EXHIBIT 10.4

 
UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
 
ADMINISTRATIVE PROCEEDING
File No.
 
 

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In the Matter of
 
Schnitzer Steel Industries, Inc.,
 
Respondent.
 

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OFFER OF SETTLEMENT
OF SCHNITZER STEEL INDUSTRIES,
INC.
 

 
I.
 
Schnitzer Steel Industries, Inc. (“Schnitzer” or “Respondent”), pursuant to Rule
240(a) of the Rules of Practice of the Securities and Exchange Commission
(“Commission”) [17 C.F.R. § 201.240(a)], submits this Offer of Settlement
(“Offer”) in anticipation of cease-and-desist proceedings to be instituted
against it by the Commission, pursuant to Section 21C of the Securities Exchange
Act of 1934 (“Exchange Act”).
 
II.
 
This Offer is submitted solely for the purpose of settling these proceedings,
with the express understanding that it will not be used in any way in these or
any other proceedings, unless the Offer is accepted by the Commission. If the
Offer is not accepted by the Commission, the Offer is withdrawn without
prejudice to Respondent and shall not become a part of the record in these or
any other proceedings, except for the waiver expressed in Section VI with
respect to Rule 240(c)(5) of the Commission’s Rules of Practice [17 C.F.R. §
201.240(c)(5)].
 
III.
 
On the basis of the foregoing, the Respondent hereby:
 
A.  Admits the jurisdiction of the Commission over it and over the matters set
forth in the Order Instituting Cease-and-Desist Proceedings, Making Findings,
and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities
Exchange Act of 1934 (“Order”);
 
B.  Solely for the purpose of these proceedings and any other proceedings
brought by or on behalf of the Commission or in which the Commission is a party,
and without admitting or denying the findings contained in the Order, except as
to the Commission’s jurisdiction over it and

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the subject matter of these proceedings, which are admitted, consents to the
entry of an Order by the Commission containing the following fmdingsl set forth
below:
 
Summary
 
1.  This matter involves violations of the Foreign Corrupt Practices Act of 1977
(“FCPA”) by Schnitzer Steel Industries, an Oregon-based steel company that sells
scrap metal. From at least 1999 through 2004, Schnitzer has paid cash kickbacks
or made gifts to managers of government-controlled steel mills in China to
induce those managers to purchase scrap metal from Schnitzer. Schnitzer made the
payments on its own behalf and as a broker for Japanese steel companies. During
this period, Schnitzer also paid bribes to managers of private steel mills in
China and South Korea, and improperly concealed those payments in its books and
records.
 
Facts
 
2.  Schnitzer, incorporated in Oregon and headquartered in Portland, Oregon,
operates three business segments that include a steel manufacturer, a metals
recycling business and an auto parts business. Schnitzer reported revenue of
$853 million for its fiscal year ended August 31, 2005. At the time of the
conduct described below, Schnitzer’s common stock was registered with the
Commission pursuant to Section 12(g) of the Exchange Act and was listed on the
NASDAQ National Market. Schnitzer filed reports with the Commission pursuant to
Section 13 of the Exchange Act.
 
3.  As part of its metals recycling business, Schnitzer buys and resells metal,
including selling scrap metal to steel mills in Asia. In 1995, Schnitzer
acquired an entity with two subsidiaries: a subsidiary in South Korea that it
renamed SSI International Far East Ltd. (“SSI Korea”), and a U.S. subsidiary in
Tacoma, Washington that it renamed SSI International, Inc. (“SSI
International”). Thereafter, Schnitzer used these subsidiaries to facilitate its
Asian scrap metal sales.
 
A.     Sales to Government-owned Steel Mills in China
 
4.  From at least 1999 through 2004, employees and agents of SSI International
and SSI Korea made improper cash payments to managers of scrap metal customers
owned, in whole or in part, by the Chinese government. These payments were
intended to induce those managers to purchase scrap metal from Schnitzer.
 
5.  During the period 1999 through 2004, Schnitzer paid over $205,000 in
improper payments to managers of its government-owned customers in China in
connection with 30 sales
 
____________
1The findings herein are made pursuant to Respondent’s Offer of Settlement and
are not binding on any other person or entity in this or any other proceeding.

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transactions. Schnitzer’s gross revenue for those transactions totaled
approximately $96 million, and Schnitzer earned $6,259,104 in net profits on the
sales.
 
6.  Schnitzer paid two types of kickbacks to the general managers of its scrap
metal customers. For the first type, Schnitzer paid a “standard” kickback, which
was generally $3,000 to $6,000 per shipment. Schnitzer paid these kickbacks out
of the revenue it earned on the scrap metal sale. Schnitzer also paid the
general managers of Chinese customers a second kickback that Schnitzer referred
to internally as a “refund” or “rebate.” To pay the “refunds,” Schnitzer
participated in a scheme whereby the general manager of a steel mill would cause
the steel mill to overpay Schnitzer for the steel purchase, and would then
personally recover the “overpayment” from Schnitzer, in amounts ranging from
$3,000 to $15,000.
 
7.  Schnitzer wired the money for the improper payments to secret bank accounts
in South Korea opened by the head of SSI Korea specifically for receiving these
payments. The head of SSI International and the head of SSI Korea would then use
funds from the secret accounts to make improper cash payments to managers of
Schnitzer’s customers. In addition to the cash payments, the Schnitzer officers
gave gifts to the managers of the government-owned customers. A Schnitzer senior
official was aware of and authorized the wire transfers to the secret bank
accounts.
 
8.  Separate from SSI Korea’s role as a seller of Schnitzer’s metals, SSI Korea
also acted as a broker for Japanese scrap metal companies that sold scrap metal
in China, receiving brokerage commissions for locating scrap metal buyers in
China. Since at least 1999, Japanese companies provided SSI Korea with funds to
make improper payments to managers of the Chinese steel mills similar to the
payments made by Schnitzer for scrap metal it sold. On behalf of Schnitzer, the
funds were delivered to the managers of the Japanese steel mill customers.
 
9.       From 1999 to 2004, Schnitzer made improper payments on behalf of its
Japanese customers to managers of steel mills owned, in whole or in part, by the
Chinese government in approximately eight scrap metal transactions. S SI Korea
earned $58,610 in brokerage commissions and realized $19,991 in net profits from
those eight transactions.
 
10.     In order to conceal the improper payments, Schnitzer falsely described
those payments to the foreign officials as “sales commissions,” “commission to
the customer,” “refunds,” or “rebates” in Schnitzer’s books and records.
 
B.      Sales to Privately Owned Steel Mills in China and South Korea
 
11.     In addition to making improper payments for scrap metal sales to
government-owned steel mills in China, Schnitzer paid bribes to managers of
privately owned steel mills in China and South Korea. Schnitzer falsely
described the payments as “sales commissions,” “commission to the customer,”
“refunds,” or “rebates” in Schnitzer’s books and records.

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12.    From 1999 to 2004, Schnitzer made over $420,000 in improper payments to
managers of privately owned Chinese steel mills to induce them to purchase scrap
metal from Schnitzer. Schnitzer paid managers of the privately owned South
Korean steel mills approximately $1,273,000 in bribes from 1999 to 2004 to
induce them to purchase scrap metal from Schnitzer. From 1999 to 2004, SSI Korea
also earned $1,513,097 in commissions for brokered sales on behalf of Japanese
companies in which such kickbacks were paid. Schnitzer also provided non-cash
gifts to general managers of Korean customers.
 
C.      Schnitzer’s Lack of Internal Controls
 
13.     During the period of the foreign transactions described above, Schnitzer
provided no training or education to any of its employees, agents or
subsidiaries regarding the requirements of the FCPA. Schnitzer also failed to
establish a program to monitor its employees, agents and subsidiaries for
compliance with the FCPA.
 
D.      Schnitzer’s Investigation and Subsequent Events
 
14.     In May 2004, Schnitzer’s compliance department uncovered the improper
payments and Schnitzer began to investigate the potential FCPA violations. At
that time, a senior executive of Schnitzer prohibited any further payments, but
nonetheless authorized Schnitzer employees to pay at least two additional bribes
that Schnitzer previously had promised private customers. The same senior
executive also authorized Schnitzer employees to increase entertainment expenses
in lieu of cash payments to its private and government-owned scrap metal
customers. In response, Schnitzer employees gave managers of Schnitzer’s scrap
metal customers additional gifts, including gift certificates worth $10,000 and
a watch worth $2,400.
 
15.     After Schnitzer began its internal investigation, but before it had
issued a directive to its employees to preserve documents related to the scrap
metal transactions, SSI Korea employees destroyed documents concerning the
improper payments.
 
Legal Analysis
 
16.     The FCPA, enacted in 1977, added Section 30A to the Exchange Act to
prohibit public companies from, among other things, making improper payments to
foreign officials for the purpose of influencing their decisions in order to
obtain or retain business. See 15 U.S.C.§ 78dd-1.
 
17.     The FCPA also added Exchange Act Section 13(b)(2)(A) to require public
companies to make and keep books, records, and accounts, which, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the issuer, and Exchange Act Section 13(b)(2)(B) to require such
companies to devise and maintain a system of internal accounting controls
sufficient to provide reasonable assurances that: (i) transactions are

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executed in accordance with management’s general or specific authorization; and
(ii) transactions are recorded as necessary to permit preparation of fmancial
statements in conformity with generally accepted accounting principles or any
other criteria applicable to such statements, and to maintain accountability for
assets. See 15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B).
 
18.      In each of the transactions described above, Schnitzer was aware of the
high probability that its employees or agents intended to make gifts or payments
in order to obtain or retain business for Schnitzer. In each instance described
in paragraphs 4 through 9, by proceeding with the transactions, Schnitzer made
or authorized the making of illegal payments to foreign officials, in violation
of Section 30A. Schnitzer violated Section 13(b)(2)(A) by improperly recording
in its books and records payments it made in the transactions involving its
subsidiary in Korea. Finally, Schnitzer violated Section 13(b)(2)(B) by failing
to devise and maintain an effective system of internal controls to prevent and
detect violations of the FCPA.
 
Schnitzer’s Remedial Efforts
 
19.      In determining to accept the Offer, the Commission considered remedial
acts undertaken by Respondent and cooperation afforded the Commission staff.
 
IV.
 
Undertakings
 
                              Respondent undertakes to:
 
1.  Retain, through its Board of Directors, within sixty (60) calendar days of
the issuance of this Order, and for a period of three years thereafter, an
independent compliance consultant (“Compliance Consultant”), not unacceptable to
the staff of the Commission, to review and evaluate Schnitzer’s internal
controls, record-keeping, and financial reporting policies and procedures as
they relate to Schnitzer’s compliance with the books and records, internal
accounting controls, and anti-bribery provisions of the FCPA, codified at
Sections 13(b)(2)(A), 13(b)(2)(B), and 30A of the Exchange Act and other
applicable foreign bribery laws. This review and evaluation shall include an
assessment of those policies and procedures as actually implemented in practice.
The compensation and expenses of the Compliance Consultant, and of the persons
hired under his or her authority, shall be paid by Schnitzer. Schnitzer may
extend the time period for retention of the Compliance Consultant with prior
written approval of the Commission staff;
 
2.  Schnitzer shall cooperate fully with the Compliance Consultant. Schnitzer
shall grant the Compliance Consultant the authority to take such reasonable
steps, in the Compliance Consultant’s view, as necessary to be fully informed
about the operations of Schnitzer within the scope of his or her
responsibilities under this Order. To that end, Schnitzer shall provide the
Compliance Consultant with access to files, books, records, and personnel that
fall within the scope

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of his or her responsibilities under this Order. It shall be a condition of the
Compliance Consultant’s retention that the Compliance Consultant is independent
of Schnitzer and that no attorney-client relationship shall be formed between
them. In connection with the Compliance Consultant’s work, Schnitzer shall not
withhold from the Commission or the Commission’s staff, and shall require the
Compliance Consultant to agree not to withhold from the Commission or the
Commission’s staff, any documents or information on the basis of any privilege
or work product claims. This paragraph does not apply to communications and
information shared among Schnitzer and counsel representing Schnitzer solely for
the purpose of rendering legal advice in connection with investigations
conducted by the Department of Justice (“DOJ”) and the Commission.
 
3.       Schnitzer shall order the Compliance Consultant to assess whether
Schnitzer’s policies and procedures are reasonably designed to detect and
prevent violations of the FCPA, and during the three-year consultancy, conduct
an initial review and prepare an initial report, followed by two follow-up
reviews and follow-up reports as described below. With respect to each of the
three reviews, after initial consultations with Schnitzer, DOJ, and the
Commission staff, Schnitzer shall require the Compliance Consultant to prepare a
written work plan for each of the three reviews, which shall be submitted to
Schnitzer, the Commission staff, and DOJ. In order to conduct an effective
initial review and to fully understand any existing deficiencies in controls,
policies, and procedures related to the FCPA and other applicable foreign
bribery laws, Schnitzer shall require that the Compliance Consultant’s initial
work plan include such steps as are necessary to develop an understanding of the
facts and circumstances surrounding the violations described above in Section
III.
 
4.       In connection with the initial review, Schnitzer shall require the
Compliance Consultant to issue a written report, within one hundred twenty (120)
calendar days after being retained, setting forth the Compliance Consultant’s
assessment and making recommendations reasonably designed to improve Schnitzer’s
program, policies, and procedures for ensuring compliance with the FCPA.
Schnitzer shall require that the Compliance Consultant provide the report to
Schnitzer’s Board of Directors and contemporaneously transmit a copy to the
following individuals or their successors: (1) Helane L. Morrison, District
Administrator, Securities and Exchange Commission, 44 Montgomery St., Suite
2600, San Francisco, California 94104; and (2) Mark F. Mendelsohn, Deputy Chief,
Fraud Section, Criminal Division, U.S. Department of Justice, 10th and
Constitution Ave., N.W. (Bond), Washington, D.C. 20530. Schnitzer shall allow
the Compliance Consultant to extend the time period for issuance of the report
with prior written approval of the DOJ and the Commission staff;
 
5.       Within one hundred twenty (120) calendar days after receiving the
report, Schnitzer shall adopt all recommendations in the report of the
Compliance Consultant; provided, however, that within one hundred twenty (120)
calendar days after receiving the report, Schnitzer shall in writing advise the
Compliance Consultant and the Commission staff in writing of any recommendations
that it considers to be unduly burdensome, impractical or costly. With respect
to any recommendation that Schnitzer considers unduly burdensome, impractical or
costly, Schnitzer need not adopt that recommendation within that time but shall
propose in writing an alternative policy, procedure or system designed to
achieve the same objective or purpose. As to

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any recommendation on which Schnitzer and the Compliance Consultant do not
agree, Schnitzer shall attempt in good faith to reach an agreement within sixty
(60) calendar days after Schnitzer serves the written advice. In the event
Schnitzer and the Compliance Consultant are unable to agree on an alternative
proposal, Schnitzer shall abide by the determinations of the Compliance
Consultant. With respect to any recommendation that the Compliance Consultant
determines cannot reasonably be implemented within one hundred twenty (120)
calendar days after receiving the report, Schnitzer shall allow the Compliance
Consultant to extend the time period for implementation with prior written
approval of the Commission staff and DOJ.
 
6.       Schnitzer shall require the Compliance Consultant to undertake two
follow-up reviews to determine whether Schnitzer’s policies and procedures are
reasonably designed to detect and prevent violations of the FCPA and other
applicable foreign bribery laws. Within one hundred twenty (120) calendar days
of initiating each follow-up review, Schnitzer shall (i) require the Compliance
Consultant to complete the review, (ii) require the Compliance Consultant to
certify whether Schnitzer’s anti-bribery compliance program, including its
policies and procedures, is appropriately designed and implemented to ensure
compliance with the FCPA, (iii) report on the Compliance Consultant’s findings
in the same fashion as set forth in paragraph IV.4 with respect to the initial
review, and (iv) adopt recommendations in the same fashion as set forth in
paragraph IV.5 with respect to the initial review. Schnitzer shall require the
Compliance Consultant to commence the first follow-up review one year after
retention of the Compliance Consultant, and the second follow-up review at least
one year after completion of the first follow-up review. Schnitzer shall allow
the Compliance Consultant to extend the time period for these follow-up reviews
with prior written approval of the Commission staff and DOJ.
 
7.  In undertaking the initial review and follow-up reviews described in
Paragraphs IV.2 through IV.6 above, Schnitzer shall require the Compliance
Consultant to formulate conclusions based on sufficient evidence obtained
through, among other things, (i) inspection of documents, including all of
Schnitzer’s policies and procedures relating to Schnitzer’s anti-bribery
compliance program; (ii) onsite observation of FCPA systems and procedures,
including Schnitzer’s internal controls, recordkeeping and internal audit
procedures; (iii) meetings with and interviews of Schnitzer employees, officers,
directors and any other relevant persons; and (iv) analyses, studies and testing
of Schnitzer’s anti-bribery compliance program. In undertaking such assessment
and reviews, Schnitzer shall allow the Compliance Consultant, at his or her own
discretion, to rely, to a reasonable extent and after reasonable inquiry, on
reports, studies, and analyses issued or undertaken by other consultants hired
by Schnitzer prior to the date of this Order.
 
8.  The Compliance Consultant’s charge, as described above, is to review
Schnitzer’s controls, policies and procedures related to the compliance with the
FCPA. To the extent the Compliance Consultant, during the course of his or her
assessment, discovers that corrupt payments or corrupt transfers of property or
interests may have been offered, promised, paid, or authorized by any Schnitzer
entity or person, or any entity or person working directly or indirectly for
Schnitzer, Schnitzer shall require the Compliance Consultant promptly to report

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such payments to Schnitzer’s Corporate Compliance Officer, to its Audit
Committee, and to its outside counsel (who must have experience providing advice
and conducting investigations regarding FCPA matters) for further investigation,
unless the Compliance Consultant believes, in the exercise of his or her
discretion, that such disclosure should be delayed. In such circumstances,
Schnitzer shall allow the Compliance Consultant to refer the matter directly to
the staff of the Commission or DOJ at the address listed above in paragraph
IV.4. If the Compliance Consultant refers the matter only to Schnitzer’s
Corporate Compliance Officer, its Audit Committee, and its outside counsel,
Schnitzer shall promptly report the same to the Commission staff and DOJ at the
addresses listed above in paragraph IV.4. If Schnitzer fails to make such
disclosure within ten (10) calendar days of the report of such payments to
Schnitzer’s Corporate Compliance Officer, to its Audit Committee, and to its
outside counsel, Schnitzer shall require the Compliance Consultant to
independently disclose his/her findings to the staff of the Commission and DOJ.
Further, in the event that any Schnitzer entity or person, or any entity or
person working directly or indirectly for Schnitzer, refuses to provide
information necessary for the performance of the Compliance Consultant’s
responsibilities, Schnitzer shall require the Compliance Consultant to disclose
that fact to the Commission staff and to DOJ. Schnitzer shall not take any
action to retaliate against the Compliance Consultant for such disclosures.
Schnitzer shall not preclude the Compliance Consultant from reporting other
criminal or regulatory violations discovered in the course of performing his or
her duties, in the same manner as described above.
 
9.       Schnitzer shall require the Compliance Consultant to enter into an
agreement with Schnitzer that provides that for the period of engagement and for
a period of two years from completion of the engagement, the Compliance
Consultant shall not enter into any additional employment, consultant,
attorney-client, auditing or other professional relationship with Schnitzer, or
any of its present or former affiliates, directors, officers, employees, or
agents acting in their capacity. The agreement will also provide that the
Compliance Consultant will require that any firm with which he or she is
affiliated or of which he or she is a member, and any person engaged to assist
the Compliance Consultant in performance of his or her duties under this Order
shall not, without prior written consent of the Securities and Exchange
Commission’s Division of Enforcement, enter into any employment, consultant,
attorney-client, auditing or other professional relationship with Schnitzer, or
any of its present or former affiliates, directors, officers, employees, or
agents acting in their capacity as such for the period of the engagement and for
a period of two years after the engagement. To ensure the independence of the
Compliance Consultant, Schnitzer shall not have the authority to terminate the
Compliance Consultant without the prior written approval of the Commission staff
and the DOJ.
 
V.
 
In view of the foregoing, the Commission deems it appropriate to impose the
sanctions agreed to in Respondent Schnitzer’s Offer.

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Accordingly, it is hereby ORDERED that:
 
A.  Respondent Schnitzer cease and desist from committing or causing any
violations and any future violations of Sections 13(b)(2)(A),13(b)(2)(B), and
30A of the Exchange Act.
 
B.  Respondent shall comply with the undertakings enumerated in Section V above.
 
C.  IT IS FURTHERED ORDERED that Respondent shall, within ten days of the entry
of this Order, pay disgorgement and prejudgment interest in the total amount of
$7,725,201, consisting of $6,279,095 in disgorgement and $1,446,106 in
prejudgment interest, to the United States Treasury. Such payment shall be: (A)
made by United States postal money order, certified check, bank cashier’s check
or bank money order; (B) made payable to the Securities and Exchange Commission;
(C) hand-delivered or mailed to the Office of Financial Management, Securities
and Exchange Commission, Operations Center, 6432 General Green Way, Alexandria,
Stop 0-3, VA 22312; and (D) submitted under cover letter that identifies
Schnitzer Steel Industries, Inc. as a Respondent in these proceedings, the file
number of these proceedings, a copy of which cover letter and money order or
check shall be sent to Helane L. Morrison, District Administrator, Securities
and Exchange Commission, 44 Montgomery Street, 26th Floor, San Francisco, CA
94127.
 
VI.
 
By submitting this Offer, Respondent hereby acknowledges its waiver of those
rights specified in Rules 240(c)(4) and (5) [17 C.F.R. §201.240(c)(4) and (5)]
of the Commission’s Rules of Practice. Respondent also hereby waives service of
the Order.
 
VII.
 
Respondent understands and agrees to comply with the Commission’s policy “not to
permit a defendant or respondent to consent to a judgment or order that imposes
a sanction while denying the allegations in the complaint or order for
proceedings” (17 C.F.R. §202.5(e)). In compliance with this policy, Respondent
agrees: (i) not to take any action or to make or permit to be made any public
statement denying, directly or indirectly, any finding in the Order or creating
the impression that the Order is without factual basis; and (ii) that upon the
filing of this Offer of Settlement, Respondent hereby withdraws any papers
previously filed in this proceeding to the extent that they deny, directly or
indirectly, any finding in the Order. If Respondent breaches this agreement, the
Division of Enforcement may petition the Commission to vacate the Order and
restore this proceeding to its active docket. Nothing in this provision affects
Respondent’s: (i) testimonial obligations; or (ii) right to take legal or
factual positions in litigation or other legal proceedings in which the
Commission is not a party.

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VIII.
 
Consistent with the provisions of 17 C.F.R. § 202.5(f), Respondent waives any
claim of Double Jeopardy based upon the settlement of this proceeding, including
the imposition of any remedy or civil penalty herein.
 
IX.
 
Respondent hereby waives any rights under the Equal Access to Justice Act, the
Small Business Regulatory Enforcement Fairness Act of 1996, or any other
provision of law to seek from the United States, or any agency, or any official
of the United States acting in his or her official capacity, directly or
indirectly, reimbursement of attorney’s fees or other fees, expenses, or costs
expended by Respondent to defend against this action. For these purposes,
Respondent agrees that Respondent is not the prevailing party in this action
since the parties have reached a good faith settlement.

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
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X.
 
Respondent states that it has read and understands the foregoing Offer, that
this Offer is made voluntarily, and that no promises, offers, threats, or
inducements of any kind or nature whatsoever have been made by the Commission or
any member, officer, employee, agent, or representative of the Commission in
consideration of this Offer or otherwise to induce it to submit to this Offer.
 
 
 

    /s/ Kenneth M. Novack
26th Day of July, 2006
  Schnitzer Steel Industries, Inc.      

 
 

STATE OF OREGON }     } SS:  
COUNTY OF MULTNOMAH
}     

                                                                                            
            
 
 
The foregoing instrument as acknowledged before me this 26thday of July, 2006,
by Schnitzer Steel Industries, who ü is personally known to me or __ who has
produced an Oregon driver’s license as identification and who did take an oath.
 
 
 
 
 
/s/ Debra S. Morgan                                          
Notary Public
OFFICIAL SEAL 
State of Oregon
DEBRA S MORGAN 
Commission Number:                  400577 
NOTARY PUBLIC-OREGON 
Commission Expiration:                  12/23/2009
COMMISSION NO. 400577   
MY COMMISSION EXPIRES DECEMBER 23, 2009 

 
 
 
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