In an article dated August 22, 2007, an appeals court has affirmed a lower court decision dismissing a securities suit brought by a labor union's pension fund against Integrated Electrical Services Inc. In the decision on Tuesday, the three-judge panel of the U.S. Court Appeals for the Fifth Circuit agreed with the lower court that the Central Laborers' Pension Fund failed to meet the pleading standards of the Private Securities Litigation Reform Act.
According to the Company’s FORM 10-Q For the Quarterly Period Ended June 30, 2006, on December 21, 2005, the Court held a telephonic hearing relating to the motion to dismiss. On January 10, the Court issued a memorandum and order dismissing with prejudice all claims filed against the Defendants. Plaintiff in the securities class action filed its notice of appeal on February 2, 2006. On February 28, 2006 IES filed a suggestion of bankruptcy informing the Court that the action was automatically stayed because IES had filed for Chapter 11 bankruptcy. On March 20, 2006 Plaintiffs filed a partial opposition to IES’s suggestion of bankruptcy arguing that the action against non-bankrupt co-defendants was not stayed. On July 24, 2006 the United States Fifth Circuit Court of Appeals set the briefing scheduling for the appeal proceedings. Appellant’s brief is due on September 5, 2006. Appellee’s brief is due on October 5, 2006. Appellant’s reply brief is due on October 19, 2006, fourteen days after Appellee’s brief.
As disclosed by the same SEC filing, between August 20 and October 4, 2004, five putative securities fraud class actions were filed against IES and certain of its officers and directors in the United States District Court for the Southern District of Texas. The five lawsuits were consolidated under the caption In re Integrated Electrical Services, Inc. Securities Litigation, No. 4:04-CV-3342. On March 23, 2005, the Court appointed Central Laborer’ Pension Fund as lead plaintiff and appointed lead counsel. Pursuant to the parties’ agreed scheduling order, lead plaintiff filed its amended complaint on June 6, 2005. The amended complaint alleges that defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading statements during the proposed class period of November 10, 2003 to August 13, 2004. Specifically, the amended complaint alleges that defendants misrepresented the Company’s financial condition in 2003 and 2004 as evidenced by the restatement, violated generally accepted accounting principles, and misrepresented the sufficiency of the Company’s internal controls so that they could engage in insider trading at artificially-inflated prices, retain their positions at the Company, and obtain a credit facility for the Company. On August 5, 2005, the defendants moved to dismiss the amended complaint for failure to state a claim. The defendants argued, among other things, that the amended complaint fails to allege fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure and fails to satisfy the heightened pleading requirements for securities fraud class actions under the Private Securities Litigation Reform Act of 1995. Specifically, defendants argue that the amended complaint does not allege fraud with particularity as to numerous GAAP violations and opinion statements about internal controls, fails to raise a strong inference that defendants acted knowingly or with severe recklessness, and includes vague and conclusory allegations from confidential witnesses without a proper factual basis. Lead plaintiff filed its opposition to the motion to dismiss on September 28, 2005, and defendants filed their reply in support of the motion to dismiss on November 14, 2005.
The original class action lawsuit was filed in the United States District Court for the Southern District of Texas on behalf of all securities purchasers of the Integrated Electrical Services ('IES' or the 'Company') from November 10, 2003 through August 13, 2004 inclusive (the 'Class Period').
The complaint charges IES, and certain of its officers and directors, with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. More specifically, the Complaint alleges that the Company failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them: (1) that the Company failed to appropriately adjust for actual costs in a series of large contracts; (2) that with respect to one contract the Company inappropriately accounted for general and administrative costs; (3) that the Company incorrectly recorded margin on a particular contract; (4) that the Company improperly recognized revenue on the substantial contract; (5) that the Company lacked adequate internal controls; and (6) that as a result of the foregoing the Company's financial results violated the Generally Accepted Accounting Principles ('GAAP') and were materially inflated at all relevant times.
On August 2, 2004, IES announced that it had rescheduled its fiscal 2004 third quarter earnings release and conference call, due to its ongoing evaluation of certain large and complex projects at one subsidiary that experienced project management changes in the latter part of the third quarter. On this news, shares of IES fell $0.85 per share, or 10.08 percent to close, on August 3, 2004, at $7.58 per share. On August 13, 2004, IES announced that it would not be able to file its fiscal 2004 Third Quarter Report on Form 10-Q in a timely manner and that the delay in filing may result in a default under the terms of its outstanding debt and could affect IES's ability to secure surety bonds. IES further announced that its independent auditors had identified two material weaknesses in its internal controls, that it was withdrawing its previously announced earnings estimates for the fourth quarter of fiscal 2004, and that IES may have to restate its previously reported financial results. Following this announcement, shares of IES common stock fell $2.65 per share, or 40%, to close at $3.93 per share on extremely high trading volume.