Nicholas Stavros, et al., v. Exelon Corporation, et al. 02 ...securities.stanford.edu/filings-documents/1024/EXC02-01/2002101_r01c... · NICHOLAS STAVROS, on behalfof himself ) OCT

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IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

NICHOLAS STAVROS, on behalf of himself )and all others similarly situated, )

Plaintiff,

V, ) No. 02 C 3316

EXELON CORPORATION, CORBIN A . ) Judge Ruben CastilR nCDMCNEILL, JR., JOHN W. ROWE, ) c z

in(-

mRUTH ANN GILLIS, )

To

I.Defendants. ) o

NOTICE OF FILING 0fn

Counsel on the Attached Certificate of Service 2

PLEASE TAKE NOTICE that on Tuesday, October 1, 2002, we filed with the Clerk of th e

United States District Court for the Northern District of Illinois, Eastern Division, 219 South

Dearborn Street, Chicago, Illinois and then and there present the Consolidated Amended Class

Action Complaint, a copy of which is hereby served upon you .

Dated : October 1, 2002 Respectfully submitted, QC]' t̀oil

By :C2vin A. Miller

Jennifer Winter SprengelLori A. FanningMILLER FAUCHER and CAFFERTY LLP30 North LaSalle Street

W03 .S .n Suite 3200Chicago, Illinois 60602

e ., (312) 782-4880:1 Wd

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CERTIFICATE OF SERVIC E

1, Lori A. Fanning, one of plaintiff' s attorneys , hereby ce rtify that I caused the ConsolidatedAmended Class Action Complaint to be served on all counsel on the attached service list by placinga copy of the same in the United States Mail at 30 North LaSalle Street , Chicago, Illinois this 1"' dayof October, 2002 :

J . Kevin McCallJenner & Block LLC

One IBM Plaza333 North Wabash Avenue

43rd FloorChicago, Illinois 6061 1

on A . Fanning

i j

IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

DOCKETEDNICHOLAS STAVROS, on behalf of himself )

OCT 3 2002and all others similarly situated, )

mPlaintiff, ) n

v. ) No. 02 C 3316 r

EXELON CORPORATION, CORBIN A. } Judge Ruben CastilloMMCNEILL, JR., JOHN W . ROWE, w c mN

RUTH ANN GILLIS, } o} JURY TRIAL DEMA11 °D

Defendants. ) -q

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Lead Plaintiffs, by their attorneys, allege the following based upon knowledge with respec t

to their own acts, and upon other facts obtained through an investigation made by and through their

counsel, including a review of United States Securities and Exchange Commission ("SEC") filing s

by Exelon Corporation ("Exelon" or the "Company"), as well as regulatory filings and reports, new s

articles, securities analyst reports, advisories about the Company, press releases and other publi c

statements issued by the Company or its representatives, media reports about the Company, and

interviews of, among others, former Exelon employees and other persons with knowledge, Excep t

as alleged herein, the underlying information concerning defendants' misconduct and the particular s

thereof are not available to Lead Plaintiffs and the public and lie within the possession and contro l

of defendants and other Exelon insiders . Based upon the substantial facts already uncovered, an d

alleged herein, Lead Plaintiffs believe that substantial additional evidentiary support will exist for the

1318ISI0 S'f1allegations set forth herein after a reasonable opportunity for di~y . {

~d 1-130 Z0

1 1

NATURE OF THE ACTION

1 . This is a securities class action on behalf of purchasers other than defendants and

certain related parties (the "Class") of the common stock ofExelon during the period April 24, 200 1

through September 27, 2001, inclusive (the "Class Period "), seeking to recover damages under the

Securities Exchange Act of 1934 (the "Exchange Act" )

2. Exelon, headquartered in Chicago, Illinois, is a diversified energy services holdin g

company that, following a merger in October 2000, is the parent corporation for each of the followin g

utilities : Commonwealth Edison Company ("ComEd"), serving northern Illinois , and PECO Energy

Company ("PECO"), serving southeastern Pennsylvania . In January 2001, Exelon undertook a

restructuring to separate its electric generation and other competitive businesses from its regulated

energy delivery business . As a result of this restructuring, Exelon now conducts its operation s

through three separate business segments : (i) Energy Delivery, (ii) Generation, and (iii) Enterprises.

Energy Delivery consists of the regulated retail electricity distribution and transmission businesse s

of ComEd and PECO. Generation consists of Exelon's electric generating facilities and energ y

marketing operations called Power Team . Enterprises primarily consists of a number of competitive ,

non-regulated businesses purchased and operated by Exelon and its predecessor companies over th e

last few years . Enterprises' businesses are heavily weighted towards the business of infrastructur e

services for the utility and telecommunications industry as well as the ownership, investment, an d

operations of various telecommunications businesses .

3 . Throughout the Class Period, defendants falsely represented that Exelon was well-

positioned to achieve 10% year-over-year growth and earnings per share of $4 .50 in 2001 . In press

releases, conference calls, media interviews and presentations at analyst conferences, defendants

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repeatedly reaffirmed this representation stating, among other things, that Exelon was "clearly o n

track" to "meet or beat" its 2001 earnings target of $4 .50 per share, and that Exelon's low-cost

nuclear generating capacity and built-in customer base provided "earnings protection" against fallin g

energy prices and declining demand resulting from unfavorable weather conditions and the slowing

economy. Further, defendants touted the future growth potential of Exelon's Enterprises busines s

segment and represented that Enterprises was "on plan" and expected to have positive earnings befor e

interest and taxes (EBIT) of $60 million in 2001 . These positive public statements were reiterate d

even in the face of the collapse of the telecommunications market, falling energy prices and significan t

economic weakness, and in response to direct inquiries concerning the impact these conditions wer e

having on Exelon's results and the Company's ability to meet its earnings target .

4. The price of Exelon's common stock was inflated as a result of these

misrepresentations and reached a Class Period high of $62 .25 on May 14, 2001 . In addition,

defendants' statements caused credit rating agencies to upgrade their ratings of the debt of Exelon

and its subsidiaries, and permitted Exelon to sell $500 million in senior secured notes, maturing on

May 11, 2011, with a lower interest rate of 6 .75%, and Generation to sell $700 million in senio r

unsecured notes, maturing June 15, 2001, with a lower interest rate of 6.95% .

5 . In fact, however, defendants' rosy growth and earnings projections lacked any

reasonable basis and its much touted "earnings protection" was non-existent . Exelon's targete d

growth rate of 10% and EPS of $4 .50 could not be achieved in the absence of superior performanc e

by Generation . During the Class Period, however, Generation's financial results were impacte d

negatively by the slowing economy, declining demand and significantly lower energy prices .

Specifically, during the Class Period, Generation's financial results were adversely affected by (i) high-

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priced power purchase agreements that Generation entered into in early 2001, which left Generatio n

with a surplus of capacity that could not profitably be resold in the wholesale spot market ; and (ii )

fixed price contracts that Generation entered into as part of the restructuring that committed mos t

of Generation's low-cost nuclear capacity during peak periods to ComEd and PECO customers an d

largely limited sales of Generation's excess capacity in the wholesale market to off-peak periods whe n

prices were low and insufficient to generate needed margins .

6. At the same time , Exelon Enterprises, which principally consisted of infrastructur e

service and telecommunications businesses, and was touted by defendants as a future source o f

growth that was on track to achieve positive EBIT in 2001, was being decimated by the collapse o f

the telecommunications industry. Exelon Infrastructure Services (EIS), Enterprises' largest business

segment, which laid pipes and cable for the electric, gas and telecommunications industries, saw it s

business fall sharply in the first quarter of 2001, and began to implement cost cutting measures ,

including significant lay-offs . Further, the value of Enterprises' investments in telecommunication s

companies, including Corvis Corporation ("Corvis"), a provider of all-optical communication s

networks, declined substantially and should have been written down to fair market value unde r

Generally Accepted Accounting Principles ("GAAP") . Defendants improperly delayed writing down

the Corvis investment until the third quarter of 2001, however, long after other companies ha d

written down similar investments . As a result, Exelon's reported earnings for the first and secon d

quarters of 2001 were materially misstated in violation of GAAP .

7. On September 27, 2001, Exelon issued a press release finally conceding that i t

expected its results for the third quarter of 2001 to be a disappointment, and stating that the

Company's EPS target was being revised downward . The Company blamed the shortfall on the very

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factors it had repeatedly reassured the market were not having a materially adverse impact on it s

business, namely, a downturn in the economy, falling energy prices and the collapse of th e

telecommunications market . In addition, the Company disclosed that it was belatedly writing dow n

the value of its investment in Corvis resulting in a $36 million charge . In reaction to the press release ,

Exelon' s common stock plummeted 22%, falling to a low of $ 38 .85 on September 27, 2001, after

closing at $50.45 on September 26, 2001 .

JURISDICTION AND VENU E

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

Exchange Act [15 U.S .C. §§ 78j(b) and 78t(a)] and Rule 10b -5 promulgated thereunder by the SEC

[17 C.F.R. § 240.10b-5] .

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

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

10. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 2 8

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

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

maintains its chief executive offices and principal place of business within this District .

11 . In connection with the acts alleged in this complaint, defendants, directly or indirectly ,

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

interstate telephone communications and the facilities of the national securities markets .

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PARTIES

Plainffi

12. As detailed in their certifications previously filed in this litigation, Lead Plaintiffs

Natcan Investment Management, Inc . and IBEW Local 98 Pension Fund (who were appointed Lead

Plaintiffs by Order of this Court dated July 31, 2002), and additional plaintiffs Nicholas Stavros ,

Beverly Glanter, James E . Bie, Gerald A. Rollins, Lara Beth Newman and Rosemary Wong eac h

purchased Exelon common stock at artificially inflated prices during the Class Period and wa s

damaged thereby .

De endants

13 . Exelon is organized under the laws of Pennsylvania and maintains its principa l

executive offices at 10 South Dearborn Street, Chicago, Illinois 60680 . Exelon is a diversified energy

company involved, through subsidiaries, in the production and delivery of electricity and natural gas .

Exelon also operates energy-related businesses such as energy trading and invests in energy an d

communications infrastructure services .

14. Corbin A. McNeill, Jr . ("McNeill") was Exelon's Co-Chief Executive Officer an d

Chairman of the Board of Directors throughout the Class Period . McNeill also was President of

Exelon Generation during the Class Period .

15. John W. Rowe ("Rowe") was Exelon's President and Co-Chief Executive Officer

throughout the Class Period . During the Class Period, defendant Rowe had ultimate oversight

responsibility for Exelon Enterprises .

16. Ruth Ann Gillis ("Gillis" ) was Exelon 's Senior Vice President and Chief Financial

Officer throughout the Class Period .

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17, McNeill, Rowe and Gillis are referred to collectively herein as the "Individual

Defendants" .

18 . As set forth in detail below, during the Class Period, because of their senior executive

positions with the Company, the Individual Defendants were directly involved in the day-to-day

operations of the Company, at the highest levels, and were privy to confidential and proprietary

information concerning the Company and its subsidiaries, including Generation and Enterprises, a s

alleged herein . The Individual Defendants had access to adverse non-public information concerning

matters alleged in this Complaint through access to internal corporate documents (including the

Company's operating plans, budgets, forecasts and reports of actual operations), communications

with other corporate officers and employees, attendance at management and Board of Directors'

meetings and committees thereof and periodic reports and other information provided to them .

Except to the extent set forth in this Complaint, Lead Plaintiffs and other members of the Class had

no access to such information, which was, and remains solely under the control of defendants .

19 . It is appropriate to treat the Individual Defendants as a group for pleading purpose s

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

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

narrowly defined group of defendants identified above. Each of the Individual Defendants, by virtue

of his or her high-level position with the Company, directly participated in the management of the

Company, was directly involved in the day-to-day operations of the Company at the highest levels

and was privy to confidential proprietary information concerning the Company and its business,

operations, products, growth, financial statements, and financial condition, as alleged herein .

Defendants were involved in drafting, producing, reviewing and/or disseminating the materially fals e

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and misleading statements and information alleged herein, were aware or recklessly disregarded that

materially false and misleading statements were being issued regarding the Company, and approve d

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

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

is registered with the SEC pursuant to the Exchange Act, traded on the New York Stock Exchang e

(the "NYSE") and governed by the provisions ofthe federal securities laws, the Individual Defendant s

each had a duty to disseminate promptly accurate and truthful information with respect to th e

Company's financial condition and performance, growth, operations, financial statements, business ,

products, markets, management, earnings and present and future business prospects, and to correct

any previously-issued statements that had become materially misleading or untrue, so that the market

price of the Company's publicly-traded securities would be based on truthful and accurat e

information . The Individual Defendants' misrepresentations and omissions during the Class Period

violated these specific requirements and obligations .

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

of the various public and shareholder and investor reports and other-communications complained o f

herein and were aware of, or recklessly disregarded, the misstatements and omissions contained i n

the communications, and were aware of their materially false and misleading nature . By virtue of hi s

or her Board membership and/or executive and managerial position with Exelon, each of th e

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

business prospects and financial condition and performance as particularized herein and knew (o r

recklessly disregarded) that these adverse facts rendered the positive representations made, o r

adopted, by Exelon materially false and misleading .

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

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

SEC filings, its press releases and other public statements pertaining to the Company during the Class

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

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

their issuance or cause them to be corrected . Accordingly, each Individual Defendant is responsible

for the accuracy of the public reports and releases described herein and is, therefore, primarily liable

for the representations they contained .

CLASS ACTION ALLEGATION S

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

Procedure 23(a) and (b)(3) on behalf of a class (the "Class") consisting of all persons who purchased

the common stock of Exelon during the period April 24, 2001 through September 27, 2001, inclusive

(the "Class Period"). Excluded from the Class are defendants, persons serving as officers and

directors of the Company during the relevant time, members of each of their immediate families and

their legal representatives, heirs, successors or assigns, and any entity in which any of the foregoing

have or had a controlling interest .

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

impracticable. Throughout the Class Period, Exelon had approximately 321 million shares of

common stock outstanding, which were actively traded on the NYSE . While the exact number of

Class members is unknown at the present time and can only be ascertained through appropriate

discovery, Lead Plaintiffs believe that there are thousands of members in the proposed Class and that

they are geographically dispersed . Record owners and other members of the Class may be identifie d

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from records maintained by Exelon or its transfer agent, and may be notified of the pendency of thi s

action by mail, using a form of notice similar to that customarily used in securities class actions .

25. Lead Plaintiffs' claims are typical of the claims of the members of the Class, as al l

members of the Class are similarly affected by defendants' wrongful conduct in violation of federa l

law that is complained of herein and have incurred substantial damages in connection therewith .

26 . Lead Plaintiffs will fairly and adequately protect the interests of the Class member s

and have retained counsel who are competent and experienced in both class action and securitie s

litigation. Lead Plaintiffs have no interests which conflict with those of the Class members they see k

to represent .

27. Common questions of law and fact exist as to all Class members and predominate ove r

any questions that may affect only individual Class members . Among the questions of law and fact

common to the Class are :

(a) Whether defendants' acts, as alleged herein, violated the federal securities laws ;

(b) Whether statements made by defendants to the investing public during th e

Class Period omitted and/or misrepresented material facts about the business, operations and financia l

performance of Exelon ;

(c) Whether defendants breached any duty to convey material facts or to correc t

material facts previously disseminated ;

(d) Whether defendants participated in and pursued the fraudulent scheme o r

course of conduct complained of ,

(e) Whether defendants acted willfully, with knowledge or recklessly, in omitting

and/or misrepresenting material facts ;

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(f) Whether the market price of Exelon common stock was artificially inflate d

during the Class Period due to the material misrepresentations and omissions complained of herein ;

and

(g) Whether the members of the Class have sustained damages and, if so, what i s

the appropriate measure of damages .

28 . A class action is superior to all other available methods for the fair and efficien t

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

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

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

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

SUBSTANTIVE ALLEGATION S

Background Facts

29. Exelon was incorporated in Pennsylvania in February 1999 as a wholly owned

subsidiary of PECO for the purpose of effectuating a merger between PECO, and Unicom

Corporation ("Unicom"), and Unicom's principal subsidiary ComEd . On October 20, 2000, the

merger was accomplished using a two-step process whereby PECO shares were exchanged fo r

Exelon shares followed by a merger of Unicorn into Exelon . As a result of the merger, Exelon

became the parent company ofPECO and ComEd . The merger was accounted for using the purchas e

method of accounting .

30. Exelon is a utility services holding company engaged through its subsidiaries in the

production, purchase, transmission, distribution and sale of electricity and natural gas to retai l

customers . Exelon also engages through its subsidiaries in the wholesale marketing of electricity, an d

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the provision of utility infrastructure, communications and other utility related services in variou s

regions of the United States .

31 . In January 2001, Exelon undertook a corporate restructuring to separate its generatio n

and other competitive, non-regulated businesses from its regulated energy delivery businesse s

conducted by ComEd and PECO . Through the restructuring, Exelon created Exelon Venture s

Company, which was comprised of Exelon Generation Company ("Generation") and Exelo n

Enterprises Company ("Enterprises" )

32. Generation combines the electric generating facilities formerly held by PECO an d

ComEd and includes Power Team, Generation's wholesale power marketing business . Generatio n

enters into arrangements for the purchase, sale and delivery of energy and competes in the wholesal e

spot markets for electricity .

33 . Enterprises combines a mix of several different non-regulated businesses formerly held

by PECO and Unicorn . It primarily focuses on the areas of network infrastructure services for th e

telecommunications and energy industry, energy retail sales, venture capital endeavors, and th e

ownership and operation of telecommunication businesses . During the Class Period, Enterprises

principally consisted of the following businesses :

(a) Exelon Infrastructure Services, Inc . ("EIS") (renamedlnfraSource, Inc .) . EIS

provided integrated services on a nationwide basis to network infrastructure owners in the energy an d

telecommunications industries . In 1999 and 2000, EIS acquired a number of companies in an attemp t

to become, according to a December 11, 2000 press release put out by Exelon, "the leading provide r

of infrastructure services for electric, gas, cable and telecommunications businesses in the U . S ." In

particular, EIS planned to use its experience in the electric and gas transmission business to becom e

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a major player in the business of constructing, operating and maintaining fiber optic cables used

extensively in the telecommunications industry . During the Class Period, EIS employed over 8,00 0

people and provided over half of the revenue brought in by Enterprises .

(b) Exelon Energy . Exelon Energy operates as an independent energy retaile r

selling electricity and natural gas to industrial , commercial and residential customers .

(c) Exelon Communications . Exelon Communications was engaged in operatin g

two telecommunications businesses -- AT&T Wireless Digital PCS, a joint venture with AT&T

Wireless Services, and PECOAdeiphia Communications, a 50% joint venture between PECO an d

Adelphia Business Solutions . Adelphia Business Solutions filed for bankruptcy on March 27, 2002 .

(d) Exelon Capital Partners . Exelon Capital Partners was the venture capital arm

of Exelon . It provided capital funding to, and invested in, primarily companies engaged in the

communications, cable and Internet industries, including optical communications equipmen t

manufacturer Corvis .

34 . On November 15, 2000, Exelon held an investor conference in New York to explai n

to investors the merger of PECO and Unicom to form Exelon and Exelon's strategy and earning s

targets . The slides used by Company management who spoke at the conference, including the

Individual Defendants and Michael Egan, then CEO of Exelon Enterprises, were filed with the SE C

as an Exhibit to Exelon's Form 8-K dated November 15, 2000, which was signed by defendant Gillis .

35 . Defendants' presentation at the conference emphasized Exelon's "integrated strategy "

predicated on its three business segments (i) Energy Delivery; (ii) Generation; and (iii) Enterprises .

Defendants portrayed Energy Delivery as a "significant and steady source of earnings ." Generation

was identified as the primary driver of growth in the near term, and defendants portrayed Enterprises '

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telecommunications and infrastructure services businesses and investments as providing "long ter m

growth prospects," a message that analysts readily absorbed and disseminated to the market . For

example, a Merrill Lynch Capital Markets research report issued two days after the conferenc e

characterized Enterprises as the "call option in owning [Exelon] stock," and stated that "Enterprise s

should create value through monetizations and earn ings growth . "

36. At the conference , defendants raised BPS guidance for 2001 for Exelon from $4 .20

to $4.50. Enterprises CEO Michael Egan presented the following financial projections for Enterprise s

for 2001 :

Revenues $3 billionEBITDA $140 millionEBIT $60 millio nNet Loss $15 million

A November 16, 2000, ABN Amro research repo rt on the conference quoted Egan as reiterating

confidence in the infrastructure services and telecom businesses of Enterprises . A November 16,

2000, Jefferies & Company research note reported management's assertion that Enterprises' teleco m

businesses were "on budget. "

37 . Defendants' statements at the November 15, 2000, conference caused the price of

Exelon's common stock to rise . On the day of the conference, Exelon's shares were trading a t

approximately $58 per share . By April 24, 2001, the first day of the Class Period, the price o f

Exelon's common stock had risen to almost $70 per share .

38 . Defendants' statements and the statements of Enterprises CEO Michael Egan at th e

November 15, 2000, investor conference described in ¶¶ 3 5-37 above remained alive and uncorrecte d

and continued to affect the market price of Exelon's shares during the Class Period .

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Undisclosed Adverse Facts Impacting Exelon'sBusiness And Operations During The Class Perio d

39 . Throughout the Class Period, Exelon represented, in press releases, earnings

conference calls and media interviews given by defendant Rowe, that Exelon was "clearly on track "

to "meet or beat" its announced EPS target of $4 .50 in 2001, notwithstanding falling energy prices ,

unfavorable weather conditions and the slowdown in the economy, all of which lead to lower energy

prices and decreased demand. According to defendants, Exelon was well-positioned to withstan d

these challenges (circumstances which were well underway during the later half of the second quarter )

because of its purported diversification and low-cost nuclear generating capacity . These statements

were materially false and misleading because they misrepresented or omitted to disclose the materia l

adverse facts set forth in %40-62, below .

A. Generation's Declining Margin s

40 . Generation combined the generating resources and wholesale power marketing

operations owned by PECO and CorEd prior to Exelon's restructuring in January 2001 . The

generating resources of Generation consisted of ownership interests in generating facilities and long-

term contracts for capacity . According to Exelon's 2000 Form 10-K, Generation sought to maintai n

a net positive supply of energy and capacity through ownership of generation assets and power

purchase and lease agreements . Excess power was sold in the wholesale market by Generation' s

power marketing operation, PowerTeam .

41 . As a result of Exelon's restructuring , PECO entered into a long -term (through 2010 )

power purchase agreement with Generation to obtain sufficient power at the rates it was allowed t o

charge to service customers who did not choose an alternate energy supplier . ComEd also entered

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into a long-term (through 2006) power purchase agreement with Generation to obtain sufficien t

power at fixed rates . Generation also contracted with Exelon Energy, Exelon' s competitive retai l

energy supplier, to meet its supply commitments pursuant to its competitive retail generation sale s

agreements . During the Class Period, 60% of Generation's capacity was used to satisfy it s

commitments to PECO, ComEd and Exelon Energy . The remaining 40% of plant output was sol d

in the wholesale market, much of it during off-peak hours when prices were lowest .

42. In the summer of 1999, ComEd had experienced significant service interruptions i n

Chicago during a massive heat wave that struck the city . As a result of these outages, the Illinoi s

Commerce Commission opened an investigation regarding the design and reliability of ComEd' s

transmission and distribution system, and since then, ComEd has devoted significant resources t o

making improvements . Thus, in early 2001, Exelon was particularly focused on ensuring an adequat e

supply of energy to meet peak summer demand .

43 . Early in 2001, when prices were extremely high, Generation bought additional capacit y

to cover peak summer demand reasoning that this excess capacity could be profitably resold by Powe r

Team in the wholesale market if it was not needed by ComEd and PECO . By June 2001, however,

declining demand as a result of unfavorable weather conditions and the slowing economy left

Generation with significant excess capacity . Further, very low natural gas prices together wit h

declining demand kept spot market prices for wholesale electricity very low squeezing Generation' s

margins . Natural gas prices peaked on December 11, 2000 at a price of $10 .70 per 1,000 cubic feet ,

and then gradually declined throughout 2001 to the $4 range in September 2001 . The decline in pric e

was the result of increased production in 2000 in response to the high prices and demand of 2000 ,

as well as a cool summer in 2001 . Wholesale power prices also fell sharply throughout 2001 and mil d

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weather kept the demand low in summer 2001 . The San Diego Business Journal reported on August

13, 2001, that July spot market prices nationwide were dramatically below July contract levels set

in June, sometimes more than 50 percent lower . Generation's significantly weaker than expecte d

performance made Exelon's highly touted growth and EPS targets unattainable, as defendants wel l

knew, and was a substantial contributing factor in Exelon's failure to meet its $4 .50 EPS target .

B . Enterprises' Poor Financial Results And Overvalued Telecom Investments

44 . The financial results of the individual companies constituting Enterprises were largel y

unknown to investors . As a result, the market lacked material information that was necessary t o

independently value Enterprises' financial health . Such information was available to defendants ,

however, as a result of their access to non-public information concerning the performance o f

Enterprises' various businesses .

45. The hodge-podge of businesses that comprised Enterprises during the Class Period

were largely telecommunications companies, such as AT&T Wireless, PECOAdelphia and Corvis,

or businesses that were extremely dependent on telecom companies, such as the businesses that

comprised Exelon Infrastructure Services (EIS) . By the fourth quarter of 2000, however, the

telecommunications industry had begun a long downward spiral from which it has never recovered .

For example, an article in the Wall Street Journal on February 21, 2001, reported that inventories in

the telecom industry rose more than 50% in the fourth quarter of 2000 "as sales growth slowed t o

a crawl" signaling the beginning of the downturn .

46 . By the first quarter of 2001, the downturn in the telecom market was already steep

and unstoppable, and began to have ripple effects throughout the economy . An April 23, 2001 ,

Business Week article headlined "Telecom Meltdown," reported that the industry was "quickl y

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turning into a wasteland, as profits vanish[ed], revenues slump[ed], stocks plummet[ed], and

companies [began] going belly up." Notwithstanding the disastrous decline that had already occurred

through the first quarter of 2001, it was widely recognized, as the Business Week article observed,

that "[t]he end of the dark days of telecom. . .[were] still a long way off." Feeling the pinch,

PECOAdelphia Communications announced in January 2001, that it had halted its previously

announced plans to expand into southern New Jersey .

47 . EIS, a division of Enterprises engaged in the business of installing fiber optic cable,

was particularly hampered by the massive glut of fiber optic cable, which had contributed substantially

to the telecommunications downturn . A June 18, 2001 Wall Street Journal article titled "How the

Fiber Barons Plunged the Nation Into A Telecom Glut" stated that the "fiber glut underlies much of

the uncertainty plaguing the telecom sector," and reported that 39 million miles of fiber-optic cable

crisscrossed the U .S . at that time, but only 2 .6% was in use, and "much of it may remain dark

forever . "

48 . The impact on Enterprises' business was inevitable and unmistakable, as almost ever y

aspect of its business quickly fell far behind plan . According to a former employee of Enterprises,

the adverse impact on Enterprises' various businesses resulting from the collapse of the telecom

market was discussed at monthly staff meetings during the Class Period . According to a former

general manager in the Enterprises group, Enterprises' 2001 business plan, which targeted $60 million

in EBZT for Enterprises in 2001, was premised on substantial growth in telecommunications-related

business . However, by April 2001, defendants knew or recklessly disregarded, that Enterprises'

businesses had been adversely impacted by the collapse of the telecommunications market . In fact,

Enterprises had already lost a number of anticipated deals by this time . According to a Business IT

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Specialist in the Enterprises' group, by July 2001, Greg Cucchi, a former senior vice president wit h

EIS, was openly acknowledging within the Company that Enterprises , which was heavily invested i n

telecommunications, was performing poorly, and, consequently, Enterprises' business strategy woul d

have to be revised and significant lay-offs would be necessary .

49. The dismal performance ofthe businesses in which Enterprises had invested meant tha t

Enterprises' poor performance would further reduce Exelon's already disappointing financial results .

Further, the value of Enterprises' substantial investments in the these telecom and infrastructur e

service companies had become significantly impaired and should have been written down to fai r

market value. Accordingly, during the Class Period, there was no reasonable basis for defendants '

increased EPS guidance of $4 .50 in 2001 .

1 . Exelon 's Failure To Write Down Its Investment In Corvis Corporatio n

50 . One of Enterprises ' telecommunications investments (through Exelon Capital Partners)

was in a company called Corvis, a provider of communication networks and products that enable d

all-optical transmission and switching of data traffic over long distances . According to the Prospectus

filed by Corvis in connection with its initial public offering ("IPO"), the target customers for Corvis '

products were a limited number of service providers that operated backbone communication s

networks. At the time of its initial public offering, Corvis had only three customers : Broadwing

Communications, Inc . ("Broadwing"), Williams Communications, Inc . ("Williams"), and Quest

Communications Corporation ("Quest") . Although Corvis purported to be in discussions with other

service providers to begin field trials and to purchase its products, no additional customers had agree d

to purchase Corvis ' products at the time of the IPO .

-19-

51 . The Prospectus acknowledged that customers who purchased Corvis' products would

do so as part of a large-scale deployment of the products across their networks and, therefore, a

customer's decision to purchase Corvis' products would involve "a significant commitment of its

resources ." Corvis' IPO Prospectus warned that "[tlhe rate at which customers purchase

products . . . will depend, in part, on the increasing demand for bandwidth by service providers'

customers," and that "[a]ny failure of service providers to purchase products . . .for any reason,

including any downturn in their business, would seriously harm [Corvis'] business, financial condition

and results of operations . "

52 . Prior to the merger, Unicorn and PECO each owned Corvis shares, which had been

acquired through two limited partnerships . As part of the merger of Unicorn and PECO, under the

purchase method of accounting, all of Unicorn's assets, including its shares of Corvis, purportedly

were recorded at their fair value as of the date of the merger . Corvis had become a public company

on July 28, 2000, and its shares were trading at $67.125 per share on the date of the PECO/Unicom

merger. Asa result of the merger, Unicorn's Corvis shares (535,000 shares in one investment limited

partnership and 337,000 shares in the second) were re-valued at $32 per share (up from the actual

cash cost of between $0 .35-$1 .15 per share) . The cost basis of PECO's 535,000 Corvis shares was

unchanged as a result of the merger, and post-merger PECO continued to carry its investment in

Corvis at its actual cash cost of $1 .15 per share .

53 . As a result of Exelon's corporate restructuring, in February 2001, 1,070,000 shares

of Corvis (535,000 shares from each of PECO and Unicorn) were transferred to Exelon . The cost

basis of the shares purportedly was adjusted at that time to Corvis' share price on the date of

distribution -- $26 per share -- resulting in a $10 million non-cash gain in the first quarter of 2001 .

-20-

By the end of the first quarter of 2001, however, there was no reasonable basis to value Exelon' s

Corvis shares at $26 per share and, therefore, the Company's recognition of a $10 million non-cash

gain on its Corvis shares in the first quarter of 2001 violated GAAP as set forth in T J91-114 below .

In fact, by this time, Corvis' shares were trading at less than $10 per share .

54. Shares of Corvis were initially offered to the public on July 28, 2000, at a price of $36

per share. Thereafter, the price of Corvis' shares rose reaching a high of $108 .06 on August 4, 2000 .

By October 20, 2000, the day of the PECO/Unicom merger, however, Corvis' shares had traded a s

low as $46 per share (on October 18, 2000), and its share price was declining steadily . By March

2001, the price of Corvis' shares had fallen to under $10 and , on April 24, 2001, the date Exelo n

announced its financial results for the first quarter of 2001, ended March 31, 2001, Corvis' share s

were trading at a mere $7 .96 per share .

55 . The decline in Corvis ' share price was directly attributable to its poor financial result s

and the precipitous downturn in the telecommunications industry, which negatively impacted Corvis '

limited group of targeted customers . On April 26, 2001, Corvis announced its results for the firs t

quarter of 2001, ended March 31, 2001 . Corvis reported a net loss of $ 100.8 million in the first

quarter , as compared with a repo rted net loss of$26 .8 million in the first qua rter of 2000 . A research

note on Corvis published by Epoch Partners titled "Corvis' True Colors Shine Through : They Ain't

Exactly Pretty," issued the following day, observed that Corvis' first quarter results reflected declining

margins, soaring DSO (days sales outstanding), increasing inventory and a high cash burn rate . The

Epoch Partners ' note also observed that new customers that Corvis had been hinting at for months

had not materialized . As a result, Epoch Partners revised its estimates for Corvis downwar d

"reflecting Corvis' cautious tone about customer demand and pricing pressure for its equipment . "

-21-

56. Corvis' financial situation continued to deteriorate in the second quarter of 2001 . On

May 14, 2001, Corvis announced that it was eliminating 250 employees citing "the need to streamlin e

its cost structure in light of current business conditions ." The price of Corvis' shares continued to

decline from $6 on April 2, 2001, to $4 .39 on June 30, 2001 . Then, on July 26, 2001, Corvis

announced its results for the second quarter and six months ended June 30, 2001 . For the six months

ended June 30, 2001, Corvis reported a net loss of $922 million, up from a $127 million loss in th e

same period in 2000. By the end of July 2001, Corvis' share price was less than $4 .

57. Nevertheless, during the first and second quarters of 2001, Exelon continued to valu e

its Corvis shares at $26 . In contrast, other companies were writing down the value of simila r

investments during this period . For example, on April 25, 2001, the New York Times reported that

AT&T was taking a $739 million charge as a result of the impairment of its investment in Excite At

Home Corporation . Likewise, on June 16, 2001, the New York Times reported that Nortel

Networks of Canada announced that it would post a loss in the second quarter "largely because of

an accounting move to reflect a decline in the value of the companies it acquired in the last tw o

years ." Similarly, JDS Uniphase, a producer of fiber optic lasers announced in April 2001 that it was

seeking guidance from the SEC with respect to a large write-off to reflect the diminished value o f

assets it had acquired .

58. Unlike these companies, Exelon improperly delayed writing down the value of it s

investment in Corvis in violation of GAAP until the third quarter of 2001 . Finally, on September 27 ,

2001, Exelon announced that it was writing down its investment in Corvis to $2 per share -- Corvis '

share price at the time -- which resulted in a $36 million non-cash loss in the third quarter . Exelon's

investment in Corvis should have been written down no later than the first quarter of 2001, however,

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because the value of Corvis' shares had declined precipitously by that date and could not reasonabl y

have been expected to rise . A write-down of Exelon's investment in Corvis in the first quarter o f

2001 would have alerted the market to the dire financial condition of Enterprises and undermine d

investors' confidence in defendants' baseless assertions that Enterprises was expected to achieve $60

million in EBIT in 2001 .

2. The Substantial Losses Incurred By Exelon Infrastructure Service s

59. EIS, a provider of infrastructure services to owners of electric, gas, and

telecommunications systems, was established in 1997 . Between 1999 and January 2001, EIS

acquired 13 infrastructure service companies . According to Exelon's Form 10-K for the year ended

December 31, 2000, EIS had revenues of over $1 billion and employed more than 8,000 people, the

bulk of Enterprises' employees and revenues during 2000 . However , as early as the Spring of 2001 ,

the slowing economy and EIS' dependence on telecommunications companies had resulted in a hug e

decline in business that was negatively impacting revenues, earnings and margins of the companie s

EIS had acquired . By April-May 2001, nearly all of EIS' telecom work was on hold . EIS was simpl y

finishing out its old business and was acquiring little, if any, new telecom business .

60. One of the companies EIS had acquired in 1999 was OSP Consultants ("OSP") . OSP

performed engineering, design, and construction-related services and project management o n

telecommunications infrastructure projects especially fiber optic contracts . By the Spring of 2001 ,

however, Metro Media Fiber Network (MFN), one of OSP's most important clients (with potentia l

revenues in the millions), was consistently delinquent in making payments to EIS . During the summer

of 2001, OSP wrote off $5 million relating to work for MFN . Similarly, according to a former

director of marketing and business development, another of the companies acquired by EIS, Pac e

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Engineering, also lost a major contract in or about April 2001, which severely impacted its ability t o

meet its business plan .

61 . According to several former employees , cost cutting at EIS began in earnest in th e

Spring of 2001 as the economy softened and the telecommunications market collapsed . According

to a former director of marketing and business development at EIS, two indicators of EIS' poo r

performance as early as the first quarter of 2001 was its failure to pay "built-in bonuses" to EI S

staffers and the implementation of a hiring freeze . In addition, according to a former EIS project s

manager, a series of lay-offs began at EIS in the Spring (April-May) of 2001, as a result of the loss

of business from MFN . Further, according to a former project specialist in OSP's Atlanta office, news

of impending lay-offs as a result of the loss of business from Bell South began to circulate in Jul y

2001 . The lay-offs in OSP's Richardson, Texas office began even earlier in February 2001, accordin g

to a former OSP technical recruiter . According to a November 2, 2001, Philadelphia Busines s

Journal article, 1,500 Enterprises' employees were laid off in 2001, nearly half of all employees lai d

off by Exelon that year . As a result of these cutbacks , Enterprises spent $48 million in severance i n

the second half of 2001 alone, $30 million of which was in the third quarter. These lay-offs were over

and above those that had been planned as part of the merger and resulted in substantial additiona l

expense, which further decreased earnings .

62. Because of these and other factors discussed below, defendants knew, or recklessly

disregarded, that Exelon was incapable of generating EPS of $4 .50 in 2001, and defendants' repeated

statements reassuring the market that the Company could achieve earnings growth of this magnitude

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even in the face of the slowing economy, falling energy prices and the collapse of the

telecommunications industry were lacking in any reasonable basis.

Materially False And MisleadingStatements Made During The Class Perio d

63 . The Class Period begins on April 24, 2001, the day Exelon issued a press releas e

announcing its results for the first quarter of 2001 . This press release was included in a Form 8- K

signed by defendant Gillis, which was filed with the SEC . The Company reported "a strong first full

quarter of operation since the completion of its merger ." Earnings were reportedly $399 million, or

$1 .23 per share. According to the press release, "earnings were fueled by outstanding performance

in [Exelon's] generation and power marketing operations ." The press release also quoted defendant

McNeill as stating that Exelon was "clearly on track to meet our 2001 earnings target of $4.50 per

share. " (Emphasis added) . With respect to Exelon's Enterprises business segment, the press releas e

stated that "Enterprise companiesperformed in accordance with their businessplans. " (Emphasis

added). Finally, the press release announced that Exelon would hold a conference call concerning

its first quarter results on April 24, 2001 .

64 . Following the earnings release and subsequent conference call, securities analyst s

issued research reports commenting on the results and passing along statements to their clients an d

the market made by Exelon representatives on the conference call . Notably, analysts and investors

were led to believe , by defendants , that the earnings estimate of $4.50 per share was very

conservative and that the Company was expecting to beat that estimate . The following are statement s

from several analysts' reports reflecting that view :

-25-

PNC Institutional Investment Service : in an April 25, 2001, company report ,

analyst D .L. Carpenter stated that Exelon's earnings per share of $1 .19 beat the consensus estimates

of $1 .10 by a wide margin. Regarding Exelon' s earnings estimate the report stated as follows :

The Company reiterated its EPS guidance of $4 .50 for 2001, but we believe thatnumber is conservative and that the risk to our own earnings estimate [of $4 .55 to$4.95 per share ] is to the upside .

2 . Merrill Lynch Capital Markets : in an April 25, 2001 company report, analys t

S.L. Fleishman explained that while management reiterated its $4 .50 per share earnings figure, it was

"with the byline of under promising and over-delivering ." Asa result, Merrill Lynch raised the target

price of Exelon's shares to $84 and its earnings estimates stating in relevant part the following :

With key earnings factors ahead of plan, such as power prices, merger synergies, andnuclear performance, we believe that earnings are highly likely to exceed managementexpectations, potentially by significant levels . We are raising our estimates by$0.05/share to $4 .60 for 2001 and $5 .10 for 2002, but believe there remains furtherupside .

65 . Shortly after the highly positive press releases and analyst repo rts were disseminated

to the public, on May 2, 2001, Fitch, Inc ., one of three credit ratings agencies, upgraded its ratings

on the senior unsecured debt of Exelon to BBB+ from BBB, and upgraded the senior secured deb t

of PECO to A from A- . Simultaneously, Fitch assigned an implied BBB+ rating to the senio r

unsecured debt of Generation, and affirmed the senior secured rating of ComEd at A- . In discussing

the reasons for these actions, Fitch highlighted the same supposed benefits that were repeatedl y

extolled by the Company in its press releases and investor conferences, notably, the Company' s

supposedly reliable projected financial results and protection from price fluctuations .

66. Within days ofthe credit ratings upgrade, on May 8, 2001 , Exelon issued $500 million

in senior unsecured notes, maturing on May 1, 2011, with an interest rate of 6,75%. According to

-26-

the Company, the proceeds were used to repay part of a $1 .21 billion loan. In addition, on June 14,

2001 Exelon Generation issued $700 million in senior unsecured notes, maturing on June 15, 2011,

with an interest rate of 6 .95%. According to the Company, these proceeds were to used to repay an

intercom pay obligation of $695 million to Exelon, incurred to fund the acquisition of 49 .9% interest

in Sithe Energies in December 2000 .

67. On May 15, 2001, Exelon filed with the SEC its Form 10-Q for the quarter ende d

March 31, 2001, which included the results announced on April 24, 2001 . Segment information

contained in the Form 10-Q reflected EBIT of $293 million for Generation for the quarter ended

March 31, 2001, an increase of $255 million from the same period in 2000 . According to the Form

10-Q, almost 70% of this increase was attributable to "higher margins on market and affiliate

wholesale energy sales, coupled with decreased operating costs at nuclear plants ." The Form 10-Q

stated that, during the first quarter of2001, Generation benefitted from increases in wholesale energy

prices, which were "primarily driven by significant increases in fossil fuel prices ." During the first

quarter, Generation was able to "capture the higher prices for wholesale market sales, with minimal

exposure to the increasing fuel prices" due to its large concentration of nuclear generation . Segment

information in the first quarter Form 10-Q for Enterprises reflected EBIT of negative $31 million in

the quarter ended March 31, 2001, compared with EBIT of negative $12 million for the same quarter

in 2000. The notes to the financial statements included in the Form 10-Q stated that the financial

statements "include[d] all adjustments that [Exelon, ComEd and PECO] consider[ed] necessary for

a fair presentation of such financial statements ."

-27

68 . The statements referenced in ¶J 63-67, above, were each materially false an d

misleading when made because they failed to disclose and misrepresented the material adverse facts

described in ¶¶ 40-62 above, which then existed, including :

1 . That Exelon ' s robust results in the first quarter of 2001, which were driven b y

its Generation and Delivery businesses , were not sustainable . In particular, Generation 's healthy

margins were already under pressure from declining wholesale energy prices, which were no t

expected to rebound . Further, Exelon was holding contracts to purchase power at rates significantl y

higher than prevailing prices ;

2. That the value of investments in telecommunications companies made b y

PECO and ComEd and subsequently grouped under the umbrella of Enterprises, such as Corvis, wa s

significantly impaired but had not been written down . Further, EIS, Exelon's infrastructur e

subsidiary, was experiencing declining demand for its products as its primary customers ,

telecommunications companies, were facing severe industry-wide problems, such as mounting debt

and over-capacity, and were significantly cutting back on their capital expenditures . As a result

Enterprises was behind plan and it could not and would not achieve the represented EBIT of $6 0

million in 2001 . Enterprises' EBIT in the first quarter was negative $31 million, and there was n o

reason to believe that this disappointing trend could be reversed at any time in the near future ; and

3 . Given the foregoing, defendants' statement that Exelon "was clearly on trac k

to meet its 2001 earnings target of $4 .50 per share" was lacking in any reasonable basis .

69. On May 31, 2001, defendant Rowe gave an interview to the Wall Street Transcrip t

Corporation, which published the interview. Consistent with his, and the Company's prior statements ,

defendant Rowe continued to condition the market to believe in the resiliency of Exelon's busines s

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and its ability to prosper in tough economic times and to deal profitably with excess supply produce d

by an expected drop in energy demand . In relevant part, defendant Rowe conceded that th e

Company was expecting energy prices to fall nationwide but that Exelon was well-positioned to deal

with the decline because of its wholesale power business, which would sell excess capacity where i t

was needed, and because its costs were tightly controlled . When asked to comment on trends in th e

energy industry, defendant Rowe responded as follows :

Mergers and consolidations will continue, although in a somewhat haphazard way .There are increasing rewards to being large and low-cost in the generation business .The uneven evolution of the wholesale power markets requires a company to havevery good wholesale power marketing expertise if it wants to be active in thosemarkets . We have benefitted greatly as a company from the rises in wholesalepower prices over the last several years because our basic strategy is to be long oncapacity and to deal with periods of excess by being low cost . Looking forward,in many regions of the country prices will drop some over the next several years,but we're well positioned to deal with that because of our low cost base . [Emphasisadded] .

In reiterating the Company's theme that Exelon's low cost generation base would shield the Company

from an economic slowdown, defendant Rowe made the following statements when asked to

comment on Exelon's vulnerability to an economic slowdown :

All utilities are affected by a slowdown . Because Exelon has a relatively low-costgeneration base, we're affected less than most, but we keep a close weather eye onthe economy . The best indicator is that we had a very good first quarter in spite ofthe shaky economic conditions in this quarter , and we 're optimistic about havinga good year this year even in an uncertain economy . [Emphasis added] .

Defendant Rowe identified "meeting our earnings expectations" as a priority, and assured the marke t

that Exelon was well on its way to doing so :

We have public commitments of $4.50 a share for this year, $4 .95 for next year and$5 .40 for the year after . Those commitments were based upon a 10% growth fromour pro forma merger assumptions , and we believe we have a strong capability of

-29-

meeting those - and indeed, we're hard at work trying not only to meet them butto beat them . So meeting those financial goals will be a huge thing .

70. On June 13, 2001, securities firm Deutsche Banc Alex Brown held a "Powe r

Conference" in New York, an event attended by Exelon representatives, including defendant Rowe .

Following the Company's presentation at the conference, Exelon issued a press release headline d

"Exelon on track to meet or beat 2001 earnings target of $4 .50 per share ." The press release, whic h

was included in a Form 8-K signed by defendant Gillis, stated that "Exelon Corporation Co-CE O

John W. Rowe told investors today that Exelon is well on track to meet or beat its 2001 earning s

target of $4.50 per share . Rowe made the announcement during a presentation at the [conference] . "

71 . According to the press release, defendant Rowe attributed Exelon's success to the

merger "and value-creating opportunities in the first quarter" fueled by high gas prices an d

"PowerTeam's increasing knowledge of how to move power around the high demand markets withi n

[Exelon's] reach." Additionally, the press release quoted defendant Rowe's statements regardin g

Exelon's resiliency and the Company's so-called "earnings protection" :

Asked how an excess supply of generation would effect Exelon's earnings andprofitability, Rowe cited the resilience of and earnings protection afforded byExelon's low cost of nuclear production (less than 2 .2 cent/kilowatt-hour), theexpertise and market reach of PowerTeam and the heavy demand generated fromComEd and PECO's combined customer base of 5 million . [Emphasis added] .

72 . A slide presentation given by defendant Rowe at the conference, which was include d

in Exelon's Form 8-K filed on June 13, 2001, continued to describe Generation as Exelon's "near-ter m

growth vehicle," and Enterprises as a "platform for future growth ." Although it noted that the

downturn in the telecommunications market was impacting Enterprises' infrastructure services unit ,

the slide presentation indicated that "cost controls imposed [at the] end of the first quarter '0 1

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[would] strengthen year-end performance," and reaffirmed forecasted 2001 revenues of $15 billion ,

EPS of $4 .50, and 10% earnings growth through 2003 for Exelon .

73 . Defendant Rowe's statements described in ¶1169-72 above, were each materially fals e

and misleading when made because they failed to disclose or misrepresented the material adverse fact s

described in ¶¶ 40-62 above, which then existed , including :

I . That Exelon's low-cost generation did not afford it "earnings protection" given

existing market and economic conditions . Generation's margins were being squeezed by falling prices

in the wholesale markets and the high prices it was paying pursuant to agreements made in early 200 1

to purchase substantial additional capacity for the summer months ;

2 . That Exelon's first quarter performance could not be replicated and the

Company did not have "a strong capability of meeting" its public commitment of $4 .50 EPS in 2001 ,

because the unfavorable weather, declining wholesale energy prices, economic slump and the collaps e

of the telecommunications market were already having, and would continue to have, a significan t

negative impact on Exelon' s results , which was unavoidable;

3 . That Enterprises, which had been expected to contribute $60 million in EBIT

in 2001, remained far behind plan, and demand for the services of EIS, Enterprises largest group, wa s

weak; and

4 . In violation of GAAP, Exelon had failed to write down the value of its

investment in Corvis to market value .

74. Beginning on July 19, 2001, Exelon 's stock price began to drop on investor concern s

that unfavorable weather, declining wholesale markets and the negative outlook for the economy

would have a significant impact on Exelon's business and its ability to meet its earnings target .

-31-

Between July 19 and July 24, the price of Exelon's common stock declined from $64 .07 per share to

$54 .50 per share. Defendants, aware of the market's concerns, specifically assured the investing

public, in a July 24, 2001 press release (discussed below), that Exelon was capable of meeting it s

earnings commitments despite the unfavorable climate .

75 . On July 24, 2001 , Exelon issued a press release headlined "Exelon Reports Strong

Second Quarter Earnings Of $0 .97 Per Diluted Share," announcing its results for the second quarte r

ended June 30, 2001 . A copy of the press release was included in a Form 8 -K signed by defendant

Gillis, which was filed the same day . The Company reported earnings of $315 million or $0 .97 per

share, a 17% increase over the second quarter of 2000 . According to the press release , highlights fo r

the quarter included a "[s]trong performance by Power Team, Exelon Generation's wholesal e

marketing division, in April and May which was partially offset by the effects of cool weather acros s

most of the United States and a decline in wholesale power prices in June ." Seeking to diffuse market

concerns over the effect of expected cool (summer) weather and the attendant drop in wholesal e

energy prices, Exelon representatives again reiterated the Company's resiliency and vouched for it s

ability to meet the $4 .50 earnings figure . In that regard, defendant McNeill was quoted in the press

release as stating the following :

"The quarter confirmed, yet again, Exelon's ability to meet its commitments . Despitecool weather and the fall in wholesale prices in June, we've produced earningsthat surpassed market expectations . And we did it as we've done it in the past :through superior execution ." [Emphasis added ]

Further, defendant Rowe emphasized the Company's diversification and was quoted as stating :

I am delighted that our generation group, Power Team, PECO and ComEd deliveryoperations all contributed to these excellent results . While we expect largerchallenges in the wholesale power markets and in our Enterprises group duringthe second half, the combined strength of our generation, power marketing and

-32-

energy delivery groups put us in a strong position to meet our commitments for theyear. [Emphasis added]

Defendant Gillis added that the Company would meet its earnings guidance, stating the following :

Ruth Ann Gillis, Senior Vice President and ChiefFinancial Officer, confirmed thecompany's previous earnings guidance. She noted, "We have had two goodquarters and we continue to believe our integrated strategy positions us to meet ourcommitment of $4.50 earnings per share for 2001 ." [Emphasis added ]

With respect to Enterprises, the press release stated :

Enterprises revenues were $546 million in the second quarter, an increase of 36%compared to second quarter 2000 pro forma revenues of $401 million. EBIT was aloss of $5 million in the quarter compared to a pro forma EBIT loss of $42 million inthe second quarter of 2000 . Enterprises EBIT reflects lower margins in theinfrastructure services business, which has been impacted by the significant downturnin the telecommunications industry . The sluggish performance of the infrastructureservices business was partially offset by a gain from the sale of certaincommunications investments .

76. On July 24, 2001, defendant Rowe appeared on CNBC's Business Center and was

interviewed concerning Exelon's strong reported second quarter results . When asked to explai n

Exelon's ability to beat the market's expectations, defendant Rowe stated :

f WJe have a generation business , a whole-sale marketing business and retaildistribution companies, we're able to work up and down the value chain, and thatgives us some security against these swings. . . . It's not a complete hedge, but it's apartial hedge. We have customers that we can count on for a relatively long time;thus, we're able to trade in smaller portions of our assets. We're a little lessdependent on the ups and downs in the spot markets each day. We're very carefulto do our trading off of assets and not on a purely speculative basis . So we have afine generation business . Our nuclear fleet had a capacity factor of over 96 percent,which is almost incredibly good for the first six months . Our distribution businessesbeat their earnings targets . So we get support from our major sectors, and we expectto continue to work on that in the second half. [Emphasis added] .

-33-

77. Defendants' assurances had their desired effect . Following Exelon's second quarter

earnings announcement, the Company's stock rebounded, closing at $59 .10 per share on July 25, after

a $54.40 close on July 24, 2001 .

78. Following the issuance of the press release and the conference call, securities analyst s

published research reports on the Company, based on information in the press release and the

conference call held on July 24, 2001 . As they had done following the Company's first quarter o f

2001 press release and earnings conference call, analysts reiterated that the Company had stated i t

could meet its earnings target (which analysts considered to be conservative) and that the compan y

was relatively insulated from demand swings . For example, on July 25, 2001, UBS Warburg, issued

a research note, authored by analyst B.M. Abramson, which stated that "[t]he Company repeated it s

full-year 2001 EPS guidance of $4 .50 per share and the Company still expects to achieve 10% EP S

growth from the $4 .50 base for 2002 . Our estimates are slightly higher because we view the

company's guidance as being conservative ." Regarding the Company's ability to withstand the effect s

of unfavorable weather, the UBS Warburg report stated the following : "Exelon is much less exposed

to weather and wholesale power prices because the company is typically about 90% naturall y

hedged." The report concluded that "the Company's statements confirming full year 2001 EPS an d

the 10% growth on top of that for 2002, should reassure investors . "

79 . On August 14, 2001, Exelon filed with the SEC its Form 10-Q for the quarter ended

June 30, 2001, which included the results announced on July 24, 2001 . Segment information

contained in the Form 10-Q reflected EBIT of $126 million for Generation for the three month s

ended June 30, 2001, down from $293 million in the first quarter of 2001 . The Form 10-Q reported

EBIT of negative $36 million for Enterprises for the six months ended June 30, 2001, compared wit h

-34-

EBIT of negative $44 million for the same period in 2000 . The notes to the financial statement s

included in the second quarter Form 10-Q stated that the financial statements included "al l

adjustments that [Exelon, ComEd and PECO] consider[ed] necessary for a fair presentation of such

financial statements . "

80 . The statements referred to in ¶ ] 74-76 & 79 above, were each materially false and

misleading when made because they failed to disclose or misrepresented the adverse facts describe d

in ¶¶ 40-62 above, which then existed , including :

That the Company was not "hedged" to withstand all of the known, existing

adverse conditions that were negatively impacting Exelon's business and financial results . In

particular, lower demand had left Exelon holding significant excess capacity acquired early in 200 1

at high prices, and low wholesale energy prices were depressing margins ;

2 . That many of Enterprises' telecommunications investments were significantly

overvalued and new business at its infrastructure services group was nearly at a standstill ; and

3 . That as a result of the foregoing there was no reasonable basis for defendants '

continued assurances that Exelon's business was capable of growing its earnings to meet it s

commitment of $4 .50 earnings per share in 2001 .

81 . On August 27, 2001, an article headlined "Exelon halts campaign to diversify ; won't

expand, may sell unregulated businesses," appeared in Crain's Chicago Business . Reporting on an

interview with defendant Rowe, the article stated that : (i) Enterprises had yet to turn a profit ; (ii)

Exelon would likely budget little or nothing in 2002 to grow Enterprises; and (iii) Exelon was willin g

to sell its telecom businesses and Exelon Energy . The article quoted defendant Rowe as stating wit h

respect to Enterprises : "We had hoped to have substantial positive EBIT . . .this year . It will be zero

-35-

to negative." Nothing was said concerning Exelon's targeted EPS of $4 .50, leaving defendants' prior

statements uncorrected .

82. Defendant Rowe's statements described in 11 81 above were materially false an d

misleading when made because they failed to disclose or misrepresented the then current expectation s

for Enterprises' financial results in 2001 . There was no reasonable basis for defendant Rowe t o

represent that Enterprises might achieve "zero" EBIT in 2001 . For the six months ended June 30,

2001, Enterprises had negative EBIT of $36 million . As defendant Rowe well knew or recklessly

disregarded, Enterprises' EBIT had declined even further by August 2001 . Exelon's Form 10-Q for

the third quarter of 2001, filed on November 14, 2001, revealed that, for the nine months ende d

September 30, 2001, Enterprises' EBIT was negative $80 million . Further, by August 27, 200 1

defendant Rowe knew, or recklessly disregarded, that Exelon's targeted EPS of $4 .50 was

unattainable due to Generation's declining margins and Enterprises losses .

The Truth Emerge s

83 . On September 27, 2001, Exelon shocked the market by announcing that it wa s

lowering its earnings figure for 2001 due to unfavorable markets and a weak economy, stating i n

relevant part the following :

As a result of economic and market weaknesses and volatile energy markets, Exelon(NYSE:EXC) is reducing its 2001 earnings guidance . Exelon previously issuedguidance that its third quarter of 2001 [EPS] would represent 30%-40% of its $4 .50EPS target for 2001 . Exelon currently expects its third quarter earnings to be in arange of $1 .10 to $1 .20 per share . Pro forma third quarter 2000 EPS (assuming themerger occurred on January 1, 2000) was $1 .27. Given reduced expectations for thethird quarter and the recent economic uncertainty, Exelon's full year earnings guidanceis being reduced to a range of $4 .30 to $4.45 EPS .

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84. The press release further disclosed that the disappointing results were purportedly

caused by the disappointing performance ofExelon Power Team due to market factors (which Exelo n

had repeatedly represented would not materially affect its ability to meet earnings commitments) an d

a downturn in the telecommunications industry, which negatively impacted Enterprises' operation s

and would force the Company to recognize a charge of some $36 million, The press release state d

in pertinent part as follows :

Factors influencing the company's results are as follows :

After very strong first and second quarters , weather-driven reductions in energy-market prices and volatility adversely affected Exelon Power Team performance inthe third quarter. In addition , Generation recorded an increase in its reserves forlitigation of $14 million in the quarter .

The Company has identified approximately 450 positions for elimination above the2,900 positions previously announced in conjunction with the merger . . . . In the thirdquarter the severance charge is approximately $30 million and the fourth quartercharge is estimated to be $18 million . . . .

Exelon Enterprises has experienced weakness throughout the year in a number of itsbusinesses related to the downturn in the telecommunications market . In the thirdquarter, it anticipates a $36 million write-down of its investment in Corvis, atelecommunications equipment manufacturer . The Corvis shares were receivedthrough venture capital fund investments . Margins in Exelon Infrastructure Servicesare greatly reduced, due to the fall-off in telecommunications infrastructure build-outacross the country. Growth in this business group is severely restricted . Thedownturn has also limited new investment opportunities .

85. In response to the announcement, the price of Exelon's common stock plummeted b y

22%, falling to a low of $38.85 per share on September 27, 2001, after closing at $50 .45 the previou s

day, on trading volume of 9,543,300 shares -- many times the stock's ordinary daily trading volum e

of approximately 1 .2 million shares .

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Post Class Period Disclosures

86. Subsequently, on October 23, 2001, Exelon announced its actual third quarter results .

In a press release, Exelon boasted that the "reported earnings of $403 million or $1 .25 per diluted

share . . . exceeds the high end of our recent guidance due to higher estimates for unbilled revenue tha n

were used in developing the guidance ." The Company reiterated its overall 2001 revised earnings

guidance of $4.30 to $4 .45 per share, without one-time expenses or charges .

87. On November 14, 2001, Exelon filed its Form 10-Q for the third quarter ende d

September 30, 2001, which included the results announced on October 23, 2001 . The Form 10- Q

reported that Generation's EBIT had decreased $14 million for the three months ended September

30, 2001, compared to the same period in 2000, as a result of lower margins on energy sales .

Although volumes increased 7% as a result of increased sales to retail affiliates, "margins on sale s

decreased as a result of higher purchased power costs ." With respect to Enterprises, the third quarter

Form 10-Q reported EBIT of negative $80 million for the nine months ended September 30, 2001 ,

as compared with EBIT of negative $44 million for the prior quarter .

88. In a third quarter conference call with analysts on October 23, 2001, defendant Row e

admitted that Exelon had been "severely impacted . . .by the large collapse of the telecommunications

market" in 2001, and was seeking buyers for different parts of Enterprises . Rowe stated :

Our Enterprise group has been severely impacted over the past nine months, andit will continue to be impacted by the collapse of the telecommunicationsmarket. . . .We are no longer looking at Enterprises as a strategic growth engine .

[Emphasis added . ]

According to an October 24, 2001, article in the Chicago -Sun-Times, Enterprises lost $1 .5 billion of

sales in the third quarter of 2001 alone .

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89. In addition to the $36 million write-down of its investment in Corvis, the largest losse s

within Enterprises resulted from its infrastructure services group, which worked closely with electri c

utilities and the telecom industry . According to a November 2, 2001, article in the Philadelphia

Business Journal , EIS sharply curtailed network-building activities in 2001, and defendant Row e

reported a " $66 million swing" in expectations for EIS compared with budget . As a result, according

to Exelon's Form 8-K dated February 28, 2002, Enterprises' EBIT for 2001 was negative $10 7

million versus original expectations of positive $60 million announced in November 2000 an d

repeatedly reaffirmed throughout the Class Period . The November 2, 2001, Philadelphia Busines s

Journal article quoted defendant Rowe as acknowledging that existing market conditions made i t

"virtually impossible" for Exelon to sell its telecom investments . Commenting on Exelon's third

quarter earnings announcement in a research report dated October 23, 2001, analyst D .F . Ford of

Lehman Brothers stated : "[w]hile management has had a strong record, for now [Exelon] belongs

with those working to repair credibility with investors. "

90. Subsequently, defendants were forced to retract their statements that Exelon's thir d

qua rter results had turned out better than expected . On January 25, 2002, Exelon announced that

it would be restating its third quarter of 2001 earnings to $1 .16 from the $1 .25 per share it reported

on October 23, stating in relevant part, the following :

Exelon announced today that it is restating its third quarter 2001 financial statementsas a result of an error in the amount of realized nuclear decommissioning trust fundlosses recorded for the third quarter . As a result of the restatement, third quarter2001 diluted earnings per share decreased to $1 .16 from the previously reported$1 .25 . . . .

Exelon records realized income or loss on decommissioning trust funds based on an estimateprovided by the custodian of the funds. In January 2002, as part of the year-end closeprocess, Exelon discovered that the actual loss realized by the trust funds during the thir d

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quarter was higher than the estimated amount used in preparation of the financial statements,and determined that restatement of third quarter results was appropriate .

EXELON'S DECEPTIVE ACCOUNTINGAND FINANCIAL MISREPRESENTATION S

Overview

91 . At all relevant times during the Class Period , Exelon represented that its financial

statements were prepared in accordance with GAAP . These representations were materially false an d

misleading when made because (1) the Company improperly recorded a $10 million gain on it s

investment in Corvis during the first quarter of 2001 ; and (2) the Company compounded its fraudulent

accounting for its investment in Corvis by failing to timely record an impairment in the value of its

investment in Corvis during the first and second quarters of 2001 .

92. GAAP are those principles recognized by the accounting profession as the

conventions, rules, and procedures necessary to define accepted accounting practice at a particular

time . As set forth in Financial Accounting Standards Board ("FASB") Statement of Concepts

("Concepts Statement") No . 1, one of the fundamental objectives of financial reporting is that i t

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

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

Financial reporting should provide information about an enterprise's financialperformance during a period . Investors and creditors often use information about thepast to help in assessing the prospects of an enterprise . Thus, although investmentand credit decisions reflect investors' and creditors' expectations about futureenterprise performance, those expectations are commonly based at least partly onevaluations of past enterprise performance .

93 . Regulation S-X [17 C .F .R. § 210 .4-01 (a)(1)] states that financial statements filed wit h

the SEC that are not prepared in conformity with GAAP are p resumed to be misleading an d

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inaccurate. The representations by the defendants that Exelon's financial statements were prepare d

in accordance with GAAP were materially false and misleading because the financial statement s

materially inflated and distorted the Company's true operating results during the Class Period .

In the First Quarter of 2001 Exelon ImproperlyRecorded A $10 Million Gain On Its Investment In Corvi s

94, As noted above, Exelon was incorporated in Pennsylvania in February 1999 as a

wholly owned subsidiary of PECO for the purpose of effectuating a merger between PECO and

Unicorn. After the merger, Exelon became the parent company of Unicorn and PECO . The merger

was accounted for using the purchase method of accounting .

95. The purchase method , as set forth in then existing GAAP's Accounting Principles

Board ("APB") Opinion No . 16, ¶11, provided that : '

The acquiring corporation records at its cost the acquired assets less liabilitiesassumed. A difference between the cost of an acquired company and the sum of thefair values of tangible and identifiable intangible assets less liabilities is recorded asgoodwill .

Accordingly, the acqui ring entity records the acquired assets (both tangible and identifiable intangibl e

assets ) and liabilities assumed at their respective fair values .

96. In accounting for the merger transaction, the assets purchased from Unicorn wer e

recorded by Exelon at their purported fair value . In October 2001, Exelon disclosed for the first time

that 872,000 shares of Corvis stock belonging to Unicorn, which were recorded at their fair value o f

$32.00 per share at the time of the merger, and 535,000 shares of Corvis belonging to PEC O

APB Opinion No, 16 has been superceded by FASB's Statement of FinancialAccounting Standards ("SFAS") No. 141 . SFAS No. 141 carries forward, withoutreconsideration, the guidance in APB Opinion No . 16 (and certain of its amendments andinterpretations) related to the application of the purchase method .

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(previously its parent company) were transferred to the Company's Exelon Enterprises subsidiary i n

February 2001 . Upon such transfer, Exelon improperly "adjusted" the value of the Corvis stock t o

$26.00 per share, resulting in a $10 million non-cash gain .

97 . APB Opinion No . 16, ¶ 5, provides that parent and subsidiary companies are deeme d

to be under "common control" for accounting purposes . GAAP, in the AICPA's Interpretation No .

3 9 to APB No. 16, provides that transfers or exchanges of assets between companies under common

control are not to be revalued, rather they are required to be recorded by the acquiring entity at the

historical cost of the acquiree . 2

98 . Exelon, PECO, ComEd and Enterprises were under common control for accountin g

purposes , as the defendants knew or recklessly ignored . Accordingly, the shares of Corvis transferre d

from PECO and ComEd to Enterprises were required to be recorded by Enterprises at historical cost .

Defendants knew or recklessly ignored that Exelon's recording of a $10 million gain (resulting fro m

the adjustment of Exelon's value of the shares of Corvis to the fair value of the shares on the date

of transfer to Enterprises ) violated GAAP and improperly inflated Exelon's net income during th e

quarter ended March 31, 2001 .

Exelon Improperly Failed To Timely RecordAn Impairment In The Value Of Its Investment In Corvi s

99. Exelon compounded its improper accounting for its investment in Corvis during th e

first quarter of 2001 by failing to timely record an impairment in the value of such investment . During

the third quarter of 2001, Exelon recorded a $36 million charge related to an impairment in the valu e

See also ¶ 7 of FASB's Technical Bulletin ("FTB") No . 85-5, and FASB'sEmerging Issues Task Force Abstract No . 90-5 .

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of its investment in Corvis . This impairment related to the shares Exelon Enterprises received from

Unicorn and PECO .

100. GAAP, in SFAS No . 115, provides the accounting guidance for investments in equit y

securities that have readily determinable fair values. Paragraphs 12-13 of SFAS No . 115 (as amende d

by SFAS No. 130 and 133) provide, in pertinent part :

. . . [E] quity securities that have readily determinable fair values shall be classified in oneof the following categories and measured at fair value in the [balance sheet] :

a. Trading Securities. Securities that are bought and held principally for the purposeof selling them in the near term (thus held for only a short period of time) shall beclassified as trading securities. Trading generally reflects active and frequent buyingand selling, and trading securities are generally used with the objective of generatingprofits on short-term differences in price .

b. Available-for-sale securities . Investments not classified as trading securities . . .shall be classified as available for sale securities .

Unrealized holding gains and losses for trading securities shall be included in earnings .Unrealized holding gains and losses for available-for-sale securities . . . shall beexcluded from earnings and reported in other comprehensive income untilrealized . . . . .' [Emphasis Added ]

101 . In its December 31, 2000 financial statements, Exelon disclosed that it had no

marketable securities that it classified as trading securities . Accordingly, its investment in Corvis wa s

classified as a security that was available-for-sale .

102. As noted in SFAS No . 115, unrealized gains or holding losses in marketable securitie s

classified as available-for-sale in each accounting period do not affect net income, but rather appea r

3 SFAS No. 115 defines holding gains and losses as the net change in the fair valueof a security exclusive . . . of any write down for an other than-than-temporary impairment in thevalue of a security

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in the caption "comprehensive income." These unrealized holding gains or losses affect net income

only when the available-for-sale securities are sold (i .e ., realized) or when the Company recognize s

an impairment in the value of the securities .

103 . Pursuant to SFAS No . 115, ¶ 16 (as amended by SFAS No. 130 and 133) :

For individual securities classified as . . . available-for-sale . . ., an enterprise shalldetermine whether a decline in fair value below the amortized cost basis is other thantemporary . . . . If the decline in fair value is judged to be other than temporary, the costbasis of the individual security shall be written down to fair value as a new cost basisand the amount of the write-down shall be included in earnings (that is, accounted foras a realized loss) . The new cost basis shall not be changed for subsequent recoveriesin fair value . Subsequent increases in the fair value of available-for-sale securitiesshall be included in other comprehensive income . . . ; subsequent decreases in fair value,if not an other-than-temporary impairment, also shall be included in othercomprehensive income .

104. The SEC, in Staff Accounting Bulletin Topic 5 M, provides the following guidanc e

in determining when a decline in the value of a security is other than temporary :

The staff believes that the FASB consciously chose the phrase "other thantemporary" because it did not intend that the test be "permanent impairment, " ashas been used elsewhere in accounting practice . . . .

. . .The market price may be affected by general market conditions which reflectprospects for the economy as a whole or by specific information pertaining to anindustry or an individual company . Such declines require further investigation bymanagement . Acting upon the premise that a write-down may be required,management should consider all available evidence to evaluate the realizable value ofits investment . . . .

The staff believes that the following are only a few examples of the factors which,individually or in combination, indicate that a decline is other than temporary and thata write-down of the carrying value is required :

a. The length of the time and the extent to which the marketvalue has been less than cost ;

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b . The financial condition and near-term prospects of the issuer,including any specific events which may influence the operations ofthe issuer such as changes in technology that may impair the earningspotential of the investment or the discontinuance of a segment of thebusiness that may affect the future earnings potential ; or

c. The intent and ability ofthe holder to retain its investment in the issuerfor a period of time sufficient to allow for any anticipated recovery inmarket value. [Emphasis Added]

105 . Similarly, Generally Accepted Auditing Standards ("GAAS") provide auditors with

guidance to assess when a decline in the value of a security is other than tempora ry. GAAS, in AU

§ 332 .32 provides :

Examples of factors that may indicate an other-than-temporary impairment conditioninclude the following :

• Fair value is significantly below cost .• The decline in fair value is attributable to specific adverse conditions

affecting a particular investment• The decline in fair value is attributable to specific conditions, such as

conditions in an industry or in a geographic area .• Management does not possess both the intent and the ability to hold the

investment for a period oftime sufficient to allow for any anticipated recoveryin fair value .

• The decline in fair value has existed for an extended period of time.• A debt security has been downgraded by a rating agency .• The financial condition of the issuer has deteriorated .• Dividends have been reduced or eliminated, or scheduled interest payments

on debt securities have not been made .

106. During the quarter ended March 31, 2001, Exelon improperly increased the cost o f

the Corvis shares to $26 .00 as noted above . This increase resulted in ExeIon reporting a $10 millio n

gain during the first quarter of 2001 . Exelon's intent to inflate its reported operating results during

the Class Period is evidenced by the fact that it failed to record an impairment in the value of it s

investment in Corvis .

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107. When PECO and ComEd transferred their shares in Corvis to Exelon Enterprises early

in the first quarter of 2001, Corvis was trading in the market at approximately $26 .00 per share.

However, by the end of March 2001, the price of Corvis stock had declined to $7 .00 per share, and

it remained at approximately that price through the time Exelon filed its first quarter Form 10-Q wit h

the SEC on May 15, 2001 . Indeed, the price of Corvis's shares, like other fiber-optic equipment and

telecom-related companies sharply declined during the first quarter of 2001 when the market' s

expectation for the demand of such companies' products dropped significantly .

108 . During the first quarter of 2001, the price of Corvis's common stock also declined o n

concern that the Company was having difficulty obtaining new customers . In fact, during the fourth

quarter of 2000, Corvis generated all its sales from a single customer . In April 2001, Corvi s

announced a $100 million loss for the quarter ended March 31, 2001, and that it expected ne w

customers would not be obtained before the second half of the year .

109, The foregoing factors, in addition to those described in % 50-58 above, indicated tha t

the decline in the value of Corvis shares was other-than-temporary as contemplated under GAAP ,

and that Exelon was required to record an impairment in the value of this investment as early a s

March 31, 2001, and certainly by the end of the June 30, 2001 quarter . In fact, in June 2001, Corvi s

shares traded as low as $3 .00 per share. Despite this fact and the adverse conditions then existing

in the telecom industry, as noted above, Exelon nonetheless still failed to record an impairment in th e

value of its investment in Corvis during the quarter ended June 30, 2001 . Ultimately, in the quarter

ended September 30, 2001, Exelon recorded a $36 million impairment in the value of its investmen t

in Corvis .

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Exelon Improperly Failed To_Tim_ely Record Impaired Goodwil l

110 . FASB's SFAS No . 121 required that where an event or changes in circumstance s

indicate that the carrying value of the asset may not be recoverable, then : 1) the entity shall estimate

the future undiscounted cash flows resulting from the asset, and 2) compare the estimated future cash

flows against the carrying (Le .,., the reported) value of the asset . If the sum of the expected future

cash flows is less than the carrying value, the entity shall record an impairment loss . Pursuant to

SFAS No . 121, if goodwill is associated with the assets subject to an impairment loss, the carrying

value of goodwill is reduced to zero via a charge against earnings before an impairment loss i s

charged against the carrying value of the impaired asset .

111 . As noted above, it was widely known that the conditions in the telecom marke t

deteriorated significantly during 2001 . This was a circumstance that indicated that the value o f

Exelon's Enterprises business was impaired as early as June 30, 2001 . Nonetheless , Exelon failed to

record a loss on the impairment in the carrying value of its reported goodwill until the quarter ende d

March 31, 2002, when Exelon took a charge of $243 million for an impairment of goodwill relate d

solely to its Enterprises business .

112 . In addition to the accounting improprieties stated above, Exelon presented its financia l

statements during the Class Period in a manner which also violated at least the following provision s

of GAAP :

The concept that conservatism be used as a prudent reaction to uncertainty to

try to ensure that uncertainties and risks inherent in business situations are adequately considered .

The best way to avoid injury to investors is to try to ensure that what is reported represents what it

purports to represent (Concepts Statement No . 2, ¶¶ 95, 97) ;

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2 . The concept of completeness, which means that nothing is left out of the

information that may be necessary to ensure that it validly represents underlying events and condition s

(Concepts Statement No . 2, 179) ;

3 . The concept that financial reporting should provide information that is usefu l

to present and potential investors and creditors and other users in making rational investment, credi t

and similar decisions (Concepts Statement No . 1, 134))-

4. The concept that financial reporting should provide information about th e

economic resources of an enterprise, the claims to those resources, and the effects of transactions,

events and circumstances that change resources and claims to those resources (Concepts Statemen t

No . 1, ¶ 40) ;

5 . The concept that financial reporting should provide information about ho w

management of an enterprise has discharged its stewardship responsibility to owners (stockholders )

for the use of enterprise resources entrusted to it . To the extent that management offers securitie s

of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability t o

prospective investors and to the public in general (Concepts Statement No . 1, 150))-

6. The concept that financial reporting should provide information about an

enterprise's financial performance during a period . Investors and creditors often use informatio n

about the past to help in assessing the prospects of an enterprise . Thus, although investment and

credit decisions reflect investors' expectations about future enterprise performance, those expectations

are commonly based at least partly on evaluations of past enterprise performance (Concepts

Statement No . 1, ¶ 42) ; and

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7. The concept that financial reporting should be reliable in that it represents wha t

it purports to represent . That information should be reliable as well as relevant is a notion that i s

central to accounting (Concepts Statement No . 2, ¶¶ 58-59) .

113 . The foregoing accounting improprieties caused Exelon to issue financial statements

during the Class Period which violated numerous provisions of GAAP and the SEC 's accounting rule s

and regulations . In failing to file financial statements with the SEC which conformed to th e

requirements of GAAP, Exelon disseminated financial statements that were presumptively misleading

and inaccurate . Indeed, the numerous accounting machinations detailed herein evidence th e

defendants' intent to deceive investors during the Class Period and misrepresent the truth about th e

Company and its business, operations and financial performance to the detriment of those who relie d

on them .

114. The Company' s Class Period Forms 10-Q filed with the SEC were also materially fals e

and misleading in that they failed to disclose known trends, demands, commitments, events, and

uncertainties that were reasonably likely to have a materially adverse effect on the Company' s

liquidity, net sales, revenues and income from continuing operations, as required by Item 303 of

Regulation S-K .

DEFENDANTS' MATERIALLY FALSE AND MISLEADINGMISREPRESENTATIONS AND OMISSIONS WERE THE CAUSE

OF THE DAMAGES SUFFERED BY LEAD PLAINTIFFS AND THE CLAS S

115 . The market for Exelon common stock was open, well-developed and efficient at al l

relevant times . As a result of the materially false and misleading statements and failures to disclos e

described above, Exelon common stock traded at artificially inflated prices during the Class Period .

The artificial inflation continued through and including September 27, 2001, when defendant s

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disclosed, among other things, that EPS of $4 .50 in 2001 was unattainable and that a $36 million

charge was necessary to write-down Enterprises' investment in Corvis . Lead Plaintiffs and other

members of the Class purchased or otherwise acquired Exelon's common stock relying upon the

integrity of the market price ofExelon common stock and market information relating to Exelon, and

have been damaged thereby .

116. During the Class Period, defendants materially misled the investing public, thereb y

inflating the price of Exelon common stock, by publicly issuing false and misleading statements and

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

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

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

business and operations, as detailed herein .

117 . At all relevant times, the material misrepresentations and omissions particularized i n

this Complaint directly or proximately caused, or were a substantial contributing cause of, th e

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

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

statements about Exelon's business, prospects and operations . These material misstatements an d

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

Exelon and its business, prospects and operations, thus causing the Company's common stock to b e

overvalued and artificially inflated at all relevant times . Defendants' materially false and misleadin g

statements during the Class Period resulted in Lead Plaintiffs and other members of the Clas s

purchasing the Company's common stock at artificially inflated prices, thus causing the damage s

complained of herein .

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ADDITIONAL SCIENTER ALLEGATION S

118 . As alleged herein, defendants acted with scienter in that defendants knew or recklessly

disregarded, that the public documents and statements issued or disseminated in the name of the

Company, as set forth herein, were materially false and misleading when made . Defendants knew that

such statements or documents would be issued or disseminated to the investing public and the y

knowingly and substantially participated or acquiesced in the issuance or dissemination of such

statements or documents as primary violators of the federal securities laws . As set forth elsewhere

herein in detail , defendants , by virtue of their receipt of information reflecting the true facts regardin g

Exelon and its business, their control over and/or receipt of the Company's allegedly materiall y

misleading misstatements, and/or their associations with the Company, which made them privy t o

confidential proprietary information concerning Exelon were active and culpable participants in th e

fraudulent scheme alleged herein .

119. Defendants Rowe, McNeill and Gillis were the co-CEOs and CFO, respectively, o f

Exelon and were intimately involved and had direct responsibility with respect to important issue s

affecting Exelon's business, operations, performance, and prospects, such as the performance of it s

subsidiaries and the subsidiaries' contribution to Exelon's earnings . In addition, Gillis in her positio n

as the CFO was intimately involved in the accounting and financial reporting functions of Exelon .

120 . The Individual Defendants were motivated, among other things, to commit the frau d

alleged herein so that Exelon's and Generation's debt offerings could be consummated on better term s

than if the truth about Exelon's business was known . Also, according to Exelon 's public fi lings ,

Individual Defendants Rowe and McNeill were awarded compensation incentives in 2001 in the form

of restricted stock based on the Company's achievements with respect to shareholder return an d

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earnings per share . Accordingly, Rowe and McNeill were motivated to commit the fraud allege d

herein to increase their compensation package in 2001 .

121 . In addition, at all relevant times, defendants had actual knowledge of, or recklessly

disregarded, Exelon's declining financial performance as particularized in ¶¶ 40-62 above .

Nevertheless, defendants issued the materially false and misleading statements identified above, whic h

were contradicted by internal evidence, which was known to or recklessly disregarded by defendants

during the Class Period including, among other things, that :

(a) Exelon's touted growth rate of 10% and EPS of $4 .50 per share could not b e

achieved in the absence of superior performance by Generation, which was being negatively impacte d

by the adverse market and economic conditions that existed after the first quarter of 2001 ;

(b) Generation had entered into power purchase agreementsfor additional capacity

early in 2001 at then prevailing high market prices, that was unneeded and could not profitably be

resold during the Class Period due to the precipitous decline in energy prices and the weakenin g

economy, which lessened demand ;

(c) Enterprises' various businesses, which were heavily weighted towards

infrastructure services and other investments in telecommunications, were far behind plan and ha d

instituted massive cost-cutting measures, including significant lay-offs, as early as the first quarter o f

2001 . These lay-offs, which were over and above those planned as part of the merger, resulted in

significant additional severance expenses of $30 million and $18 million in the third and fourth

quarters of 2001, respectively, further reducing earnings ;

(d) Enterprises was carrying investments in telecommunications companies ,

including Corvis, at values far in excess of their market value in violation of GAAP ; and

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(e) EIS' business had nearly ground to be halt as a result of the collapse of th e

telecommunications market and the downturn in the economy .

APPLICABILITY OF PRESUMPTION OF RELIANCE :FRAUD-ON-THE-MARKET DOCTRIN E

122, Lead Plaintiffs rely, in part, on the presumption of reliance established by the fraud-on-

the-market doctrine .

123 . At all relevant times, the market for Exelon's common stock was an efficient market

for the following reasons, among others :

(a) Exelon stock met the requirements for listing, and was listed and activel y

traded on the NYSE, a highly efficient and automated market ;

(b) As a regulated issuer, Exelon filed periodic public reports with the SEC an d

the NYSE that contained material misrepresentations and/or omitted material facts during the Class

Period as alleged herein, causing Exelon stock to trade at artificially inflated prices ,

(c) Exelon regularly communicated with public investors via established marke t

communication mechanisms, including through regular disseminations of press releases on th e

national circuits of major newswire services and through other wide-ranging public disclosures, suc h

as communications with the financial press, conference calls with analysts and other similar reportin g

services ;

(d) Exelon was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customer s

of their respective brokerage firms . Each of these reports was publicly available and entered th e

public marketplace . In writing these reports, analysts reflected information provided by defendants ;

and

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(e) The trading volume ofExelon common stock was substantial during the Clas s

Period, indicating that there was a liquid market for Exelon common stock during the Class Period .

124. As a result of the foregoing, the market for Exelon's common stock promptly digeste d

current information regarding the Company from all publicly available sources and reflected such

information in Exelon's stock price . Under these circumstances, all purchasers of Exelon common

stock during the Class Period are entitled to a presumption of reliance because they all suffered

similar injury through their purchase of Exelon common stock at artificially inflated prices .

NO SAFE HARBOR

125. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint . Many

of the specific statements pleaded herein were not identified as "forward-looking statements" when

made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements . Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of Exelon who knew that those statements were false when made .

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FIRST CLAIM

Violation Of Section 10(b) OfThe Exchange Act And Rule IOb- S

Promulgated Thereunder Against All Defendants

126. Lead Plaintiffs repeat and reallege each and eve ry allegation contained above as if fully

set forth herein .

127 . During the Class Period, Exelon and the Individual Defendants carried out a plan ,

scheme and course of conduct which was intended to and did : (i) deceive the investing public ,

including Lead Plaintiffs and other Class members, as alleged herein ; (ii) artificially inflate and

maintain the market price of Exelon's common stock ; and (iii) cause Lead Plaintiffs and othe r

members ofthe Class to purchase Exelon's common stock at artificially inflated prices . In furtherance

of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the action s

set forth herein .

128. Defendants, either individually or as a group : (a) employed devices, schemes, an d

artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material fact s

necessary to make the statements made not misleading ; and (c) engaged in acts, practices, and a

course of business which operated as a fraud and deceit upon the purchasers of the Company's

common stock in an effort to maintain artificially high market prices for Exelon' s common stock in

violation of Section 10(b) of the Exchange Act and Rule 10b-5 . All defendants are sued as primary

participants in the wrongful and illegal conduct charged herein and the Individual Defendants are als o

sued herein as controlling persons of Exelon as alleged below .

129. In addition to the duties of full disclosure imposed on defendants as a result of their

dissemination of affirmative statements, or participation in the making of affirmative statements to

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the investing public, they each had a duty to promptly disseminate truthful information that would b e

material to investors in compliance with the integrated disclosure provisions of the SEC as embodie d

in SEC Regulation S-X (17 C .F.R. Sections 210.01 et seq .) and Regulation S-K (17 C.F.R. Sections

229 .10 et seq .) and other SEC regulations, including accurate and truthful information with respec t

to the Company's operations, financial condition and performance so that the market price of th e

Company's common stock would be based on truthful, complete and accurate information .

130 . Defendants , individually and as a group , directly and indirectly, by the use, means o r

instrumentalities of interstate commerce and/or ofthe mails, engaged and participated in a continuou s

course of conduct to conceal adverse material information about the business, operations and future

prospects of Exelon as specified herein .

131 . Defendants employed devices, schemes and artifices to defraud, while in possessio n

of material adverse non-public information and engaged in acts, practices, and a course of conduc t

as alleged herein in an effort to assure investors of Exelon's value and performance and continue d

substantial growth, which included the making of, or the participation in the making of, untru e

statements of material facts and omitting to state material facts necessary in order to make th e

statements made about Exelon and its business operations and future prospects, in the light of th e

circumstances under which they were made, not misleading , as set forth more particularly herein, and

engaged in transactions, practices and a course of business which operated as a fraud and deceit upon

the purchasers of Exelon's common stock during the Class Period .

132. Each of the Individual Defendants' primary liability, and controlling person liability,

arises from the following facts : (i) the Individual Defendants were directors and/or high-leve l

executives at the Company during the Class Period and members of the Company's managemen t

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team; (ii) each of these defendants, by virtue of his or her responsibilities and activities as a senio r

officer of the Company, was privy to and participated in the creation, development and reporting o f

the Company's internal budgets, plans, projections and/or reports ;

(iii) each of these defendants enjoyed significant personal contact and familiarity with the othe r

defendants and was advised of or had access to other members of the Company's management team ,

internal reports and other data and information about the Company's business finances and operations

at all relevant times ; and (iv) each of these defendants was aware of the Company's dissemination of

information to the investing public which they knew or recklessly disregarded was materially false an d

misleading .

133 . Defendants had actual knowledge of the misrepresentations and omissions of material

facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain an d

to disclose such facts, even though such facts were readily available to them . Defendants' material

misrepresentations and/or omissions were made knowingly or recklessly and for the purpose an d

effect of concealing Exelon's operating condition and future business prospects from the investin g

public and supporting the artificially inflated price of its common stock . If defendants did not hav e

actual knowledge ofthe misrepresentations and omissions alleged, they were at the very least reckles s

in failing to obtain such knowledge by deliberately refraining from taking those steps necessary t o

discover whether those statements were false or misleading,

134. As a result of the dissemination of the materially false and misleading information an d

failure to disclose material facts, as set forth above, the market price of Exelon's common stock wa s

artificially inflated during the Class Period . In ignorance of the fact that the market price of Exelon' s

shares was artificially inflated, and relying directly or indirectly on the false and misleading statement s

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made by defendants or upon the integrity of the market in which the securities trade, and/or on th e

absence of material adverse information that was known to or recklessly disregarded by defendant s

but not disclosed in public statements by defendants during the Class Period, Lead Plaintiffs and th e

other members of the Class acquired Exelon common stock during the Class Period at artificially hig h

prices based on their reliance and were damaged thereby .

135 . At the time defendants disseminated the misrepresentations and omissions complaine d

of herein, Lead Plaintiffs and other members of the Class were ignorant of their falsity, and believe d

them to be true . Had Lead Plaintiffs and the other members of the Class and the marketplace know n

of the true financial condition and business prospects of Exelon, which were not disclosed b y

defendants, Lead Plaintiffs and other members of the Class would not have purchased or otherwis e

acquired their Exelon shares, or, if they had acquired such shares during the Class Period, they would

not have purchased them at the artificially inflated prices which they paid .

136 . By virtue of the foregoing, defendants have violated Section 10(b) of the Exchang e

Act, and Rule IOb-5 promulgated thereunder.

137. As a direct and proximate result of defendants ' wrongful conduct , Lead Plaintiffs an d

the other members of the Class suffered damages in connection with their purchases ofthe Company' s

common stock during the Class Period .

SECOND CLAIM

Violation Of Section 20(a) OfThe Exchange Act Against the Individual Defendants

138 . Plaintiff repeats and realleges each and every allegation contained above as if fully se t

forth herein . This claim is asserted against the Individual Defendants .

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• P

139, The Individual Defendants were and acted as controlling persons ofExelon within th e

meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-leve l

positions with Exelon, their ownership and contractual rights, their participation in and/or awarenes s

of the Company's operations, and/or their intimate knowledge of the Company's actual performanc e

and undisclosed problems, the Individual Defendants had the power to influence and control and di d

influence and control, directly or indirectly, the decision-making of the Company, including th e

content and dissemination of the various statements which Lead Plaintiffs contend are false an d

misleading . The Individual Defendants were provided with, or had unlimited access to, copies ofthe

Company's reports, press releases, public filings and other statements alleged by Lead Plaintiffs to be

misleading prior to and/or shortly after these statements were issued and had the ability to preven t

the issuance of the statements or cause the statements to be corrected .

140 . In particular, each ofthe Individual Defendants had direct and supervisory involvemen t

in the day-to-day operations of the Company and, therefore, is presumed to have had the power t o

control or influence the particular transactions giving rise to the securities violations as alleged herein ,

and exercised the same .

141 . As set forth above, Exelon violated Section 10(b) and Rule lOb-5 by its acts an d

omissions as alleged in this Complaint . By virtue of their positions as controlling persons of Exelon ,

the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct an d

proximate result of defendants' wrongful conduct, Lead Plaintiffs and other members of the Clas s

suffered damages in connection with their purchases of the Company's common stock during th e

Class Period .

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- _ ,1

W IEREFORE, Lead Plaintiffs, on their own behalf and on behalf of the Class, prays fo r

judgment, as follows :

Determining that this action is a proper class action and certifying Lead

Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure ;

2 . Awarding compensatory damages in favor of Lead Plaintiffs and the other

Class members against all defendants, jointly and severally, for all damages sustained as a result o f

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;

3 . Awarding Lead Plaintiffs and the Class their reasonable costs and expense s

incurred in this action, including counsel fees and expert fees; and

4. Awarding such other and further relief as the Court may deem just and proper .

JURY TRIAL DEMANDED

Lead Plaintiffs hereby demand a trial by jury on all issues so triable .

Dated : October 1, 2002

By :

JO11L111G1 VV 1Liici i.,pl G11~G1

Lori A. FanningMILLER FAUCHER and CAFFERTY LLP30 North LaSalle StreetSuite 3200Chicago, Illinois 60602(312) 782-488 0

Liaison Counsel for Plaintiffs and the Class

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Deborah Clark -WeintraubKirk E . ChapmanKristi M. StahnkeMILBERG WEISS BERSHAD

ITYNES & LERACH LLPOne Pennsylvania Plaza - 49th FloorNew York, New York 10119(212) 594-5300

Richard SchiffrinSheryl AlexrodSCHIFFRIN & BARROWAY, LLPThree Bala Plaza East, Suite 40 0Bala Cynwyd, Pennsylvania 19004(610) 667-7706

Lead Counsel Attorneys for Plaintiff

and the Class

Nadeem FaruqiFARUQI & FARUQI, LLP320 East 39th StreetNew York, New York 10016(212) 983-9330

Andrew M . SchatzPatrick A. KlingmanSCHATZ & NOBEL, P.C.330 Main Street2°' FloorHartford, Connecticut 06106-1851(860) 493-6292

Paul J . GellerCAULEY GELLER BOWMAN & COATES, LLPOne Boca Place2266 Glades Road, Suite 42 1ABoca Raton, Florida 33431(561) 750-300 0

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t

Evan J . SmithBRODSKY & SMITH, LLC11 Bala Avenu eSuite 39Bala Cynwyd, Pennsylvania 10004(610) 665-798 7

Brian FelgoiseLAW OFFICES OF BRIAN FELGOISE230 South Broad StreetSuite 404Philadelphia, Pennsylvania 19102(215) 735-681 0

David ScottSCOTT & SCOTTP .O . Box 192108 Norwich AvenueColchester, Connecticut 06415(860) 537-553 7

John G. Emerson, Jr .THE EMERSON FIRM11311 Arcade DriveSuite 102Little Rock, Arkansas 72212(501) 907-255 5

Robert I . HarwoodFrederick W . Gerkens, IIIJeffrey M. NortonWECHSLER HARWOOD LLP488 Madison Avenu eNew York, New York 10022(212) 935-7400

Charles J . PivenLAW OFFICES OF CHARLES J. PIVEN, P.A.401 East Pratt Street, Suite 252 5Baltimore, MD 2120 2

Counsel for Plaintiffs

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