The original complaint alleges that during the Class Period, defendants falsely represented that Shaw's internal controls relating to financial reporting were adequate and effective, and, in the second quarter of 2006, materially overstated Shaw's revenues and understated reported losses, causing its reported net income and earnings per share to be materially overstated. The Company's false statements, reported in a press release and quarterly SEC filings, deceived investors and caused Shaw securities to trade at artificially inflated prices throughout the Class Period.
Defendants were motivated to engage in the wrongdoing alleged herein in order to allow defendant, Shaw's CEO, to sell $17.8 million in Shaw Stock, and defendant Shaw's CFO to sell $1.5 million in Shaw stock, at artificially inflated prices.
The complaint alleges that the true facts came to light on July 10, 2006. On that day, before the opening of ordinary trading, Shaw issued a press release announcing results for its third quarter of 2006. In addition, the Company also announced that it overstated its reported net income by 13% in the second quarter of 2002. A restatement would be necessary to correct for the inaccurate financial statements contained in the Company's previously filed quarterly report. The restatement would correct the Company's previously improper accounting for revenues received from a construction contract and for unrecognized losses incurred by an entity in which Shaw had a minority interest. The press release warned that the Company's previously filed financial statement for the second quarter of 2006 "should not be relied upon". Defendant Shaw's CFO stated that the errors were the result of "material weaknesses in [Shaw's] internal controls over financial reporting."
The complaint further alleges that in reaction to this news, the price of Shaw common stock fell by 16.6% in one day, from $25.75 per share on July 7, 2007 (the previous trading day) to $22.08 per share on July 10, 2006, on unusually heavy trading volume of 9.3 million shares.
As summarized by the Company’s FORM 10-Q for the quarterly period ended November 30, 2007, the Company and certain of its current and former officers, have been named in a purported shareholder class action lawsuit alleging violations of federal securities laws. This suit is styled as City of Brockton Retirement System v. The Shaw Group Inc., et al., and was filed on October 10, 2006, in the U.S. District Court for the Southern District of New York, Case No. 06-CV-8245. The complaint alleges claims under Sections 10(b) and Rule 10b-5 promulgated thereunder, and 20(a) of the Exchange Act on behalf of purchasers of the Company’s common stock during the period from January 6, 2006 to July 9, 2006. The complaint alleges, among other things, that: (1) the Company falsely represented that internal controls were adequate and effective in the second quarter of fiscal year 2006; and (2) in the second quarter of 2006, the Company materially overstated revenues and understated losses. The complaint does not specify the amount of damages sought. To date, the action has not been certified as a class action by the Court. On September 25, 2007, the Judge signed an order appointing as lead plaintiffs The City of Brockton Retirement System and The Norfolk County Retirement System, and appointing as lead counsel for plaintiffs the firm of Labaton Sucharow & Rudoff LLP. On December 3, 2007, plaintiffs served an amended class action complaint, which includes the same substantive allegations and the same two claims as the initial complaint.
According to a Decision of Interest dated March 25, 2008, Defendants move to dismiss the Amended Complaint for failure to state a claim under the heightened pleading standards set forth by Congress in the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. §78u-4, as interpreted by the United States Supreme Court in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007). The motion is granted.