The Police Retirement System of St. Louis v. Granite Construction Incorporated

Background

The Police Retirement System of St. Louis was the court-appointed lead plaintiff in a proposed class action against Granite Construction Incorporated, James H. Roberts, Jigisha Desai, and Laurel J. Krzeminski. The proposed class covered people and entities that acquired Granite stock between April 30, 2018, and October 24, 2019.

The amended complaint concerned four infrastructure projects operated through joint ventures. It alleged that Granite understated or concealed cost overruns and used accounting practices that overstated revenue and earnings. The alleged conduct involved revenue recognition under Accounting Standards Codification Topic 606 and disclosures of reasonably possible additional costs under ASC 450-20-50. The complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 against all defendants, as well as control-person claims under Section 20(a) against Roberts, Desai, and Krzeminski.

Motion to Dismiss

The defendants argued that the complaint failed to allege an actionable misrepresentation or omission, failed to plead scienter—the required wrongful state of mind—with sufficient detail, and that the Private Securities Litigation Reform Act’s safe harbor protected the challenged statements. They also argued that the Section 20(a) claims failed because the complaint did not state an underlying securities-fraud claim.

The court held that the complaint adequately described eight confidential former employees by their job responsibilities and therefore could rely on their allegations. It also held that the complaint provided enough detail about the alleged accounting violations, including 74 statements in earnings calls and financial reports, the four projects, the alleged cost overruns, and the amounts of revenue and earnings allegedly overstated. The court treated the alleged misstatements as statements about existing facts rather than forward-looking opinions, so the safe harbor did not apply.

The court further held that the complaint pleaded a sufficiently strong inference of scienter. It cited allegations that the individual defendants received project reports, monitored project finances, and discussed the projects and cost overruns. The allegations regarding Roberts were stronger because the complaint also alleged his direct involvement with claims against project customers, but the court found the allegations concerning Desai and Krzeminski sufficient as well.

Control-Person Claims

The court rejected the defendants’ argument that the Section 20(a) claims failed for lack of an underlying violation. It nevertheless found a timing problem concerning the chief financial officer positions. The motion to dismiss Desai’s Section 20(a) claims for statements made before July 8, 2019, was granted. The motion to dismiss Krzeminski’s Section 20(a) claims for statements made after July 8, 2019, was also granted.

Disposition

The court denied the motion to dismiss the Section 10(b) and Rule 10b-5 claims. It denied the motion to dismiss the Section 20(a) claims against Roberts. It granted the motion to dismiss the Section 20(a) claims against Krzeminski as to statements made after July 8, 2019, and denied it as to statements made beforehand. It granted the motion to dismiss the Section 20(a) claims against Desai as to statements made before July 8, 2019, and denied it as to statements made afterward.

The court also granted both sides’ unopposed requests for judicial notice of the documents they submitted. The answer was due within fourteen calendar days, and the court ordered discovery to proceed immediately.