City of Dearborn Heights Act 345 Police & Fire Retirement System v. Chicago Bridge & Iron Company N.V. et al

Filing 108

OPINION AND ORDER re: 91 MOTION to Dismiss . filed by Westley S. Stockton, Chicago Bridge & Iron Company N.V., Philip K. Asherman, Ronald A. Ballschmiede, 97 AMENDED MOTION to Dismiss the Consolidated Amended Complaint. f iled by Westley S. Stockton, Chicago Bridge & Iron Company N.V., Philip K. Asherman, Ronald A. Ballschmiede. Defendants move to dismiss the Consolidated Amended Complaint (the "Complaint") pursuant to Federal Rule of Civil Procedure 12( b)(6). (As further set forth in this Order.) For the foregoing reasons, Defendants' motion to dismiss is DENIED. The Clerk of Court is respectfully directed to close the motions at Docket Nos. 91 and 97. (Signed by Judge Lorna G. Schofield on 5/24/2018) (cf)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE CHICAGO BRIDGE & IRON COMPAY :
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N.V. SECURITIES LITIGATION
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5/24/2018

17 Civ. 1580 (LGS)
OPINION AND ORDER

LORNA G. SCHOFIELD, District Judge:
Plaintiff City of Dearborn Heights Act 345 Police & Fire Retirement System,
individually and on behalf of all other persons similarly situated, bring this putative class action
against Defendants Chicago Bridge & Iron Company N.V. (“CBI”), Philip K. Asherman, Ronald
A. Ballschmiede and Westley S. Stockton, alleging violation of §10(b) and § 20(a) of the
Securities Exchange Act of 1934 (the “Exchange Act”). The case arises from Defendants’
alleged misrepresentations and omissions in CBI’s financial statements and elsewhere regarding
losses in CBI’s construction of two nuclear plants. Defendants move to dismiss the Consolidated
Amended Complaint (the “Complaint”) pursuant to Federal Rule of Civil Procedure 12(b)(6).
For the following reasons, the motion is denied.
BACKGROUND
The following facts are taken from the Complaint and accepted as true for the purposes of
this motion. See Doe v. Columbia Univ., 831 F.3d 46, 48 (2d Cir. 2016).
A.

Background

Defendant CBI is a global engineering, procurement and construction (“EPC”) company
headquartered in the Hague, Netherlands. CBI provides conceptual design, technology,
engineering, procurement and other services, to customers in the energy infrastructure market

worldwide. At all relevant times, Defendant Asherman was CBI’s Chief Executive Officer
(“CEO”), Defendant Ballschimiede was its Chief Financial Officer (“CFO”) and Defendant
Stockton was its Chief Accounting Officer (collectively, the “Individual Defendants”).
In July 2012, CBI agreed to purchase the Shaw Group (“Shaw”) for approximately $3.3
billion ($2.2 billion net of cash acquired), funded in part with $1.9 billion in debt financing.
This sale closed in February 2013.
Shaw’s subsidiary, Stone & Webster, had contracted to build a nuclear power plant in
Waynesboro, Georgia (“Vogtle Plant”) and Jenkinsville, South Carolina (“V.C. Summer Plant”)
(collectively, the “Nuclear Projects”).

Both plants were to include AP1000 nuclear reactors

developed by Westinghouse Electric Corporation (“Westinghouse”). These contracts (the “EPC
Agreements”) provided that Stone & Webster would receive a fixed price for its services. Stone
& Webster was entitled to a change order, resulting in additional compensation above the
contract price, only in specified circumstances.
B.

Events during the Class Period

During the period from October 30, 2013, to June 23, 2015, inclusive (the “Class
Period”), CBI allegedly made material misstatements and omissions about the Nuclear Projects’
repeated delays, cost overruns and resulting deterioration in profitability. CBI’s main fabricating
facility in Lake Charles, Louisiana (the “Lake Charles facility”) was “the number one reason [the
Nuclear Projects] went into cost overruns.” CBI’s failure to track and ship materials properly
resulted in additional cost overruns and delays.
From May 2011 to 2013, in response to a whistle-blower complaint that a part used in the
Nuclear Projects did not meet specifications, the Nuclear Regulatory Commission (“NRC”)
conducted an investigation at the Lake Charles facility. On September 16, 2013, the NRC issued

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a Confirmatory Order, requiring CBI to adopt a series of internal safety reforms, to which CBI
agreed. On January 13, 2014, CBI imposed a Stop Work Order at its Lake Charles facility for
three months, due to “systematic problems with production activities, the corrective action
program and quality assurance program procedures.” CBI represented to NRC that, during the
Stop Work period, it had identified and addressed “multiple adverse conditions,” including
“welder qualification, the qualification and compliance of welding procedures, and
documentation of fabrication activities” at the Lake Charles facility.
Throughout the Class Period, the Vogtle and V.C. Summer Plants’ owners disputed
CBI’s claim for change orders due to cost overruns and delays under the EPC Agreements,
including through litigation. In May 2015, a Georgia court disclosed CBI’s sealed statement that
it had “completed an estimate of future damage as a result of Vogtle delays.”
Various public news outlets reported the Nuclear Projects’ delays, cost overruns and
issues with the Lake Charles facility throughout the Class Period. On June 17, 2014, Prescience
Point, a research firm, issued a report (the “Prescience Point Report”) that concluded Defendants
had manipulated contract liabilities and goodwill through purchase price adjustments, lowering
the quality of CBI’s earnings and distorting its prospects. In response to these reports, CBI
issued a press release, held two earnings conferences and issued 10-K’s and 10-Q’s, disputing
the reports’ accuracy. For example, in a June 17, 2014, press release, Defendant Asherman
stated that the CBI “management team operates our company with the absolute highest integrity,
and we take great issue with [these] erroneous claims.” In this press release, CBI discouraged
investors from crediting the Prescience Point Report and warned that Prescience Point holds
“short positions in CBI common stock and [Prescience Point] stand[s] to realize significant gains
in the event that CBI’s stock price declines.”

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C.

Events after the Class Period

On October 27, 2015, CBI announced that it would take a $1 billion loss on the sale of its
Stone & Webster unit to Westinghouse in exchange for a release of liabilities. On April 28,
2016, pursuant to the sales contract, Westinghouse delivered its post-closing accounting “true
up” to CBI. Westinghouse claimed that CBI owed $2.1 billion in disputed liabilities between
CBI and Westinghouse, noting that CBI’s accounting for liability it faced for the Nuclear
Projects was “not recorded in accordance with [Generally Accepted Accounting Principles
(“GAAP”)]” and that CBI “should have recorded a reserve liability of hundreds of millions of
dollars for losses.”
On July 21, 2016, in response to Westinghouse’s demand for $2.1 billion, CBI filed a
complaint in the Delaware Chancery Court barring Westinghouse from making a claim for the
$2.1 billion. In this lawsuit, CBI admitted that, as early as February 2015, CBI had begun
negotiating a “quitclaim deal” that would relieve it from the liabilities associated with the
Nuclear Projects. In June 2017, the Supreme Court of Delaware reversed the Court of Chancery
and concluded that Westinghouse had waived its claim against CBI under the sale agreement.
On March 31, 2017, Westinghouse filed for Chapter 11 bankruptcy as a result of the Nuclear
Projects’ liabilities.
D.

The Alleged Material Omissions and Misrepresentations

The Complaint alleges material omissions and misstatements made during the Class
Period in violation of § 10(b) of the Exchange Act in: (1) Forms 10-Q and 10-K, (2) Forms 8-K
and (3) conference calls with investors and analysts.
The Complaint’s allegations of material omissions and misstatements principally fall into
three categories. The first category is that CBI recorded unapproved change orders as assets and

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revenue in the financial statements contained in its 10-Ks and 10-Qs in violation of GAAP (the
“Change Order Statements”). CBI adjusted the contract price on its financial statements to
include unapproved change orders, even though in many cases, recovery of those amounts was in
dispute and not contractually warranted. For example, in its 10-K for the period ended
December 31, 2013, CBI stated, “[c]ontract revenue for our long-term contracts . . . reflects the
original contract price adjusted for [among other things] unapproved change orders and claims”
and that “recorded unapproved change orders and claims reflect our best estimate of recovery
amounts.” In fiscal year 2013, CBI recorded approximately $936 million in the project price and
recognized revenue of $173 million for unapproved changed orders.
The second category of alleged misstatements involved the overstatement of goodwill in
CBI’s financial statements contained its Forms 10-Q and 10-K (the “Goodwill Statements”). The
overstatement resulted in part from CBI’s improper recording of purchase price adjustments in
the year following the Shaw acquisition. The Complaint alleges that CBI failed to record an
impairment to goodwill to reflect that its carrying value was higher than its fair value, as required
by GAAP. As a result, the assets on CBI’s balance sheet were overstated throughout the Class
Period, and the expenses on its income statement were understated for the periods when the
goodwill should have been written down. For example, in its 10-Q for the period ended
September 30, 2013, CBI recorded goodwill of approximately $3.75 billion and represented that
it had conducted “a qualitative assessment of goodwill to determine whether it was more likely
than not that the fair value of a reporting unit was less than its carrying value,” and that “no
indicators of goodwill impairment were identified and therefore no goodwill impairment charge
was recorded.” CBI recorded increasing amounts of goodwill and made substantially the same
representation in all of its Forms 10-Q and 10-K during the Class Period.

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The third category of alleged misstatements concerns the status of the Nuclear Projects
and CBI’s failure to disclose mounting problems and their impact on profitability during
conference calls with investors and analysts (the “Progress Statements”). For example, on April
23, 2014, Defendants CBI and Asherman held a conference call where an analyst asked about
“how everything has progressed [with respect to the Nuclear Projects].” Defendant Asherman
responded, “[CBI] made some good progress. I am very pleased with the milestone, as I
mentioned, on the main module” and that “Lake Charles has gone through some extensive
[Nuclear Regulatory Commission] audits recently and I think passed those pretty well.”
Defendant Asherman did not discuss the January 2014 Stop Work Order during this conference
call.
E.

Scienter

The Complaint alleges scienter based on inferences from the facts summarized above. In
addition, the Complaint relies on confidential witnesses (“CWs”). At least three CWs, who
worked at the Vogtle and V.C. Summer Plants, including CW 2 who worked as a mechanical
engineer, reported that engineering teams filed weekly reports in a company system called
Sharepoint, where Defendants could and did access them. These reports detailed (1) cost
overruns that dated back to 2009 and continued growing through 2015; (2) overruns and delays
caused by the Lake Charles facility’s failure to produce conforming materials for the Nuclear
Projects; (3) overruns and delays because CBI could not properly track, ship and store materials;
and (4) delays caused by the Stop Work Order at the Lake Charles facility.
CW 1, who served as the director of financial operations for CBI Fabrication &
Manufacturing from January 2015 until approximately June 2016, and as director of Americas
financial operations for CBI Oil & Gas from 2009 through 2014, confirmed that numbers from

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CBI’s large contracts were discussed at monthly meetings attended by all three Individual
Defendants.
CW3, who worked at Shaw prior to its merger with CBI as a sourcing analyst and buyer
at the V.C. Summer Plant through June 2015, reported that CBI executives received monthly
Excel reports, reflecting the Nuclear Projects’ budgets.
F.

Reliance and Loss Causation

Plaintiffs purchased CBI stock during the Class Period. Between June 10 and 12, 2014,
following unfavorable media reports about safety code violations at the Vogtle and V.C. Summer
Plants, cost overruns and unapproved work orders, CBI’s stock price decreased from $83.30 to
$76.72 per share. Following the July 17, 2014, Prescience Point Report, CBI’s stock price
dropped from $74.46 to $68.26 per share. Following news articles about project delays and cost
overruns on the Nuclear Projects, between October 1 and 10, 2014, CBI’s stock price dropped
from $57.00 to $49.38 per share. In each case, after further disclosures about delays and related
costs, between January 29 and 30, 2015, CBI’s stock price dropped from $38.47 to $34.51 per
share; on February 4, 2015, CBI’s stock price dropped from $37.29 per share to $35.29 per
share; on April 23, 2015, CBI’s stock price dropped from $51.10 to 48.97 per share; and between
June 23 and 27, 2015, CBI’s stock price dropped from $54.03 to $49.63 per share.
STANDARD
To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”

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Id. (citing Twombly, 550 U.S. at 556). It is not enough for a plaintiff to allege facts that are
consistent with liability; the complaint must “nudge[]” claims “across the line from conceivable
to plausible.” Twombly, 550 U.S. at 570. “To survive dismissal, the plaintiff must provide the
grounds upon which his claim rests through factual allegations sufficient ‘to raise a right to relief
above the speculative level.’” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d
Cir. 2007) (quoting Twombly, 550 U.S. at 555). On a Rule 12(b)(6) motion, “all factual
allegations in the complaint are accepted as true and all inferences are drawn in the plaintiff’s
favor.” Apotex Inc. v. Acorda Therapeutics, Inc., 823 F.3d 51, 59 (2d Cir. 2016). “The Court . .
. may consider a document that is attached to the complaint, incorporated by reference or integral
to the complaint, provided there is no dispute regarding its authenticity, accuracy or relevance.”
Vaher v. Town of Orangetown, N.Y., 916 F. Supp. 2d 404, 423–24 (S.D.N.Y. 2013) (citing
DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 111 (2d Cir. 2010)).
Plaintiff asserts claims under § 10(b) of the Exchange Act and its implementing rule,
Rule 10b-5. That rule makes it unlawful “[t]o make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5. To allege
a violation of § 10(b) and Rule 10b-5, “the 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. § 78u4(b)(1)(B). “[T]he plaintiff may recover money damages only on proof that the defendant acted
with a particular state of mind, the complaint shall, with respect to each act or omission alleged

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to violate this chapter, state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” Id. § 78u(b)(2)(A).
The six elements of a claim under § 10(b) and its implementing rule, Rule 10b-5 are:
“(1) a material misrepresentation or omission by the defendant; (2) scienter, (3) a connection
between the misrepresentation or omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss; and (6) loss causation” Erica P.
John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 804 (2011); accord Ind. Pub. Ret. Sys. v.
SAIC, Inc., 818 F.3d 85, 93 (2d Cir. 2016).
“Any complaint alleging securities fraud must satisfy the heightened pleading
requirements of the [Private Securities Litigation Reform Act (“PSLRA”)] and Fed. R. Civ. P.
9(b) by stating with particularity the circumstances constituting fraud.” Emps.’ Ret. Sys. of Gov’t
of the V.I. v. Blanford, 794 F.3d 297, 304 (2d Cir. 2015) (quoting ECA, Local 134 IBEW Joint
Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009)). “A securities
fraud complaint based on misstatements must (1) specify the statements that the plaintiff
contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were
made, and (4) explain why the statements were fraudulent.” ATSI, 493 F.3d at 99. Allegations
of fraud may be “too speculative even on a motion to dismiss,” particularly when premised on
“‘distorted inferences and speculations.’” Id. at 104 (citing and quoting Segal v. Gordon, 467
F.2d 602, 606, 608 (2d Cir. 1972)).
“The PSLRA expanded on the Rule 9(b) standard, requiring that ‘securities fraud
complaints specify each misleading statement; that they set forth the facts on which [a] belief
that a statement is misleading was formed; and that they state with particularity facts giving rise
to a strong inference that the defendant acted with the required state of mind.’” Anschutz Corp.

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v. Merrill Lynch & Co., 690 F.3d 98, 108 (2d Cir. 2012) (quoting Dura Pharms., Inc. v.
Broudo, 544 U.S. 336, 345 (2005)).
The Complaint also asserts a claim under § 20(a) of the Exchange Act. To state a claim
under § 20(a), the complaint must sufficiently plead “(1) a primary violation by the controlled
person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in
some meaningful sense, a culpable participant in the controlled person’s fraud.” Carpenters
Pension Tr. Fund of St. Louis v. Barclays P.L.C., 750 F.3d 227, 236 (2d Cir. 2014) (internal
quotation marks omitted). If the Complaint does not allege a primary violation, then the § 20(a)
claim must be dismissed.
DISCUSSION
The issues on this motion are whether the Section 10(b) claim is time barred and whether
the Complaint sufficiently pleads two of the six elements of securities fraud – a material
misrepresentation or omission, and scienter.
A.

Statute of Limitations

Because the statute of limitations is an affirmative defense, Defendants carry the burden
of showing that Plaintiffs failed to plead timely claims. See Staehr v. Hartford Fin. Servs. Grp.,
Inc., 547 F.3d 406, 425 (2d Cir. 2008) (“The lapse of a limitations period is an affirmative
defense that a defendant must plead and prove.” (citing Fed. R. Civ. P. 8(c)(1))). Dismissal
based on an affirmative defense at the complaint stage is warranted only if “it is clear from the
face of the complaint, and matters of which the court may take judicial notice, that the plaintiff’s
claims are barred as a matter of law.” Id. (emphasis and internal quotation marks omitted);
accord Ellul v. Congregation of Christian Bros., 774 F.3d 791, 798 n.12 (2d Cir. 2014).

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A private right of action under Section 10(b) and 10b-5 may be brought not later than the
earlier of two years after the discovery of the facts constituting the violation or five years after
the violation. 28 U.S.C.A. § 1658(b). “‘Discovery’ in this context is stricter than inquiry notice,
and occurs when ‘a reasonably diligent plaintiff would have sufficient information . . . to
adequately plead [its claim] in a complaint.’” Charles Schwab Corp. v Bank of Am. Corp., 883
F.3d 68, 94 (2d Cir, 2018) (quoting City of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 637 F.3d
169, 175 (2d Cir. 2011)).
The Complaint on its face, taking all inferences in Plaintiff’s favor, does not reveal
precisely when Plaintiff would have discovered sufficiently detailed information as to every
element of its securities fraud claim to satisfy the heightened pleading standard under the PSLRA
and Rule 9(b); nor does the Complaint show as a matter of law that all of such facts could been
discovered with reasonable diligence before March 2, 2015, two years before the initial
complaint was filed. Although there were many news reports of delays and accounting
irregularities, Defendants countered those statements throughout the Class Period both explicitly
with denials and implicitly by adhering to the same accounting practices. Only with the “quit
claim” sale to Westinghouse in October 2015, for no cash consideration and only the release of
liabilities, did it become clear to outsiders that the Company’s accounting for the Nuclear
Projects significantly overstated their value on the CBI financial statements and that senior
executives involved with both the sale and the financial statements must have known that fact.
B.

Section 10(b) Violation
1. Material Omissions and Misrepresentations

As noted above, the first element of a Rule 10b-5 violation is that the defendant made an
omission or misstatement of material fact. “[Section] 10(b) and Rule 10b-5 do not create an

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affirmative duty to disclose any and all material information. Disclosure is required under these
provisions only when necessary to make . . . statements made, in the light of the circumstances
under which they were made, not misleading.” Matrixx Initiatives, Inc. v. Sircusano, 563 U.S.
27, 44 (2011) (internal quotation mark omitted) (quoting Rule 10b-5, 17 C.F.R. § 240.10b-5(b)).
A statement or omission is materially misleading when there is “a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the reasonable investor as having
significantly altered the total mix of information made available” to the market. Id. at 38
(internal quotation marks omitted).
The PSLRA provides a safe harbor for forward looking statements. See 15 U.S.C. § 78u5(c). While forward looking statements are not actionable so long as they are accompanied by
“meaningful cautionary language,” a forward looking statement may nonetheless be actionable if
made with “actual knowledge that it was false or misleading.” Slayton v. Am. Exp. Co., 604 F.3d
758, 766 (2d Cir. 2010) (describing 15 U.S.C. § 78u-5(c)).
“Financial statements filed with the [SEC] which are not prepared in accordance with
generally accepted accounting principles will be presumed to be misleading or inaccurate . . ..”
17 C.F.R. § 210.4-01. Though “allegations of GAAP violations or accounting irregularities,
standing alone, are insufficient to state a securities fraud claim[,] . . . where such allegations are
coupled with evidence of corresponding fraudulent intent,” the allegations might be sufficient to
state a claim. Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000).
In Omnicare, Inc. v. Laborers Dist. Council Const. Indus., 135 S. Ct 1318 (2015), the
Supreme Court held that an opinion statement is actionable if (1) the speaker did not hold the
belief she professed, (2) the supporting fact[s] she supplied were untrue, or (3) the stated opinion,

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though sincerely held and otherwise true as a matter of fact, omitted information whose omission
made the stated opinion misleading to a reasonable investor. Id. at 1327, 1333.
A statement of fact is objectively verifiable, but a statement of opinion is not. Axar
Master Fund, Ltd. v Bedford, No. 17 Civ. 0426, 2018 WL 1547093, at *8 (S.D.N.Y. Mar. 29,
2018) (citing Tongue v. Sanofi, 816 F.3d 199, 210–11 (2d Cir. 2016)). Because “[i]t is wellsettled that GAAP provisions are subject to interpretation and tolerate a range of reasonable
treatments, leaving the choice among alternatives to the management,” Harris v. AmTrust Fin.
Servs., Inc., 135 F. Supp. 3d 155, 171 (S.D.N.Y. 2015) (citing Thor Power Tool Co. v. C.I.R.,
439 U.S. 522, 544 (1979)), aff’d, 649 F. App’x 7 (2d Cir. 2016), where there is no objective
standard for an accounting decision, that decision should be construed as a statement of opinion
and be analyzed under Omnicare. See, e.g., Fait v. Regions Fin. Corp., 655 F.3d 105, 113 (2d
Cir. 2011) (determining adequacy of loan loss reserves “is not a matter of objective fact” but is
“inherently subjective”); In re Deutsche Bank AG Sec. Litig., No. 09 Civ. 1714, 2016 WL
4083429, at *23 (S.D.N.Y. Jul. 25, 2016) (finding that the defendants’ failure to disclose the
company’s exposure to subprime and nonprime residential mortgage markets, in violation of
GAAP, is not actionable because the plaintiffs failed to meet the Omnicare standard).
a. The Change Order Statements
ASC § 605-35-25-31 states, “Recognition of additional contract revenue relating to
claims [based on disputed or unapproved change orders] is appropriate only if it is probable that
the claim will result in additional contract revenue and if the amount can’t be reliably estimated.”
(emphasis added). The same ASC provides that those two requirements are satisfied “by the
existence of all of the following conditions: (a) [t]he contract or other evidence provides a legal
basis for the claim . . .; (b) [a]dditional costs are caused by circumstances that were unforeseen . .

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. and are not the result of deficiencies in the contractor’s performance; (c) [c]osts associated with
the claim are identifiable or otherwise determinable and are reasonable in view of the work
performed; (d) [t]he evidence supporting the claim is objective and verifiable . . . .” Id. At least
the first two of these conditions -- legal basis, foreseeability and deficient performance -- require
subjective judgments and are therefore assessed under the Omnicare standard for opinions.
In its Forms 10-K and 10-Q filed during the Class Period, CBI reported significant
amounts of unapproved change orders as assets and revenues, by recording them as contract
price adjustments. CBI thus implicitly represented that collecting on these change orders was
“probable,” and CBI explicitly stated that “recorded unapproved change orders and claims reflect
our best estimate of recovery amounts.” The Complaint adequately alleges that these statements
of opinion were false and that Defendants knew that they were false. The Complaint alleges that
CBI knew that its claim for the unapproved change orders was disputed and the subject of
litigation, and that CBI lacked a legal basis for the claims, which were the result of deficiencies
in CBI’s performance. The EPC Agreements provided that CBI was not entitled to recover if the
change orders were a result of CBI’s failure to comply with NRC standards or failure to produce
requisite manufacturing parts. The Nuclear Projects’ cost overruns and delays allegedly were
due to the Lake Charles facility’s failure to produce necessary parts, CBI’s Stop Work Order and
CBI’s inability to properly track and store the manufactured parts.1

1

CBI had consortium agreements with Westinghouse, under which Westinghouse was obligated
to cover some of the cost overruns. Westinghouse and CBI disputed the scope of
Westinghouse’s responsibility for the cost overruns. In a February 25, 2014, conference,
Defendant Asherman acknowledged the dispute surrounding the unapproved change orders and
asserted that CBI would be responsible for at most half of the cost overruns and that
Westinghouse would be responsible for the remaining half.
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CBI’s argument that Plaintiff’s allegations are “nothing more than disagreement with
[Defendants’] accounting judgment” is rejected. CBI reliance on N. Collier Fire Control and
Rescue Dist. Firefighter Pension Plan and Plymouth Cty. Ret. Assoc. v. MDC Partners, Inc., No.
15 Civ. 6034, 2016 WL 5794774 (S.D.N.Y. Sept. 30, 2016), for this proposition is inapposite. In
MDC, the plaintiff alleged that the defendants should have recorded a goodwill impairment
because the firm’s revenues had declined and a significant client had departed; in effect, the
defendants had made a judgment and prediction about an uncertain outcome given these events.
Id. at *10–11. Unlike the present case, the plaintiff in MDC did not allege objective facts that
would weigh heavily, if not overwhelmingly, against the outcome that the defendants had
predicted. See id.
That CBI’s accounting drew no objection from its auditors does not change the analysis.
The issue on this motion is whether the Complaint states a claim against Defendants, and not
what the non-party auditors may have known or believed that caused them to approve the
financial statements as being prepared in accordance with GAAP.
b. The Goodwill Statements
Under SFAS No. 141, goodwill is “an asset representing the future economic benefits
arising from other assets acquired in a business combination that are not individually identified
and separately recognized.” Business Combinations, SFAS No. 141 ¶ 3j (Fin. Accounting
Standards Bd. 2007). “[I]t is well-settled in the Second Circuit that goodwill estimates are
opinion statements because they depend on management’s determination of the fair value of the
assets acquired and liabilities assumed, which are not matters of objective fact and will vary
depending on the particular methodology and assumptions used.” MDC, 2016 WL 5794774, at
*20 (internal quotation marks omitted); accord Fait, 655 F.3d at 110–11. Where an omission is

15

based on an accounting write down’s timing, it is not sufficient to simply allege the write down
should have occurred earlier; instead, the complaint must include factual allegations from which
a reader could infer Defendants intentionally or recklessly failed to take write downs when they
should have. Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of
Commerce, 694 F. Supp. 2d 287, 301 (S.D.N.Y. 2010) (citing S. Cherry St., L.L.C. v. Hennessee
Grp., LLC, 573 F.3d 98, 109 (2d Cir. 2009)); accord In re Forcefield Energy Sec. Litig., No. 15
Civ. 3020, 2017 WL 1319802, at *13 (S.D.N.Y. Mar. 29, 2017).
Here, the Complaint includes factual allegations that raise an inference that Defendants
intentionally or recklessly failed to write down their goodwill accounting. GAAP requires a
company to assess goodwill at least annually and whenever “an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its
carrying amount.” Goodwill and Other Intangible Assets, SFAS No. 142 ¶ 28 (Fin. Accounting
Standards Bd. 2001); see City of Omaha v. CBS Corp., No. 08 Civ. 10816, 2010 WL 1029290 at
*7 (S.D.N.Y. Mar. 16, 2010), aff’d sub nom. City of Omaha, Neb. Civilian Emps.’ Ret. Sys. v.
CBS Corp., 679 F.3d 64 (2d Cir. 2012). The Complaint alleges that goodwill was not written
down until the sale to Westinghouse, despite known delays, cost overruns, growing liability
disputes and CBI’s contemplation and eventual execution of a quitclaim deed to relieve itself of
liabilities associated with Shaw. These allegations are sufficient to survive a motion to dismiss.
c. The Progress Statements
The Complaint adequately pleads misstatements and material omission as to the Nuclear
Projects’ progress. Throughout the Class Period, Defendants represented to investors in
conference calls that the Nuclear Projects were meeting its milestones without delay. For
example, on April 23, 2014, Defendants CBI and Asherman stated that, “[CBI] made some good

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progress. I am very pleased with the milestone, as I mentioned, on the main module” and that
“Lake Charles has gone through some extensive [Nuclear Regulatory Commission] audits
recently and I think passed those pretty well.” However, on January 13, 2014, CBI had instituted
a Stop Work Order for three months, due to “systematic problems with production activities, the
corrective action program and quality assurance program procedures” in its Lake Charles
facility. In this Stop Work Order, CBI admitted that that “multiple adverse conditions” had been
identified, such as “[the] welder qualification, the qualification and compliance of welding
procedures, and documentation of fabrication activities [at the Lake Charles facility].” Failure to
disclose the three-month long Stop Work Order makes Asherman’s and CBI’s statement
misleading as to the status of the Nuclear Projects. See Omnicare, 135 S. Ct. at 1329 (“If a
registration statement omits material facts about the issuer’s inquiry into, or knowledge
concerning, a statement of opinion, and if those facts conflict with what a reasonable investor,
reading the statement fairly and in context, would take from the statement itself, then [that
omission] creates liability.”).
CBI’s argument that the Progress Statements are mere puffery is unpersuasive. Though
“[g]eneral statements about reputation, integrity, and compliance with ethical norms are
inactionable ‘puffery,’” City of Pontiac Policemen’s and Firemen’s Ret. Sys. v. UBS AG, 752
F.3d 173, 183 (2d Cir. 2014), “there is a difference between enthusiastic statements amounting to
general puffery and opinion-based statements that are anchored in misrepresentations of existing
facts,” In re Bank of Am. Corp. Sec., Derivative & ERISA Litig., 757 F. Supp. 2d 260, 310
(S.D.N.Y. 2010). Unlike in UBS AG, where the statements at issue contained qualifiers such as
“aims to,” “wants to” and “should,” 752 F.3d at 183, the Progress Statements here definitively

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claimed that CBI “continue[s] to make progress and substantial progress on [the Nuclear
Projects]” despite reports of delays, NRC investigations and the three month Stop Work Order.
CBI’s argument that the Progress Statements were forward looking statements protected
under the PSLRA safe harbor is also unpersuasive. “[I]t is well recognized that even when an
allegedly false statement has both a forward looking aspect and an aspect that encompasses a
representation of present fact, the safe harbor provision of the PSLRA does not apply.” In re
SLM Corp. Sec. Litig., 740 F. Supp. 2d 542, 556 (S.D.N.Y. 2010). Here, the Progress Statements
included both forward looking aspects -- that CBI does not believe that its pending contractual
claims and disputes will have a materially adverse effect on its future results of operations -- and
alleged misrepresentation of present fact -- that the Nuclear Projects were achieving important
milestones and that CBI passed the NRC investigations successfully.
2. Scienter
The Complaint sufficiently pleads scienter as to each Defendant. The PSLRA requires a
plaintiff to “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)(A). “This standard requires courts
take into account ‘plausible opposing inferences.’” Matrixx, 563 U.S. at 48 (quoting Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323 (2007)). “For an inference of scienter to
be strong, ‘a reasonable person [must] deem [it] cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.’” ATSI, 493 F.3d at 99 (quoting
Tellabs, 551 U.S. at 324) (alterations and emphasis in original). In making this determination, a
court must review “all the allegations holistically.” Tellabs, 551 U.S. at 326. A plaintiff may
satisfy the scienter requirement by “alleging facts (1) showing that the defendants had both
motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of

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conscious misbehavior or recklessness.” Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 106
(2d Cir. 2015) (quoting ATSI, 493 F.3d at 99).
Conscious misbehavior “encompasses deliberate illegal behavior,” Novak, 216 F.3d at
308, whereas recklessness includes “conscious recklessness” or “a state of mind approximating
actual intent, and not merely a heightened form of negligence,” S. Cherry St., 573 F.3d at 109. A
plaintiff adequately pleads recklessness where it alleges that the defendant: (1) knew facts or had
access to information contradicting its public statements; or (2) failed to review or check
information that it had a duty to monitor. See Novak, 216 F.3d at 308. “[W]here plaintiffs
contend defendants had access to contrary facts, they must specifically identify the reports or
statements containing this information.” Teamsters Local 445 Freight Div. Pension Fund v.
Dynex Capital Inc., 531 F.3d 190, 196 (2d Cir. 2008) (quoting Novak, 216 F.3d at 309).
Furthermore, although GAAP violations do not independently sustain an inference of scienter,
they may contribute to that inference. See Rothman v. Gregor, 220 F.3d 81, 98 (2d Cir. 2000);
accord Varghese v. China Shenghuo Pharm. Holdings, Inc., 672 F. Supp. 2d 596, 608 (S.D.N.Y.
2009).
“To prove liability against a corporation, of course, a plaintiff must prove that an agent of
the corporation committed a culpable act with the requisite scienter, and that the act (and
accompanying mental state) are attributable to the corporation.” Teamsters Local 445, 531 F.3d
at 195.
a. The Individual Defendants’ Scienter
The Complaint’s allegations of recklessness are sufficient to support an inference of
scienter that is “at least as compelling as any opposing inference one could draw from the facts
alleged.” Tellabs, 551 U.S. at 324. The Complaint alleges that the Individual Defendants knew

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facts or had access to information contradicting the Company’s public statements in SEC filings
that they signed or certified or in their own oral statements on behalf of the Company. First, the
CEO, CFO and Chief Accounting Officer not only had access to the facts underlying the
Company’s financial reporting, they were responsible for it and attested to its accuracy by
signing or certifying the Company’s Forms 10-K and 10-Q.
Second, the CWs stated that the Individual Defendants had access to and accessed
monthly reports that contained details on (1) cost overruns that dated back to 2009 and that
continued growing through 2015; (2) overruns and delays caused by the Lake Charles facility’s
failure to produce conforming materials for the Nuclear Projects; (3) overruns and delays caused
by CBI’s inability to properly track and ship materials; (4) overruns and delays caused by CBI’s
inability to properly store materials; and (5) delays caused by the Stop Work Order on the Lake
Charles facility. The Individual Defendants also participated in meetings where the cost
overruns and delays associated with the Nuclear Projects were discussed. Defendants’ failure to
comply with GAAP in their SEC filings bolsters the inference of scienter. See Rothman, 220
F.3d at 98.
Third, the monthly reports on Sharepoint, the Stop Work Order, the NRC investigations,
and the unapproved change orders in dispute with the Vogtle and V.C. Summers Plants’ owners
put the Individual Defendants on notice that many of the unapproved change orders should not
have been accounted for as additional income or assets.
That some of the CW’s lacked direct contact with the Individual Defendants does not
undermine their evidence. CW2 and CW3 were not merely opining about facts as to which they
had no personal knowledge. Instead they detailed the types of relevant information made
available to senior executives via the Sharepoint system, and they confirmed that numbers from

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the Company’s large contracts were discussed at monthly meetings. These statements taken
together are sufficient to raise a strong inference of scienter. See, e.g., New Orleans Emps. Ret.
Sys. v. Celestica, Inc., 455 F. App’x 10, 13 (2d Cir. 2011) (summary order) (finding that the
confidential witness’ statement that they “either provided information about rising inventory
levels to [the defendants] directly or participated in meetings where they heard [the defendants]
informed by others about the company’s inventory management problems” raised strong
inference of scienter.); City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed Martin Corp., 875 F.
Supp. 2d 359, 369 (S.D.N.Y. 2012) (finding that the confidential witnesses’ statement that they
“told [the defendants] that the financial goals for IS & GS for 2009 were overstated and could
not be achieved” and that the defendants had “a practice of submitting ‘lowball’ bids for
contracts in an effort to close contracts, despite knowing that Lockheed Martin could not perform
the work it bid on without large cost overruns” raised strong inference of scienter.).
b. Corporate Scienter
Because the Complaint adequately alleges scienter as to the Individual Defendants, CBI’s
scienter is inferred from theirs. See, e.g., Teamsters Local 445, 531 F.3d at 195 (“[T]he most
straightforward way to raise [an inference of requisite scienter] for a corporate defendant will be
to plead it for an individual defendant.”).
B.

Section 20(a) Violation

As the Court has denied Defendants' Motion to Dismiss Plaintiffs’ § 10(b) claim, and
Plaintiffs have otherwise adequately alleged a control person violation, Defendants’ motion to
dismiss Plaintiffs’ Section 20(a) claim is denied.

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CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is DENIED. The Clerk of
Court is respectfully directed to close the motions at Docket Nos. 91 and 97.
Dated: May 24, 2018
New York, New York

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