In re Chicago Bridge & Iron Company N.V. Securities Litigation

Background

This consolidated securities-fraud class action was brought by ALSAR Ltd. Partnership, Ironworkers Local 40, 361 and 417 Union Security Funds, and Iron Workers Local 580 Joint Funds, individually and for other similarly situated investors. The defendants were Chicago Bridge & Iron Company N.V. (CBI), Philip K. Asherman, Ronald A. Ballschmiede, and Westley S. Stockton. The plaintiffs alleged that statements about CBI’s 2012 purchase of the Shaw Group violated Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934.

Shaw had a subsidiary involved in constructing two nuclear-power plants. The projects experienced delays and cost overruns, and CBI disputed with Westinghouse and the project owners whether CBI was entitled to payment for resulting claims and unapproved change orders. Between June 2014 and February 2015, defendants made disclosures about the projects and CBI’s finances that were followed by declines in CBI’s stock price. CBI later sold Shaw’s nuclear operations to Westinghouse and agreed not to pursue certain claims and unapproved change orders.

The defendants sought summary judgment on 16 groups of challenged statements, arguing that no reasonable jury could find the statements false or misleading or find that they were made with the required state of mind, called scienter. Summary judgment is appropriate only when there is no genuine dispute about a fact that could affect the outcome and the moving party is entitled to judgment under the law. The court viewed disputed evidence in the plaintiffs’ favor because they were the parties opposing the motion.

Court’s analysis

Goodwill statements. The court held that a reasonable jury could find CBI’s statements that it had identified no goodwill impairment misleading. Goodwill is an accounting asset representing the portion of a purchase price exceeding the fair value of the acquired assets and liabilities. CBI reported goodwill associated with the Shaw acquisition that increased to approximately the acquisition price, while it combined its nuclear business with a larger Power unit for reporting purposes. The defendants acknowledged that this reporting choice allowed positive cash flows elsewhere in the Power unit to offset estimated negative cash flows from the nuclear projects and avoid recording an impairment. The court found that a jury could conclude this choice concealed important information about the nuclear business and that defendants acted with reckless disregard for the truth. Summary judgment was denied on these statements.

Purchase-price accounting and related accounting statements. CBI made accounting adjustments that increased liabilities connected to the nuclear projects and increased goodwill, rather than recording the increased costs as current expenses. The court found a factual dispute about whether the adjustments were based on new information about conditions existing when CBI acquired Shaw, as required for the accounting treatment asserted by CBI. A reasonable jury could find that the adjustments and related statements about compliance with generally accepted accounting principles misled investors about the projects’ performance, outlook, and CBI’s profitability. Summary judgment was denied on these statements.

Claim-revenue statements. The court found that a reasonable jury could determine that statements about expected recovery of revenue from contractual disputes misled investors by suggesting recovery was more likely than it actually was. Evidence indicated that CBI did not expect significant recovery from Westinghouse and considered stopping work, pursuing litigation, or transferring ownership of the nuclear projects because of continuing nonpayment. A jury could also find that defendants made the statements with reckless disregard for the truth. Summary judgment was denied.

Generally accepted accounting principles statements. The court explained that compliance with accounting rules does not automatically defeat a securities-fraud claim. Because factual disputes remained about whether the goodwill and purchase-price accounting statements were misleading, summary judgment was denied as to the related statements that CBI’s financial statements complied with generally accepted accounting principles. The court did not separately decide whether CBI complied with those principles regarding the goodwill statements.

Progress statements. The court found that a reasonable jury could determine that statements describing the nuclear projects as making good progress or being on track, and statements suggesting delays and cost overruns would not affect revenue or profitability, omitted important contrary information. The record included evidence of significant delays and logistical problems, poor cash flows and revenues, and a low likelihood of recovering projected cost overruns. The court also found that a jury could find reckless disregard for the truth. Summary judgment was denied.

Safety statement. Asherman’s statement that CBI had a “relentless focus and commitment to safety” was ruled non-actionable puffery. Puffery is a general, aspirational statement that investors would not reasonably treat as a precise factual representation. The court therefore granted defendants summary judgment on that statement, even though plaintiffs pointed to evidence of safety concerns involving the nuclear projects.

Disposition

The defendants’ motion for summary judgment was granted as to the Safety Statement and denied for the remaining Challenged Statements. The defendants’ motion for oral argument was denied as moot. The clerk was directed to close docket entries 252 and 292. The opinion resolved the summary-judgment motion; it did not determine that defendants were ultimately liable for securities fraud on the statements that remained in dispute.