Indiana Elec. Workers' Pension Trust v. Shaw Group

• Decision Date: 29 July 2008
• Docket Number: No. 06-30908.,06-30908.
• Citation: 537 F.3d 527
• Parties: INDIANA ELECTRICAL WORKERS' PENSION TRUST FUND IBEW; Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund; Carpenters Pension Fund, of Baltimore, Maryland; Hawaii Laborers Pension Plan, Plaintiffs-Appellees, v. SHAW GROUP, INC.; Tim Barfield, Jr.; J.M. Bernhard, Jr.; Richard F. Gill; Robert Belk, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

537 F.3d 527

INDIANA ELECTRICAL WORKERS' PENSION TRUST FUND IBEW; Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund; Carpenters Pension Fund, of Baltimore, Maryland; Hawaii Laborers Pension Plan, Plaintiffs-Appellees, v. SHAW GROUP, INC.; Tim Barfield, Jr.; J.M. Bernhard, Jr.; Richard F. Gill; Robert Belk, Defendants-Appellants.

No. 06-30908.

United States Court of Appeals, Fifth Circuit.

July 29, 2008.

David J. George, Douglas Wilens (argued), Paul J. Geller, Coughlin, Stoia, Geller, Rudman & Robbins, LLP, Boca Raton, FL, Joel R. Waltzer, Waltzer & Associates, Harvey, LA, for Plaintiffs-Appellees.

Clifford Thau, Hilary Lovett Preston, Steven Robert Paradise, Vinson & Elkins, New York City, Arthur Gregory Grimsal, Gordon, Arata, McCollam, Duplantis & Eagan, New Orleans, LA, Thomas S. Leatherbury, Vinson, & Elkins, Dallas, TX, Marie Roach Yeates (argued), Vinson & Elkins, Hounston, TX, for Defendants-Appellants.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before JONES, Chief Judge, and STEWART and CLEMENT, Circuit Judges.

EDITH H. JONES, Chief Judge:

A putative class of purchasers of Shaw Group, Inc. ("Shaw") common stock sued Shaw and four of its corporate officers alleging that Shaw engaged in a scheme to misrepresent the true nature of the company's financial condition to the public and inflate its stock price. Shaw moved to dismiss for failure to satisfy the Private Securities Litigation Reform Act's ("PSLRA") heightened pleading requirements for securities fraud cases, but the district court denied the motion without a written opinion. On this interlocutory appeal, we hold that the complaint failed to allege facts from which a "strong inference of scienter" may be drawn against the defendants. We reverse and remand with instructions to dismiss the case.

BACKGROUND

Shaw, which is headquartered in Baton Rouge, Louisiana, provides engineering, design and construction services to the energy, chemical and environmental industries, as well as federal, state and local governments. On June 10, 2004, Shaw issued a press release announcing that the Securities and Exchange Commission ("SEC") was conducting an informal inquiry concerning the company, which appeared to relate to the company's use of the purchase method of accounting for acquisitions. When the stock price fell on this notice, several class action suits were filed. Union pension funds have become the lead plaintiffs in the consolidated class action against defendants Shaw and its CEO J.M. Bernhard, Jr., CFO Robert Belk, COO Tim Barfield and former COO Richard Gill.¹ The class period runs from October 19, 2000, to June 10, 2004.

Pleading violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 securities fraud, and Section 20(a) control person liability, the lengthy complaint alleges that Shaw knowingly or with severe recklessness misled the public in five ways. See 15 U.S.C. § 78j(b); 17 C.F.R § 240.10b-5; 15 U.S.C. § 78t(a). First, Shaw artificially inflated its earnings by manipulating the purchase method of accounting in connection with two acquisitions. Second, Shaw prematurely recognized revenue on long-term engineering, procurement and construction contracts by exploiting the percentage of completion method of accounting in violation of generally accepted accounting principles ("GAAP"). Third, Shaw failed to disclose material issues affecting the viability of a major construction project. Fourth, the company overstated its backlog of contracts to give a false impression that demand for its services was higher than it actually was. Fifth, Shaw delayed paying vendors or did not pay them at all as a device to improve its reported cash flow.

Plaintiffs allege that the true nature of Shaw's financial condition leaked to the stock market in a series of four disclosures beginning with the August 2002 announcement that a customer had failed to make a $32 million milestone payment for work performed on a construction project, and continuing with negative disclosures about the company's earnings and operational performance.² The stock price dropped allegedly in response to each of these events and to the final straw, the announcement of the SEC inquiry.

Curiously, given the dramatic nature of the allegations and the claims that the company overstated assets by "hundreds of millions of dollars," the company never restated its earnings or financial reports based on the matters alleged by plaintiffs; has not received a qualified audit report; has not reported that it was the victim of any accounting irregularities; and has endured no liquidity crisis, as might have been expected if massive accounting fraud had occurred. Finally, we take judicial notice that the SEC terminated its inquiry against Shaw on December 28, 2007, with no enforcement recommendation.

The district court denied Shaw's motion to dismiss for failure to satisfy Federal Rule of Civil Procedure 12(b)(6) in light of the PSLRA's heightened securities fraud pleading requirements. The court heard oral argument and ruled from the bench with no written or orally stated opinion. This court granted an interlocutory appeal. Shaw challenges the sufficiency of plaintiffs' pleading of falsity, scienter and loss causation.

DISCUSSION

The PSLRA set high standards for pursuing federal securities fraud suits in order to check "frivolous, lawyer-driven litigation, while preserving investors' ability to recover on meritorious claims." Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127 S.Ct. 2499, 2509, 168 L.Ed.2d 179 (2007). To be sure, the elements of a fraud claim have stayed the same: a material misrepresentation or omission; a defendant with scienter concerning the fraud; reliance; damages; and loss causation. See Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 264 n. 5 (5th Cir.2007) (citing Dura Pharms. Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005)). But the PSLRA enhanced the particularity requirements for pleading fraud under Federal Rule of Civil Procedure 9(b) in two ways. First, plaintiffs must "specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading ...." 15 U.S.C. § 78u-4(b)(1)(B). Second, for "each act or omission alleged" to be false or misleading, plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2).

In this case, we pretermit testing the sufficiency of the allegations of falsity and loss causation because the complaint insufficiently alleges that the defendants acted with scienter. We review the sufficiency of the complaint de novo on appeal. See Central Laborers' Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 550 (5th Cir.2007) [hereinafter Central Laborers].

Tellabs affirmed a three step approach to reviewing scienter allegations on a motion to dismiss a federal securities fraud case pursuant to the PSLRA. Tellabs, 127 S.Ct. at 2509-10. First, the allegations must, as in federal pleadings generally, be taken as true. Id. at 2509. Second, courts may consider documents incorporated in the complaint by reference and matters subject to judicial notice. Id. The facts must be evaluated collectively, not in isolation, to determine whether a strong inference of scienter has been pled. Third, a court must take into account plausible inferences opposing as well as supporting a strong inference of scienter. Id. The inference of scienter must ultimately be "cogent and compelling," not merely "reasonable" or "permissible." Id. at 2510.

Before Tellabs, this court had elaborated on the basis for scienter allegations. The required state of mind is an "intent to deceive, manipulate, or defraud" or "severe recklessness." Rosenzweig v. Azurix Corp., 332 F.3d 854, 866 (5th Cir. 2003) (internal quotation marks omitted). Severe recklessness is

limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.

Id. at 866 (quoting Nathenson v. Zonagen Inc., 267 F.3d 400, 408 (5th Cir.2001)). Although circumstantial evidence can support a strong inference of scienter, Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir.2002), allegations of motive and opportunity standing alone will not suffice. Rosenzweig, 332 F.3d at 867. Appropriate motive and opportunity allegations may, however, "meaningfully enhance the strength of the inference of scienter." Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 368 (5th Cir.2004) (quoting Nathenson, 267 F.3d at 412). Finally, this court has rejected the group pleading approach to scienter and instead looks to the state of mind of the individual corporate official or officials "who make or issue the statement (or order or approve it or its making or issuance, or who furnish information or language for inclusion therein, or the like) rather than generally to the collective knowledge of all the corporation's officers and employees acquired in the course of their employment." Id. at 366. Consequently, "it is only necessary for us to address the allegations claimed to adequately show [scienter] on the part of the [named officers]" to determine whether the complaint sufficiently pleads scienter. Id. at 367.

With this landscape in mind, we turn to examine the scienter allegations pertinent to each category of alleged misstatements and then to the attempted motive and opportunity bolstering allegations against Bernhard and Belk.

A. Accounting Irregularities

The vast bulk of allegations in a very bulky complaint relate to Shaw's...