Pomerantz Achieves Victory for Defrauded Chicago Bridge & Iron Investors

POMERANTZ MONITOR | MAY JUNE 2022

By Joshua B. Silverman

In a victory for investors, Pomerantz, as counsel for two of the three court-appointed class representatives, achieved a $44 million settlement in a securities fraud class action against Chicago Bridge & Iron Co., N.V. (“CBI”) and its former Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. The Honorable Lorna G. Schofield of the United States District Court for the Southern District of New York granted preliminary approval of the settlement on March 30, 2022 and set the final approval hearing for July 25, 2022.

CBI is an energy services company specializing in the engineering, procurement and construction of energy plants and related facilities. In 2013, CBI entered the nuclear fabrication business by acquiring The Shaw Group for $3.3 billion. The crown jewel of the acquisition was Shaw’s nuclear construction unit, which was part of a consortium building the first new nuclear plants in the United States in decades, two at a Georgia facility called Vogtle and two at the V.C. Summer facility in South Carolina. CBI and its CEO claimed to have conducted thorough due diligence prior to the acquisition and to have gained a clear understanding of the status of the nuclear projects.

Between October 2013 and January 2015, CBI and its executives made several positive but false statements about the progress of the nuclear projects, hid adverse information about schedule delays and cost overruns, and claimed in periodic reports filed with the Securities and Exchange Commission that there were no indicators of impairment despite significant internal red flags indicating that the nuclear projects were unlikely to ever yield the profits that the company had modeled. They also misrepresented CBI’s ability to recover for unapproved change orders (“UCOs”)—massive but disputed invoices for expenses stemming from design changes. Although the electric utilities that owned the nuclear projects and CBI’s consortium partner refused to reimburse CBI for the UCOs, CBI nonetheless told investors that payment was probable and booked them as revenue.

In mid-2014, institutional analyst firm Vertical Research and short seller Prescience Point each put out negative reports about CBI’s nuclear construction business. By early 2015, it was clear to CBI (and increasingly to investors) that the nuclear construction business was a disaster. CBI began to negotiate a “quit claim” deal with its consortium partner, Westinghouse, to essentially walk away from the nuclear construction projects, stemming losses but receiving virtually nothing for the business it had paid billions for just two years earlier. In October 2015, CBI announced that it would transfer the nuclear construction business to Westinghouse for only a true up of expenses incurred during the transition.

Early motion practice wins established a momentum that carried plaintiffs to trial. First, plaintiffs defeated defendants’ attempt to transfer the lawsuit to the Southern District of Texas, where CBI would enjoy a “home court” advantage. Then, plaintiffs defeated defendants’ motions to dismiss.

Years of discovery developed strong evidence that defendants had concealed adverse information about the nuclear projects from investors. Pomerantz and other plaintiffs’ counsel reviewed over 9 million pages of documents and took approximately 30 depositions. They uncovered evidence that CBI had manipulated its financial reporting by mixing the nuclear construction business with other profitable businesses into a single reporting unit to hide deterioration and avoid a write-down, that both the owners and Westinghouse had rejected CBI’s view that the contracts required reimbursement of UCOs, and that CBI internally did not expect to be paid on many items booked as revenue for several years, if ever.

In addition to uncovering strong factual evidence, plaintiffs also put together a world-class slate of expert witnesses on the topics of market efficiency, damages/loss causation, accounting, and materiality. These experts were particularly crucial at class certification, where both sides’ economic experts testified during an eleven-hour hearing before the Special Master appointed by the Court, the Honorable Shira Scheindlin (Ret.). Pomerantz played a key role, cross-examining defendants’ expert and exposing the weaknesses in her price impact analysis. The Special Master ruled in a 107-page Report & Recommendation that certification should be granted, which the District Court adopted. After full briefing, the United States Court of Appeals declined to consider an appeal of that ruling.

Unbowed, and despite the considerable evidentiary record amassed by plaintiffs, defendants moved for summary judgment on all claims. After full briefing, the district court denied that motion and set the case for trial in February 2022.

Trial always involves risks, and this one more so than others. Defendants had won a jury trial of similar claims in Texas state court against a hedge fund that opted out of the class action. Although Pomerantz believed that its case did not suffer from the flaws that sunk the Texas case, the Texas trial showed that the risk of an adverse verdict was substantial. Against these risks, the class action plaintiffs had limited upside to proceeding to trial. The corporate defendant and its parent had both declared bankruptcy, and the individual defendants did not have sufficient resources to satisfy a large jury award. While Pomerantz and other plaintiffs’ counsel retained bankruptcy counsel to make sure that bankruptcy releases did not bar class claims, the bankruptcy effectively meant that recovery was limited to a rapidly eroding insurance stack.

Acknowledging the risks that both sides faced at trial, the parties decided to take a final run at mediation before the Honorable Layn R. Phillips (Ret.). Ultimately, both sides accepted a mediator’s proposal to settle the case for $44 million, an excellent recovery under the circumstances. Despite the bankruptcy, Pomerantz’s perseverance resulted in a class recovery that was significantly higher than the median for comparable class actions.