Opinion ID: 62908
Heading Depth: 2
Heading Rank: 2

Heading: Viability of the LSP-Pike Project

Text: Plaintiffs allege that Shaw failed to timely or fully disclose material concerns affecting the viability of a major construction project. In September 2001, Shaw announced that it had signed an agreement with NRG Energy, Inc. to construct two power plants, one of which was known as the LSP-Pike project. On August 5, 2002, however, Shaw announced that NRG had experienced liquidity problems and would not make its next scheduled $32 million milestone payment on the project. See Shaw Group Inc., Press Release (Form 8-K) (Aug. 5, 2002). Shaw also announced that it had reached an agreement with NRG to acquire substantially all of the assets of Pike in exchange for forgiveness of current sums owed to Shaw and a payment of $43 million to NRG by Shaw. Id. Shaw noted that if the companies could not implement the agreement and NRG failed ultimately to complete its scheduled payment, there could be a material adverse effect on Shaw's ability to meet its earnings expectations. Id. Shaw's stock price immediately dropped. Whether viewed from the perspective of substantive liability standards, the complaint's use of a confidential source, or the gap between plaintiffs' pleading and their misleading characterizations of the complaint on appeal, these allegations fail to support a strong inference of scienter against Bernhard, Belk or Shaw. As with the preceding claims, Bernhard and Belk are not specifically connected in any way to Shaw's August 2002 disclosure or its nondisclosures or the timing of disclosures concerning this project, nor does the confidential source tie the defendants to ongoing knowledge about the project's status. First, plaintiffs' underlying theories of securities fraud are that Shaw (a) should have disclosed earlier its knowledge that the project was in financial jeopardy or (b) did not disclose enough about the project's difficulties. They cite no caselaw or SEC rules to support these claims. In general, a corporation does not commit securities fraud merely by failing to disclose all nonpublic material information in its possession. Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir. 1996), superseded by statute on other grounds as recognized in Greebel v. FTP Software, Inc., 194 F.3d 185, 197 (1st Cir. 1999). This court has affirmed that [l]iability under Rule 10b-5 for nondisclosure arises if there is a duty to speak. Kaplan v. Utilicorp United, Inc., 9 F.3d 405, 407 (5th Cir.1993). Plaintiffs do not explain why Shaw had an affirmative duty to disclose NRG's missed payments or other problems concerning this one construction project before August 5, 2002. Similarly, their claim of incomplete disclosure is actionable only if what they said is misleading. [I]n other words it must affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists. Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir.2002); see also McDonald v. Kinder-Morgan, Inc., 287 F.3d 992, 998 (10th Cir.2002) ([A] duty to disclose arises only where both the statement made is material, and the omitted fact is material to the statement in that it alters the meaning of the statement.) (internal quotation marks omitted). Plaintiffs' allegations do not meet this standard. Even assuming arguendo that the omitted information was material, Shaw's announcement neither stated nor implied anything about the history of Shaw's relationship with NRG. Shaw's omission of information about its alleged problems with NRG before August 2002 did not make its announcement untrue or misleading. [12] Second, plaintiffs make no attempt to state with particularity facts giving rise to a strong inference that either Bernhard or Belk knew or was severely reckless in not knowing about the LSP-Pike project difficulties long before NRG missed a payment in August 2002. We indulge the assumption that the confidential source occupied a position that enabled him to know about NRG's internal financial problems that ultimately caused it to miss a milestone payment. See ABC Arbitrage, 291 F.3d at 353. Nonetheless, the complaint does not indicate how or when the officers became aware of what the confidential source allegedly knew. Cf. Kushner v. Beverly Enters., Inc., 317 F.3d 820, 828 (8th Cir.2003) (holding that an allegation that someone involved in a fraudulent scheme reported to one of the named defendants was not specific enough to support a strong inference that [the defendant] knew of or participated in the fraudulent practice while it was occurring). Third, the plaintiffs contend in their appellate brief that their confidential source arranged a special meeting in April 2002 with the defendants and others to discuss the LSP-Pike project problems. But the complaint tells a different story. Although it states that the source organized a meeting, it does not state that these defendants attended or how they allegedly learned what was discussed at the meeting. [13] As has been noted, we review only the well-pleaded facts in the complaint. This new allegation may not be considered. Blackwell, 440 F.3d at 289. Plaintiffs also allege in their brief but not in their complaint that it is inconceivable that the defendants did not know about the status of the LSP-Pike project because Shaw's financial health was dependent on, in large part, the success of the LSP-Pike project, a $340 million contract. The complaint states neither that Shaw's financial health depended on the project nor that it was a $340 million contract. In any event, defendants' status within the company is inadequate for an inference of knowledge about alleged misstatements. See Abrams, 292 F.3d at 432. No viable inferences of guilty knowledge as to these defendants arises from plaintiffs' allegations concerning the LSP-Pike project.