of conscious misbehavior or recklessness" or "show that defendants had both motive and opportunity to commit fraud." Id.

In enacting the Reform Act, Congress sought to reduce the volume of abusive federal securities litigation by erecting procedural barriers to prevent plaintiffs from asserting baseless securities fraud claims. See H.R. Conf. Rep. 104-369, at 31. An important component of the Reform Act's new standard is its heightened pleading requirement for scienter. Under this heightened

standard, plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," and do so "with respect to each act or omission alleged." 15 U.S.C. Section 78u-4(b)(2) (emphasis added). This new standard augments and reinforces the Fifth Circuit's existing mandate under Fed. R. Civ. P. 9(b) that the circumstances allegedly constituting fraud must be spelled out in great detail. See Melder, 27 F.3d at 1100 (setting forth Rule 9(b) requirements for pleading securities fraud).

The Reform Act's new standard no longer permits plaintiffs to plead scienter by merely alleging facts showing defendants' "motive and opportunity" to commit fraud. See, e.g., Silicon Graphics II, 183 F.3d at 977-79. Congress soundly rejected Second Circuit case law that allegations of "motive and opportunity" could suffice to provide the required strong inference of scienter.(24) In fact, the Conference Report, which is the authoritative source for finding the Legislature's intent, expressly stated that Congress declined to adopt the "motive and opportunity" test:

The Conference Committee language is based in part on the pleading standard of the Second Circuit. . . .Regarded as the most stringent pleading standard, the Second Circuit requirement is that the plaintiff state facts with particularity, and that these facts, in turn, must give rise to a "strong inference" of the defendant's fraudulent intent. Because the Conference Committee intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit's case law interpreting this pleading standard. FN 23/

FN 23/ For this reason, the Conference Report chose not to include in the pleading standard certain language relating to motive, opportunity, or recklessness.

(24) The legislative history of this provision of the Reform Act is set out in great detail in In re Paracelsus Corp. Sec. Litig., 1998 WL 1108373, at *5-6 (S.D. Tex. 1998) (Werelin, J.).

H.R. Conf. Rep. 104-369, at 41 n.23. See also S. Rep. 104-98, at 15 ("The Committee does not intend to codify the Second Circuit's case law interpreting
[the strong inference] pleading standard, although courts may find this body of law instructive").

Congress also rejected an amendment that would have codified the Second Circuit standard, making "motive and opportunity" part of the statutory language. See H.R. Conf. Rep. 104-369, at 41; 141 Cong. Rec. S9199, S9201. Several courts have considered Congress' rejection of such proposed statutory language to be persuasive evidence that Congress did not intend to leave alive the "motive and opportunity" test. See, e.g., Friedberg v. Discreet Logic, Inc., 959 F. Supp. 42, 48-9 (D.Mass. 1997). Indeed, "[f]ew principles of statutory construction are more compelling than the proposition that Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor of other language." INS v. Cardoza-Fonseca, 480 U.S. 421, 442-43 (1987). See also Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 200 (1974) (by expressly declining to adopt proposed statutory language, Congress' action "strongly militates against a judgment that Congress intended [the] result that it expressly declined to enact").

"Congress further provided very strong evidence of its intent to go beyond the Second Circuit standard when it overrode President Clinton's veto of the [Reform Act]." Silicon Graphics II, 183 F.3d 979. President Clinton vetoed the Reform Act, in part, because "the conferees make crystal clear...their intent to raise the [pleading] standard even beyond [the Second Circuit] level," and "the conferees meant to erect a higher barrier to bringing suit than any now existing." H.R. Doc. No. 104-150 (1995). By overriding the President's veto and enacting this "higher barrier," Congress provided powerful evidence to elevate the pleading standard to a level beyond that in the Second Circuit.

Accordingly, a number of courts addressing the issue have held that following passage of the Reform Act, allegations of motive and opportunity, without more, will no longer be presumed sufficient to support a strong inference of scienter.(25) As the Ninth Circuit has explained:

[P]laintiffs proceeding under the [Reform Act] can no longer aver intent in general terms of mere motive and opportunity or "recklessness," but rather, must state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent. Thus...the [Reform Act] requires plaintiffs to plead, at a minimum, particular facts giving rise to a strong inference of deliberate or conscious recklessness.

(25) Three other circuit courts have agreed that the Reform Act raised the scienter pleading standard to something more than just "motive and opportunity." In In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 549 (6th Cir. 1999), the Sixth Circuit held that plaintiffs "may plead scienter in Section 10(b) or Rule 10b-5 cases by alleging facts giving rise to a strong inference of recklessness, but not by alleging facts merely establishing that a defendant had the motive and opportunity to commit fraud." Similarly, the 11th Circuit has recently held that ("[Congress] did not intend to codify the lesser-known, lesser-accepted, and certainly not well-established notion that allegations of motive and opportunity to commit fraud are sufficient to show scienter"). Bryant
v. Avado Brands, Inc., 1999 WL 688050, *12 (11th Cir. 1999). The Third Circuit found that the "Reform Act establishes a pleading standard approximately equal in stringency to that of the [pre-Reform Act] Second Circuit," (including allegations of motive and opportunity), but recognized that "particularity" language in the Reform Act resulted in a "heightened standard." In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999).

By contrast, the Second Circuit, without any analysis of the statutory language or the oft-cited legislative history, merely adopted the "motive and opportunity" test used before the enactment of the Reform Act. Press v. Chemical Investment Services Corp., 166 F.3d 529, 538 (2d Cir. 1999).

Silicon Graphics II at *21.(26) This interpretation follows from Congress' intent as expressed in the legislative history of the Reform Act.(27)

B. PLAINTIFFS' ALLEGATIONS DO NOT SUPPORT A STRONG INFERENCE OF SCIENTER.

Plaintiffs' scienter allegations amount to no more than an attempt to plead motive alone and therefore fail to satisfy the Reform Act's heightened pleading standard. On this ground alone, Plaintiffs' 10(b) and 10b-5 claims should be dismissed. But whatever standard applies, the Reform Act requires "facts giving rise to a strong inference" of scienter. The CCAC's scienter allegations fall woefully short of the mark.

(26) The SCI Defendants expect the Plaintiffs to cite Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir.), cert. denied, 118 S.Ct. 412 (1997) for the proposition that the Fifth Circuit has adopted the "motive and opportunity" test under the Reform Act. This argument is without merit as Judge Werlein recently noted:

The Court notes the argument made by Plaintiffs that the Fifth Circuit in Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir.), cert. denied, 118 S.Ct. 412 (1997), stated that the [Reform Act] did not change the strong inference pleading standard adopted by the Second Circuit.... In Williams, however, the Fifth Circuit was not discussing the standard for pleading scienter under Section 10(b); instead, the court cited a Second Circuit case that discussed the particularity with which the elements of fraud had to be pled under Rule 9(b) (i.e., the "who, what, when, and where"). See Williams, 112 F.3d at 177-78 (citing Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir.1993) (setting forth the specificity with which the elements of fraud must be pled)). The Fifth Circuit in Williams did not discuss the new requirement for pleading scienter under Section 10(b), nor did it rely upon the Second Circuit's contrary decision in Shields, which had held that pleading motive and opportunity was sufficient from which to infer scienter. Maldonado v. Dominguez,137 F.3d 1, 9 n.5 (1st Cir.1998), which made a similar statement to the one in Williams, is distinguishable on the same basis as Williams.

In re Paracelsus Corp., 1998 WL 1108373, at *6 fn.2.

(27) The two courts in the Southern District of Texas that have construed this section of the Reform Act are divided in their interpretations. Compare In re Paracelsus Corp., 1998 WL 1108373 (holding that the Reform Act imposes a heightened pleading standard and eliminates the ability to plead scienter solely by alleging evidence of a defendant's motive and opportunity) with Robertson v. Strassner, 32 F. Supp.2d 443 (S.D. Tex. 1998) (Atlas, J.) (adopting "motive and opportunity" test).

1. PLAINTIFFS' ALLEGATIONS THAT THE SCI DEFENDANTS MADE MISSTATEMENTS TO MAINTAIN SCI'S BOND RATING FAILS TO CREATE THE REQUIRED INFERENCE OF SCIENTER.

Plaintiffs' conclusory allegation that the SCI Defendants made false and misleading statements "to obtain and maintain favorable ratings on the debt securities that SCI had registered with the SEC but not yet issued" (CCAC at Paragraph 113) fails to support an inference of motive even under the pre- Reform Act pleading standards for scienter. Applying only Rule 9(b), courts, including the Fifth Circuit, repeatedly refused to infer "motive" from similar allegations that misstatements were made to maintain a high bond or credit rating. See, e.g., Melder, 27 F.3d at 1102;(28) L.L. Capital Partners, L.P. v. Rockefeller Center Properties, Inc., 939 F. Supp. 294, 300 (S.D.N.Y. 1996) (holding under Rule 9(b) that allegations that misrepresentations were made to facilitate $21 million offering insufficient to establish motive).

Post-Reform Act cases looking to motive as a relevant factor equally reject such allegations as a basis for inferring scienter. In San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Companies, 75 F.3d 801, 813-14 (2d Cir. 1996), for example, the plaintiffs attempted to establish motive by alleging that an inflated stock price maintained the company's bond or credit rating at the highest possible level, so as to maximize the marketability of $700 million of debt securities. The Second Circuit held:

We do not agree that a company's desire to maintain a high bond or credit rating qualifies as a sufficient motive for fraud in these circumstances, because "if scienter could be pleaded on that basis alone, virtually every

(28) The Fifth Circuit, in Melder, affirmed the dismissal of plaintiffs' section 10(b) claims where plaintiffs alleged that defendants engaged in securities fraud "so that they could inflate the price of the Company's common stock in order to . . . successfully bring to fruition the
[initial and secondary public] offering." 27 F.3d at 1102. The Melder court held that plaintiffs' allegations "did not set out facts sufficient to allow for a proper inference of scienter." Id.

company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions."

San Leandro, 75 F.3d at 814 (citation omitted).

Courts have quite correctly interpreted the San Leandro decision as an "unequivocal rejection of the concept of motive predicated upon desire to maximize the marketability of debt securities and to minimize interest rates." In re 1993 Corning Sec. Litig., 1996 WL 257603, at * 6 (S.D.N.Y. 1996) (holding that allegations of company's desire to complete bond offering and maximize ongoing marketability of debt securities insufficient to plead scienter). See also In re Crown Am. Realty Trust Sec. Litig., 1997 WL 599299, at *25 (W.D. Pa. 1997) (holding that allegations of "desire to improve [defendant's] financial picture to enhance its ability to finance further capital improvements" is insufficient to plead scienter). Accordingly, even if this Court is prepared to accept "motive and opportunity" allegations as a sufficient basis for scienter, the allegations in the CCAC of the SCI Defendants' motivation is inadequate.

2. PLAINTIFFS' ALLEGATION THAT THE SCI DEFENDANTS MADE MISSTATEMENTS TO FACILITATE CONSUMMATION OF THE SCI-ECI MERGER FAILS TO CREATE THE REQUIRED INFERENCE OF SCIENTER.

Plaintiffs also allege that the SCI Defendants were motivated to commit fraud to facilitate the consummation of the SCI-ECI merger. See CCAC at Paragraph 112 ("SCI was motivated to maintain SCI's stock price in an effort to acquire ECI in a stock-for-stock transaction for less than ECI's true value").

However, it is well-settled that a "desire to consummate [a] corporate transaction does not constitute a motive for securities fraud." In re Health Management, Inc. Sec. Litig., 970 F. Supp. 192, 203-04 (E.D.N.Y.1997) (motive not established by pleading corporate acquisition using supposedly artificially inflated stock). See also Leventhal v. Tow, 48 F. Supp. 2d 104, 115 (D. Conn.

1999) (finding that allegation that the defendants had a motive to artificially inflate stock price during the class period in order to get more favorable terms in the stock-for-stock transactions and in the issuance of the debentures was an insufficient allegation of scienter); Malin v. Ivax, 17 F. Supp.2d 1345, 1361 (S.D. Fla. 1998) (rejecting motive "maintaining the stock price...to facilitate mergers and acquisitions"); In re Cirrus Logic Sec. Litig., 946 F. Supp. 1446, 1477 (N.D. Cal. 1996) (allegation that defendants misrepresented reserves to facilitate stock-for-stock merger is insufficient to establish scienter).

If all a securities fraud plaintiff had to do to sufficiently plead scienter was to allege that the defendants artificially inflated a stock's price to obtain more favorable terms in a stock-for-stock transaction "nearly every stock-for-stock transaction conducted in the United States could be subject to challenge." In re Cirrus Logic Sec. Litig., 946 F. Supp. at 1477. At that point, the scienter requirement becomes meaningless.

Additionally, the Plaintiffs do not expressly or even inferentially explain how the desire to conclude the SCI-ECI merger by using inflated value of the stock as consideration for the merger, is in the economic self-interest of the Individual Defendants. Numerous courts have found that stock ownership, standing alone, is insufficient to plead scienter. See, e.g., Duncan v. Pencer, 1996 WL 19043, at * 11 (S.D. N.Y. 1996) (defendants' motive "to enhance the value of their personal holdings and options" is insufficient to plead scienter).

3. THE INDIVIDUAL DEFENDANTS' LACK OF TRADING IN SCI STOCK NEGATES ANY INFERENCE OF SCIENTER.

Plaintiffs' scienter allegations contain an interesting - although unsurprising - omission. Plaintiffs fail to inform the Court that none of the Individual Defendants sold SCI stock during the

Class Period.(29) The collective failure of the three Individual Defendants - SCI's Chief Executive Officer, Chief Operating Officer and Chief Financial Officer - to take advantage of "artificially inflated prices" and to sell stock during the Class Period negates any inference of scienter. See, e.g., In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1423 (3d Cir. 1997) (finding that no inference of scienter was established because "two of the more powerful" defendants did not sell any stock).

The Individual Defendants are, without question, substantial shareholders in SCI. The chart below summarizes the Individual Defendants stock ownership as of July 17, 1998:

                                                                                  Total Holdings
                           Shares of Stock(30)         Vested Options(31)       Available for Sale
                           -------------------         ------------------       ------------------
Waltrip                    889,645                     2,235,753                3,125,398

Heiligbrodt                588,944                     1,333,452                1,922,396

Champagne                   63,150                           510                   63,660

Despite the fact that the Individual Defendants had a cumulative 5,111,454 shares available for sale, there are no allegations that the Individual Defendants sold a single share during the Class Period. It defies belief that the three presumed masterminds of the massive fraud alleged in the

(29) The Individual Defendants' stock sales are publicly reported on SEC Form 4 within 10 days of the end of the month in which a transaction occurs. Form 4 requires the dates and amounts of the security purchased or sold. See SEC Rules 16a-1 to a-3 and Form 4, codified at 17 C.F.R. Section 240.16a-1 to a-3, and Official Form (1997). Form 4 is usually the only source of data on insider trades.

(30) See Forms 4 and Forms 5, attached as Exhibits J, K and L. Form 5 is an Annual Statement of Changes in Beneficial Ownership. These figures include both indirect and direct holdings.

(31) See 1999 Proxy Statement and 1999 Annual Meeting Notice, attached as Exhibit M, at p. 14.

CCAC would not take advantage of that scheme and sell even a small portion of their stock holdings during the Class Period.

In evaluating whether the allegations of a complaint sufficiently allege scienter, courts routinely place great importance on the complaint's lack of any allegations of stock trading by the company's high-ranking executives. In In re Gleaner Technologies, Inc. Sec. Litig., 1998 WL 915907 (S.D.N.Y. 1998), for example, the Court stated:

[P]erhaps most importantly, the inference of scienter is undermined by the fact that [the company's] Chief Executive Officer ("CEO") and Chairman, Vice Chairman, Chief Financial Officer ("CFO") and Comptroller did not sell any stock before the Company publicly disclosed the [negative] impact of the FCC freeze [on the company]. Certainly one can assume that these high-ranking corporate officers, arguably the most knowledgeable of all Board members, would be part of any fraudulent scheme to benefit from insider information through pre-emptive stock sales. The absence of sales from these individuals, then, suggests that the February trading by the seven defendants does not give rise to a strong inference of scienter.

Id. at *4. See also Head v. NetManage, Inc., 1998 WL 917794, at *4 (N.D. Cal. 1998) (dismissing complaint; holding that chief financial officer did not sell negated scienter and stating that it makes no sense that "the alleged masterminds of the fraudulent scheme" would not take advantage of the scheme); In re Health Mgmt. Sys. Sec. Litig., 1998 WL 283286, at * 6 (finding that no inference of scienter is created because the CFO did not sell any stock); In re Comshare Sec. Litig., 1997 WL 1091468, at * 10 (E.D. Mich. 1997), aff'd, 183 F.3d 542 (6th Cir. 1999) ("the CEO and CFO would have been essential participants in any scheme, thus, their having sold no stock, undermines any suggestion of knowledge on the part of defendants due to the other sales"); In re Credit Acceptance Corporation Securities Litigation, 50 F. Supp.2d 662, 677 (E.D. Mich. 1999) ("It seems as though the CFO would have been an essential participant in any fraudulent scheme to defraud the company.

The fact that he did not sell any shares during the class period undermines the suggestion that the Defendants engaged in securities fraud in order to profit from their own stock sales") .

The fact that the three Individual Defendants retained substantial holdings affirmatively demonstrates no scienter. See In re Worlds of Wonder Sec. Litig., 35 F.3d at 1425 (holding that there was no inference of scienter where defendants retained the bulk of their shares). Waltrip's SCI total holdings declined in value approximately $46.6 million on January 26, 1999, the day SCI announced that it expected earnings per share for the fourth quarter 1998 to be lower than analysts' expectations. That same day, Heiligbrodt's SCI total holdings declined in value approximately $28.7 million and Champagne's SCI total holdings declined in value approximately $950,000. Far from supporting a "strong inference" that the Individual Defendants had a motive to capitalize on artificially inflated stock prices, these facts suggest they had every incentive to ensure the long term growth and stability of SCI.(32)

CONCLUSION

Plaintiffs' allegations against the SCI Defendants epitomize the abusive claims the Reform Act was designed to prevent. For the reasons stated above, the SCI Defendants respectfully request that the Court dismiss the Consolidated Class Action Complaint in its entirety with prejudice.

(32) Further refuting an inference of scienter is the fact that Heiligbrodt sold all of his holdings of SCI stock after the end of the Class Period, at $17 per share. See Exhibit M at p. 17. This is approximately 50 percent less than SCI's stock price at the beginning of the Class Period. If, as Plaintiffs assert, Heiligbrodt was responsible for committing a fraud, one would expect him to sell his stock when it was "inflated," not when it was at a 52-week low.

Respectfully submitted,

Bracewell & Patterson, L.L.P.

By:
   ----------------------------------
   J. Clifford Gunter III
   State Bar No. 08627000

South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
Telephone:        (713) 223-2900
Facsimile:        (713) 221-1212
ATTORNEY-IN-CHARGE

Andrew M. Edison

Bracewell & Patterson, L.L.P.

South Tower Pennzoil Place
711 Louisiana, Suite 2900
Houston, Texas 77002-2781
Telephone: (713) 223-2900
Facsimile: (713) 221-1212

COUNSEL FOR DEFENDANTS

CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of the foregoing document was forwarded by messenger on the 8th day of October, 1999 to Plaintiffs' Lead Counsel:

Mr. Roger E. Greenberg Greenberg, Peden, Siegmyer & Oshman, P.C.

12 Greenway Plaza
10th Floor
Houston, Texas 77046

In re: SERVICE CORPORATION INTERNATIONAL        Civil Action No. H-99-280

                                                JURY DEMANDED
-------------------------------------------

PLAINTIFFS' OPPOSITION TO DEFENDANTS' MOTION TO DISMISS
THE CONSOLIDATED CLASS ACTION COMPLAINT

PRELIMINARY STATEMENT.....................................................................................................1

THE ALLEGATIONS OF THE COMPLAINT..........................................................................................4

         A.      Background...............................................................................................4

         B.      The Preneed Study Proves A Number Of Plaintiffs' Allegations.............................................6

         C.      Defendants' Scheme.......................................................................................7

         D.      Defendants' Motives.....................................................................................10

         E.      The Truth Is Revealed...................................................................................11

ARGUMENT ................................................................................................................13

I.       THE APPLICABLE LEGAL STANDARDS..................................................................................13

II.      THE COMPLAINT STATES CLAIMS AGAINST DEFENDANTS FOR
         VIOLATIONS OF SECTIONS 11 AND 12(a)(2)..........................................................................14

         A.      Elements of Claims Under Sections 11 and 12(a)(2).......................................................15

         B.      The Amended Complaint Adequately Alleges the Elements of Claims
                 Under Sections 11 and 12(a)(2) For Material Omissions and Misstatements
                 in the Registration Statement/Prospectus................................................................17

         C.      Plaintiffs' Section 11 and 12(a)(2) Claims Are Not Subject to Fed. R.
                 Civ. P. 9(b) Or To the Particularity Requirements of the PSLRA..........................................20

III.     THE COMPLAINT STATES CLAIMS FOR VIOLATIONS OF SECTION
         10(b) AND RULE 10b-5............................................................................................21

         A.      The Circumstances of Defendants' Fraud Are Stated With
                 Sufficient Particularity Under Rule 9(b) And The PSLRA..................................................21

                 1.   Defendants' Fraudulent Statements in Connection With the ECI
                      Acquisition and the Fourth Quarter of 1998.........................................................22

                 2.   The Complaint Also Alleges With Particularity the Defendants'
                      False and Misleading Statements Throughout The Class Period........................................24

         B.      The Preneed Study, Along With Defendants' Public Statements And
                 Admissions, Amply Support The Allegations In The Complaint..............................................25

         C.      Plaintiffs Are Not Required By The PSLRA Or Rule 9(b) To
                 Identify Internal Documents Or Informants...............................................................27

IV.      THE COMPLAINT ADEQUATELY ALLEGES SCIENTER.......................................................................28

         A.      The Legal Standards.....................................................................................28

         B.      The Defendants Acted With Actual Knowledge Or A
                 Reckless Disregard For The Truth........................................................................31

         C.      Defendants Also Had Motive And Opportunity To Engage
                 In The Fraudulent Scheme................................................................................33

V.       THE FALSE AND MISLEADING STATEMENTS CHALLENGED
         IN THE COMPLAINT ARE NEITHER "PUFFERY" NOR "FORWARD LOOKING."...................................................36

         A.      Defendants' Statements Regarding SCI's Growth And Profitability
                 Are More Than Mere Corporate Puffery....................................................................36

         B.      Defendants' Statements And Omissions Are Not Protected By The Safe Harbor
                 Provisions of the PSLRA.................................................................................38

CONCLUSION...............................................................................................................40

Blake v. Dierdorff, 856 F.2d 1365 (9th Cir. `988)........................................................................35

Bryant v. Avado Brands, Inc., 1999 WL 688050, *12 (11th Cir. 1999).......................................................30

Coates v. Heartland Wireless Communications, Inc., 26 F. Supp.
  2d 910 (N.D. Tex. 1998)............................................................................................27, 29

Cohen v. Koenig, 25 F.3d 1168 (2d Cir. 1994).............................................................................27

Conley v. Gibson, 355 U.S. 41 (1957).....................................................................................13

Cooper v. Pickett, 137 F.3d 616 (9th Cir. 1997)..........................................................................38

Cosmas v. Hassett, 886 F.2d 12 (2d Cir. 1989)........................................................................27, 35

Degulis v. LXR Biotechnology, Inc., 928 F. Supp. 1301 (S.D.N.Y. 1996)................................................16, 20

Duncan v. Pencer, No. 94 Civ. 0321, U.S. Dist. LEXIS 401, at
  *48-49 (S.D.N.Y. Jan. 18, 1996)........................................................................................34

Epstein v. Itron, Inc., 993 F.Supp. 1314 (E.D. Wash. 1998)...............................................................35

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).........................................................................16

Friedberg v. Discreet Logic Inc., 959 F. Supp. 42 (D. Mass. 1997)........................................................32

Goldman v. Belden, 754 F.2d 1059 (2d Cir. 1985)..........................................................................27

Greebel v. FTP Software, Inc., 1999 WL 902898 (1st Cir. 1999)............................................................30

Gross v. Medaphis Corp., 977 F.Supp. 1463 (N.D. Ga. 1997)........................................................33, 35, 39

Hanon v. Dataproducts Corp., 976 F.2d 497 (9th Cir. 1992)............................................................35, 38

Hartsell v. SourceMedia, Inc., 1999 WL 649645 (N.D. Texas 1999)..........................................................29

Harvey M. Jasper Retirement Trust v. Ivax Corp., 920 F.Supp. 1260 (S.D. Fla. 1995).......................................34

Herman and MacLean v. Huddleston, 459 U.S. 375 (1983)................................................................16, 20

Hill York Corporation v. American International Franchises, Inc.,
  448 F.2d 680 (5th Cir. 1971)...........................................................................................16

Holmes v. Texas A&M Univ., 145 F.3d 681 (5th Cir. 1998)..................................................................13

In re Advanta Corp. Sec. Litig., 1999 WL 395997, at *3 (3d Cir. June 17, 1999)...........................................30

In re Bausch & Lomb, Inc. Sec. Litig., 941 F. Supp. 1352 (W.D.N.Y. 1996).............................................14, 27

In re Cephalon Sec. Litig., [1997 Transfer Binder] Fed. Sec. L. Rep.
  (CCH) P. 99,562, at 97,799 (E.D. Pa. Aug. 29, 1997)....................................................................14

In re Compaq Sec. Litig., 848 F. Supp. 1307 (S.D. Tex. 1993).............................................................35

In re Comshare, Inc. Sec. Litig., 183 F.3d 542 (6th Cir. 1999)...........................................................31

In re Digi Int'l Sec. Litig., 6 F. Supp. 2d 1089 (D. Minn. 1998).........................................................14

In re F & M Distributors, Inc. Sec. Litig., 937 F. Supp. 647 (E.D.Mich. 1996)............................................16

In re Health Management Sec. Litig., 970 F. Supp. 192 (E.D.N.Y. 1997)................................................14, 34

In re Home Health Corp. of America, Inc. Sec. Litig.,
  1999 WL 79057, *15 (E.D. Pa. 1999).....................................................................................35

In re Nationsmart Sec. Litig., 130 F.3d 309 (8th Cir. 1997)..............................................................21

In Re Silicon Graphics II, 183 F.3d at 977-79 (9th Cir. 1999)............................................................30

In re Stratosphere Corp. Sec Litig., 1 F. Supp. 2d 1096 (D. Nev. 1998)...................................................26

In re Wells Fargo, 12 F.3d 922 (9th Cir. 1993)...........................................................................35

Kensington Capital Management v. Oakley, Inc., [1999 Transfer Binder]
  Fed. Sec. L. Rep. (CCH) P. 90,411 (C.D.Cal. Jan. 14, 1999).............................................................21

Khurana v. Innovative Health Care Systems, Inc., 130 F.3d 143 (5th Cir. 1997)........................................13, 25

Leventhal v. Tow, 1999 WL 270089, *10-11 (D. Conn. 1999).................................................................34

Lowrey v. Texas A&M University System, 117 F.3d 242 (5th Cir. 1997)......................................................13

Marra v. Tel-Save Holdings, Inc., 1999 WL 317103 (E.D.Pa. 1999)..........................................................34

McNamara v. Bre-X Minerals Ltd., 57 F. Supp. 2d 396 (E.D. Tex. 1999).....................................................29

Parcelsus, 1998 WL 1108373 (N.D. Tex. 1998)..............................................................................29

Picture Lake Campground v. Holiday Inns, Inc., 497 F. Supp. 858 (E.D. Va. 1980)..........................................14

Powers v. Eichen, 977 F. Supp. 1031 (S.D. Cal. 1997).....................................................................33

Press v. Chemical Inv. Servs. Corp., 166 F.3d 529 (2d Cir. 1999).....................................................29, 30

Rehm v. Eagle Finance Corp., 954 F. Supp. 1246 (N.D. Ill. 1997)..........................................................32

Robertson v. Strassner, 32 F. Supp. 2d 443 (S.D. Tex. 1998)...................................................13, 29-31, 36

Ross v. A.H. Robins Co., 607 F.2d 545 Cir. 1979).........................................................................14

Shaw v. Digital Equip. Corp. 82 F.3d 1194 (1st Cir. 1996).............................................................18-21

Shields v. Citytrust Bancorp, 25 F.3d 1124 (2d Cir. 1994)................................................................33

STI Classic Fund v. Bollinger Industries, Inc., 1996 U.S. Dist.
  Lexis 21553, *3 (N.D. Tex. 1996)...................................................................................29, 30

Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991)....................................................................38

Weiner v. Quaker Oats Co., 129 F.3d 310 (3d Cir. 1997)...................................................................35

Williams v. WMX Techs., Inc., 112 F.3d 175 (5th Cir.) cert. denied,
  118 S.Ct. 412 (1997)............................................................................................21, 29-31

Zuckerman v. Foxmeyer Health Corp., 4 F. Supp. 2d 618 (N.D. Tex. 1998).............................13, 21, 25, 29-31, 35-36

STATUTES AND RULES

Section 11 of the Securities Exchange Act of 1933 (15 U.S.C. Section 77(k))......................1, 2, 14, 15-18, 20-21, 23

Section 12(a)(2) of the Securities Exchange Act of 1933 (15 U.S.C. Section 77(l)(2)).................1, 2, 14-17, 20-21, 23

Section 15 of the Securities Exchange Act of 1933 (15 U.S.C. Section 77(o))..............................................40

Section 20(a) of the Securities Exchange Act of 1933 (15 U.S.C. Section 78t(a))..........................................40

Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78j(b))..........................2, 4, 20-21, 28-29

Section 20A of the Securities Exchange Act of 1934 (15 U.S.C. Section 78t-1).............................................35

15 U.S.C. Section 77z-1..................................................................................................20

15 U.S.C. Section 78u-4..................................................................................................20

15 U.S.C. Section 78u-4(b)(1)........................................................................................21, 28

Fed. R. Civ. P. 9(b).....................................................................................13, 14, 22, 26, 29

Fed. R. Civ. 12(b)6)..................................................................................................4, 13

Private Securities Litigation Reform Act of 1995.................................................................in passium

OTHER

Merriam Webster's Collegiate Dictionary 598-99 (10th ed. 1993)...........................................................26

141 Cong. Rec. S19044-45 (Dec. 21, 1995) ................................................................................28

House-Senate Conference Report, H. R. Rep. No. 104-369, at 41 (Nov. 28, 1995)............................................28

Plaintiffs submit this memorandum in opposition to the defendants' motion to dismiss the Consolidated Class Action Complaint (the "Complaint").(1)

PRELIMINARY STATEMENT

There are two principal claims at issue in this case. The first is on behalf of former owners of the common stock and stock options of Equity Corp. International ("ECI"). These innocent shareholders were duped when, 19 days after the close of the fourth quarter of Service Corp. International's ("SCI") financial year, they exchanged their ECI stock and options for SCI stock and options. By January 19, 1999, the date of the exchange, SCI's fourth quarter results were in hand, were far below expectations, and yet were not disclosed to the ECI holders as required under the securities laws. Seven days later, on January 26, 1999, when SCI finally chose to disclose those results, its stock price was cut almost in half, and the value of the SCI shares that the ECI holders had received days before dropped from $556 million to $278 million.

Pursuant to Sections 11 and 12(a)(2) of the Securities Act of 1933 (the "1933 Act"), plaintiffs need only prove that the poor 1998 fourth quarter results for SCI were in existence and rendered SCI's registration statement and prospectus (the "Registration Statement/Prospectus"), pursuant to which the ECI shares were exchanged, misleading. Plaintiffs do not have to prove defendants' scienter under these 1933 Act claims -- neither recklessness, nor knowledge, nor intent. In fact, the Registration Statement/Prospectus were patently misleading because they contained a provision requiring SCI to disclose up until the closing of the exchange any event which was having -- or could have -- a materially adverse effect on its business condition. Liability attaches strictly from the failure

to disclose the materially adverse fourth quarter results; the reasons for these poor results are irrelevant to these claims.

Defendants' Motion to Dismiss essentially ignores -- and thereby concedes -- the validity of the claims brought on behalf of the ECI stock and option holders regarding the January 19, 1999 stock exchange. Defendants' only mention of the Section 11 and 12(a)(2) claims (set forth solely in footnote 15, page 13 of their brief) asserts that plaintiffs must plead these claims with particularity because they sound in fraud. However, defendants do not contend that plaintiffs failed to plead these claims with particularity. Indeed, such an argument strains credulity: how could plaintiffs be more particular than pleading (1) the fourth quarter had ended; (2) the fourth quarter's poor results were necessarily complete; (3) defendants closed on the ECI transaction without disclosing these results; and (4) the Registration Statement/Prospectus affirmatively represented that SCI experienced no events -- up until the close of the transaction -- which would have a materially adverse effect on their business condition? These claims must be sustained.

The second set of claims in this case is brought on behalf of both the former ECI stock and option holders who exchanged their ECI holdings for SCI common stock on January 19, 1999 and open-market purchasers of SCI stock and options from July 17, 1998 through January 26, 1999 (the "Class Period"). This second set of claims is brought under Section 10(b) of the Securities and Exchange Act of 1934 (the "1934 Act"). In addition to former ECI shareholders, all members of the class who bought SCI stock during the Class Period in reliance on the integrity and honesty of SCI's public statements suffered dramatic losses when the disclosure of SCI's true financial condition on January 26, 1999 drove the inflated price of SCI stock down a stunning 44%.

As alleged in the Complaint, the poor fourth quarter results were no surprise to defendants. To the contrary, the exchange of grossly inflated SCI stock for ECI securities on January 19, 1999 was the culmination of defendants' longstanding scheme to conceal a growing deterioration in the business and financial condition of SCI, a deterioration that was known by the defendants throughout the Class Period. The most critical of SCI's mounting problems was the enormous backlog of unprofitable "preneed" funeral service contracts SCI had inherited from the hundreds of funeral homes it had acquired in the 1990s. Defendants concealed that crisis from the investing public during the second and third quarters of 1998 by carefully "managing" SCI's reported financial results, and schemed to continue to conceal the problem in the fourth quarter financial results.

By mid-November the Individual Defendants(2) were openly discussing among themselves their scheme to "bury" what they already knew would be an $.08 to $.10 shortfall in reported earnings in a special one-time charge attributed to the ECI acquisition. The scheme was foiled, however, when the closing date for the ECI acquisition was delayed past year-end 1998 by regulatory issues and defendants were forced to reveal SCI's results.

Defendants failed to disclose this information in any of the statements they made to the investing public during the Class Period, i.e., SCI's growing backlog of unprofitable acquired preneed contracts and the increasingly adverse impact those contracts had already had, and were continuing to have, on SCI's overall profit margins. In particular, the Complaint alleges that SCI woefully failed to manage its preneed funds actively to generate a rate of return in excess of actual funeral cost increases. The Complaint also specifically identifies all of the materially false and misleading statements and omissions made by defendants during the Class Period, and explains in

detail how and why those statements and omissions were fraudulent. The Complaint also alleges specific facts that are more than sufficient to raise a compelling inference that defendants made those statements with knowledge -- or reckless disregard -- of their untruthfulness. The facts alleged thus state a Section 10(b) claim under the 1934 Act and more than satisfy the pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA") and Federal Rules of Civil Procedure 9(b) and 12(b)(6). The Section 10(b) claims must also be sustained.

THE ALLEGATIONS OF THE COMPLAINT

A. BACKGROUND.

SCI operates 3,442 funeral service locations, 433 cemeteries and 191 crematoria located in 20 countries on five continents. P. 19. SCI became the world's largest death care services provider by purchasing more than 3,000 locally-owned family operated independent funeral homes throughout the 1990's. P. 20.
Among the assets acquired by SCI from these funeral home purchases were "preneed" (sometimes called "guaranteed price") funeral contracts that had been entered into when the acquired funeral homes were independently operated. P. 22. Preneed funeral contracts allow individuals to make and lock in the price of funeral arrangements before dying. Under such contracts, the funeral home agrees to provide funeral services and products in the future in return for a fixed sum paid at the time of the contract or under an installment schedule. P. 22. Defendants have admitted that SCI assumed the contractual obligation to perform price guaranteed funerals when it acquired the independent funeral homes. Ans. P. 22.(3)

When the preneed contracts were sold, the independent funeral homes established mortuary trusts funded with the payments from the prospective clients. P. 23. The total funds, or trust principal, generally were less than the then-current cost of providing the funeral service because preneed funeral services were often sold at a discount. P. 23. SCI acquired those mortuary trust assets when it purchased the independent homes. P. 23; Ans. P. 23.

To the extent that the principal and income generated by the trust equals or exceeds the ultimate cost of performing the funeral service, the funeral home either will break-even or realize a profit. P. 23. If, on the other hand, the mortuary trust assets do not grow to equal or exceed the future cost of performing the service, then the funeral service will be performed at the contractually agreed upon price, resulting in a loss. P. 23. As SCI's internal documents unequivocally recognize, "[t]he exposure to cost increases falls to SCI." Exhibits in Support of Defendants Motion to Dismiss the Consolidated Class Action Complaint (hereinafter "Exhibit"), Exhibit C-5, SCI0068. As defendants admit, SCI had amassed a multi-billion dollar preneed funeral contract backlog. Ans. P. 31 (acknowledging that "[d]uring 1995 alone, SCI purchased 1,263 independent funeral homes and acquired a staggering $656 million in preneed funeral contracts"); Ans. P. P. 24, 28 (conceding between 1992 and 1998, in just a six-year period, SCI's preneed funeral contract backlog increased three-fold, from $1.2 billion to $3.7 billion").

The vast majority of the independent funeral homes acquired by SCI lacked the financial sophistication to perform any meaningful analysis aimed at determining whether the assets invested in the mortuary trusts would generate a real rate of return in excess of the amount necessary to cover future increases in the cost of providing a price guaranteed funeral service. P. 24. The funds invested in these mortuary trusts often were not actively managed - if they were managed at all - and whether

such funds would grow sufficiently to equal or exceed the cost of providing a price guaranteed funeral service at some future date was left to happenstance. P. 24. Indeed, defendants have admitted that the financial management of these mortuary trust assets often consisted of little more than opening a certificate of deposit at a local bank. Ans. P. 24. And these practices have had a severely negative impact on SCI's profit margins during the protracted period of declining interest rates and escalating funeral home costs throughout the 1990's. P. P. 25, 26.

B. THE PRENEED STUDY PROVES A NUMBER OF PLAINTIFFS' ALLEGATIONS.

During 1996, SCI undertook what it termed "a review of the prearranged trust investment process which included an asset/liability study" (the "Preneed Study"). P. 32. Defendants have submitted a collection of select unauthenticated internal SCI documents that they conclusorily assert constitute the Preneed Study alleged in the Complaint. Defendants' reliance on these select documents, and arguments based on self-serving interpretations of these documents, amount to a debate about the meaning and weight of evidence, inappropriate on a motion to dismiss.

In all events, even the documents submitted by defendants, which have not been tested by any discovery or cross-examinations, support plaintiffs' claim that "SCI failed to establish any means of actively managing the mortuary trust assets that would eventually be used to pay for these acquired preneed funeral contracts." P. 30. Among other things, the collection of internal SCI documents defendants attached to their motion confirms that:

o SCI did not have an investment program to provide "independent, objective advice and assistance, particularly in the areas of asset allocation development and investment manager evaluation and selection," Exhibit C-5, SCI0067;

o SCI did not have a "scientific, analytical approach, focused on meeting SCI's financial objectives" and, at best, SCI was "in the process of developing" an "overall investment policy for the Pre-arranged Funeral trust funds." Exhibit C-5, SCI0070;

o SCI lacked the ability to even identify all of the mortuary trust assets it had acquired during its funeral home acquisition campaign - let alone manage these assets. See Exhibit C-6, SCI0138 (December 1996 memorandum stated "[c]urrently there is no reliable source to determine whether all acquisitions have been loaded to the trust general ledger."); Exhibit C-5, SCI0070 ("all trust funds currently identifiable are on the FSG system.") (Emphasis added);

o more than $600 million in mortuary trust assets was not even being monitored - let alone managed - as recently as June 30, 1997: "as of June 30, 1997, approximately 2000 trusts with total assets of $1.72 billion are being monitored." Exhibit C-5, SCI0070. According to the Company's Form 10-Q for the quarter ended June 30, 1997, however, total preneed contract assets totaled $2.3 billion;(4)

o SCI's failure to actively manage its preneed mortuary trust assets resulted in SCI earning approximately 5.5% annually on these assets. In stark contrast, funeral home costs escalated approximately 8.5% annually during this same period - thereby guaranteeing SCI a loss of at least 3% per annum on these assets. See Exhibit C-1, SCI0005. The 5.5% rate of return on SCI's preneed mortuary trust assets was 1.5% below SCI's own "target" rate of return, and a full 3.0% below the rate of return SCI knew it needed to earn on these preneed mortuary trust assets in order to perform this funeral backlog at break-even. Exhibit C-4, SCI0064;

o SCI's preneed mortuary trust assets were not invested in accordance with SCI's own asset allocation policy. SCI had invested 33% of its preneed trust assets in "Cash," when its asset allocation policy required that no more than 10% of such assets be invested in "Cash;" and only 21% of the assets had been invested in "Domestic Equities" when SCI's program had required that 40% of such assets be invested in "Domestic Equities." See Exhibit C-1, SCI0009; Exhibit C-4, SCI0063. These practices, as defendants knew, virtually guaranteed that these preneed mortuary trust assets would not grow sufficiently to allow SCI to perform the associated funerals profitably. As the defendants' own documents state: "Studies have shown that the asset class allocation decision ultimately determines over 90% of the fund's total return." Exhibit C-5, SCI0070; and

o 26% ($211 million of $811 million total prearranged funeral funds as of June 30, 1997 - an undeniably material portion) of the preneed trust assets acquired by SCI remained in the possession of "pre-acquisition trustees," inactively managed, and invested in low yielding certificates of deposit. Exhibit C-5, SCI0067.

C. DEFENDANTS' SCHEME.

By 1998, SCI's failure to actively manage its mortuary trust assets was having an increasingly negative impact on SCI's profit margin. P. 36. Gross margins decreased from 28% to 15% during

fiscal year 1998. P. 36. Although defendants were keenly aware of the risk posed by SCI's failure to actively manage the preneed assets, they were severely hampered in correcting the condition because of SCI's need to secret its identity from the public. P.'s 38, 40, 42, Ans. P. 18.

Rather than disclosing that SCI had amassed an enormous backlog of unmanaged, underperforming preneed funds and that a material number of SCI's funeral services had been, and would continue to be, performed at significant losses, defendants falsely represented that SCI was actively managing its backlog of acquired preneed trust assets. P. P. 45, 47. At the beginning of the Class Period in July 1998, the defendants publicly announced the creation of SCI Financial Services, Inc., a subsidiary which would purportedly actively manage SCI's preneed trust assets. P. 47. To establish this new organization SCI purchased two companies, each of which had experience in preneed asset management. P. 48. The first acquisition was of American Memorial Life Insurance Company ("AML" or "American Memorial"), and the second was ECI. P. 49.

The purchase of ECI is of particular significance because ECI, unlike SCI, already had established, and fully disclosed the existence of, a financial management system which ensured that its customers' preneed investments, or the funeral insurance coverage obtained, would be sufficient to cover adequately the future costs of prearranged funeral services. P. 50. While ECI disclosed that its insurance policies included "built-in escalation clauses" and that earnings on its trust funds "have allowed [it] to adequately cover the inflationary increase in costs of funeral services," SCI remained silent on these points. P.
53. The reason for SCI's omissions is clear: SCI's trust funds had not been managed to grow at a rate equal to or greater than the increase in the costs of funeral services. P. 53.

Defendants deceived the Class as to the primary -- and continuing -- reason for SCI's funeral service gross margin contraction during the first three quarters of 1998 by pointing to declining death

rates in North America, higher costs and lower volumes of funerals throughout the industry. P. 55. In addition, defendants carefully "managed" SCI's reported 1998 second and third quarter earnings by, inter alia, their aggressive acquisition program which provided SCI fresh sources of revenue, including, for example, the purchase of American Memorial in the third quarter of 1998. P. 55. However, defendants knew that SCI's deteriorating funeral service profit margins had already, and were continuing to, impact reported earnings, the all important indicia of SCI's financial condition for the investing public, and that SCI's fiscal year end would soon bring about a day of reckoning. P. 55.

By November 1998, the Individual Defendants knew that SCI's fourth quarter 1998 earnings would fall at least between $.08 to $.10 below analysts' estimates. P. 56. The Individual Defendants were also aware, by virtue of their receipt of daily, weekly and monthly profit/loss reports via SCI's "Falcon" system from each of SCI's domestic funeral homes, that this shortfall resulted from the performance of unprofitable preneed funerals, as well as undisclosed increases in costs for those services. P. 56.(5) Senior SCI executives, also aware of this impending shortfall and the reasons for it, openly discussed how to hide the shortfall from investors and how they and the Individual Defendants planned to "bury" this shortfall in a one-time charge that SCI planned to take in connection with its acquisition of ECI. P. 56.

Defendants knew the success of their plan hinged on their ability to close the ECI acquisition during the fourth quarter of 1998 so that SCI could take a one-time charge in the fourth quarter and close the ECI transaction without having to disclose the true reasons for the Company's earnings shortfall. P. 56. Pointedly, defendants make no attempt in their motion to challenge the sufficiency of the Complaint's allegations about their scheme to bury expected earnings shortfall in a one-time

charge that SCI planned to take in the fourth quarter in connection with the ECI merger. P. 56. This omission, coupled with defendants' admission that SCI was unable to divest itself of certain properties in time to obtain FTC approval to close the ECI merger in the fourth quarter of 1998, further supports plaintiffs' claims. Ans. P. 59.

Defendants' scheme was foiled, however, when SCI was unable to divest itself of certain properties in time to obtain FTC approval to close the ECI transaction in the fourth quarter of 1998. P. 57; Ans. P. 59. Defendants were unable to "bury" the earnings shortfall, which by the end of the fourth quarter had nearly doubled to $.19 to $.20 per share, in an acquisition charge as defendants had planned because the Merger did not close until after the end of the fourth quarter. P. 59.

Defendants nonetheless proceeded to close the ECI transaction without ever disclosing to ECI or the Class that SCI would report a drastic shortfall in its 1998 fourth quarter earnings. P. 60. Defendants did so despite the fact that the Merger Agreement between SCI and ECI, dated August 6, 1998 required SCI to disclose to ECI its poor performance during the fourth quarter of 1998 at any time at which it could reasonably be anticipated that such poor performance could have an adverse financial impact on SCI. P. 61. Defendants, aware that disclosure of the adverse financial conditions at SCI would lead to the termination of the Merger by ECI or to a renegotiation of the transaction, refused to take that risk. P. 67.

D. DEFENDANTS' MOTIVES.

Defendants had strong motives to conceal the true reasons behind SCI's funeral margin contraction and the negative impact that SCI's unprofitable multi-million dollar preneed funeral backlog had already had, and was continuing to have, on SCI's profit margins and earnings. P. 110. By doing so, defendants were able to cause the market price of SCI's stock to become and remain

materially artificially inflated throughout the Class Period. P. 110. Because the consideration paid by SCI to ECI stockholders was SCI common stock, SCI was able to effectively purchase ECI with "watered stock," thereby saving SCI millions. P. 110.

The ECI acquisition was undeniably critical to SCI's ability to turn around its unprofitable preneed business. P. 111. ECI had the right to terminate the Merger Agreement, however, "if the representations and warranties of [SCI] shall fail to be true and correct in all material respects . . . ." P. 112. Thus, prior to negotiating the deal with ECI, SCI had ample motive to maintain SCI's stock price in an effort to acquire ECI in a stock-for-stock transaction for less than ECI's true value. P. 112. After the Merger Agreement was executed, but before the deal closed, SCI had motive to continue to hide conceal adverse developments from ECI to prevent ECI from terminating the Merger Agreement. P.
112. Had SCI disclosed the existence of its problems, ECI would have been able to terminate the Merger Agreement under Section 9.1. P. 112. Defendants also admit that the shelf- registration statements filed with the SEC during the Class Period permitted SCI to "avail itself of much needed funds to finance the Company's acquisitions and operations." Ans. P. 114 (emphasis added).

E. THE TRUTH IS REVEALED.

On January 26, 1999, just five business days after SCI and ECI jointly announced the completion of the Merger, SCI shocked the investment community by issuing a press release which stated:

[SCI], the world's largest funeral and cemetery company, announced today that it expects diluted earnings per share for the fourth quarter of 1998 to be lower than current analyst expectations.

P. 123. SCI's fourth quarter 1998 gross profits declined by 19% from SCI's third quarter 1998 and 24% from SCI's fourth quarter 1997 gross profits. SCI's earnings per share for fourth quarter 1998 were 28% below the third quarter 1998, 36% below the fourth quarter 1997, and 45% below the average forecast or "consensus estimate" for the fourth quarter by analysts who followed SCI. P.
123. These "consensus estimates" were based on misleading information given directly by SCI to professional market analysts. P. 123. Defendants deceptively failed to disclose to analysts and the market, and to ECI and its shareholders in the course of negotiating and closing the Merger, the truth about SCI's increasingly unprofitable preneed funeral business. P. 123.

The market's reaction to the January 26, 1999 disclosure was swift and severe. P. 124. The price of SCI common stock plunged from $34 7/16 per share on January 25 to $19 1/8 per share on trading of over 36 million shares, a one-day decline of $15.3125 per share or 44%. P. 124. This price decline also virtually cut the consideration paid for each share of ECI common stock in the Merger in half.P. 124.

On February 9, 1999, the Company issued a press release purporting to explain the earnings shortfall. The primary reasons cited by SCI for the shortfall were decreased revenues and increased costs. However, the true reason for this "surprised" shortfall was revealed later by statements defendant Heiligbrodt made to the press. As alleged, this earnings shortfall resulted from losses on SCI's preneed business, losses which were known to defendants throughout the Class Period. P. 126 (excerpting story in industry publication in which defendant Heiligbrodt stated "the at need value of many of the preneed plans sold in the 1980's is about 20 percent less than the company presently charges for its services"); Ans. P. 127 (admitting, without qualification, story in industry publication

reporting that "SCI has said in the past that it loses money on some of its preneed services because the contract was sold at too low a price").

ARGUMENT

I. THE APPLICABLE LEGAL STANDARDS

Rule 12(b)(6): Rule 12(b)6) allows for dismissal of a complaint if the plaintiff fails to "state a claim upon which relief may be granted." Robertson
v. Strassner, 32 F. Supp. 2d 443, 445 (S.D. Tex. 1998) (citations omitted). A motion to dismiss is "viewed with disfavor and is rarely granted." Lowrey v. Texas A&M University System, 117 F.3d 242, 247 (5th Cir. 1997). Dismissal is appropriate only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley
v. Gibson, 355 U.S. 41, 45-46 (1957); Holmes v. Texas A&M Univ., 145 F.3d 681,
683 (5th Cir. 1998). In deciding whether dismissal is warranted, the Court must accept as true the non-conclusory allegations in the plaintiff's complaint. Khurana v. Innovative Health Care Systems, Inc., 130 F.3d 143, 147 (5th Cir. 1997); Zuckerman v. Foxmeyer Health Corp., 4 F. Supp. 2d 618, 621 (N.D. Tex. 1998).

Rule 9(b): Rule 9(b) properly serves to deter vague and conclusory allegations of fraud. But, Rule 9(b) does not allow "defendants by sophisticated claims of ignorance, to plow meritorious claims into stumps...Enforcement of Rule 9(b) should not become .... a tool to require plaintiffs repeatedly to redraft pleadings despite defendants' pre-existing full knowledge of the matters which plaintiffs' pleadings address." Picture Lake Campground v. Holiday Inns, Inc., 497 F. Supp. 858, 866-67 (E.D. Va. 1980). The defendants urge the Court to interpret Rule 9 (and the PSLRA) as requiring plaintiffs to, in effect, prove their claims with evidentiary detail at the pleading stage, Def. Mem. at 14-16, but there is no requirement that plaintiffs plead their evidence in a publicly filed complaint. See, e.g., In

re Health Management Sec. Litig., 970 F. Supp. 192, 208 (E.D.N.Y. 1997) (Rule 9(b) does not require that the pleading contain "'detailed evidentiary matter'") (quoting Ross v. A.H. Robins Co., 607 F.2d 545, 557 n.20 (2d Cir. 1979)); In re Bausch & Lomb, Inc. Sec. Litig., 941 F. Supp. 1352, 1361 (W.D.N.Y. 1996) (same); In re Cephalon Sec. Litig., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) P. 99,562, at 97,799 (E.D. Pa. Aug. 29, 1997) (PSLRA "does not require pleading all of the evidence and proof thereunder supporting a plaintiff's claim"); In re Digi Int'l Sec. Litig., 6 F. Supp. 2d 1089, 1096-97 (D. Minn. 1998) (plaintiffs allegations need not be supported by "underlying documentary evidence").

Facts supporting plaintiffs' allegations of fraud are plead in detail, based on publicly available information and plaintiffs' counsels' extensive investigation into SCI's operations. See, e.g., P. 128. Those facts -- together with the reasonable inferences drawn therefrom -- more than adequately state a claim against defendants.(6)

II. THE COMPLAINT STATES CLAIMS AGAINST DEFENDANTS FOR

VIOLATIONS OF SECTIONS 11 AND 12(a)(2).

The Section 11 and Section 12(a)(2) claims arise from the fact that the owners of the common stock and stock options of ECI, 19 days after the close of the fourth quarter of SCI's financial year, exchanged their ECI stock and options for SCI stock and options based upon SCI's false and

(6)Defendants resort to a well-worn, conclusory argument, stating that "[t]his securities fraud class action is exactly the type of case that prompted Congress to reform the federal securities laws: that this case is "reminiscent of pre-Reform Act pleadings", and requires dismissal under the PSLRA. Def. Mem. at 2. However, the PSLRA was not enacted to erect impregnable barriers to legitimate private fraud actions, but to deter frivolous litigation. See PSLRA Statement of Managers, 141 Cong. Rec. at H13699 (daily ed. 11/28/95) (recognizing legitimate private fraud actions are an "indispensable tool with which defrauded investors can recover their losses," "promote...confidence in our capital markets," and "help to deter wrongdoing"). This action is the very kind of carefully prepared case, attacking real fraud by insiders, based on a significant investigation of plaintiffs' counsel, that Congress, by weeding out frivolous suits, wanted victims to be able to prosecute more effectively.

misleading Registration Statement/Prospectus. At the time of the exchange on January 19, 1999, SCI's fourth quarter was already closed, the results were far below expectations, and yet these results were not disclosed to ECI holders. Seven days later, on January 26, 1999, when SCI finally disclosed its poor fourth quarter results, its stock price was cut almost in half and the value of the SCI shares that the ECI holders had received just days earlier were now worth just over half as much -- losing $278 million dollars in value.

SCI's Registration Statement/Prospectus warranted -- as defendants admit -- that "as of the closing date," "there has not been any event, occurrence, development or state of circumstances or facts which has had, or could reasonably be anticipated to have, individually or in the aggregate, a Materially Adverse Effect." P.'s 106-107; Ans. at P.'s 106-107 (emphasis added). Because the fourth quarter had already closed at the time of the completion of the stock exchange, and because its results demonstrated a severe earnings shortfall, it is clear that an event had indeed occurred that had a materially adverse effect on SCI's operations. Thus, the Registration Statement/Prospectus' warranty to the contrary was necessarily false and misleading in violation of Sections 11 and 12(a)(2). These claims must be sustained.

A. ELEMENTS OF CLAIMS UNDER SECTIONS 11 AND 12(a)(2).

Under Section 11 of the 1933 Act, purchasers of registered securities may recover damages if the registration statement contains a material misstatement or omission; plaintiffs do not need to plead or prove fraud, reliance, motive, intent, knowledge or recklessness:

[Section 11] impos[es] a stringent standard of liability on the parties who play a direct role in a registered offering. If a plaintiff purchased a security issued pursuant to a registration statement, he need only show a material misstatement or omission to establish his prima facie case. Liability against the issuer of the security is virtually absolute, even for innocent misstatements.

Herman and MacLean v. Huddleston, 459 U.S. 375, 381 (1983)(emphasis added). See also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 200 (1976)(policy underlying
Section 11 was to create liability regardless of fault); In re F & M Distributors, Inc. Sec. Litig., 937 F. Supp. 647, 656 n. 5 (E.D.Mich. 1996)(scienter is not an element of Section 11 or 12(a)(2) claims). To state a claim under Section 11, the Complaint need only allege that: (1) the plaintiff purchased securities traceable to an effective registration statement (see P. 133); (2) the defendant falls within the statutorily enumerated categories (see P. 134); and (3) the registration statement contained a material misstatement or omission.(7)

Section 12(a)(2) of the 1933 Act, like Section 11, imposes strict liability for false and misleading statements in a prospectus, and it has no reference to the effective date of the registration statement. See, e.g. Degulis
v. LXR Biotechnology, Inc., 928 F. Supp. 1301, 1310 (S.D.N.Y. 1996)("only a material misstatement or omission need be shown to establish a prima facie case
[under Section 11 or 12], and scienter need not be alleged"). Rather, Section 12(a)(2) imposes liability whenever a prospectus (such as the one at issue here) is false or misleading and securities are eventually sold or acquired thereby. In Hill York Corporation v. American International Franchises, Inc., 448 F.2d
680 (5th Cir. 1971), the Fifth Circuit set forth the elements of a section 12(a)(2) violation:

the plaintiffs were required to prove that the defendants sold or offered to sell these securities by the use of the mails or instruments of transportation or communication in interstate commerce, and that the defendants misrepresented or omitted material facts. In addition the plaintiffs had to show that they had no knowledge of any untruth or omission. The plaintiffs need not prove scienter on the part of the defendants. Finally, the plaintiffs need not prove that they relied in any way on the alleged misrepresentations or omissions.

Id. at 695 (internal citations omitted).

As shown below, defendants violated Sections 11 and 12(a)(2) by consummating an exchange of SCI stock and options for their ECI counterparts on January 19, 1999 based upon false and misleading statements in the Registration Statement/Prospectus regarding SCI's financial health.

B. THE AMENDED COMPLAINT ADEQUATELY ALLEGES THE ELEMENTS OF CLAIMS UNDER SECTIONS 11 AND 12(a)(2) FOR MATERIAL OMISSIONS AND MISSTATEMENTS IN THE REGISTRATION STATEMENT/PROSPECTUS.

Sections 11 and 12(a)(2) placed defendants under a duty to disclose, both to the investing public and as a condition of the ECI merger, the adverse financial conditions at SCI both during the fourth quarter and after the quarter closed. As of November 1998, the individual defendants knew that ECI had a material shortfall in its fourth quarter earnings but nonetheless falsely represented in the Registration Statement that no material, adverse changes in SCI's business had -- or could -- occur. P. 56. Defendants' knowledge is clear from two admissions in its Answer. First, defendants admit that the Falcon system "allows SCI to determine the level of funeral and cemetery sales" (Ans. P. 121) -- information plaintiffs allege was available on a daily basis. P. 121. Accordingly, by the date the Registration Statement became effective on November 20, 1999, nearly two-thirds of the way through SCI's fourth quarter, SCI had available, via Falcon, data regarding SCI's earnings shortfall. Second, SCI knew that this shortfall could not possibly be made up in the remainder of the quarter because, as defendants' admit, SCI's high fixed cost structure could not be reduced to accommodate slower periods of revenue growth, and supply could not be increased to make up the shortfall because "a death care provider cannot promise to fill an order in 'a week or two.'" P. 119; Ans. 119. Thus, SCI's Falcon system informed it of its earnings shortfall and the nature of the defendants' business made it impossible to recover from that shortfall; in other words, the writing was on the wall.

Accordingly, even as early as the preliminary effective date of the Registration Statement in November, SCI's claim that there were no materially adverse effects on its business was necessarily false and misleading. See Shaw v. Digital Equip. Corp. 82 F.3d 1194, 1210 (1st Cir. 1996)("Present, known information that strongly implies an important future outcome is not immune from mandatory disclosure merely because it does not foreordain any particular outcome").

For the same reasons, the Registration Statement/Prospectus were defectively misleading when, only twelve business days prior to the end of SCI's quarter, SCI and ECI amended the Merger Agreement in SCI's favor. P.'s 70-71.(8) At this point in time, Falcon had provided defendants with nearly conclusive fourth quarter results and there was even less time to make up the shortfall that was now all but a fait accompli. Still, defendants failed to disclose the deteriorating results or the material impact on SCI's business operations, leaving uncorrected the unavoidably false and misleading statement of "no materially adverse effect" in the Registration Statement/Prospectus. P. 71, 56-57. Then, on December 31, 1998, the ECI shareholders voted to approve the merger and stock exchange, still without any disclosure of the fourth quarter debacle. Finally, 19 days after the fourth quarter had closed, sealing SCI's poor performance, SCI unbelievably continued to keep private its knowledge of the dramatic decline in SCI's earnings, waiting until one week after the acquisition transaction was safely closed to share its knowledge with the world and the ECI shareholders that SCI's fourth quarter results were nearly 50% below expectations. "[I]n the context of a public offering, there is a strong affirmative duty of disclosure." Shaw v. Digital Equip. Corp. 82 F.3d at 1202 (emphasis added). In the Shaw case, the First Circuit sustained Section 11 claims based upon a failure to disclose poor quarterly results in a registration

statement that became effective 11 days prior to the end of the quarter. Id. at 1211. The Court analogized the defendant corporation to an inside trader, arguing that

just as an individual insider with material nonpublic information about a pending merger. . . could not purchase his company's securities without making disclosure, the company itself may not engage in such a purchase of its own stock, if it is in possession of such undisclosed information. By extension, a comparable rule should apply to issuers engaged in a stock offering. Otherwise, a corporate issuer selling its own securities would be left free to exploit its information trading advantage, at the expense of investors, by delaying disclosure of material nonpublic negative news until after completion of the offering.

Id. at 1204 (internal citations omitted and emphasis added). Any other rule "would allow companies to exploit what amounts to a naked informational trading advantage." Id. at 1209. Thus, at "any point in a quarter," if "there is a sufficient probability that unexpected disastrous quarter-to-date performance will carry forward to the end of the quarter," to avoid liability, such results must be disclosed if "a reasonable investor would likely consider the interim performance important to the overall mix of information available.". Id. at 1210 (emphasis added).

The facts of the instant case are even more egregious than Shaw because, here, the defendants thrice traded on inside information, utilizing their "naked informational trading advantage" by failing to disclose negative information material to the acquisition of ECI, in November of the fourth quarter, 12 business days before the quarter's end, and even after the quarter had closed -- in spite of their express promise in the Registration Statement/Prospectus to report such information up until the date the transaction closed.(9) Accordingly, plaintiffs have amply met their pleading burden to allege

material misstatements and omissions. Nothing more is required under Sections 11 and 12(a)(2) of the 1933 Act. Herman & MacLean v. Huddleston, 459 U.S. at 381-82.(10)

C. PLAINTIFFS' SECTION 11 AND 12(a)(2) CLAIMS ARE NOT SUBJECT TO FED.
R. CIV. P. 9(b) OR TO THE PARTICULARITY REQUIREMENTS OF THE PSLRA

Defendants also argue -- albeit in a conclusory manner in a cursory footnote -- that the plaintiffs' 1933 Act claims are subject to the particularity requirements of the PSLRA and Rule 9(b) because the gravamen of all the claims is fraud. See Def. Mem. at 13. This argument has no merit.

The PSLRA, which included amendments to both the 1933 Act and the 1934 Securities Exchange Act of 1934 (the "1934 Act"), only added "particularity" pleading requirements to the 1934 Act, clearly preserving the strict liability of the 1933 Act claims. Compare 15 U.S.C. Section 77z-1 with 15 U.S.C. Section 78u-4. Plaintiffs' prima facie case for violations of Section 11 and 12(a)(2) is pled by alleging the presence of false and misleading statements or omissions in the Registration Statement. Degulis v. LXR Biotechnology, Inc., 928 F. Supp. 1301, 1310 (S.D.N.Y. 1996). See also In re Nationsmart Sec. Litig., 130 F.3d 309, 315 (8th Cir. 1997) (declining to apply Rule 9(b) to Section 11 claim because Section 11 does not include fraud or mistake as an element). Kensington Capital

Management v. Oakley, Inc., [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) P. 90,411, at 91,855 (C.D.Cal. Jan. 14, 1999) (same).

III. THE COMPLAINT STATES CLAIMS FOR VIOLATIONS OF SECTION 10(b) AND RULE 10b-5.

Not only are the statements in the Registration Statement per se actionable under Sections 11 and 12(a)(2), but those statements, as well as the other statements detailed in the Complaint, give rise to a cause of action under
Section 10(b).(11)

A. THE CIRCUMSTANCES OF DEFENDANTS' FRAUD ARE STATED WITH SUFFICIENT PARTICULARITY UNDER RULE 9(B) AND THE PSLRA.

Pursuant to Rule 9(b) of the Federal Rules of Civil Procedure a plaintiff must specify the "statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent." Zuckerman v. Foxmeyer Health Corp., 4 F. Supp. 2d 618, 622 (N.D. Tex. 1998). Plaintiffs have identified the precise omissions and misstatements alleged to have been made, the Registration Statement, press release, or SEC filing in which they were made, the context and the manner in which the statements were misleading and what defendants gained by the alleged fraud.

If an allegation regarding a statement or omission is made on information and belief, the PSLRA requires the complaint to state with particularity "all facts on which that belief is formed." 15 U.S.C. Section 78u-4(b)(1). Because the Complaint's detailed allegations of falsity are based on the

(11)See, e.g., Shaw, 82 F.3d at 1221 (the same misstatements and omissions in a Registration Statement which give rise to Section 11 and 12(a)(2) claims may give rise to a cause of action under Section 10(b) provided that plaintiffs establish the additional elements of Rule 10(b); Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir. 1997) ("to state a claim based on Section 10(b) of the Securities Exchange Act of 1934 the plaintiff must allege 1) a misstatement or omission; 2) of material fact; 3) made with the intent to defraud; 4) on which the plaintiff relied; and 5) which proximately caused the plaintiff's injury.").

investigation of plaintiffs' counsel (P. 128) rather than on information and belief, the PSLRA's information and belief pleading requirements do not apply.(12) Moreover, even if the Complaint were deemed to have been alleged on information and belief for purposes of the PSLRA, its allegations of fact more than sufficiently meet the requirements of the PSLRA.

1. DEFENDANTS' FRAUDULENT STATEMENTS IN CONNECTION WITH THE ECI ACQUISITION AND THE FOURTH QUARTER OF 1998.

The Complaint alleges specific facts showing defendants carefully considered a plan to deceive the investing public about SCI's financially debilitating preneed contracts and underperforming acquired mortuary trust assets -- a plan which reached an unprecedented level in the fourth quarter of 1998, by which time it had become clear to defendants that the increasingly adverse impact on SCI's reported results could continue to be concealed only by burying deteriorating earnings in a "charge" attributed to the ECI acquisition. In Section 10.10 of the Merger Agreement, which was attached as an Exhibit to the Registration Statement, defendants represented that no "events" had occurred which had, or could reasonably be anticipated to have, individually or in the aggregate, a "Material Adverse Effect." P.'s 63-66.

(12)See, e.g., Schlagel v. Learning Tree, [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) P. 90,403, at 91,816 n.4 (C.D. Cal. Dec. 23, 1998) (plaintiffs' allegations, based upon the investigation of their counsel, did not constitute pleading on information and belief); Cherednichenko v. Quarterdeck Corp., [1998 Supp. Transfer Binder] Fed. Sec. L. Rep. (CCH) P. 90,108, at 90,142 n.3 (C.D. Cal. Nov. 26, 1997) ("Plaintiffs' allegations are based on the investigation of their counsel, not on information and belief. The heightened standard does not apply here."); Zeid v. Kimberley, 973 F. Supp. 910, 915; Lister v. Oakley, Inc., No. SA CV 97-809-GLT (EEX) 1999 U.S. Dist. LEXIS 389, at *7 (C.D. Cal. Jan. 14, 1999); Warman v. Overland Data, Inc., [1998 Supp. Transfer Binder] Fed. Sec. L. Rep. (CCH) P. 90,167, at 90,529 (S.D. Cal. Feb. 23, 1998). See also In re Employee Solutions Sec. Litig., CIV 97-545-PHX-RGS-OMP, 1998 U.S. Dist. LEXIS 16444, at *13 (D. Ariz. Sept. 29, 1998) (plaintiffs are not required to reveal the individual sources of their allegations under the PSLRA).

The Complaint specifies in detail why that statement was misleading. Defendants knew when the statement was made that SCI's unprofitable acquired preneed contracts had already had, and were continuing to have, "a material adverse effect" which was required to be disclosed pursuant to the Merger Agreement. P. 56. By November 1998, defendants knew that SCI's fourth quarter 1998 earnings would fall at least between .$08 to $.10 below analysts' estimates, and talked openly among themselves about their scheme to hide the deteriorating earnings with a special "charge" attributed to the ECI acquisition. P. 56. Disclosure of the drastic impact of servicing the preneed contracts either would require renegotiation or termination of the ECI deal -- a risk defendants were unwilling to take.
P. 67.

Similarly, on December 14, 1998, when the Merger Agreement was amended, the Complaint alleges that defendants again failed to disclose materially deteriorating fourth quarter earnings caused by, inter alia, the impact of the Company's acquired mortuary trust assets. P. 71. This was less than two weeks prior to the end of SCI's fourth quarter, by which time defendants were aware of the extent of the earnings shortfall. P. 71. By that time, defendants knew they would not be able to continue to conceal SCI's deteriorating financial condition from the public when it came time to file year end reports with the SEC.P. 56. Moreover, the true condition of SCI -- not only in the fourth quarter, but throughout the Class Period, was well known to the Individual Defendants, who closely monitored results from SCI's many funeral homes through next-day reports generated by SCI's computer system, "Falcon." P. 56. The Complaint alleges with the particularity required by Rule 9(b) and the PSLRA, why the statements made in connection with the ECI merger were false and misleading.(13)

2. THE COMPLAINT ALSO ALLEGES WITH PARTICULARITY THE DEFENDANTS' FALSE AND MISLEADING STATEMENTS THROUGHOUT THE CLASS PERIOD.

Not only does the Complaint satisfy the PSLRA and Rule 9(b)'s particularity requirements with respect to the defendants' false and misleading statements in connection with the ECI acquisition, but it also satisfies those requirements with respect to the defendants' statements throughout the Class Period. In this case, as in many others, there were material undisclosed facts concerning the same subject -- SCI's unprofitable acquired preneed funeral contracts and the impact they were having on the Company's overall profit margins and performance -- that rendered all of the challenged statements from the beginning of the Class Period materially false and misleading when made. The Complaint specifies how and why these undisclosed adverse facts rendered each of the defendants' affirmative statements identified in the Complaint false and misleading when made. See P.'s 73, 75, 78, 80, 82, 84, 86, 88, 90, 92, 94, 96, 98, 100, 102, 103, 104, 106-108 (false and misleading statements) followed by
P.'s 74, 76, 77, 79, 81, 83, 85, 87, 89, 91, 93, 95, 97, 99, 101, 105, 109 (detailed explanations of why the statements were materially false and misleading).

In an attempt to transform plaintiffs' Complaint into a case they might rather defend, defendants mischaracterize these detailed allegations of fraud as "conclusory." Def. Mem. at 12-16. Defendants' claim is belied by the Complaint's specific allegations regarding each of the alleged omissions and misstatements, which must be deemed to be true on a motion to dismiss. For example, plaintiffs do not merely "conclude" that the Company's 1998 third quarter 10-Q omitted material information regarding the Company's underperforming preneed contracts and mortuary trust assets. P. 100. They allege, very specifically, that the Company's backlog of prearranged funeral contracts included a material number of contracts that were backed by mortuary trust assets that were inadequately funded or were funded by assets invested only to ensure growth adequate to cover "the

cost of providing a price guaranteed funeral." P. 101(a). At the time the 1998 third quarter 10-Q was filed, a material number of SCI's funeral services had been, and would continue to be, performed at significant losses, resulting in an increasingly sharp erosion in SCI's profit margins for funeral services. P. 101(b).(14)

The Complaint more than adequately satisfies Rule 9(b) and the PSLRA's particularity requirements. Nothing more is required.

B. THE PRENEED STUDY, ALONG WITH DEFENDANTS' PUBLIC STATEMENTS AND ADMISSIONS, AMPLY SUPPORT THE ALLEGATIONS IN THE COMPLAINT.

Defendants argue that the collection of select unauthenticated documents they assert constitute the preneed study rebuts each of plaintiff's allegations, based on their own, self-serving interpretation of those documents. This argument -- which clearly addresses the merits of the Complaint -- is entirely improper on a motion to dismiss where the Court must accept as true reasonable inferences drawn from plaintiffs' allegations. Khurana v. Innovative Health Care Systems, Inc., 130 F.3d 143, 147 (5th Cir. 1997); Zuckerman v. Foxmeyer Health Corp., 4 F. Supp. 2d 618, 621 (N.D. Tex. 1998); accord, In re Stratosphere Corp. Sec Litig., 1 F. Supp. 2d 1096, 1109 (D. Nev. 1998)(resolving disputed facts or inferences improper on motion to dismiss).

Defendants' "explanation," which at its core admits the existence of SCI's preneed problems, goes to SCI's ultimate defense. It is a merits argument, which should be presented to the jury at trial, after plaintiffs have had their right to complete merits discovery, and where SCI's "defenses" will be subject to cross-examination and the rules of evidence; it has no place in a motion to dismiss. In any

event, SCI's defense is meritless. Even the select documents defendants rely on, along with defendants' post Class Period public statements and admissions, amply support the allegations in the Complaint. Indeed, the defendants have admitted that fourth quarter earnings shortfall was caused by SCI's unprofitable preneed business. See P. 126 (excerpting story in industry publication in which defendant Heiligbrodt stated "the at need value of many of the preneed plans sold in the 1980's is about 20 percent less than the company presently charges for its services"); Ans. P. 127 (admitting without qualification, story in industry publication reporting that "SCI has said in the past that it looses money on some of its preneed services because the contract was sold at too low a price").

Defendants do not deny the explosive growth in preneed contracts. See Ans. P.'s 28 (conceding "between 1992 and 1998, in just a six-year period, SCI's prearranged funeral contract backlog increased three-fold, from $1.2 billion to $3.7 billion"); P. 31. Defendants also admit that CD's were used to finance the future cost of performing the funeral services for preneed customers. Ans. P. 24. And the defendants' own submissions show that SCI had a material amount of its mortuary trust assets -- 33% -- tied up in cash or other low risk/low return investments (Exhibit C-1, SCI0009), despite knowing this percentage was potentially disastrous. See Exhibit C-1, SCI0009: ExhibitC-4 SCI0063 (SCI's "policy" was to invest only 10% of the preneed investments in cash).(15)

C. PLAINTIFFS ARE NOT REQUIRED BY THE PSLRA OR RULE 9(b) TO IDENTIFY INTERNAL DOCUMENTS OR INFORMANTS.

Contrary to defendants' argument (Def. Mem. at 21-23), plaintiffs need not specify which internal documents they relied on or even that they relied on internal documents at all. The Complaint satisfies the PSLRA by alleging compelling facts which raise a strong inference of scienter without reference to any internal documents, and by identifying with particularity the facts that support plaintiffs' claim that the specific statements made by defendants were misleading. See Coates v. Heartland Wireless Communications, Inc., 26 F. Supp. 2d 910, 916 (N.D. Tex. 1998). Once a plaintiff sets forth the specifics of an internal corporate problem and its importance, as plaintiffs have done, the Second Circuit precedents from which the PSLRA standard is derived do not require a plaintiff to have personal knowledge or identify precisely how the problems were communicated to the company's top executives. See, e.g., Cosmas v. Hassett, 886 F.2d at 12-13 (2d Cir. 1989), Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994); Goldman v. Belden, 754 F.2d 1059, 1070 (2d Cir. 1985). The court in In re Bausch & Lomb Sec. Litig., 941 F. Supp. 1352, 1361 (W.D.N.Y. 1996), addressed this very issue, and upheld plaintiffs' complaint even though the "complaint did not point to any specific documents that defendants saw, nor did it state precisely when or how each individual defendant became aware that the Company's statements to the public were false or misleading." Id. Notably, the court concluded, "We will not demand clairvoyance from pleaders." Id. (citation omitted).

Defendants also assert that plaintiffs must identify the underlying sources of their factual allegations (i.e., the names of their confidential informants) before plaintiffs' factual allegations may be accepted as true by the Court. Def. Mem. at 21-23. However, such a requirement is refuted by the plain and unambiguous language of the PSLRA. The PSLRA states (for 1934 Act claims only):

[T]he complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

15 U.S.C. Section 78u-4(b)(1) (emphasis added). Thus, even if the Complaint's allegations were made on "information and belief," the PSLRA requires only that plaintiffs plead all facts upon which their belief is based, not the sources of those facts. There is absolutely no reference in the PSLRA to the word "source," let alone a requirement that plaintiffs identify their sources by name in a publicly-filed pleading.(16)

IV. THE COMPLAINT ADEQUATELY ALLEGES SCIENTER

A. THE LEGAL STANDARDS.

Plaintiffs may meet the requirements of Rule 9(b) and the PSLRA as applied to Section 10(b) by "alleging either motive and opportunity to commit fraud, or by pleading facts which identify circumstances indicating defendants' conscious or reckless behavior, so long as the totality of the allegations raises a strong inference of fraudulent intent. Robertson v. Strassner, 32 F. Supp. 2d 443, 446 (S.D. Tex. 1998). Accord, Zuckerman v. Foxmeyer Health Corp., 4 F. Supp. 2d 618, 622 (N.D. Tex. 1998), STI Classic Fund v. Bollinger Industries, Inc., 1996 U.S. Dist. Lexis 21553, *3

(N.D. Tex. 1996)(holding that the "motive and opportunity" test survived the PSLRA). See also, Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999).

Defendants incorrectly argue that the Fifth Circuit's decision in Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir.) cert. denied, 118 S.Ct. 412 (1997), is inapposite. In Williams, the Fifth Circuit applied the Second Circuit's approach to proper pleading of securities fraud allegations, and expressly stated that, although the case before it was filed prior to the PSLRA's effective date, "the [PSLRA] adopted the same standard we apply today."
Id. at 177-178. It is therefore hardly surprising that of the seven published and unpublished district court cases in the Fifth Circuit that have commented on the pleading requirements for the scienter element under the PSLRA, all but one
- - Parcelsus, 1998 WL 1108373 (N.D. Tex. 1998) -- interpret the act to allow a plaintiff to plead scienter by showing motive and opportunity. See, McNamara v. Bre-X Minerals Ltd., 57 F. Supp. 2d 396 (E.D. Tex. 1999)(circumstantial evidence of conscious misbehavior or recklessness satisfies the pleading requirement; facts showing motive and opportunity can also satisfy the requirement, although they may not always do so conclusively); Coates v. Heartland Wireless Communications, Inc., 55 F. Supp. 2d 628, 633 (N.D. Tex. 1999)("This court holds that scienter can be pleaded based on motive and opportunity to commit fraud; Hartsell v. SourceMedia, Inc., 1999 WL 649645 (N.D. Texas 1999) ("allegations of motive and opportunity are sufficient.")17; accord Robertson v. Strassner,

32 F. Supp. 2d 443 (S.D. Tex. 1998); Zuckerman v. Foxmeyer Health Corp., 4 Supp. 2d 618 (S.D. Tex. 1998); STI Classic Fund v. Bollinger Industries, Inc., 1996 WL 885802 (N.D. Tex. 1996).(18)

In Re Silicon Graphics II, 183 F.3d at 977-79 (9th Cir. 1999), heavily relied on by defendants, is at odds with this Circuit's interpretation of the PSLRA's pleading requirements, as is evident from WMX Technologies and district court cases such as Zuckerman and Strassner. See also In re Advanta Corp. Sec. Litig., 1999 WL 395997, at *3 (3d Cir. June 17, 1999) (noting that the Fifth Circuit in Williams concluded that the PSLRA codified the Second Circuit standard for pleading scienter). Indeed, none of the other Circuit Courts to address the PSLRA thus far (the First, Second, Third, Sixth and Eleventh) have taken the extreme view endorsed by the Silicon Graphics court, and have held that motive and opportunity are either alone sufficient to prove scienter or can -- at minimum -- constitute strong evidence of the requisite state of mind. See, Greebel v. FTP Software, Inc., 1999 WL 902898 (1st Cir. 1999); Press v. Chemical Investment Services Corp., 166 F.3d 529, 538 (2d Cir. 1999); In re Advanta, supra. In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 549 (6th Cir. 1999); Bryant v. Avado Brands, Inc., 1999 WL 688050, *12 (11th Cir. 1999).

Defendants also indulge in a misguided attempt to minimize the strong allegations of fraudulent intent by dissecting plaintiffs' allegations, and arguing that each factor, standing alone, is insufficient to prove scienter. Def. Mem. at 33-37. This argument is based on a misinterpretation of the PSLRA, which requires that the totality of the allegations raises a strong inference of fraudulent intent. Robertson v. Strassner, 32 F. Supp. 2d at 446. Accord, Zuckerman v. Foxmeyer Health

Corp., 4 F. Supp. 2d 618, 622 (N.D. Tex. 1998). This case does more than raise allegations that defendants made false and misleading statements to maintain favorable ratings on debt securities (Def. Mem. at 33) or to consummate a merger (Def. Mem. at 34) alone. Viewed in totality, the Complaint's numerous, detailed allegations set forth amply defendants' motive, opportunity, and reckless or deliberate conduct in compliance with the PSLRA.

B. THE DEFENDANTS ACTED WITH ACTUAL KNOWLEDGE OR A RECKLESS DISREGARD FOR THE TRUTH.

The Complaint alleges specific facts which create a strong inference that the defendants acted with, at least, a reckless disregard for the truth, and in many instances, acted intentionally and deliberately, including:

o According to SCI insiders, by November 1998 the individual defendants knew that SCI's fourth quarter earnings would fall at least between $.08 to $.10 below analysts' estimates.
P. 56;

o Senior executives and the defendants were not only aware of the impending earnings shortfall, they openly discussed how to hide the shortfall from investors and plotted an intricate plan to "bury" the shortfall in a one-time charge that SCI would take in connection with the ECI merger.
P. 56;

o The Falcon system provided the individual defendants daily, weekly, and monthly profit/loss reports from each of the Company's more than 3,000 domestic funeral homes. Falcon reported SCI's performance of a material number of unprofitable preneed funerals as well as undisclosed changes in SCI's costs, for each and every funeral home owned by SCI, making it simply not credible that these defendants were unaware of SCI's financial performance. P. 20, 56;

o Due to the Falcon system's reporting methods and the extremely high level of recurring, budgeted, fixed costs which do not fluctuate in the death care industry, death care providers such as SCI, can easily predict quarterly results. Defendants knew that fourth quarter results -- absent "burial" of the preneed impact in an ECI-related charge -- would be significantly less than estimated. P. 119; and

o Defendant Heiligbrodt admitted, subsequent to the Class Period, that the Company's earnings shortfalls reported for fiscal year 1998 resulted from losses on SCI's preneed business, P.'s 126, 127.

Moreover, the Individual Defendants controlled and approved the issuance of SCI's financial statements, press releases, and SEC filings during the Class Period. The magnitude of the fraud also supports the strong inference of scienter: On January 26, 1999, SCI announced that its fourth quarter 1998 gross profits declined 19% from its third quarter gross profits and 24% from SCI's fourth quarter 1997 gross profits. SCI's EPS for the fourth quarter of 1998 were a remarkable 36% below SCI's EPS for the fourth quarter of 1997 and 45% below the consensus estimate. P. 123. The magnitude of the completely unexpected shortfall caused SCI's shares to drop over 44% in one day. P. 124. Rehm v. Eagle Finance Corp., 954 F. Supp. 1246, 1254 (N.D. Ill. 1997)("[t]he more serious the error, the less believable are defendants' protests that they were completely unaware of defendants true financial status and the stronger the inference that defendants must have known about the discrepancy.").

There is also the close proximity of the January 26, 1999 disclosure of SCI's deteriorated finances and the date on which the completion of the ECI merger was closed, a lapse of only five business days. P. 123. Defendants' failure to reveal the material, negative impact of the debilitating inherited preneed and inadequately invested mortuary trust assets is itself strong circumstantial evidence of scienter. See, e.g., Powers v. Eichen, 977 F. Supp. 1031, 1039 (S.D. Cal. 1997) (Where "bad news" was disclosed approximately four weeks after defendants' optimistic statements were made the court held that "[t]he proximity of the bad news to the dates that the defendants made optimistic statements is circumstantial evidence that the defendants knew that their optimistic statements were false."); Friedberg v. Discreet Logic Inc., 959 F. Supp. 42, 51 (D. Mass. 1997)(court upheld a complaint where the time lapse between the optimistic statements and the

disclosure of negative news was approximately two months because of "the temporal proximity between an alleged misstatement and the later disclosure of inconsistent information.").

C. DEFENDANTS ALSO HAD MOTIVE AND OPPORTUNITY TO ENGAGE IN THE FRAUDULENT SCHEME.

Defendants also had both motive and opportunity to create a false picture of SCI's operating condition in order to maintain its artificially inflated stock price. It is undisputed that the Individual Defendants, all high ranking officers of SCI with access to internal documents, "Falcon" generated reports from each separate funeral home, attendance at regular meetings, and inside knowledge of the Company's affairs, had the opportunity to engage in the fraudulent scheme. P.'s 8-15. Defendants also had motive.

To plead motive adequately requires a showing of "concrete benefits that could be realized by one or more of the false statements." In re Health Management, 970 F. Supp. 192, 202 (E.D.N.Y. 1997), quoting Shields v. Citytrust Bancorp, 25 F.3d 1124, 1128 (2d Cir. 1994)(internal quotations omitted). Here, defendants were motivated to keep the price of SCI's stock as high as possible prior to the effective date of the ECI merger. The ECI acquisition was critical to SCI's ability to turn around its increasingly unprofitable acquired preneed business. P. 111. As a result of SCI's disclosure on January 26, 1999, the consideration paid for each share of ECI common stock in the Merger was cut virtually in half. P. 124. ECI shareholders who received SCI common stock worth $25.53 per share when the deal closed, now held shares worth only $12.79 per share. P. 124. The total consideration paid for ECI was effectively reduced from $556 million to $278 million. Id.

Allegations that defendants were motivated to issue false and misleading statements in order to complete stock-for-stock acquisitions sufficiently pleads motive. See Gross v. Medaphis Corp., 977 F.Supp. 1463, 1471 (N.D. Ga. 1997); Marra v. Tel-Save Holdings, Inc., 1999 WL 317103 (E.D.Pa.

1999). In Tel-Save, the court found a strong inference of fraudulent intent where plaintiffs identified a specific acquisition that occurred during the class period which was funded by a combination of Tel- Save stock and cash. Id. at *9. See also, Duncan v. Pencer, No. 94 Civ. 0321, U.S. Dist. LEXIS 401, at *48-49 (S.D.N.Y. Jan. 18, 1996) (company's motive to obtain monies to "fund its expansion and otherwise satisfy its financial needs" held sufficient to withstand a motion to dismiss); Harvey M. Jasper Retirement Trust v. Ivax Corp., 920 F.Supp. 1260, 1264-65 (S.D. Fla. 1995) (allegations that defendants inflated stock price to use as currency in stock-for-stock merger transaction showed what defendants gained by their misrepresentations).(19)

In addition to consummating the ECI merger -- and consummating it on terms favorable to SCI -- defendants were motivated to misrepresent SCI's true financial condition because:

o Defendants needed to maintain favorable ratings on debt securities, in particular, the May 29, 1998 registration of up to $1 billion of debt, common stock and warrants, and an October 15, 1998 registration for $500 million in SCI preferred stock. By failing to disclose the nature of SCI's unprofitable preneed business, SCI was able to save millions of dollars in interest payments that would otherwise have been paid to bondholders. P.'s 113-115; and

o It was necessary for SCI to retain its favorable Standard & Poor's credit rating in order to continue to "avail itself of much need funds" to further its acquisition spree, revenues from which SCI used to mask the poor performance of its prearranged funeral contracts. P.'s 116-117; Ans. P. 114
(emphasis added.)

Finally, defendants argue that any inference of scienter is negated by the absence of insider trading. Def. Mem. at 36-36. SCI did, however, engage in insider trading by exchanging inflated

SCI stock for ECI stock in the Merger, an act defendants admit "constituted a sale of securities." within the meaning of the statue prohibiting "selling a security while inpossession of material, nonpublic information." 15U.S.C.
Section 78t-1. Ans. P. 171. Moreover, in the face of detailed, substantial allegations of motive, opportunity, and a reckless disregard for the truth, even the absence of insider trading by any defendant is no defense to a well-pled complaint. See e.g., STI Classic Fund v. Bollinger Indus. Inc., 1996 U.S. Dist. LEXIS 21553, at *5-6 (N.D. Tex. Oct. 25, 1996) (motive established in post-PSLRA case despite absence of any insider trading); In re Wells Fargo, 12 F.3d 922,
931 (9th Cir. 1993) (allegations of unusual insider trading not required to establish scienter); In re Compaq Sec. Litig., 848 F. Supp. 1307, 1311 (S.D. Tex. 1993). Accord Hanon v. Dataproducts Corp., 976 F.2d 497, 507 (9th Cir. 1992); Cosmas v. Hassett, 886 F.2d 8, 13 (2d. Cir. 1989). Indeed, post-PSLRA decisions have found scienter in the absence of any insider trading. See, e.g., Gross, 977 F.Supp. at 1472 (scienter established through allegations that defendants made false statements in order to inflate the value of its stock thereby facilitating the acquisition of other companies); Epstein v. Itron, Inc., 993 F.Supp. 1314, 1326-27 (E.D. Wash. 1998).(20)

Considering the totality of the circumstances in this case, including the fact that insider trading is not required to establish scienter, and the particularized facts demonstrating defendants knew of the

adverse impacts of SCI's multi-billion dollar preneed funeral backlog on SCI's profit margins and earnings, there can be no doubt that defendants had both the motive and opportunity to commit fraud. See, Robertson v. Strassner, 32 F. Supp. 2d at 449 (defendants "misperceive Plaintiffs' allegations as to motive and place[d] undue reliance on Defendants' sales of OEDC stock"); see also Zuckerman, 4 F. Supp. 2d at 627 ("[a]fter consideration of the entire complaint, the Court is of the opinion that Plaintiffs have succeeded in alleging scienter).

V. THE FALSE AND MISLEADING STATEMENTS CHALLENGED IN THE COMPLAINT ARE NEITHER "PUFFERY" NOR "FORWARD LOOKING."

A. DEFENDANTS' STATEMENTS REGARDING SCI'S GROWTH AND PROFITABILITY ARE MORE THAN MERE CORPORATE PUFFERY.

Defendants argue that numerous statements alleged to be false and misleading in the Complaint are merely statements of "corporate optimism." Def. Mem. at 24. Unable to refute the actual statements alleged to be false and misleading, defendants cite -- piecemeal -- to one or two sentences taken out of context from plaintiffs' allegations. In fact, when these very allegations are viewed in their entirety, it is evident that these statements are not only false and misleading, but actionable. See, e.g., P.'s 75, 84, 78, 96. For example, P. 75 challenges a series of statements by defendant Heiligbrodt about SCI's acquisition of American Life, statements defendants claim are merely "vaguely optimistic statements." Def. Mem. at 24. Not true.

Heiligbrodt's statements were intended to and did convey the impression to the investing public that SCI was in the midst of a "profitable expansion into the preneed insurance business" and that SCI's acquisition of American Memorial was undertaken to build on and increase the profitability of its existing preneed "profit base". See P.'s 74(a-f), 75-76. In fact, when Heiligbrodt's statements were made, SCI's profitability was being severely undercut by its existing backlog of preneed funeral

contracts. The acquisition of American Memorial and planned expansion into preneed insurance was an attempt to fraudulently mask the growing reductions in SCI's overall profit margins caused by having to provide unprofitable prearranged funeral services and to ensure that SCI would not be saddled with even more dormant and underperforming mortuary trust assets. P. 76.

Similarly, in P. 84, which defendants also challenge as "mere puffery", defendant Champagne characterized "the most compelling way" for SCI to "increase its market share" was to "increase the level of the prearranged funeral business". P. 84. With respect to the American Memorial acquisition, Champagne added: "You're effectively building your backlog of funding for pre-arranged funerals which has the effect of expanding or maintaining SCI's prearranged funeral business...[t]hat is a very important aspect to a company like SCI. There is a lot of competition for prearranged funeral business." P. 84.

Defendants' statements touting SCI's acquisition and boasting of the growing and enormous volume of preneed funeral business -- a critical cause of SCI's devastating January 26 earnings shortfall -- was an act designed to mislead the investing public. To imply, as the defendants do in their brief, that investors would dismiss as mere "puffery" statements about the strength of SCI's preneed business -- which by defendants' own representations constituted a "very important aspect" of SCI's business -- is just disingenuous. See also, P.
78 (defendants' discussion of the increasing backlog of prearranged funeral contracts without any mention of the resulting adverse impact on profit margins caused by unprofitable acquired contracts); P. 80 (discussion of SCI's "leading market positions" without disclosure of how SCI became a "market leader" through the acquisition of funeral homes with underperforming preneed mortuary trust assets); P. 82 (comparing ECI's operational

systems to SCI's, notably excluding disclosure that ECI, unlike SCI, had an established program to ensure its ability to cover the cost of prearranged funerals).(21)

Contrary to defendants' assertions, federal courts repeatedly have upheld challenges to statements far more general than those they label "too vague" in this case. As long as a reasonable investor could arguably rely on the statement, "general expressions of optimism may be actionable under the federal securities laws." Hanon v. Dataproducts Corp., 976 F.2d 497, 501 (9th Cir. 1992); Virginia Bankshares v. Sandberg, 501 U.S. 1083, 1091-93 (1991)(even "indefinite and unverifiable" expressions of insiders "are reasonably understood to rest on a factual basis that justifies them as accurate."). See also, Cooper
v. Pickett, 137 F.3d 616, 629 (9th Cir. 1997)(general statements of optimism actionable "if not genuinely or reasonably believed, or if the speaker is aware of undisclosed facts that tend seriously to undermine the statement's accuracy").

B. DEFENDANTS' STATEMENTS AND OMISSIONS ARE NOT PROTECTED BY THE SAFE HARBOR PROVISIONS OF THE PSLRA.

Defendants' contention that the misrepresentations alleged are "forward- looking," and therefore protected by the statutory safe harbor provision (Def. Mem. at 21-26), is wrong. Defendants, of course, concede that their omissions are not protected by any safe harbor provision. The Complaint's allegations challenge statements of then existing known facts, not

"forward-looking" information, and therefore do not fall within the statutory safe harbor. See Harris v. Ivax, 182 F.3d 799, 806 (11th Cir. 1999) ("Of course, if any of the individual sentences describing known facts (such as the customer's bankruptcy) were allegedly false, we could easily conclude that the smaller, non-forward-looking statement falls outside the safe harbor."). The nature of the fraud in this case is the defendants' concealment of the ongoing effect of SCI's existing acquired preneed business -- the negative impact of which was fully known to defendants throughout the Class Period, and which continued to adversely impact the Company's profitability. See, e.g., Gross v. Medaphis, 977 F. Supp. at 1473 ("the statutory safe harbor, like the 'bespeaks caution' doctrine, does not insulate defendants from private securities liability based on statements that misrepresent historical/hard or current facts").

Even if any of the statements detailing SCI's ongoing and past business operations could somehow be considered "forward-looking" -- which they simply cannot -- none of the statements were accompanied by "meaningful cautionary statements." See Harris v. Ivax, 182 F.3d at 804, 806 ("A defendant can fully benefit from the safe harbor's shelter only when it has disclosed risk factors in a warning accompanying the forward looking statement."). Defendants' reliance on SCI's warnings about such generalized "risks" as the state of the economy and SCI's level of acquisition activity is misplaced. Def. Mem. at 27. Nothing specific, unique or meaningful in respect to the actual, and then existing, material problems that SCI had already and was continuing to experience with its unprofitable acquired preneed business, the failure to properly invest mortuary trust assets or the resulting impact on SCI's profitability as a result of having to service contracts at a loss was ever disclosed during the Class Period.

Investors had to wait until after the Class Period and after the closing of the Merger -- when defendant Heiligbrodt admitted that the earnings shortfall was due to the underperforming preneed contracts -- to discover the truth about the Company's financial situation. Defendants cannot seek shelter within the PSLRA's safe harbor to escape liability for deceiving and defrauding the investing public.(22)

CONCLUSION

For all of the foregoing reasons, the Court should deny defendants' motion in all respects.

DATED: November 5, 1999
Respectfully submitted,

(713) 627-7057 Fax

LEAD COUNSEL FOR PLAINTIFFS

OF COUNSEL:

GREENBERG, PEDEN, SIEGMYER & OSHMAN, P.C.
David E. Sharp
Tenth Floor, 12 Greenway Plaza
Houston, TX 77046
(713) 627-2720
(713) 627-7057 Fax

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CERTIFICATE OF SERVICE

I do hereby certify that on this the 5th day of November 1999, a true and correct copy of the Opposition has been duly and properly serviced upon counsel of record in accordance with the Federal Rules of Civil Procedure.

JAMES P. HUNTER, III and                 )                 IN THE DISTRICT COURT
JAMES P. HUNTER, III FAMILY TRUST,       )
                                         )
                     Plaintiffs,         )
                                         )
vs.                                      )
                                         )
                                         )
SERVICE CORPORATION INTERNATIONAL,       )               ANGELINA COUNTY, TEXAS
ROBERT L. WALTRIP,                       )
L. WILLIAM HEILIGBRODT,                  )
GEORGE R. CHAMPAGNE,                     )
W. BLAIR WALTRIP,                        )
JAMES M. SHELGER,                        )
WESLEY T. MCRAE and                      )
PRICEWATERHOUSECOOPERS, L.L.P.           )
                                         )           ________ JUDICIAL DISTRICT
                    Defendants.          )

PLAINTIFF'S ORIGINAL PETITION

TO THE HONORABLE JUDGE OF SAID COURT:

Plaintiffs James P. Hunter, III and James P. Hunter, III Family Trust complain of defendants Service Corporation International, Robert L. Waltrip, L. William Heiligbrodt, George R. Champagne, W. Blair Waltrip, James M. Shelger, Wesley T. McRae and PricewaterhouseCoopers, L.L.P. and for cause would show the following:

I.

NATURE OF ACTION

1. Plaintiffs (collectively Hunter), sues for fraud and misrepresentation under state statutory and common law. Hunter gave up shares and stock options in Equity Corporation International (Equity) and acquired the shares of Service Corporation International (SCI) in the stock-for-stock merger of Equity into SCI (the Merger) on January 19, 1999. Jim Hunter also surrendered his positions as Chairman, CEO, and President of Equity and accepted instead a position

as an employee and officer of SCI. As the top executive officer of Equity and its chairman, as well as one of Equity's largest shareholders, Jim Hunter's consent to the Merger was essential to its consummation. To persuade Jim Hunter to consent to the Merger and to accept employment by SCI, SCI and the other defendants hid knowledge they had and were under a duty to disclose concerning SCI's poor financial performance in the quarter ending December 31, 1998. In so doing, defendants misrepresented and concealed material information that, had it been disclosed, would have resulted in termination of the transaction.

II.

JURISDICTION AND VENUE

2. The claims asserted herein arise under the Texas Securities Act, Tex. Rev. Civ. Stat art. 581-33, Tex. Bus. & Comm. Code Section 27.01, common law fraud, negligent misrepresentation, and conspiracy.

3. This Court has jurisdiction pursuant to Tex. Gov. Code Sections 24.007 and 24.008.

4. Venue is proper in this Court pursuant to Tex. Civ. Prac. & Rem. Code
Section 15.002.

III.

PARTIES

5. Plaintiff Jim Hunter is a resident of Lufkin, Texas. Jim Hunter was the Chairman of the Board, President, and Chief Executive Officer of Equity from the time of its spin-off in 1990 from SCI until the Merger. Jim Hunter built Equity into the fourth largest publicly-traded provider of deathcare services and products in the United States, and increased annual revenues from $18 million in 1990 to an estimated $206 million in 1998.

6. Defendant SCI is a corporation organized under the laws of the State of Texas with its principal executive offices located at 1929 Allen Parkway, Houston, Texas. J. Clifford Gunter,

III, of the law firm of Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002 has been authorized by defendant SCI to accept service of this Plaintiffs' Original Petition. A copy of Plaintiffs' Original Petition has been delivered to him.

7. Defendant Robert L. Waltrip (Waltrip) is the Chief Executive Officer and Chairman of the Board of SCI. Waltrip resides in Houston, Texas. J. Clifford Gunter, III, of the law firm of Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002 has been authorized by defendant Waltrip to accept service of this Plaintiffs' Original Petition. A copy of Plaintiffs' Original Petition has been delivered to him.

8. L. William Heiligbrodt (Heiligbrodt) was the President and Chief Operating Officer of SCI from before the time he contacted Hunter on July 22, 1998, to ask Hunter to consider the Merger, until February 11, 1999. J. Clifford Gunter, III, of the law firm of Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002 has been authorized by defendant Heiligbrodt to accept service of this Plaintiffs' Original Petition. A copy of Plaintiffs' Original Petition has been delivered to him.

9. George R. Champagne (Champagne) has been the Executive Vice President and Chief Financial Officer of SCI since before July 22, 1998. J. Clifford Gunter, III, of the law firm of Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002 has been authorized by defendant Champagne to accept service of this Plaintiffs' Original Petition. A copy of Plaintiffs' Original Petition has been delivered to him.

10. W. Blair Waltrip (Blair Waltrip) is the son of R. L. Waltrip and has been an Executive Vice President of SCI since before July 22, 1998. J. Clifford Gunter, III, of the law firm of Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002 has been authorized by defendant Blair Waltrip to accept service of this Plaintiffs' Original Petition. A copy

of Plaintiffs' Original Petition has been delivered to him.

11. James M. Shelger (Shelger) is the Senior Vice President, Secretary and General Counsel of SCI and has held such position since before July 22, 1998. J. Clifford Gunter, III, of the law firm of Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002 has been authorized by defendant Shelger to accept service of this Plaintiffs' Original Petition. A copy of Plaintiffs' Original Petition has been delivered to him.

12. Defendant Wesley T. McRae (McRae) was the Controller of SCI during 1998. J. Clifford Gunter, III, of the law firm of Bracewell & Patterson, L.L.P., 711 Louisiana Street, Suite 2900, Houston, Texas 77002 has been authorized by defendant McRae to accept service of this Plaintiffs' Original Petition. A copy of Plaintiffs' Original Petition has been delivered to him.

13. Defendants Waltrip, Heiligbrodt, Champagne, Blair Waltrip, Shelger, and McRae (the Individual Defendants), as senior officers or directors of SCI, were controlling persons of the Company. Each exercised his power and influence to cause SCI to engage in the fraudulent acts and practices complained of herein.

14. Defendant Pricewaterhouse Coopers, L.L.P. (Pricewaterhouse) is a national accounting firm with offices throughout the United States, including two in Houston, Texas, one at 1201 Louisiana, Suite 2900, Houston, Texas 77002-5678 and another at 1100 Louisiana, Suite 4100, Houston, Texas 77002-9980. Pricewaterhouse may be served with process at either of the above locations.

IV.

FACTS

NEGOTIATION AND CLOSING OF THE MERGER AGREEMENT

15. On July 22, 1998, defendants Heiligbrodt and Waltrip contacted Jim Hunter to ask

him whether Equity would be interested in being acquired by SCI.

16. Jim Hunter thought that SCI was an attractive merger prospect for Equity in the summer of 1998. On April 23, 1998, SCI had announced record revenues and earnings, increased margins, and "increased investment returns associated with the larger asset base from cemetery merchandise and endowment care trust funds." On July 23, 1998, SCI had reported record revenues and earnings for the second quarter of 1998. The Company had fueled its growth primarily through acquisitions such as Equity and had apparently been quite successful in integrating and managing its acquisitions. Accordingly, when defendants Heiligbrodt and Waltrip contacted Jim Hunter on July 22, 1998, Jim Hunter decided to consider a merger with SCI.

17. On July 27, 1998, Heiligbrodt met with Jim Hunter. Heiligbrodt told Jim Hunter that SCI was a strong company with a bright future and that SCI expected no significant problems despite unfavorable business trends in the industry. Heiligbrodt also told Jim Hunter the Merger was in the best interests of the Equity shareholders because they would gain the liquidity, stability, and growth associated with ownership of SCI's stock. At the meeting, Heiligbrodt delivered a letter signed by defendant Waltrip reiterating Heiligbrodt's statements about the benefits of merging with SCI and urging Jim Hunter to enter into formal merger negotiations.

18. Following the July 27, 1998 meeting, Equity formally retained ABN AMRO as its financial advisor. SCI hired J.P. Morgan & Co. (Morgan). Negotiations for the Merger began in earnest.

19. SCI and Equity executed a merger agreement (the Merger Agreement) on August 6, 1998.

20. In connection with the Merger, Jim Hunter agreed to an employment agreement with SCI and its subsidiary to serve as SCI's Executive Vice President for at least three years. The

employment agreement provided for a salary, discretionary bonuses, and other compensation to Jim Hunter.

21. In the Merger Agreement, SCI represented that at the closing date of the Merger, there had been no development that could reasonably be anticipated to be adverse to SCI's business or financial condition (sections 4.7 and 10.10(g)), and promised that SCI would promptly notify Equity if it learned of any such development (section 7.9). Equity had the right to terminate the Merger Agreement in the event of any such development (sections 8.2(a) and 9.1(a)(i)). Hunter relied on SCI's representations and promises, and understood that SCI had a duty to disclose any such adverse development to Equity, and therefore to Jim Hunter, Equity's CEO.

22. The Merger Agreement was incorporated by reference in and attached to a November 20, 1998 Prospectus and Proxy Statement (the Prospectus) that was transmitted to Hunter. The Prospectus explicitly stated that shareholders should rely on the information contained in and incorporated by reference in the Prospectus.

23. In December 1998, the Merger Agreement was amended to lower the exchange ratio for the Merger, reflecting the rising price of SCI stock. On December 12, 1998, SCI amended the Prospectus to disclose the lower exchange ratio. In accordance with the renegotiated exchange ratio, Hunter received when the Merger closed 0.71053 shares of SCI stock for each of his shares of Equity stock, and exchanged his Equity stock options for SCI stock options on the same exchange ratio.

24. The merger closed on January 19, 1999. Through January 19, 1999, SCI did not disclose to Equity or Hunter any development that could reasonably be anticipated to be adverse to SCI's business or financial condition. Hunter reasonably believed that there had been no such adverse development up to and including January 19, 1999, because he knew that SCI was required to disclose any such development to Equity, and SCI had not done so.

SCI DISCLOSES ITS POOR RESULTS

25. Within seven days of the Merger, however, SCI publicly announced on January 26, 1999 that it had substantially missed both its fourth quarter and its annual earnings estimates.

26. SCI's failure to meet its earnings estimates was material information to Hunter. If Hunter had known that SCI anticipated missing or had missed its earnings estimates before the Merger closed on January 19, 1999, Jim Hunter would have caused Equity to terminate the Merger Agreement. SCI's failure to meet its earnings estimates was a development that could reasonably be anticipated to be adverse to SCI's business or financial condition and SCI did in fact anticipate that it would be adverse to SCI's business and financial condition. SCI knew that the earnings information would come as a tremendous shock to the investment community and would cause an immediate and drastic drop in the price of SCI's shares.

HUNTER DISCOVERS THE FRAUD AND IS TOLD TO RESIGN

27. After SCI publicly announced its failure to meet its earnings estimates on January 26, 1999, SCI's CFO, defendant George Champagne, acknowledged to Jim Hunter that SCI had known before the Merger closed that SCI would substantially miss its earnings estimates.

28. In addition, after the January 26, 1999 announcement, an employee of Pricewaterhouse told Jim Hunter that Pricewaterhouse knew before the Merger closed that SCI would substantially miss its earnings estimates, and that this information was memorialized in a memorandum that had been sent to SCI.

29. In late February or early March, 1999, Jim Hunter was asked to attend a meeting in which counsel for SCI asked for Jim Hunter's reaction to the statement that "our investigation has shown that senior management of SCI had no knowledge of the impending earnings shortfall." Jim Hunter responded that the statement was ludicrous.

30. Two days later, defendant Waltrip advised Jim Hunter that there was no longer any place for him in the SCI organization. Accordingly, Jim Hunter resigned as an officer of SCI and entered into an amendment of his employment agreement with SCI. Pursuant to the amendment, the term of the employment agreement was limited, Jim Hunter's duties were restricted, and Jim Hunter's eligibility to earn bonus payments was constrained.

CAUSES OF ACTION

COUNT I

TEXAS SECURITIES ACT, ART. 581-33

31. Plaintiffs repeat and reallege each allegation contained above.

32. Plaintiffs bring this Count under the Texas Securities Act, Art. 581-33A, B, and C, against all defendants.

33. SCI offered to buy from Hunter their Equity shares, and to sell to Hunter SCI shares, by means of an untrue statement of a material fact, and by an omission to state a state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading.

34. SCI was the issuer for the SCI shares sold to Hunter via the Merger. SCI disseminated a prospectus for the Merger exchange shares registered under 15 U.S.C. Section 77f. The prospectus contained an untrue statement of material fact, and omissions of material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading.

35. Plaintiffs had no knowledge of the misrepresentations or omissions at the time of the Merger when they sold their Equity shares and purchased SCI shares.

36. Each of the defendants had knowledge of the misrepresentations and omissions or in

the exercise of reasonable care would have known of the untruths or omissions.

37. Each of the Individual Defendants was a control person of SCI for purposes of art. 581-33 F and so is liable jointly and severally with SCI for SCI's violations of art. 581-33 A, B and C.

38. Pricewaterhouse materially aided SCI, for purposes of art. 581-33 F, in violating art. 581-33 A, B and C. Pricewaterhouse acted directly or indirectly with the intent to deceive Hunter or acted with reckless disregard for the truth or for the law. Accordingly, Pricewaterhouse is liable jointly and severally with SCI for SCI's violations of art. 581-33 A, B and C.

39. Pursuant to art. 581-33 D, Hunter hereby tenders their SCI shares and options and seeks recovery of the value of the Equity shares and options they surrendered upon the Merger, which were worth several millions of dollars, with any offsets as provided under the statute.

40. Hunter also seeks costs and reasonable attorney's fees.

COUNT II
TEXAS BUSINESS & COMMERCE CODE SECTION 27.01

41. Plaintiffs repeat and reallege each allegation contained above.

42. Plaintiffs bring this Count for fraud in a transaction involving stock in a corporation under Tex. Bus. & Comm. Code Section 27.01 against all defendants.

43. SCI and the Individual Defendants misrepresented that there had been no development that could reasonably be anticipated to be adverse to SCI's business or financial condition through the date the Merger was consummated.

44. SCI and the Individual Defendants made the material misrepresentations with the intent to induce Jim Hunter to refrain from terminating the Merger Agreement and to cause Equity to consummate the Merger after shareholder approval.

45. Hunter relied on the material misrepresentations.

46. Hunter had no knowledge of the falsity of SCI's material misrepresentations.

47. As persons who made material false representations to Hunter in violation of Section 27.01(a), SCI and the Individual Defendants are liable to Hunter for actual damages under Section 27.01(b). Hunter's actual damages are in the millions of dollars, and include their loss on the value of their Equity stock and options as well as Jim Hunter's diminished compensation as an employee of SCI.

48. Because SCI and the Individual Defendants had actual awareness of the falsity of their material misrepresentations, they are liable to Hunter for exemplary damages under Section 27.01(c).

49. Pricewaterhouse had actual awareness of the falsity of SCI's and the Individual Defendants' material misrepresentations, but failed to disclose same to Equity and Hunter. Pricewaterhouse benefitted from the fraud in that it retained SCI's audit business. Accordingly, Pricewaterhouse is liable to Hunter for actual and exemplary damages under Section 27.01(d).

50. All the defendants are liable to Hunter under Section 27.01(e) for reasonable and necessary attorney's fees, expert witness fees, costs for copies of depositions, and costs of court.

COUNT III

COMMON LAW FRAUD

51. Plaintiffs repeat and reallege each allegation contained above.

52. Plaintiffs allege this Count against SCI and the Individual Defendants.

53. SCI and the Individual Defendants made the material misrepresentations described above. In addition, SCI and the Individual Defendants had a duty to disclose the information concerning SCI's poor results, but failed to do so. As soon as SCI learned of the possibility that it would miss its earnings target, SCI had a duty to inform Equity, and therefore Hunter, and the failure

to do so constituted a material omission and a continuing misrepresentation that it had not suffered any adverse development.

54. SCI and the Individual Defendants knew that the misrepresentations were false when made or made such material misrepresentations recklessly and without any knowledge of their truth, and knew that the omissions failed to correct prior representations that were false.

55. SCI and the Individual Defendants intended that Hunter rely on the material misrepresentations.

56. Hunter did rely on SCI's and the Individual Defendants' material misrepresentations.

57. As result of the defendants' fraud, Hunter suffered injury. Hunter's actual damages are in the millions of dollars, and include their loss on the value of their Equity stock and options as well as Jim Hunter's diminished compensation as an employee of SCI. The defendants are liable to Hunter for actual damages.

58. Defendants wilfully and intentionally defrauded Hunter and so are liable to them for exemplary damages.

COUNT IV

NEGLIGENT MISREPRESENTATION

59. Plaintiffs repeat and reallege each allegation contained above.

60. Plaintiffs bring this Count against SCI and the Individual Defendants.

61. SCI and the Individual Defendants provided false information to Hunter in the course of their business or in a transaction in which they had a pecuniary interest.

62. SCI and the Individual Defendants provided the false information for the guidance of Hunter in Hunter's business.

63. SCI and the Individual Defendants did not exercise reasonable care or competence

in obtaining or communicating the information to Hunter.

64. As a result of SCI's and the Individual Defendant's negligent misrepresentations, Hunter suffered damages. Hunter's actual damages are in the millions of dollars, and include their loss on the value of their Equity stock and options as well as Jim Hunter's diminished compensation as an employee of SCI.

COUNT V

CONSPIRACY

65. Plaintiffs repeat and reallege each allegation contained above.

66. SCI and Pricewaterhouse conspired to hide SCI's true value for the purpose of inducing Jim Hunter to effect the Merger. In furtherance of such purpose, SCI and Pricewaterhouse agreed to commit and did commit the violations of common law and statutory law described above. Hunter suffered damages in the millions of dollars as a result of SCI's and Pricewaterhouse's unlawful acts.

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

o Compensatory damages against all defendants, jointly and severally;

o Exemplary damages against all defendants;

o Interest on damages in accordance with law;

o Plaintiff's reasonable attorney's fees;

o Costs of court;

o Expert witness fees;

o Costs of copies of depositions; and

o Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

DATED:     11-10-99                       Respectfully submitted,
      ------------------
                                          SUSMAN GODFREY L.L.P.


                                          By: /s/ MARK L.D. WAWRO
                                             ---------------------------------
                                             Mark L.D. Wawro
                                             State Bar No. 20988275
                                             1000 Louisiana Street, Suite 5100
                                             Houston, Texas 77002
                                             Telephone: (713) 651-9366
                                             Fax: (713) 654-6666

                                             Martha A. Evans
                                             State Bar No. 06723870
                                             SUSMAN GODFREY L.L.P.
                                             2323 Bryan Street, Suite 1400
                                             Dallas, Texas 75201
                                             Telephone: (214) 754-1900
                                             Fax: (214) 754-1933

                                             Attorneys for Plaintiffs