1
EXHIBIT 99.4

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

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

JURY DEMANDED
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PLAINTIFFS' OPPOSITION TO DEFENDANTS' MOTION TO DISMISS
THE CONSOLIDATED CLASS ACTION COMPLAINT
2

TABLE OF CONTENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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TABLE OF AUTHORITIES

CASES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In re Digi Int'l Sec. Litig., 6 F. Supp. 2d 1089 (D. Minn. 1998).........................................................14

In re F & M Distributors, Inc. Sec. Litig., 937 F. Supp. 647 (E.D.Mich. 1996)............................................16

In re Health Management Sec. Litig., 970 F. Supp. 192 (E.D.N.Y. 1997)................................................14, 34

In re Home Health Corp. of America, Inc. Sec. Litig.,
1999 WL 79057, *15 (E.D. Pa. 1999).....................................................................................35

In re Nationsmart Sec. Litig., 130 F.3d 309 (8th Cir. 1997)..............................................................21

In Re Silicon Graphics II, 183 F.3d at 977-79 (9th Cir. 1999)............................................................30

In re Stratosphere Corp. Sec Litig., 1 F. Supp. 2d 1096 (D. Nev. 1998)...................................................26

In re Wells Fargo, 12 F.3d 922 (9th Cir. 1993)...........................................................................35

Kensington Capital Management v. Oakley, Inc., [1999 Transfer Binder]
Fed. Sec. L. Rep. (CCH) P. 90,411 (C.D.Cal. Jan. 14, 1999).............................................................21

Khurana v. Innovative Health Care Systems, Inc., 130 F.3d 143 (5th Cir. 1997)........................................13, 25

Leventhal v. Tow, 1999 WL 270089, *10-11 (D. Conn. 1999).................................................................34

Lowrey v. Texas A&M University System, 117 F.3d 242 (5th Cir. 1997)......................................................13

Marra v. Tel-Save Holdings, Inc., 1999 WL 317103 (E.D.Pa. 1999)..........................................................34

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McNamara v. Bre-X Minerals Ltd., 57 F. Supp. 2d 396 (E.D. Tex. 1999).....................................................29

Parcelsus, 1998 WL 1108373 (N.D. Tex. 1998)..............................................................................29

Picture Lake Campground v. Holiday Inns, Inc., 497 F. Supp. 858 (E.D. Va. 1980)..........................................14

Powers v. Eichen, 977 F. Supp. 1031 (S.D. Cal. 1997).....................................................................33

Press v. Chemical Inv. Servs. Corp., 166 F.3d 529 (2d Cir. 1999).....................................................29, 30

Rehm v. Eagle Finance Corp., 954 F. Supp. 1246 (N.D. Ill. 1997)..........................................................32

Robertson v. Strassner, 32 F. Supp. 2d 443 (S.D. Tex. 1998)...................................................13, 29-31, 36

Ross v. A.H. Robins Co., 607 F.2d 545 Cir. 1979).........................................................................14

Shaw v. Digital Equip. Corp. 82 F.3d 1194 (1st Cir. 1996).............................................................18-21

Shields v. Citytrust Bancorp, 25 F.3d 1124 (2d Cir. 1994)................................................................33

STI Classic Fund v. Bollinger Industries, Inc., 1996 U.S. Dist.
Lexis 21553, *3 (N.D. Tex. 1996)...................................................................................29, 30

Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991)....................................................................38

Weiner v. Quaker Oats Co., 129 F.3d 310 (3d Cir. 1997)...................................................................35

Williams v. WMX Techs., Inc., 112 F.3d 175 (5th Cir.) cert. denied,
118 S.Ct. 412 (1997)............................................................................................21, 29-31

Zuckerman v. Foxmeyer Health Corp., 4 F. Supp. 2d 618 (N.D. Tex. 1998).............................13, 21, 25, 29-31, 35-36

STATUTES AND RULES

Section 11 of the Securities Exchange Act of 1933 (15 U.S.C. Section 77(k))......................1, 2, 14, 15-18, 20-21, 23

Section 12(a)(2) of the Securities Exchange Act of 1933 (15 U.S.C. Section 77(l)(2)).................1, 2, 14-17, 20-21, 23

Section 15 of the Securities Exchange Act of 1933 (15 U.S.C. Section 77(o))..............................................40

Section 20(a) of the Securities Exchange Act of 1933 (15 U.S.C. Section 78t(a))..........................................40

Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78j(b))..........................2, 4, 20-21, 28-29

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Section 20A of the Securities Exchange Act of 1934 (15 U.S.C. Section 78t-1).............................................35

15 U.S.C. Section 77z-1..................................................................................................20

15 U.S.C. Section 78u-4..................................................................................................20

15 U.S.C. Section 78u-4(b)(1)........................................................................................21, 28

Fed. R. Civ. P. 9(b).....................................................................................13, 14, 22, 26, 29

Fed. R. Civ. 12(b)6)..................................................................................................4, 13

Private Securities Litigation Reform Act of 1995.................................................................in passium

OTHER

Merriam Webster's Collegiate Dictionary 598-99 (10th ed. 1993)...........................................................26

141 Cong. Rec. S19044-45 (Dec. 21, 1995) ................................................................................28

House-Senate Conference Report, H. R. Rep. No. 104-369, at 41 (Nov. 28, 1995)............................................28

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Plaintiffs submit this memorandum in opposition to the defendants'
motion to dismiss the Consolidated Class Action Complaint (the "Complaint").(1)

PRELIMINARY STATEMENT

There are two principal claims at issue in this case. The first is on
behalf of former owners of the common stock and stock options of Equity Corp.
International ("ECI"). These innocent shareholders were duped when, 19 days
after the close of the fourth quarter of Service Corp. International's ("SCI")
financial year, they exchanged their ECI stock and options for SCI stock and
options. By January 19, 1999, the date of the exchange, SCI's fourth quarter
results were in hand, were far below expectations, and yet were not disclosed to
the ECI holders as required under the securities laws. Seven days later, on
January 26, 1999, when SCI finally chose to disclose those results, its stock
price was cut almost in half, and the value of the SCI shares that the ECI
holders had received days before dropped from $556 million to $278 million.

Pursuant to Sections 11 and 12(a)(2) of the Securities Act of 1933 (the
"1933 Act"), plaintiffs need only prove that the poor 1998 fourth quarter
results for SCI were in existence and rendered SCI's registration statement and
prospectus (the "Registration Statement/Prospectus"), pursuant to which the ECI
shares were exchanged, misleading. Plaintiffs do not have to prove defendants'
scienter under these 1933 Act claims -- neither recklessness, nor knowledge, nor
intent. In fact, the Registration Statement/Prospectus were patently misleading
because they contained a provision requiring SCI to disclose up until the
closing of the exchange any event which was having -- or could have -- a
materially adverse effect on its business condition. Liability attaches strictly
from the failure

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(1) All references to "P." followed by a number indicate the referenced
paragraph of the Complaint.

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to disclose the materially adverse fourth quarter results; the reasons for these
poor results are irrelevant to these claims.

Defendants' Motion to Dismiss essentially ignores -- and thereby
concedes -- the validity of the claims brought on behalf of the ECI stock and
option holders regarding the January 19, 1999 stock exchange. Defendants' only
mention of the Section 11 and 12(a)(2) claims (set forth solely in footnote 15,
page 13 of their brief) asserts that plaintiffs must plead these claims with
particularity because they sound in fraud. However, defendants do not contend
that plaintiffs failed to plead these claims with particularity. Indeed, such an
argument strains credulity: how could plaintiffs be more particular than
pleading (1) the fourth quarter had ended; (2) the fourth quarter's poor results
were necessarily complete; (3) defendants closed on the ECI transaction without
disclosing these results; and (4) the Registration Statement/Prospectus
affirmatively represented that SCI experienced no events -- up until the close
of the transaction -- which would have a materially adverse effect on their
business condition? These claims must be sustained.

The second set of claims in this case is brought on behalf of both the
former ECI stock and option holders who exchanged their ECI holdings for SCI
common stock on January 19, 1999 and open-market purchasers of SCI stock and
options from July 17, 1998 through January 26, 1999 (the "Class Period"). This
second set of claims is brought under Section 10(b) of the Securities and
Exchange Act of 1934 (the "1934 Act"). In addition to former ECI shareholders,
all members of the class who bought SCI stock during the Class Period in
reliance on the integrity and honesty of SCI's public statements suffered
dramatic losses when the disclosure of SCI's true financial condition on January
26, 1999 drove the inflated price of SCI stock down a stunning 44%.

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As alleged in the Complaint, the poor fourth quarter results were no
surprise to defendants. To the contrary, the exchange of grossly inflated SCI
stock for ECI securities on January 19, 1999 was the culmination of defendants'
longstanding scheme to conceal a growing deterioration in the business and
financial condition of SCI, a deterioration that was known by the defendants
throughout the Class Period. The most critical of SCI's mounting problems was
the enormous backlog of unprofitable "preneed" funeral service contracts SCI had
inherited from the hundreds of funeral homes it had acquired in the 1990s.
Defendants concealed that crisis from the investing public during the second and
third quarters of 1998 by carefully "managing" SCI's reported financial results,
and schemed to continue to conceal the problem in the fourth quarter financial
results.

By mid-November the Individual Defendants(2) were openly discussing
among themselves their scheme to "bury" what they already knew would be an $.08
to $.10 shortfall in reported earnings in a special one-time charge attributed
to the ECI acquisition. The scheme was foiled, however, when the closing date
for the ECI acquisition was delayed past year-end 1998 by regulatory issues and
defendants were forced to reveal SCI's results.

Defendants failed to disclose this information in any of the statements
they made to the investing public during the Class Period, i.e., SCI's growing
backlog of unprofitable acquired preneed contracts and the increasingly adverse
impact those contracts had already had, and were continuing to have, on SCI's
overall profit margins. In particular, the Complaint alleges that SCI woefully
failed to manage its preneed funds actively to generate a rate of return in
excess of actual funeral cost increases. The Complaint also specifically
identifies all of the materially false and misleading statements and omissions
made by defendants during the Class Period, and explains in

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(2)The Individual Defendants are R.L. Waltrip, SCI's CEO; George Champagne,
SCI's CFO and L. William Heiligbrodt, SCI's President.

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detail how and why those statements and omissions were fraudulent. The Complaint
also alleges specific facts that are more than sufficient to raise a compelling
inference that defendants made those statements with knowledge -- or reckless
disregard -- of their untruthfulness. The facts alleged thus state a Section
10(b) claim under the 1934 Act and more than satisfy the pleading requirements
of the Private Securities Litigation Reform Act of 1995 ("PSLRA") and Federal
Rules of Civil Procedure 9(b) and 12(b)(6). The Section 10(b) claims must also
be sustained.

THE ALLEGATIONS OF THE COMPLAINT

A. BACKGROUND.

SCI operates 3,442 funeral service locations, 433 cemeteries and 191
crematoria located in 20 countries on five continents. P. 19. SCI became the
world's largest death care services provider by purchasing more than 3,000
locally-owned family operated independent funeral homes throughout the 1990's.
P. 20.
Among the assets acquired by SCI from these funeral home purchases were
"preneed" (sometimes called "guaranteed price") funeral contracts that had been
entered into when the acquired funeral homes were independently operated. P. 22.
Preneed funeral contracts allow individuals to make and lock in the price of
funeral arrangements before dying. Under such contracts, the funeral home agrees
to provide funeral services and products in the future in return for a fixed sum
paid at the time of the contract or under an installment schedule. P. 22.
Defendants have admitted that SCI assumed the contractual obligation to perform
price guaranteed funerals when it acquired the independent funeral homes. Ans.
P. 22.(3)

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(3) The abbreviation "Ans." followed by a paragraph designation refers to
Defendants' Answer to the Complaint.

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When the preneed contracts were sold, the independent funeral homes
established mortuary trusts funded with the payments from the prospective
clients. P. 23. The total funds, or trust principal, generally were less than
the then-current cost of providing the funeral service because preneed funeral
services were often sold at a discount. P. 23. SCI acquired those mortuary trust
assets when it purchased the independent homes. P. 23; Ans. P. 23.

To the extent that the principal and income generated by the trust
equals or exceeds the ultimate cost of performing the funeral service, the
funeral home either will break-even or realize a profit. P. 23. If, on the other
hand, the mortuary trust assets do not grow to equal or exceed the future cost
of performing the service, then the funeral service will be performed at the
contractually agreed upon price, resulting in a loss. P. 23. As SCI's internal
documents unequivocally recognize, "[t]he exposure to cost increases falls to
SCI." Exhibits in Support of Defendants Motion to Dismiss the Consolidated Class
Action Complaint (hereinafter "Exhibit"), Exhibit C-5, SCI0068. As defendants
admit, SCI had amassed a multi-billion dollar preneed funeral contract backlog.
Ans. P. 31 (acknowledging that "[d]uring 1995 alone, SCI purchased 1,263
independent funeral homes and acquired a staggering $656 million in preneed
funeral contracts"); Ans. P. P. 24, 28 (conceding between 1992 and 1998, in just
a six-year period, SCI's preneed funeral contract backlog increased three-fold,
from $1.2 billion to $3.7 billion").

The vast majority of the independent funeral homes acquired by SCI
lacked the financial sophistication to perform any meaningful analysis aimed at
determining whether the assets invested in the mortuary trusts would generate a
real rate of return in excess of the amount necessary to cover future increases
in the cost of providing a price guaranteed funeral service. P. 24. The funds
invested in these mortuary trusts often were not actively managed - if they were
managed at all - and whether

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such funds would grow sufficiently to equal or exceed the cost of providing a
price guaranteed funeral service at some future date was left to happenstance.
P. 24. Indeed, defendants have admitted that the financial management of these
mortuary trust assets often consisted of little more than opening a certificate
of deposit at a local bank. Ans. P. 24. And these practices have had a severely
negative impact on SCI's profit margins during the protracted period of
declining interest rates and escalating funeral home costs throughout the
1990's. P. P. 25, 26.

B. THE PRENEED STUDY PROVES A NUMBER OF PLAINTIFFS' ALLEGATIONS.

During 1996, SCI undertook what it termed "a review of the prearranged
trust investment process which included an asset/liability study" (the "Preneed
Study"). P. 32. Defendants have submitted a collection of select unauthenticated
internal SCI documents that they conclusorily assert constitute the Preneed
Study alleged in the Complaint. Defendants' reliance on these select documents,
and arguments based on self-serving interpretations of these documents, amount
to a debate about the meaning and weight of evidence, inappropriate on a motion
to dismiss.

In all events, even the documents submitted by defendants, which have
not been tested by any discovery or cross-examinations, support plaintiffs'
claim that "SCI failed to establish any means of actively managing the mortuary
trust assets that would eventually be used to pay for these acquired preneed
funeral contracts." P. 30. Among other things, the collection of internal SCI
documents defendants attached to their motion confirms that:

o SCI did not have an investment program to provide "independent,
objective advice and assistance, particularly in the areas of asset allocation
development and investment manager evaluation and selection," Exhibit C-5,
SCI0067;

o SCI did not have a "scientific, analytical approach, focused on
meeting SCI's financial objectives" and, at best, SCI was "in the process of
developing" an "overall investment policy for the Pre-arranged Funeral trust
funds." Exhibit C-5, SCI0070;

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o SCI lacked the ability to even identify all of the mortuary trust
assets it had acquired during its funeral home acquisition campaign - let alone
manage these assets. See Exhibit C-6, SCI0138 (December 1996 memorandum stated
"[c]urrently there is no reliable source to determine whether all acquisitions
have been loaded to the trust general ledger."); Exhibit C-5, SCI0070 ("all
trust funds currently identifiable are on the FSG system.") (Emphasis added);

o more than $600 million in mortuary trust assets was not even being
monitored - let alone managed - as recently as June 30, 1997: "as of June 30,
1997, approximately 2000 trusts with total assets of $1.72 billion are being
monitored." Exhibit C-5, SCI0070. According to the Company's Form 10-Q for the
quarter ended June 30, 1997, however, total preneed contract assets totaled $2.3
billion;(4)

o SCI's failure to actively manage its preneed mortuary trust assets
resulted in SCI earning approximately 5.5% annually on these assets. In stark
contrast, funeral home costs escalated approximately 8.5% annually during this
same period - thereby guaranteeing SCI a loss of at least 3% per annum on these
assets. See Exhibit C-1, SCI0005. The 5.5% rate of return on SCI's preneed
mortuary trust assets was 1.5% below SCI's own "target" rate of return, and a
full 3.0% below the rate of return SCI knew it needed to earn on these preneed
mortuary trust assets in order to perform this funeral backlog at break-even.
Exhibit C-4, SCI0064;

o SCI's preneed mortuary trust assets were not invested in accordance
with SCI's own asset allocation policy. SCI had invested 33% of its preneed
trust assets in "Cash," when its asset allocation policy required that no more
than 10% of such assets be invested in "Cash;" and only 21% of the assets had
been invested in "Domestic Equities" when SCI's program had required that 40% of
such assets be invested in "Domestic Equities." See Exhibit C-1, SCI0009;
Exhibit C-4, SCI0063. These practices, as defendants knew, virtually guaranteed
that these preneed mortuary trust assets would not grow sufficiently to allow
SCI to perform the associated funerals profitably. As the defendants' own
documents state: "Studies have shown that the asset class allocation decision
ultimately determines over 90% of the fund's total return." Exhibit C-5,
SCI0070; and

o 26% ($211 million of $811 million total prearranged funeral funds as
of June 30, 1997 - an undeniably material portion) of the preneed trust assets
acquired by SCI remained in the possession of "pre-acquisition trustees,"
inactively managed, and invested in low yielding certificates of deposit.
Exhibit C-5, SCI0067.

C. DEFENDANTS' SCHEME.

By 1998, SCI's failure to actively manage its mortuary trust assets was
having an increasingly negative impact on SCI's profit margin. P. 36. Gross
margins decreased from 28% to 15% during

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(4)Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, at 4.

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fiscal year 1998. P. 36. Although defendants were keenly aware of the risk posed
by SCI's failure to actively manage the preneed assets, they were severely
hampered in correcting the condition because of SCI's need to secret its
identity from the public. P.'s 38, 40, 42, Ans. P. 18.

Rather than disclosing that SCI had amassed an enormous backlog of
unmanaged, underperforming preneed funds and that a material number of SCI's
funeral services had been, and would continue to be, performed at significant
losses, defendants falsely represented that SCI was actively managing its
backlog of acquired preneed trust assets. P. P. 45, 47. At the beginning of the
Class Period in July 1998, the defendants publicly announced the creation of SCI
Financial Services, Inc., a subsidiary which would purportedly actively manage
SCI's preneed trust assets. P. 47. To establish this new organization SCI
purchased two companies, each of which had experience in preneed asset
management. P. 48. The first acquisition was of American Memorial Life Insurance
Company ("AML" or "American Memorial"), and the second was ECI. P. 49.

The purchase of ECI is of particular significance because ECI, unlike
SCI, already had established, and fully disclosed the existence of, a financial
management system which ensured that its customers' preneed investments, or the
funeral insurance coverage obtained, would be sufficient to cover adequately the
future costs of prearranged funeral services. P. 50. While ECI disclosed that
its insurance policies included "built-in escalation clauses" and that earnings
on its trust funds "have allowed [it] to adequately cover the inflationary
increase in costs of funeral services," SCI remained silent on these points. P.
53. The reason for SCI's omissions is clear: SCI's trust funds had not been
managed to grow at a rate equal to or greater than the increase in the costs of
funeral services. P. 53.

Defendants deceived the Class as to the primary -- and continuing --
reason for SCI's funeral service gross margin contraction during the first three
quarters of 1998 by pointing to declining death

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rates in North America, higher costs and lower volumes of funerals throughout
the industry. P. 55. In addition, defendants carefully "managed" SCI's reported
1998 second and third quarter earnings by, inter alia, their aggressive
acquisition program which provided SCI fresh sources of revenue, including, for
example, the purchase of American Memorial in the third quarter of 1998. P. 55.
However, defendants knew that SCI's deteriorating funeral service profit margins
had already, and were continuing to, impact reported earnings, the all important
indicia of SCI's financial condition for the investing public, and that SCI's
fiscal year end would soon bring about a day of reckoning. P. 55.

By November 1998, the Individual Defendants knew that SCI's fourth
quarter 1998 earnings would fall at least between $.08 to $.10 below analysts'
estimates. P. 56. The Individual Defendants were also aware, by virtue of their
receipt of daily, weekly and monthly profit/loss reports via SCI's "Falcon"
system from each of SCI's domestic funeral homes, that this shortfall resulted
from the performance of unprofitable preneed funerals, as well as undisclosed
increases in costs for those services. P. 56.(5) Senior SCI executives, also
aware of this impending shortfall and the reasons for it, openly discussed how
to hide the shortfall from investors and how they and the Individual Defendants
planned to "bury" this shortfall in a one-time charge that SCI planned to take
in connection with its acquisition of ECI. P. 56.

Defendants knew the success of their plan hinged on their ability to
close the ECI acquisition during the fourth quarter of 1998 so that SCI could
take a one-time charge in the fourth quarter and close the ECI transaction
without having to disclose the true reasons for the Company's earnings
shortfall. P. 56. Pointedly, defendants make no attempt in their motion to
challenge the sufficiency of the Complaint's allegations about their scheme to
bury expected earnings shortfall in a one-time

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(5)The defendants have admitted that the Falcon system "allows SCI to
determine the level of funeral and cemetery sales." Ans. P. 121.

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charge that SCI planned to take in the fourth quarter in connection with the ECI
merger. P. 56. This omission, coupled with defendants' admission that SCI was
unable to divest itself of certain properties in time to obtain FTC approval to
close the ECI merger in the fourth quarter of 1998, further supports plaintiffs'
claims. Ans. P. 59.

Defendants' scheme was foiled, however, when SCI was unable to divest
itself of certain properties in time to obtain FTC approval to close the ECI
transaction in the fourth quarter of 1998. P. 57; Ans. P. 59. Defendants were
unable to "bury" the earnings shortfall, which by the end of the fourth quarter
had nearly doubled to $.19 to $.20 per share, in an acquisition charge as
defendants had planned because the Merger did not close until after the end of
the fourth quarter. P. 59.

Defendants nonetheless proceeded to close the ECI transaction without
ever disclosing to ECI or the Class that SCI would report a drastic shortfall in
its 1998 fourth quarter earnings. P. 60. Defendants did so despite the fact that
the Merger Agreement between SCI and ECI, dated August 6, 1998 required SCI to
disclose to ECI its poor performance during the fourth quarter of 1998 at any
time at which it could reasonably be anticipated that such poor performance
could have an adverse financial impact on SCI. P. 61. Defendants, aware that
disclosure of the adverse financial conditions at SCI would lead to the
termination of the Merger by ECI or to a renegotiation of the transaction,
refused to take that risk. P. 67.

D. DEFENDANTS' MOTIVES.

Defendants had strong motives to conceal the true reasons behind SCI's
funeral margin contraction and the negative impact that SCI's unprofitable
multi-million dollar preneed funeral backlog had already had, and was continuing
to have, on SCI's profit margins and earnings. P. 110. By doing so, defendants
were able to cause the market price of SCI's stock to become and remain

- 10 -

materially artificially inflated throughout the Class Period. P. 110. Because
the consideration paid by SCI to ECI stockholders was SCI common stock, SCI was
able to effectively purchase ECI with "watered stock," thereby saving SCI
millions. P. 110.

The ECI acquisition was undeniably critical to SCI's ability to turn
around its unprofitable preneed business. P. 111. ECI had the right to terminate
the Merger Agreement, however, "if the representations and warranties of [SCI]
shall fail to be true and correct in all material respects . . . ." P. 112.
Thus, prior to negotiating the deal with ECI, SCI had ample motive to maintain
SCI's stock price in an effort to acquire ECI in a stock-for-stock transaction
for less than ECI's true value. P. 112. After the Merger Agreement was executed,
but before the deal closed, SCI had motive to continue to hide conceal adverse
developments from ECI to prevent ECI from terminating the Merger Agreement. P.
112. Had SCI disclosed the existence of its problems, ECI would have been able
to terminate the Merger Agreement under Section 9.1. P. 112. Defendants also
admit that the shelf- registration statements filed with the SEC during the
Class Period permitted SCI to "avail itself of much needed funds to finance the
Company's acquisitions and operations." Ans. P. 114 (emphasis added).

E. THE TRUTH IS REVEALED.

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

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

- 11 -

P. 123. SCI's fourth quarter 1998 gross profits declined by 19% from SCI's third
quarter 1998 and 24% from SCI's fourth quarter 1997 gross profits. SCI's
earnings per share for fourth quarter 1998 were 28% below the third quarter
1998, 36% below the fourth quarter 1997, and 45% below the average forecast or
"consensus estimate" for the fourth quarter by analysts who followed SCI. P.
123. These "consensus estimates" were based on misleading information given
directly by SCI to professional market analysts. P. 123. Defendants deceptively
failed to disclose to analysts and the market, and to ECI and its shareholders
in the course of negotiating and closing the Merger, the truth about SCI's
increasingly unprofitable preneed funeral business. P. 123.

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

On February 9, 1999, the Company issued a press release purporting to
explain the earnings shortfall. The primary reasons cited by SCI for the
shortfall were decreased revenues and increased costs. However, the true reason
for this "surprised" shortfall was revealed later by statements defendant
Heiligbrodt made to the press. As alleged, this earnings shortfall resulted from
losses on SCI's preneed business, losses which were known to defendants
throughout the Class Period. P. 126 (excerpting story in industry publication in
which defendant Heiligbrodt stated "the at need value of many of the preneed
plans sold in the 1980's is about 20 percent less than the company presently
charges for its services"); Ans. P. 127 (admitting, without qualification, story
in industry publication

- 12 -

reporting that "SCI has said in the past that it loses money on some of its
preneed services because the contract was sold at too low a price").

ARGUMENT

I. THE APPLICABLE LEGAL STANDARDS

Rule 12(b)(6): Rule 12(b)6) allows for dismissal of a complaint if the
plaintiff fails to "state a claim upon which relief may be granted." Robertson
v. Strassner, 32 F. Supp. 2d 443, 445 (S.D. Tex. 1998) (citations omitted). A
motion to dismiss is "viewed with disfavor and is rarely granted." Lowrey v.
Texas A&M University System, 117 F.3d 242, 247 (5th Cir. 1997). Dismissal is
appropriate only when "it appears beyond doubt that the plaintiff can prove no
set of facts in support of his claim which would entitle him to relief." Conley
v. Gibson, 355 U.S. 41, 45-46 (1957); Holmes v. Texas A&M Univ., 145 F.3d 681,
683 (5th Cir. 1998). In deciding whether dismissal is warranted, the Court must
accept as true the non-conclusory allegations in the plaintiff's complaint.
Khurana v. Innovative Health Care Systems, Inc., 130 F.3d 143, 147 (5th Cir.
1997); Zuckerman v. Foxmeyer Health Corp., 4 F. Supp. 2d 618, 621 (N.D. Tex.
1998).

Rule 9(b): Rule 9(b) properly serves to deter vague and conclusory
allegations of fraud. But, Rule 9(b) does not allow "defendants by sophisticated
claims of ignorance, to plow meritorious claims into stumps...Enforcement of
Rule 9(b) should not become .... a tool to require plaintiffs repeatedly to
redraft pleadings despite defendants' pre-existing full knowledge of the matters
which plaintiffs' pleadings address." Picture Lake Campground v. Holiday Inns,
Inc., 497 F. Supp. 858, 866-67 (E.D. Va. 1980). The defendants urge the Court to
interpret Rule 9 (and the PSLRA) as requiring plaintiffs to, in effect, prove
their claims with evidentiary detail at the pleading stage, Def. Mem. at 14-16,
but there is no requirement that plaintiffs plead their evidence in a publicly
filed complaint. See, e.g., In

- 13 -

re Health Management Sec. Litig., 970 F. Supp. 192, 208 (E.D.N.Y. 1997) (Rule
9(b) does not require that the pleading contain "'detailed evidentiary matter'")
(quoting Ross v. A.H. Robins Co., 607 F.2d 545, 557 n.20 (2d Cir. 1979)); In re
Bausch & Lomb, Inc. Sec. Litig., 941 F. Supp. 1352, 1361 (W.D.N.Y. 1996) (same);
In re Cephalon Sec. Litig., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) P.
99,562, at 97,799 (E.D. Pa. Aug. 29, 1997) (PSLRA "does not require pleading all
of the evidence and proof thereunder supporting a plaintiff's claim"); In re
Digi Int'l Sec. Litig., 6 F. Supp. 2d 1089, 1096-97 (D. Minn. 1998) (plaintiffs
allegations need not be supported by "underlying documentary evidence").

Facts supporting plaintiffs' allegations of fraud are plead in detail,
based on publicly available information and plaintiffs' counsels' extensive
investigation into SCI's operations. See, e.g., P. 128. Those facts -- together
with the reasonable inferences drawn therefrom -- more than adequately state a
claim against defendants.(6)

II. THE COMPLAINT STATES CLAIMS AGAINST DEFENDANTS FOR

VIOLATIONS OF SECTIONS 11 AND 12(a)(2).

The Section 11 and Section 12(a)(2) claims arise from the fact that the
owners of the common stock and stock options of ECI, 19 days after the close of
the fourth quarter of SCI's financial year, exchanged their ECI stock and
options for SCI stock and options based upon SCI's false and

- ---------------

(6)Defendants resort to a well-worn, conclusory argument, stating that
"[t]his securities fraud class action is exactly the type of case that prompted
Congress to reform the federal securities laws: that this case is "reminiscent
of pre-Reform Act pleadings", and requires dismissal under the PSLRA. Def. Mem.
at 2. However, the PSLRA was not enacted to erect impregnable barriers to
legitimate private fraud actions, but to deter frivolous litigation. See PSLRA
Statement of Managers, 141 Cong. Rec. at H13699 (daily ed. 11/28/95)
(recognizing legitimate private fraud actions are an "indispensable tool with
which defrauded investors can recover their losses," "promote...confidence in
our capital markets," and "help to deter wrongdoing"). This action is the very
kind of carefully prepared case, attacking real fraud by insiders, based on a
significant investigation of plaintiffs' counsel, that Congress, by weeding out
frivolous suits, wanted victims to be able to prosecute more effectively.

- 14 -

misleading Registration Statement/Prospectus. At the time of the exchange on
January 19, 1999, SCI's fourth quarter was already closed, the results were far
below expectations, and yet these results were not disclosed to ECI holders.
Seven days later, on January 26, 1999, when SCI finally disclosed its poor
fourth quarter results, its stock price was cut almost in half and the value of
the SCI shares that the ECI holders had received just days earlier were now
worth just over half as much -- losing $278 million dollars in value.

SCI's Registration Statement/Prospectus warranted -- as defendants
admit -- that "as of the closing date," "there has not been any event,
occurrence, development or state of circumstances or facts which has had, or
could reasonably be anticipated to have, individually or in the aggregate, a
Materially Adverse Effect." P.'s 106-107; Ans. at P.'s 106-107 (emphasis
added). Because the fourth quarter had already closed at the time of the
completion of the stock exchange, and because its results demonstrated a severe
earnings shortfall, it is clear that an event had indeed occurred that had a
materially adverse effect on SCI's operations. Thus, the Registration
Statement/Prospectus' warranty to the contrary was necessarily false and
misleading in violation of Sections 11 and 12(a)(2). These claims must be
sustained.

A. ELEMENTS OF CLAIMS UNDER SECTIONS 11 AND 12(a)(2).

Under Section 11 of the 1933 Act, purchasers of registered securities
may recover damages if the registration statement contains a material
misstatement or omission; plaintiffs do not need to plead or prove fraud,
reliance, motive, intent, knowledge or recklessness:

[Section 11] impos[es] a stringent standard of liability on the parties
who play a direct role in a registered offering. If a plaintiff
purchased a security issued pursuant to a registration statement, he
need only show a material misstatement or omission to establish his
prima facie case. Liability against the issuer of the security is
virtually absolute, even for innocent misstatements.

- 15 -

Herman and MacLean v. Huddleston, 459 U.S. 375, 381 (1983)(emphasis added). See
also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 200 (1976)(policy underlying
Section 11 was to create liability regardless of fault); In re F & M
Distributors, Inc. Sec. Litig., 937 F. Supp. 647, 656 n. 5 (E.D.Mich.
1996)(scienter is not an element of Section 11 or 12(a)(2) claims). To state a
claim under Section 11, the Complaint need only allege that: (1) the plaintiff
purchased securities traceable to an effective registration statement (see P.
133); (2) the defendant falls within the statutorily enumerated categories (see
P. 134); and (3) the registration statement contained a material misstatement or
omission.(7)

Section 12(a)(2) of the 1933 Act, like Section 11, imposes strict
liability for false and misleading statements in a prospectus, and it has no
reference to the effective date of the registration statement. See, e.g. Degulis
v. LXR Biotechnology, Inc., 928 F. Supp. 1301, 1310 (S.D.N.Y. 1996)("only a
material misstatement or omission need be shown to establish a prima facie case
[under Section 11 or 12], and scienter need not be alleged"). Rather, Section
12(a)(2) imposes liability whenever a prospectus (such as the one at issue here)
is false or misleading and securities are eventually sold or acquired thereby.
In Hill York Corporation v. American International Franchises, Inc., 448 F.2d
680 (5th Cir. 1971), the Fifth Circuit set forth the elements of a section
12(a)(2) violation:

the plaintiffs were required to prove that the defendants sold or
offered to sell these securities by the use of the mails or instruments
of transportation or communication in interstate commerce, and that the
defendants misrepresented or omitted material facts. In addition the
plaintiffs had to show that they had no knowledge of any untruth or
omission. The plaintiffs need not prove scienter on the part of the
defendants. Finally, the plaintiffs need not prove that they relied in
any way on the alleged misrepresentations or omissions.

- ------------------
(7)Although absent in their motion, defendants will no doubt argue in their
reply that the accuracy of the registration statement is tested on its effective
date, November 20, 1998. However, the registration statement itself expressly
provides that it will be accurate up until the date of closing. (P. 107).

- 16 -

Id. at 695 (internal citations omitted).

As shown below, defendants violated Sections 11 and 12(a)(2) by
consummating an exchange of SCI stock and options for their ECI counterparts on
January 19, 1999 based upon false and misleading statements in the Registration
Statement/Prospectus regarding SCI's financial health.

B. THE AMENDED COMPLAINT ADEQUATELY ALLEGES THE ELEMENTS OF CLAIMS
UNDER SECTIONS 11 AND 12(a)(2) FOR MATERIAL OMISSIONS AND
MISSTATEMENTS IN THE REGISTRATION STATEMENT/PROSPECTUS.

Sections 11 and 12(a)(2) placed defendants under a duty to disclose,
both to the investing public and as a condition of the ECI merger, the adverse
financial conditions at SCI both during the fourth quarter and after the quarter
closed. As of November 1998, the individual defendants knew that ECI had a
material shortfall in its fourth quarter earnings but nonetheless falsely
represented in the Registration Statement that no material, adverse changes in
SCI's business had -- or could -- occur. P. 56. Defendants' knowledge is clear
from two admissions in its Answer. First, defendants admit that the Falcon
system "allows SCI to determine the level of funeral and cemetery sales" (Ans.
P. 121) -- information plaintiffs allege was available on a daily basis. P. 121.
Accordingly, by the date the Registration Statement became effective on November
20, 1999, nearly two-thirds of the way through SCI's fourth quarter, SCI had
available, via Falcon, data regarding SCI's earnings shortfall. Second, SCI knew
that this shortfall could not possibly be made up in the remainder of the
quarter because, as defendants' admit, SCI's high fixed cost structure could not
be reduced to accommodate slower periods of revenue growth, and supply could not
be increased to make up the shortfall because "a death care provider cannot
promise to fill an order in 'a week or two.'" P. 119; Ans. 119. Thus, SCI's
Falcon system informed it of its earnings shortfall and the nature of the
defendants' business made it impossible to recover from that shortfall; in other
words, the writing was on the wall.

- 17 -

Accordingly, even as early as the preliminary effective date of the Registration
Statement in November, SCI's claim that there were no materially adverse effects
on its business was necessarily false and misleading. See Shaw v. Digital Equip.
Corp. 82 F.3d 1194, 1210 (1st Cir. 1996)("Present, known information that
strongly implies an important future outcome is not immune from mandatory
disclosure merely because it does not foreordain any particular outcome").

For the same reasons, the Registration Statement/Prospectus were
defectively misleading when, only twelve business days prior to the end of SCI's
quarter, SCI and ECI amended the Merger Agreement in SCI's favor. P.'s
70-71.(8) At this point in time, Falcon had provided defendants with nearly
conclusive fourth quarter results and there was even less time to make up the
shortfall that was now all but a fait accompli. Still, defendants failed to
disclose the deteriorating results or the material impact on SCI's business
operations, leaving uncorrected the unavoidably false and misleading statement
of "no materially adverse effect" in the Registration Statement/Prospectus. P.
71, 56-57. Then, on December 31, 1998, the ECI shareholders voted to approve the
merger and stock exchange, still without any disclosure of the fourth quarter
debacle. Finally, 19 days after the fourth quarter had closed, sealing SCI's
poor performance, SCI unbelievably continued to keep private its knowledge of
the dramatic decline in SCI's earnings, waiting until one week after the
acquisition transaction was safely closed to share its knowledge with the world
and the ECI shareholders that SCI's fourth quarter results were nearly 50% below
expectations. "[I]n the context of a public offering, there is a strong
affirmative duty of disclosure." Shaw v. Digital Equip. Corp. 82 F.3d at 1202
(emphasis added). In the Shaw case, the First Circuit sustained Section 11
claims based upon a failure to disclose poor quarterly results in a registration

- ------------------
(8)Plaintiffs believe that this amendment to the Merger Agreement
(which was incorporated in the Registration Statement/Prospectus), created a new
effective date in late December 1998.

- 18 -

statement that became effective 11 days prior to the end of the quarter. Id. at
1211. The Court analogized the defendant corporation to an inside trader,
arguing that

just as an individual insider with material nonpublic information about
a pending merger. . . could not purchase his company's securities
without making disclosure, the company itself may not engage in such a
purchase of its own stock, if it is in possession of such undisclosed
information. By extension, a comparable rule should apply to issuers
engaged in a stock offering. Otherwise, a corporate issuer selling its
own securities would be left free to exploit its information trading
advantage, at the expense of investors, by delaying disclosure of
material nonpublic negative news until after completion of the
offering.

Id. at 1204 (internal citations omitted and emphasis added). Any other rule
"would allow companies to exploit what amounts to a naked informational trading
advantage." Id. at 1209. Thus, at "any point in a quarter," if "there is a
sufficient probability that unexpected disastrous quarter-to-date performance
will carry forward to the end of the quarter," to avoid liability, such results
must be disclosed if "a reasonable investor would likely consider the interim
performance important to the overall mix of information available.". Id. at 1210
(emphasis added).

The facts of the instant case are even more egregious than Shaw
because, here, the defendants thrice traded on inside information, utilizing
their "naked informational trading advantage" by failing to disclose negative
information material to the acquisition of ECI, in November of the fourth
quarter, 12 business days before the quarter's end, and even after the quarter
had closed -- in spite of their express promise in the Registration
Statement/Prospectus to report such information up until the date the
transaction closed.(9) Accordingly, plaintiffs have amply met their pleading
burden to allege

- ------------------
(9)Plaintiffs allege that the cause of the material fourth quarter earnings
shortfall was principally the result of the undisclosed mounting backlog of
unprofitable preneed contracts, and that the failure to disclose the shortfall
prior to the closure of the ECI transaction was the culmination of defendants'
six-month fraudulent campaign to cover up a long-standing financial crisis.
Defendants claim that the shortfall was caused by business reasons outside of
its control. See Def. Mem. at 9, n. 10 (citing company press release). While the
reasons for SCI's fourth quarter earnings shortfall are a factual dispute to be
resolved at trial, these reasons are irrelevant to plaintiffs' Section 11 and
12(a)(2) claims.

- 19 -

material misstatements and omissions. Nothing more is required under Sections 11
and 12(a)(2) of the 1933 Act. Herman & MacLean v. Huddleston, 459 U.S. at
381-82.(10)

C. PLAINTIFFS' SECTION 11 AND 12(a)(2) CLAIMS ARE NOT SUBJECT TO FED.
R. CIV. P. 9(b) OR TO THE PARTICULARITY REQUIREMENTS OF THE PSLRA

Defendants also argue -- albeit in a conclusory manner in a cursory
footnote -- that the plaintiffs' 1933 Act claims are subject to the
particularity requirements of the PSLRA and Rule 9(b) because the gravamen of
all the claims is fraud. See Def. Mem. at 13. This argument has no merit.

The PSLRA, which included amendments to both the 1933 Act and the 1934
Securities Exchange Act of 1934 (the "1934 Act"), only added "particularity"
pleading requirements to the 1934 Act, clearly preserving the strict liability
of the 1933 Act claims. Compare 15 U.S.C. Section 77z-1 with 15 U.S.C. Section
78u-4. Plaintiffs' prima facie case for violations of Section 11 and 12(a)(2) is
pled by alleging the presence of false and misleading statements or omissions in
the Registration Statement. Degulis v. LXR Biotechnology, Inc., 928 F. Supp.
1301, 1310 (S.D.N.Y. 1996). See also In re Nationsmart Sec. Litig., 130 F.3d
309, 315 (8th Cir. 1997) (declining to apply Rule 9(b) to Section 11 claim
because Section 11 does not include fraud or mistake as an element). Kensington
Capital

- --------------
(10)As the Shaw court noted, the duty of an inside trader -- whether an
individual or a corporation -- is to "disclose or abstain from trading." Shaw,
82 F3d at 1203. Plaintiffs' Section 11 and Section 12(a)(2) claims on behalf of
the ECI holders are predicated on SCI's failure to disclose, making its
Registration Statement/Prospectus false and misleading. In addition, plaintiffs
also assert Section 10(b) claims on behalf of the ECI holders, based upon SCI's
knowing or deliberately reckless failure to abstain from trading when it was in
possession of superior information than that available to the market. As
demonstrated below, plaintiffs have plead their 10(b) claims with sufficient
particularity and with sufficiently strong allegations of scienter to survive
dismissal. See Point III, infra. Accordingly, the ECI holders' 10(b) claims must
be sustained as well.

- 20 -

Management v. Oakley, Inc., [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) P.
90,411, at 91,855 (C.D.Cal. Jan. 14, 1999) (same).

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

Not only are the statements in the Registration Statement per se
actionable under Sections 11 and 12(a)(2), but those statements, as well as the
other statements detailed in the Complaint, give rise to a cause of action under
Section 10(b).(11)

A. THE CIRCUMSTANCES OF DEFENDANTS' FRAUD ARE STATED WITH
SUFFICIENT PARTICULARITY UNDER RULE 9(B) AND THE PSLRA.

Pursuant to Rule 9(b) of the Federal Rules of Civil Procedure a
plaintiff must specify the "statements contended to be fraudulent, identify the
speaker, state when and where the statements were made, and explain why the
statements were fraudulent." Zuckerman v. Foxmeyer Health Corp., 4 F. Supp. 2d
618, 622 (N.D. Tex. 1998). Plaintiffs have identified the precise omissions and
misstatements alleged to have been made, the Registration Statement, press
release, or SEC filing in which they were made, the context and the manner in
which the statements were misleading and what defendants gained by the alleged
fraud.

If an allegation regarding a statement or omission is made on
information and belief, the PSLRA requires the complaint to state with
particularity "all facts on which that belief is formed." 15 U.S.C. Section
78u-4(b)(1). Because the Complaint's detailed allegations of falsity are based
on the

- ----------------

(11)See, e.g., Shaw, 82 F.3d at 1221 (the same misstatements and omissions
in a Registration Statement which give rise to Section 11 and 12(a)(2) claims
may give rise to a cause of action under Section 10(b) provided that plaintiffs
establish the additional elements of Rule 10(b); Williams v. WMX Technologies,
Inc., 112 F.3d 175, 177 (5th Cir. 1997) ("to state a claim based on Section
10(b) of the Securities Exchange Act of 1934 the plaintiff must allege 1) a
misstatement or omission; 2) of material fact; 3) made with the intent to
defraud; 4) on which the plaintiff relied; and 5) which proximately caused the
plaintiff's injury.").

- 21 -

investigation of plaintiffs' counsel (P. 128) rather than on information and
belief, the PSLRA's information and belief pleading requirements do not
apply.(12) Moreover, even if the Complaint were deemed to have been alleged on
information and belief for purposes of the PSLRA, its allegations of fact more
than sufficiently meet the requirements of the PSLRA.

1. DEFENDANTS' FRAUDULENT STATEMENTS IN CONNECTION WITH THE
ECI ACQUISITION AND THE FOURTH QUARTER OF 1998.

The Complaint alleges specific facts showing defendants carefully
considered a plan to deceive the investing public about SCI's financially
debilitating preneed contracts and underperforming acquired mortuary trust
assets -- a plan which reached an unprecedented level in the fourth quarter of
1998, by which time it had become clear to defendants that the increasingly
adverse impact on SCI's reported results could continue to be concealed only by
burying deteriorating earnings in a "charge" attributed to the ECI acquisition.
In Section 10.10 of the Merger Agreement, which was attached as an Exhibit to
the Registration Statement, defendants represented that no "events" had occurred
which had, or could reasonably be anticipated to have, individually or in the
aggregate, a "Material Adverse Effect." P.'s 63-66.

- ---------------

(12)See, e.g., Schlagel v. Learning Tree, [1999 Transfer Binder] Fed. Sec.
L. Rep. (CCH) P. 90,403, at 91,816 n.4 (C.D. Cal. Dec. 23, 1998) (plaintiffs'
allegations, based upon the investigation of their counsel, did not constitute
pleading on information and belief); Cherednichenko v. Quarterdeck Corp., [1998
Supp. Transfer Binder] Fed. Sec. L. Rep. (CCH) P. 90,108, at 90,142 n.3 (C.D.
Cal. Nov. 26, 1997) ("Plaintiffs' allegations are based on the investigation of
their counsel, not on information and belief. The heightened standard does not
apply here."); Zeid v. Kimberley, 973 F. Supp. 910, 915; Lister v. Oakley, Inc.,
No. SA CV 97-809-GLT (EEX) 1999 U.S. Dist. LEXIS 389, at *7 (C.D. Cal. Jan. 14,
1999); Warman v. Overland Data, Inc., [1998 Supp. Transfer Binder] Fed. Sec. L.
Rep. (CCH) P. 90,167, at 90,529 (S.D. Cal. Feb. 23, 1998). See also In re
Employee Solutions Sec. Litig., CIV 97-545-PHX-RGS-OMP, 1998 U.S. Dist. LEXIS
16444, at *13 (D. Ariz. Sept. 29, 1998) (plaintiffs are not required to reveal
the individual sources of their allegations under the PSLRA).

- 22 -

The Complaint specifies in detail why that statement was misleading.
Defendants knew when the statement was made that SCI's unprofitable acquired
preneed contracts had already had, and were continuing to have, "a material
adverse effect" which was required to be disclosed pursuant to the Merger
Agreement. P. 56. By November 1998, defendants knew that SCI's fourth quarter
1998 earnings would fall at least between .$08 to $.10 below analysts'
estimates, and talked openly among themselves about their scheme to hide the
deteriorating earnings with a special "charge" attributed to the ECI
acquisition. P. 56. Disclosure of the drastic impact of servicing the preneed
contracts either would require renegotiation or termination of the ECI deal -- a
risk defendants were unwilling to take.
P. 67.

Similarly, on December 14, 1998, when the Merger Agreement was amended,
the Complaint alleges that defendants again failed to disclose materially
deteriorating fourth quarter earnings caused by, inter alia, the impact of the
Company's acquired mortuary trust assets. P. 71. This was less than two weeks
prior to the end of SCI's fourth quarter, by which time defendants were aware of
the extent of the earnings shortfall. P. 71. By that time, defendants knew they
would not be able to continue to conceal SCI's deteriorating financial condition
from the public when it came time to file year end reports with the SEC.P. 56.
Moreover, the true condition of SCI -- not only in the fourth quarter, but
throughout the Class Period, was well known to the Individual Defendants, who
closely monitored results from SCI's many funeral homes through next-day reports
generated by SCI's computer system, "Falcon." P. 56. The Complaint alleges with
the particularity required by Rule 9(b) and the PSLRA, why the statements made
in connection with the ECI merger were false and misleading.(13)

- ----------------
(13) Accordingly, even if plaintiffs were required to state their Sections
11 and 12 claims with particularity -- which they are not -- they have done so.

- 23 -

2. THE COMPLAINT ALSO ALLEGES WITH PARTICULARITY THE
DEFENDANTS' FALSE AND MISLEADING STATEMENTS THROUGHOUT THE
CLASS PERIOD.

Not only does the Complaint satisfy the PSLRA and Rule 9(b)'s
particularity requirements with respect to the defendants' false and misleading
statements in connection with the ECI acquisition, but it also satisfies those
requirements with respect to the defendants' statements throughout the Class
Period. In this case, as in many others, there were material undisclosed facts
concerning the same subject -- SCI's unprofitable acquired preneed funeral
contracts and the impact they were having on the Company's overall profit
margins and performance -- that rendered all of the challenged statements from
the beginning of the Class Period materially false and misleading when made. The
Complaint specifies how and why these undisclosed adverse facts rendered each of
the defendants' affirmative statements identified in the Complaint false and
misleading when made. See P.'s 73, 75, 78, 80, 82, 84, 86, 88, 90, 92, 94, 96,
98, 100, 102, 103, 104, 106-108 (false and misleading statements) followed by
P.'s 74, 76, 77, 79, 81, 83, 85, 87, 89, 91, 93, 95, 97, 99, 101, 105, 109
(detailed explanations of why the statements were materially false and
misleading).

In an attempt to transform plaintiffs' Complaint into a case they might
rather defend, defendants mischaracterize these detailed allegations of fraud as
"conclusory." Def. Mem. at 12-16. Defendants' claim is belied by the Complaint's
specific allegations regarding each of the alleged omissions and misstatements,
which must be deemed to be true on a motion to dismiss. For example, plaintiffs
do not merely "conclude" that the Company's 1998 third quarter 10-Q omitted
material information regarding the Company's underperforming preneed contracts
and mortuary trust assets. P. 100. They allege, very specifically, that the
Company's backlog of prearranged funeral contracts included a material number of
contracts that were backed by mortuary trust assets that were inadequately
funded or were funded by assets invested only to ensure growth adequate to cover
"the

- 24 -

cost of providing a price guaranteed funeral." P. 101(a). At the time the 1998
third quarter 10-Q was filed, a material number of SCI's funeral services had
been, and would continue to be, performed at significant losses, resulting in an
increasingly sharp erosion in SCI's profit margins for funeral services. P.
101(b).(14)

The Complaint more than adequately satisfies Rule 9(b) and the PSLRA's
particularity requirements. Nothing more is required.

B. THE PRENEED STUDY, ALONG WITH DEFENDANTS' PUBLIC STATEMENTS AND
ADMISSIONS, AMPLY SUPPORT THE ALLEGATIONS IN THE COMPLAINT.

Defendants argue that the collection of select unauthenticated
documents they assert constitute the preneed study rebuts each of plaintiff's
allegations, based on their own, self-serving interpretation of those documents.
This argument -- which clearly addresses the merits of the Complaint -- is
entirely improper on a motion to dismiss where the Court must accept as true
reasonable inferences drawn from plaintiffs' allegations. Khurana v. Innovative
Health Care Systems, Inc., 130 F.3d 143, 147 (5th Cir. 1997); Zuckerman v.
Foxmeyer Health Corp., 4 F. Supp. 2d 618, 621 (N.D. Tex. 1998); accord, In re
Stratosphere Corp. Sec Litig., 1 F. Supp. 2d 1096, 1109 (D. Nev. 1998)(resolving
disputed facts or inferences improper on motion to dismiss).

Defendants' "explanation," which at its core admits the existence of
SCI's preneed problems, goes to SCI's ultimate defense. It is a merits argument,
which should be presented to the jury at trial, after plaintiffs have had their
right to complete merits discovery, and where SCI's "defenses" will be subject
to cross-examination and the rules of evidence; it has no place in a motion to
dismiss. In any

- ------------------
(14)The Complaint also sets forth in detail the number of funeral homes SCI
acquired (P. 20), the increased costs associated with providing funeral
services, (P. 26), SCI's increasing backlog of preneed contracts, (P. 28), the
negative impact on SCI's profit margin (P.'s 36-37), the Company's attempts to
conceal its plunging profit margins (P.'s 42-71), and the admitted negative
impact on earnings resulting from losses on SCI's preneed business. P. 126.

- 25 -

event, SCI's defense is meritless. Even the select documents defendants rely on,
along with defendants' post Class Period public statements and admissions, amply
support the allegations in the Complaint. Indeed, the defendants have admitted
that fourth quarter earnings shortfall was caused by SCI's unprofitable preneed
business. See P. 126 (excerpting story in industry publication in which
defendant Heiligbrodt stated "the at need value of many of the preneed plans
sold in the 1980's is about 20 percent less than the company presently charges
for its services"); Ans. P. 127 (admitting without qualification, story in
industry publication reporting that "SCI has said in the past that it looses
money on some of its preneed services because the contract was sold at too low a
price").

Defendants do not deny the explosive growth in preneed contracts. See
Ans. P.'s 28 (conceding "between 1992 and 1998, in just a six-year period,
SCI's prearranged funeral contract backlog increased three-fold, from $1.2
billion to $3.7 billion"); P. 31. Defendants also admit that CD's were used to
finance the future cost of performing the funeral services for preneed
customers. Ans. P. 24. And the defendants' own submissions show that SCI had a
material amount of its mortuary trust assets -- 33% -- tied up in cash or other
low risk/low return investments (Exhibit C-1, SCI0009), despite knowing this
percentage was potentially disastrous. See Exhibit C-1, SCI0009: ExhibitC-4
SCI0063 (SCI's "policy" was to invest only 10% of the preneed investments in
cash).(15)

- -----------------
(15)Defendants' reliance on statements in their documents about "return
over inflation" of 2% (Exhibit C-4, SCI0064) to refute the merits of the
Complaint are woefully inapt. "Inflation" refers to a "continuing rise in the
general price level." Merriam Webster's Collegiate Dictionary 598-99 (10th ed.
1993) (emphasis added). The Complaint alleges that there were specific cost
increases in the funeral industry, stating "the costs associated with providing
funeral services increased at an average annual rate of 8.5%. . . ." P. 26.
Thus, defendants knew, or were reckless in not knowing, that a mere 2% return
over inflation (assumed in defendants' documents to be 3.5%, Exhibit C-1,
SCI0005) was totally insufficient in the face of 8.5% cost increases.

- 26 -

C. PLAINTIFFS ARE NOT REQUIRED BY THE PSLRA OR RULE 9(b) TO IDENTIFY
INTERNAL DOCUMENTS OR INFORMANTS.

Contrary to defendants' argument (Def. Mem. at 21-23), plaintiffs need
not specify which internal documents they relied on or even that they relied on
internal documents at all. The Complaint satisfies the PSLRA by alleging
compelling facts which raise a strong inference of scienter without reference to
any internal documents, and by identifying with particularity the facts that
support plaintiffs' claim that the specific statements made by defendants were
misleading. See Coates v. Heartland Wireless Communications, Inc., 26 F. Supp.
2d 910, 916 (N.D. Tex. 1998). Once a plaintiff sets forth the specifics of an
internal corporate problem and its importance, as plaintiffs have done, the
Second Circuit precedents from which the PSLRA standard is derived do not
require a plaintiff to have personal knowledge or identify precisely how the
problems were communicated to the company's top executives. See, e.g., Cosmas v.
Hassett, 886 F.2d at 12-13 (2d Cir. 1989), Cohen v. Koenig, 25 F.3d 1168, 1173
(2d Cir. 1994); Goldman v. Belden, 754 F.2d 1059, 1070 (2d Cir. 1985). The court
in In re Bausch & Lomb Sec. Litig., 941 F. Supp. 1352, 1361 (W.D.N.Y. 1996),
addressed this very issue, and upheld plaintiffs' complaint even though the
"complaint did not point to any specific documents that defendants saw, nor did
it state precisely when or how each individual defendant became aware that the
Company's statements to the public were false or misleading." Id. Notably, the
court concluded, "We will not demand clairvoyance from pleaders." Id. (citation
omitted).

Defendants also assert that plaintiffs must identify the underlying
sources of their factual allegations (i.e., the names of their confidential
informants) before plaintiffs' factual allegations may be accepted as true by
the Court. Def. Mem. at 21-23. However, such a requirement is refuted by the
plain and unambiguous language of the PSLRA. The PSLRA states (for 1934 Act
claims only):

- 27 -

[T]he complaint shall specify each statement alleged to have been
misleading, the reason or reasons why the statement is misleading, and,
if an allegation regarding the statement or omission is made on
information and belief, the complaint shall state with particularity
all facts on which that belief is formed.

15 U.S.C. Section 78u-4(b)(1) (emphasis added). Thus, even if the Complaint's
allegations were made on "information and belief," the PSLRA requires only that
plaintiffs plead all facts upon which their belief is based, not the sources of
those facts. There is absolutely no reference in the PSLRA to the word "source,"
let alone a requirement that plaintiffs identify their sources by name in a
publicly-filed pleading.(16)

IV. THE COMPLAINT ADEQUATELY ALLEGES SCIENTER

A. THE LEGAL STANDARDS.

Plaintiffs may meet the requirements of Rule 9(b) and the PSLRA as
applied to Section 10(b) by "alleging either motive and opportunity to commit
fraud, or by pleading facts which identify circumstances indicating defendants'
conscious or reckless behavior, so long as the totality of the allegations
raises a strong inference of fraudulent intent. Robertson v. Strassner, 32 F.
Supp. 2d 443, 446 (S.D. Tex. 1998). Accord, Zuckerman v. Foxmeyer Health Corp.,
4 F. Supp. 2d 618, 622 (N.D. Tex. 1998), STI Classic Fund v. Bollinger
Industries, Inc., 1996 U.S. Dist. Lexis 21553, *3

- ------------------
(16) An earlier draft of the PSLRA (requiring plaintiffs to plead "all
information") was ultimately changed to require only the pleading of "all
facts." This change was proposed by Judge Anthony Scirica of the Third Circuit
on behalf of the Judicial Conference of the United States in order to conform
the requirements of Section 21D(b)(1) of the PSLRA to those set forth in Rule
9(b). See 141 Cong. Rec. S19044-45 (Dec. 21, 1995) (remarks of Senator Domenici
reproducing letter from the Hon. Anthony Scirica). See also House-Senate
Conference Report, H. R. Rep. No. 104-369, at 41 (Nov. 28, 1995) (noting that
the final text was "specifically written to conform the language to Rule 9(b)'s
notion of pleading with 'particularity'"); Schaffer v. Evolving Sys., Inc., 29
F. Supp. 2d 1213, 1223 (D. Colo. 1998) (holding that Section 78u-4(b)(1) appears
to be "merely a codification" of pre-existing Rule 9(b) jurisprudence).

- 28 -

(N.D. Tex. 1996)(holding that the "motive and opportunity" test survived the
PSLRA). See also, Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d
Cir. 1999).

Defendants incorrectly argue that the Fifth Circuit's decision in
Williams v. WMX Techs., Inc., 112 F.3d 175, 178 (5th Cir.) cert. denied, 118
S.Ct. 412 (1997), is inapposite. In Williams, the Fifth Circuit applied the
Second Circuit's approach to proper pleading of securities fraud allegations,
and expressly stated that, although the case before it was filed prior to the
PSLRA's effective date, "the [PSLRA] adopted the same standard we apply today."
Id. at 177-178. It is therefore hardly surprising that of the seven published
and unpublished district court cases in the Fifth Circuit that have commented on
the pleading requirements for the scienter element under the PSLRA, all but one
- - - Parcelsus, 1998 WL 1108373 (N.D. Tex. 1998) -- interpret the act to allow a
plaintiff to plead scienter by showing motive and opportunity. See, McNamara v.
Bre-X Minerals Ltd., 57 F. Supp. 2d 396 (E.D. Tex. 1999)(circumstantial evidence
of conscious misbehavior or recklessness satisfies the pleading requirement;
facts showing motive and opportunity can also satisfy the requirement, although
they may not always do so conclusively); Coates v. Heartland Wireless
Communications, Inc., 55 F. Supp. 2d 628, 633 (N.D. Tex. 1999)("This court holds
that scienter can be pleaded based on motive and opportunity to commit fraud;
Hartsell v. SourceMedia, Inc., 1999 WL 649645 (N.D. Texas 1999) ("allegations of
motive and opportunity are sufficient.")17; accord Robertson v. Strassner,

- ---------------
(17)The transcript of the hearing in Hartsell v. Source Media Inc., No.
3:98-CV-1980-R (N.D. Tex. July 15, 1999) before Judge Buchmeyer is attached
hereto as Exhibit A. Judge Buchmeyer rejected the Ninth Circuit's opinion in
Silicon Graphics, supra, finding that the better approach allows plaintiffs to
prove scienter through motive and opportunity. Exh. A, pg. 33, 15-25.

- 29 -

32 F. Supp. 2d 443 (S.D. Tex. 1998); Zuckerman v. Foxmeyer Health Corp., 4 Supp.
2d 618 (S.D. Tex. 1998); STI Classic Fund v. Bollinger Industries, Inc., 1996 WL
885802 (N.D. Tex. 1996).(18)

In Re Silicon Graphics II, 183 F.3d at 977-79 (9th Cir. 1999), heavily
relied on by defendants, is at odds with this Circuit's interpretation of the
PSLRA's pleading requirements, as is evident from WMX Technologies and district
court cases such as Zuckerman and Strassner. See also In re Advanta Corp. Sec.
Litig., 1999 WL 395997, at *3 (3d Cir. June 17, 1999) (noting that the Fifth
Circuit in Williams concluded that the PSLRA codified the Second Circuit
standard for pleading scienter). Indeed, none of the other Circuit Courts to
address the PSLRA thus far (the First, Second, Third, Sixth and Eleventh) have
taken the extreme view endorsed by the Silicon Graphics court, and have held
that motive and opportunity are either alone sufficient to prove scienter or can
- -- at minimum -- constitute strong evidence of the requisite state of mind. See,
Greebel v. FTP Software, Inc., 1999 WL 902898 (1st Cir. 1999); Press v. Chemical
Investment Services Corp., 166 F.3d 529, 538 (2d Cir. 1999); In re Advanta,
supra. In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 549 (6th Cir. 1999);
Bryant v. Avado Brands, Inc., 1999 WL 688050, *12 (11th Cir. 1999).

Defendants also indulge in a misguided attempt to minimize the strong
allegations of fraudulent intent by dissecting plaintiffs' allegations, and
arguing that each factor, standing alone, is insufficient to prove scienter.
Def. Mem. at 33-37. This argument is based on a misinterpretation of the PSLRA,
which requires that the totality of the allegations raises a strong inference of
fraudulent intent. Robertson v. Strassner, 32 F. Supp. 2d at 446. Accord,
Zuckerman v. Foxmeyer Health

- ---------------
(18)Defendants' arguments that the PSLRA imposed a new scienter standard
based on legislative history have been considered and discussed at great length
by the district courts ruling on the issue, and then rejected. "[T]he
Legislative history of the [Reform Act] does not indicate that Congress acted to
eliminate recklessness as a basis for scienter. . . ." McNamara, 57 F.Supp. at
634 (citing Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F.Supp. 1297,
1310 (C.D. Cal. 1996).

- 30 -

Corp., 4 F. Supp. 2d 618, 622 (N.D. Tex. 1998). This case does more than raise
allegations that defendants made false and misleading statements to maintain
favorable ratings on debt securities (Def. Mem. at 33) or to consummate a merger
(Def. Mem. at 34) alone. Viewed in totality, the Complaint's numerous, detailed
allegations set forth amply defendants' motive, opportunity, and reckless or
deliberate conduct in compliance with the PSLRA.

B. THE DEFENDANTS ACTED WITH ACTUAL KNOWLEDGE OR A RECKLESS DISREGARD
FOR THE TRUTH.

The Complaint alleges specific facts which create a strong inference
that the defendants acted with, at least, a reckless disregard for the truth,
and in many instances, acted intentionally and deliberately, including:

o According to SCI insiders, by November 1998 the individual defendants
knew that SCI's fourth quarter earnings would fall at least between $.08 to $.10
below analysts' estimates.
P. 56;

o Senior executives and the defendants were not only aware of the
impending earnings shortfall, they openly discussed how to hide the shortfall
from investors and plotted an intricate plan to "bury" the shortfall in a
one-time charge that SCI would take in connection with the ECI merger.
P. 56;

o The Falcon system provided the individual defendants daily, weekly,
and monthly profit/loss reports from each of the Company's more than 3,000
domestic funeral homes. Falcon reported SCI's performance of a material number
of unprofitable preneed funerals as well as undisclosed changes in SCI's costs,
for each and every funeral home owned by SCI, making it simply not credible that
these defendants were unaware of SCI's financial performance. P. 20, 56;

o Due to the Falcon system's reporting methods and the extremely high
level of recurring, budgeted, fixed costs which do not fluctuate in the death
care industry, death care providers such as SCI, can easily predict quarterly
results. Defendants knew that fourth quarter results -- absent "burial" of the
preneed impact in an ECI-related charge -- would be significantly less than
estimated. P. 119; and

o Defendant Heiligbrodt admitted, subsequent to the Class Period, that
the Company's earnings shortfalls reported for fiscal year 1998 resulted from
losses on SCI's preneed business, P.'s 126, 127.

- 31 -

Moreover, the Individual Defendants controlled and approved the
issuance of SCI's financial statements, press releases, and SEC filings during
the Class Period. The magnitude of the fraud also supports the strong inference
of scienter: On January 26, 1999, SCI announced that its fourth quarter 1998
gross profits declined 19% from its third quarter gross profits and 24% from
SCI's fourth quarter 1997 gross profits. SCI's EPS for the fourth quarter of
1998 were a remarkable 36% below SCI's EPS for the fourth quarter of 1997 and
45% below the consensus estimate. P. 123. The magnitude of the completely
unexpected shortfall caused SCI's shares to drop over 44% in one day. P. 124.
Rehm v. Eagle Finance Corp., 954 F. Supp. 1246, 1254 (N.D. Ill. 1997)("[t]he
more serious the error, the less believable are defendants' protests that they
were completely unaware of defendants true financial status and the stronger the
inference that defendants must have known about the discrepancy.").

There is also the close proximity of the January 26, 1999 disclosure of
SCI's deteriorated finances and the date on which the completion of the ECI
merger was closed, a lapse of only five business days. P. 123. Defendants'
failure to reveal the material, negative impact of the debilitating inherited
preneed and inadequately invested mortuary trust assets is itself strong
circumstantial evidence of scienter. See, e.g., Powers v. Eichen, 977 F. Supp.
1031, 1039 (S.D. Cal. 1997) (Where "bad news" was disclosed approximately four
weeks after defendants' optimistic statements were made the court held that
"[t]he proximity of the bad news to the dates that the defendants made
optimistic statements is circumstantial evidence that the defendants knew that
their optimistic statements were false."); Friedberg v. Discreet Logic Inc., 959
F. Supp. 42, 51 (D. Mass. 1997)(court upheld a complaint where the time lapse
between the optimistic statements and the

- 32 -

disclosure of negative news was approximately two months because of "the
temporal proximity between an alleged misstatement and the later disclosure of
inconsistent information.").

C. DEFENDANTS ALSO HAD MOTIVE AND OPPORTUNITY TO ENGAGE IN THE
FRAUDULENT SCHEME.

Defendants also had both motive and opportunity to create a false
picture of SCI's operating condition in order to maintain its artificially
inflated stock price. It is undisputed that the Individual Defendants, all high
ranking officers of SCI with access to internal documents, "Falcon" generated
reports from each separate funeral home, attendance at regular meetings, and
inside knowledge of the Company's affairs, had the opportunity to engage in the
fraudulent scheme. P.'s 8-15. Defendants also had motive.

To plead motive adequately requires a showing of "concrete benefits
that could be realized by one or more of the false statements." In re Health
Management, 970 F. Supp. 192, 202 (E.D.N.Y. 1997), quoting Shields v. Citytrust
Bancorp, 25 F.3d 1124, 1128 (2d Cir. 1994)(internal quotations omitted). Here,
defendants were motivated to keep the price of SCI's stock as high as possible
prior to the effective date of the ECI merger. The ECI acquisition was critical
to SCI's ability to turn around its increasingly unprofitable acquired preneed
business. P. 111. As a result of SCI's disclosure on January 26, 1999, the
consideration paid for each share of ECI common stock in the Merger was cut
virtually in half. P. 124. ECI shareholders who received SCI common stock worth
$25.53 per share when the deal closed, now held shares worth only $12.79 per
share. P. 124. The total consideration paid for ECI was effectively reduced from
$556 million to $278 million. Id.

Allegations that defendants were motivated to issue false and
misleading statements in order to complete stock-for-stock acquisitions
sufficiently pleads motive. See Gross v. Medaphis Corp., 977 F.Supp. 1463, 1471
(N.D. Ga. 1997); Marra v. Tel-Save Holdings, Inc., 1999 WL 317103 (E.D.Pa.

- 33 -

1999). In Tel-Save, the court found a strong inference of fraudulent intent
where plaintiffs identified a specific acquisition that occurred during the
class period which was funded by a combination of Tel- Save stock and cash. Id.
at *9. See also, Duncan v. Pencer, No. 94 Civ. 0321, U.S. Dist. LEXIS 401, at
*48-49 (S.D.N.Y. Jan. 18, 1996) (company's motive to obtain monies to "fund its
expansion and otherwise satisfy its financial needs" held sufficient to
withstand a motion to dismiss); Harvey M. Jasper Retirement Trust v. Ivax Corp.,
920 F.Supp. 1260, 1264-65 (S.D. Fla. 1995) (allegations that defendants inflated
stock price to use as currency in stock-for-stock merger transaction showed what
defendants gained by their misrepresentations).(19)

In addition to consummating the ECI merger -- and consummating it on
terms favorable to SCI -- defendants were motivated to misrepresent SCI's true
financial condition because:

o Defendants needed to maintain favorable ratings on debt securities,
in particular, the May 29, 1998 registration of up to $1 billion of debt, common
stock and warrants, and an October 15, 1998 registration for $500 million in SCI
preferred stock. By failing to disclose the nature of SCI's unprofitable preneed
business, SCI was able to save millions of dollars in interest payments that
would otherwise have been paid to bondholders. P.'s 113-115; and

o It was necessary for SCI to retain its favorable Standard & Poor's
credit rating in order to continue to "avail itself of much need funds" to
further its acquisition spree, revenues from which SCI used to mask the poor
performance of its prearranged funeral contracts. P.'s 116-117; Ans. P. 114
(emphasis added.)

Finally, defendants argue that any inference of scienter is negated by
the absence of insider trading. Def. Mem. at 36-36. SCI did, however, engage in
insider trading by exchanging inflated

- -----------------
(19) While it may be that "unsubstantiated allegations that [a company]
sought to inflate its market price to consummate unspecified acquisitions do not
raise a strong inference of scienter," In re Home Health Corp. of America, Inc.
Sec. Litig., 1999 WL 79057, *15 (E.D. Pa. 1999), that is not the case here. The
allegations about SCI's stock-for-stock merger with ECI are neither
unsubstantiated nor unspecified. Defendants reliance on Leventhal v. Tow, 1999
WL 270089, *10-11 (D. Conn. 1999) and Health Management, supra, is misplaced. In
both cases, the court found that allegations that defendants were motivated by a
desire to complete unspecified future stock-for-stock transactions was
insufficient to allege scienter.

- 34 -

SCI stock for ECI stock in the Merger, an act defendants admit "constituted a
sale of securities." within the meaning of the statue prohibiting "selling a
security while inpossession of material, nonpublic information." 15U.S.C.
Section 78t-1. Ans. P. 171. Moreover, in the face of detailed, substantial
allegations of motive, opportunity, and a reckless disregard for the truth, even
the absence of insider trading by any defendant is no defense to a well-pled
complaint. See e.g., STI Classic Fund v. Bollinger Indus. Inc., 1996 U.S. Dist.
LEXIS 21553, at *5-6 (N.D. Tex. Oct. 25, 1996) (motive established in post-PSLRA
case despite absence of any insider trading); In re Wells Fargo, 12 F.3d 922,
931 (9th Cir. 1993) (allegations of unusual insider trading not required to
establish scienter); In re Compaq Sec. Litig., 848 F. Supp. 1307, 1311 (S.D.
Tex. 1993). Accord Hanon v. Dataproducts Corp., 976 F.2d 497, 507 (9th Cir.
1992); Cosmas v. Hassett, 886 F.2d 8, 13 (2d. Cir. 1989). Indeed, post-PSLRA
decisions have found scienter in the absence of any insider trading. See, e.g.,
Gross, 977 F.Supp. at 1472 (scienter established through allegations that
defendants made false statements in order to inflate the value of its stock
thereby facilitating the acquisition of other companies); Epstein v. Itron,
Inc., 993 F.Supp. 1314, 1326-27 (E.D. Wash. 1998).(20)

Considering the totality of the circumstances in this case, including
the fact that insider trading is not required to establish scienter, and the
particularized facts demonstrating defendants knew of the

- ---------------
(20)The Individual Defendants also had motives to maintain and enhance the
price of SCI common stock to protect and enhance their executive positions and
the substantial compensation and prestige obtained thereby. See, e.g., Zuckerman
v. Foxmeyer Health Corp. 4 F. Supp. 2d 618, 627 (N.D. Tx. 1998) (personal
pecuniary benefits can create a strong motive to engage in fraud); In re Compaq
Sec. Litig., 848 F. Supp. at 1311; Weiner v. Quaker Oats Co., 129 F. 3d 310, 318
n.8 (3d Cir. 1997); Blake v. Dierdorff, 856 F.2d 1365, 1369-70 (9th Cir. 1988).
See also Wells Fargo 12 F.3d at 931 (allegations that defendants "stood to
receive more compensation because of the alleged non-disclosure of material
information" sufficient to raise an inference of scienter); In re Digi Int'l
Inc. Sec. Litig., 6 F. Supp. 2d 1089, 1098 (D. Minn. 1998) (holding that
allegations that individual defendants could receive substantially more
performance-based compensation as a result of misrepresentations constituted
evidence of scienter).

- 35 -

adverse impacts of SCI's multi-billion dollar preneed funeral backlog on SCI's
profit margins and earnings, there can be no doubt that defendants had both the
motive and opportunity to commit fraud. See, Robertson v. Strassner, 32 F. Supp.
2d at 449 (defendants "misperceive Plaintiffs' allegations as to motive and
place[d] undue reliance on Defendants' sales of OEDC stock"); see also
Zuckerman, 4 F. Supp. 2d at 627 ("[a]fter consideration of the entire complaint,
the Court is of the opinion that Plaintiffs have succeeded in alleging
scienter).

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

A. DEFENDANTS' STATEMENTS REGARDING SCI'S GROWTH AND PROFITABILITY
ARE MORE THAN MERE CORPORATE PUFFERY.

Defendants argue that numerous statements alleged to be false and
misleading in the Complaint are merely statements of "corporate optimism." Def.
Mem. at 24. Unable to refute the actual statements alleged to be false and
misleading, defendants cite -- piecemeal -- to one or two sentences taken out of
context from plaintiffs' allegations. In fact, when these very allegations are
viewed in their entirety, it is evident that these statements are not only false
and misleading, but actionable. See, e.g., P.'s 75, 84, 78, 96. For example, P.
75 challenges a series of statements by defendant Heiligbrodt about SCI's
acquisition of American Life, statements defendants claim are merely "vaguely
optimistic statements." Def. Mem. at 24. Not true.

Heiligbrodt's statements were intended to and did convey the impression
to the investing public that SCI was in the midst of a "profitable expansion
into the preneed insurance business" and that SCI's acquisition of American
Memorial was undertaken to build on and increase the profitability of its
existing preneed "profit base". See P.'s 74(a-f), 75-76. In fact, when
Heiligbrodt's statements were made, SCI's profitability was being severely
undercut by its existing backlog of preneed funeral

- 36 -

contracts. The acquisition of American Memorial and planned expansion into
preneed insurance was an attempt to fraudulently mask the growing reductions in
SCI's overall profit margins caused by having to provide unprofitable
prearranged funeral services and to ensure that SCI would not be saddled with
even more dormant and underperforming mortuary trust assets. P. 76.

Similarly, in P. 84, which defendants also challenge as "mere puffery",
defendant Champagne characterized "the most compelling way" for SCI to "increase
its market share" was to "increase the level of the prearranged funeral
business". P. 84. With respect to the American Memorial acquisition, Champagne
added: "You're effectively building your backlog of funding for pre-arranged
funerals which has the effect of expanding or maintaining SCI's prearranged
funeral business...[t]hat is a very important aspect to a company like SCI.
There is a lot of competition for prearranged funeral business." P. 84.

Defendants' statements touting SCI's acquisition and boasting of the
growing and enormous volume of preneed funeral business -- a critical cause of
SCI's devastating January 26 earnings shortfall -- was an act designed to
mislead the investing public. To imply, as the defendants do in their brief,
that investors would dismiss as mere "puffery" statements about the strength of
SCI's preneed business -- which by defendants' own representations constituted a
"very important aspect" of SCI's business -- is just disingenuous. See also, P.
78 (defendants' discussion of the increasing backlog of prearranged funeral
contracts without any mention of the resulting adverse impact on profit margins
caused by unprofitable acquired contracts); P. 80 (discussion of SCI's "leading
market positions" without disclosure of how SCI became a "market leader" through
the acquisition of funeral homes with underperforming preneed mortuary trust
assets); P. 82 (comparing ECI's operational

- 37 -

systems to SCI's, notably excluding disclosure that ECI, unlike SCI, had an
established program to ensure its ability to cover the cost of prearranged
funerals).(21)

Contrary to defendants' assertions, federal courts repeatedly have
upheld challenges to statements far more general than those they label "too
vague" in this case. As long as a reasonable investor could arguably rely on the
statement, "general expressions of optimism may be actionable under the federal
securities laws." Hanon v. Dataproducts Corp., 976 F.2d 497, 501 (9th Cir.
1992); Virginia Bankshares v. Sandberg, 501 U.S. 1083, 1091-93 (1991)(even
"indefinite and unverifiable" expressions of insiders "are reasonably understood
to rest on a factual basis that justifies them as accurate."). See also, Cooper
v. Pickett, 137 F.3d 616, 629 (9th Cir. 1997)(general statements of optimism
actionable "if not genuinely or reasonably believed, or if the speaker is aware
of undisclosed facts that tend seriously to undermine the statement's
accuracy").

B. DEFENDANTS' STATEMENTS AND OMISSIONS ARE NOT PROTECTED BY THE
SAFE HARBOR PROVISIONS OF THE PSLRA.

Defendants' contention that the misrepresentations alleged are
"forward- looking," and therefore protected by the statutory safe harbor
provision (Def. Mem. at 21-26), is wrong. Defendants, of course, concede that
their omissions are not protected by any safe harbor provision. The Complaint's
allegations challenge statements of then existing known facts, not

- -------------------
(21)Defendants' reliance on In re Verifone Sec. Litig., 784 F. Supp. 1471,
1482 (N.D. Ca. 1992), is misplaced. There the court held that a corporation need
not disclose "its own internal forecasts or otherwise provide the market with
the corporation's prediction of its own future. The decision was based on the
belief that disclosure of predictions is "duplicative information already known
to most analysts," that such predictions were likely to be a "hinderance, not a
benefit, to investors," and that the securities laws do not oblige a corporation
to bury shareholders with trivial information. Id. at 1482-83. The Complaint
here alleges, however, that the defendants violated the securities laws by
failing to disclose "hard" factual information about SCI's unprofitable acquired
preneed business and mortuary trust assets. See, e.g., P.'s 29-37. Disclosure
of internal forecasts or "soft" information is simply not at issue.

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"forward-looking" information, and therefore do not fall within the statutory
safe harbor. See Harris v. Ivax, 182 F.3d 799, 806 (11th Cir. 1999) ("Of course,
if any of the individual sentences describing known facts (such as the
customer's bankruptcy) were allegedly false, we could easily conclude that the
smaller, non-forward-looking statement falls outside the safe harbor."). The
nature of the fraud in this case is the defendants' concealment of the ongoing
effect of SCI's existing acquired preneed business -- the negative impact of
which was fully known to defendants throughout the Class Period, and which
continued to adversely impact the Company's profitability. See, e.g., Gross v.
Medaphis, 977 F. Supp. at 1473 ("the statutory safe harbor, like the 'bespeaks
caution' doctrine, does not insulate defendants from private securities
liability based on statements that misrepresent historical/hard or current
facts").

Even if any of the statements detailing SCI's ongoing and past business
operations could somehow be considered "forward-looking" -- which they simply
cannot -- none of the statements were accompanied by "meaningful cautionary
statements." See Harris v. Ivax, 182 F.3d at 804, 806 ("A defendant can fully
benefit from the safe harbor's shelter only when it has disclosed risk factors
in a warning accompanying the forward looking statement."). Defendants' reliance
on SCI's warnings about such generalized "risks" as the state of the economy and
SCI's level of acquisition activity is misplaced. Def. Mem. at 27. Nothing
specific, unique or meaningful in respect to the actual, and then existing,
material problems that SCI had already and was continuing to experience with its
unprofitable acquired preneed business, the failure to properly invest mortuary
trust assets or the resulting impact on SCI's profitability as a result of
having to service contracts at a loss was ever disclosed during the Class
Period.

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Investors had to wait until after the Class Period and after the
closing of the Merger -- when defendant Heiligbrodt admitted that the earnings
shortfall was due to the underperforming preneed contracts -- to discover the
truth about the Company's financial situation. Defendants cannot seek shelter
within the PSLRA's safe harbor to escape liability for deceiving and defrauding
the investing public.(22)

CONCLUSION

For all of the foregoing reasons, the Court should deny defendants'
motion in all respects.

DATED: November 5, 1999
Respectfully submitted,

By:
--------------------------------
ROGER B. GREENBERG
Attorney-in-Charge
State Bar No. 08390000
12 Greenway Plaza, 10th Fl.
Houston, TX 77046
(713) 627-2720
(713) 627-7057 Fax

LEAD COUNSEL FOR PLAINTIFFS

OF COUNSEL:

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

- ---------------
(22)Plaintiffs have also stated claims against the Individual Defendants as
"control persons" of SCI pursuant to Sections 20(a) and 15. See,. e.g., P.'s
166-173. Defendants do not contest the Individual Defendants' "control" status,
relying instead entirely on their mistaken assertion that the Complaint does not
state claims for primary liability. Def. Mem. at 4, n.4.

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WOLF POPPER LLP BERGER & MONTAGUE, PC
Robert M. Kornreich Todd S. Collins
Paul O. Paradis Michael L. Block
Peter Safirstein 1622 Locust Street
Catherine E. Anderson Philadelphia, PA 19103
845 Third Avenue
New York, NY 10022 BOIES & SCHILLER, LLP
Richard Drubel
BERMAN, DEVALERIO & PEASE LLP 26 South Main Street
Glen DeValerio Hanover, New Hampshire 03755
Michael T. Matraia
One Liberty Square BRUCE G. MURPHY
Boston, MA 02109 265 Llywyd's Lane
Veto Beach, Florida 32963
BERNSTEIN LITOWITZ BERGER
& GROSSMANN, LLP CHANDLER LAW OFFICES
Douglas M. McKeige George Chandler
1285 Avenue of the Americas P.O. Box 3400
33rd Floor Lufkin, TX 75901
New York, NY 10019
CLAXTON & HILL, PLLC
LAW OFFICES OF STEVEN E. CAULEY, PA Roger F. Claxton
Steven E. Cauley Robert J. Hill
Suite 218, Cypress Plaza 3131 McKinney Avenue - LB 103
Little Rock, AK 72212 700 McKinney Place
Dallas, Texas 75204-2471
COHEN, MILSTEIN, HAUSFELD & TOLL, PLLC
Steven J. Toll CONSTANT & VELA
999 Third Avenue, Suite 3600 Anthony Constant
Seatlle, WA 98104 802 North Caranachua
Suite 1570
MILBERG WEISS BERSHAD Corpus Christi, TX 78401
HYNES & LERACH LLP
Abraham Rappaport CRUSE, SCOTT, HENDERSON & ALLEN, LLP
Maya Saxena Sam W. Cruse
5355 Town Center Road 600 Travis Street, Suite 3900
Suite 900 Houston, TX 77002-2910
Boca Raton, FL 33486
FARUQI & FARUQI
ABBEY, GARDY & SQUITIERI LLP Nadeem Farqui
Mark S. Gardy 415 Madison Avenue
212 East 39th Street New York, NY 10017
New York, NY 10016

BARRACK, RODOS & BACINE
2001 Market Street, 33rd Floor
Philadephia, PA 19103

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FINKELSTEIN & KRINSK LAW OFFICES OF DENNIS J. JOHNSON
Howard D. Finkelstein Dennis J. Johnson
Jeffrey R. Krinsk 1690 Williston Road
501 West Broadway, Suite 1250 South Burlington, VT 05403
San Diego, CA 92101-3579
LOCKRIDGE, GRINDAL, NAUEN & HOSTEIN,
FRANK & ROSEN PLLP
Alan L. Frank Richard A. Lockridge
David T. Shulick Karen M. Hanson
1835 Market Street, Suite 320 100 Washington Avenue South, Suite 2200
Philadelphia, PA 19103 Minneapolis, MN 55401

HOEFFNER, BILEK & EIDMAN LOWEY DANNENBERG BEMPORAD
Thomas E. Bilek & SELINGER PC
720 Lyric Office Center Richard Bemporad
440 Louisiana, Suite 720 David C. Harrison
Houston, TX 77002 The Gateway - 11th Floor
One North Lexington Avenue
JAROSLAWICZ & JAROS White Plains, NY 10601-1714
David Jaroslawicz
150 William Street LYNN STODGHILL MELCHIMER
New York, NY 10038 AND TILLOTSON, LLP
Thomas M. McIsheimer
KAPLAN, KILSHEIMER & FOX LLP M. Brett Johnson
Robert N. Kaplan 750 N. Pearl Street, Suite 1400
Peter A. Lennon Dallas, TX 75201
Janine R. Azriliant
685 Third Avenue, 26th Floor RABIN & PECKEL LLP
New York, NY 10017 Marvin L. Frank
Joseph V. McBride
KENNETH A. ELAN 275 Madison Avenue, 34th Floor
217 Broadway, Suite 404 New York, NY 10016
New York, NY 10007
SCHIFFRIN & BARROWAY, LLP
KIRBY MCINERNEY & SQUIRE Andrew L. Barroway
Jeffrey H. Squire David Kessler
Ira M. Press Three Bala Plaza East, Suite 400
830 Third Avenue, 10th Floor Bala Cynwyd, Penn. 19004
New York, NY 10022
SCOTT & SCOTT
LAW OFFICES OF CLAYTON E. DARK, JR. Neil Rothstein
Clayton E. Dark, Jr. 108 Norwich Avenue
P.O. Box 2207 P.O. Box 192
Lufkin, TX 75902-2207 Cochester, CT 06415

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SCOTT, DOUGLASS & MCCONNICO, LLP
Stephen E. McConnico
600 Congress Avenue, 15th Floor
Austin, TX 78701-2334

SPECTOR & ROSEMAN, PC
Eugene A. Spector
Jeffrey L. Kodroff
1818 Market Street, Suite 2500
Philadelphia, PA 19103

STULL STULL & BRODY
Jules Brody
Aaron Brody
6 East 45th Street
New York, NY 10017

SUSMAN GODFREY LLP
Kenneth S. Marks
5100 First Interstate Bank Plaza
1000 Louisiana
Houston, TX 77002-5096

THE OLSEN LAW FIRM
Kurt Olsen
2121 K. Street, N.W. Suite 800
Washington, D.C. 20037

WEISS & YOURMAN
Joseph H. Weiss
551 Fifth Avenue, Suite 1600
New York, NY 10176

WHITTINGTON, VONSTERNBERG, EMERSON
& WILSHER, LLP
John G. Emerson, Jr.
2600 South Gessner, Suite 600
Houston, TX 77063

WOLF, HALDENSTEIN, ADLER, FREEMAN
& HERZ, LLP
Fred T. Isquith
Robert Abrams
270 Madison Avenue
New York, NY 10016

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CERTIFICATE OF SERVICE

I do hereby certify that on this the 5th day of November 1999, a true
and correct copy of the Opposition has been duly and properly serviced upon
counsel of record in accordance with the Federal Rules of Civil Procedure.

-----------------------------------------
David E. Sharp

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