Indiana Electrical Workers' Pension Trust Fund IBEW v. Shaw Group, Inc.

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit

FILED
July 29, 2008

No. 06-30908 Charles R. Fulbruge III
Clerk

INDIANA ELECTRICAL WORKERS’ PENSION TRUST FUND IBEW;
PLUMBERS AND PIPEFITTERS LOCAL UNION NO. 630 PENSION-
ANNUITY TRUST FUND; CARPENTERS PENSION FUND, of Baltimore,
Maryland; HAWAII LABORERS PENSION PLAN

Plaintiffs – Appellees
v.

SHAW GROUP INC; TIM BARFIELD, JR; J M BERNHARD, JR;
RICHARD F GILL; ROBERT BELK

Defendants – Appellants

Appeal from the United States District Court
for the Eastern District of Louisiana

Before JONES, Chief Judge, and STEWART, and CLEMENT, Circuit Judges.
EDITH H. JONES, Chief Judge:
A putative class of purchasers of Shaw Group, Inc. (“Shaw”) common stock
sued Shaw and four of its corporate officers alleging that Shaw engaged in a
scheme to misrepresent the true nature of the company’s financial condition to
the public and inflate its stock price. Shaw moved to dismiss for failure to
satisfy the Private Securities Litigation Reform Act’s (“PSLRA”) heightened
pleading requirements for securities fraud cases, but the district court denied
the motion without a written opinion. On this interlocutory appeal, we hold that
the complaint failed to allege facts from which a “strong inference of scienter”
 No. 06-30908

may be drawn against the defendants. We reverse and remand with instructions
to dismiss the case.
BACKGROUND
Shaw, which is headquartered in Baton Rouge, Louisiana, provides
engineering, design and construction services to the energy, chemical and
environmental industries, as well as federal, state and local governments. On
June 10, 2004, Shaw issued a press release announcing that the Securities and
Exchange Commission (“SEC”) was conducting an informal inquiry concerning
the company, which appeared to relate to the company’s use of the purchase
method of accounting for acquisitions. When the stock price fell on this notice,
several class action suits were filed. Union pension funds have become the lead
plaintiffs in the consolidated class action against defendants Shaw and its CEO
J. M. Bernhard, Jr., CFO Robert Belk, COO Tim Barfield and former COO
Richard Gill.1 The class period runs from October 19, 2000, to June 10, 2004.
Pleading violations of Section 10(b) of the Securities Exchange Act of 1934,
Rule 10b-5 securities fraud, and Section 20(a) control person liability, the
lengthy complaint alleges that Shaw knowingly or with severe recklessness
misled the public in five ways. See 15 U.S.C. § 78j(b); 17 C.F.R § 240.10b-5;
15 U.S.C. § 78t(a). First, Shaw artificially inflated its earnings by manipulating
the purchase method of accounting in connection with two acquisitions. Second,

1
At oral argument, plaintiffs conceded that Barfield and Gill should be dismissed as
defendants. Therefore, we do not examine the allegations against them. The allegations
against Barfield and Gill appear to rely on the “group pleading doctrine,” a judicial
presumption that statements in group-published documents are attributable to those
individuals with direct involvement in the everyday business of the company, which this court
has rejected. See Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 363-65
(5th Cir. 2004).

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Shaw prematurely recognized revenue on long-term engineering, procurement
and construction contracts by exploiting the percentage of completion method of
accounting in violation of generally accepted accounting principles (“GAAP”).
Third, Shaw failed to disclose material issues affecting the viability of a major
construction project. Fourth, the company overstated its backlog of contracts to
give a false impression that demand for its services was higher than it actually
was. Fifth, Shaw delayed paying vendors or did not pay them at all as a device
to improve its reported cash flow.
Plaintiffs allege that the true nature of Shaw’s financial condition leaked
to the stock market in a series of four disclosures beginning with the August
2002 announcement that a customer had failed to make a $32 million milestone
payment for work performed on a construction project, and continuing with
negative disclosures about the company’s earnings and operational
performance.2 The stock price dropped allegedly in response to each of these
events and to the final straw, the announcement of the SEC inquiry.
Curiously, given the dramatic nature of the allegations and the claims that
the company overstated assets by “hundreds of millions of dollars,” the company
never restated its earnings or financial reports based on the matters alleged by
plaintiffs; has not received a qualified audit report; has not reported that it was
the victim of any accounting irregularities; and has endured no liquidity crisis,
as might have been expected if massive accounting fraud had occurred. Finally,
we take judicial notice that the SEC terminated its inquiry against Shaw on
December 28, 2007, with no enforcement recommendation.

2
Shaw announced (1) negative financials and revised estimates on July 11, 2003, (2) a
downturn in earnings on October 16, 2003, and (3) a disappointing operational performance
on January 14, 2004.

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The district court denied Shaw’s motion to dismiss for failure to satisfy
Federal Rule of Civil Procedure 12(b)(6) in light of the PSLRA’s heightened
securities fraud pleading requirements. The court heard oral argument and
ruled from the bench with no written or orally stated opinion. This court
granted an interlocutory appeal. Shaw challenges the sufficiency of plaintiffs’
pleading of falsity, scienter and loss causation.
DISCUSSION
The PSLRA set high standards for pursuing federal securities fraud suits
in order to check “frivolous, lawyer-driven litigation, while preserving investors’
ability to recover on meritorious claims.” Tellabs, Inc. v Makor Issues & Rights,
Ltd., - - - U.S. - - -, 127 S. Ct. 2499, 2509 (2007). To be sure, the elements of a
fraud claim have stayed the same: a material misrepresentation or omission; a
defendant with scienter concerning the fraud; reliance; damages; and loss
causation. See Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d
261, 264 n.5 (5th Cir. 2007) (citing Dura Pharms. Inc. v. Broudo, 544 U.S. 336,
341-42, 125 S. Ct. 1627 (2005)). But the PSLRA enhanced the particularity
requirements for pleading fraud under Federal Rule of Civil Procedure 9(b) in
two ways. First, plaintiffs must “specify each statement alleged to have been
misleading, [and] the reason or reasons why the statement is misleading . . . .”
15 U.S.C. § 78u-4(b)(1)(B). Second, for “each act or omission alleged” to be false
or misleading, plaintiffs must “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).
In this case, we pretermit testing the sufficiency of the allegations of
falsity and loss causation because the complaint insufficiently alleges that the

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defendants acted with scienter. We review the sufficiency of the complaint
de novo on appeal. See Central Laborers’ Pension Fund v. Integrated Elec. Servs.
Inc., 497 F.3d 546, 550 (5th Cir. 2007) [hereinafter Central Laborers].
Tellabs affirmed a three step approach to reviewing scienter allegations
on a motion to dismiss a federal securities fraud case pursuant to the PSLRA.
Tellabs, 127 S. Ct. at 2509-10. First, the allegations must, as in federal
pleadings generally, be taken as true. Id. at 2509. Second, courts may consider
documents incorporated in the complaint by reference and matters subject to
judicial notice. Id. The facts must be evaluated collectively, not in isolation, to
determine whether a strong inference of scienter has been pled. Third, a court
must take into account plausible inferences opposing as well as supporting a
strong inference of scienter. Id. The inference of scienter must ultimately be
“cogent and compelling,” not merely “reasonable” or “permissible.” Id. at 2510.
Before Tellabs, this court had elaborated on the basis for scienter
allegations. The required state of mind is an “intent to deceive, manipulate, or
defraud” or “severe recklessness.” Rosenzweig v. Azurix Corp., 332 F.3d 854, 866
(5th Cir. 2003) (internal quotation marks omitted). Severe recklessness is
limited to those highly unreasonable omissions or
misrepresentations that involve not merely simple or even
inexcusable negligence, but an extreme departure from the
standards of ordinary care, and that present a danger of misleading
buyers or sellers which is either known to the defendant or is so
obvious that the defendant must have been aware of it.
Id. at 866 (quoting Nathenson v. Zonagen Inc., 267 F.3d 400, 408 (5th Cir.
2001)). Although circumstantial evidence can support a strong inference of
scienter, Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir. 2002),
allegations of motive and opportunity standing alone will not suffice.

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Rosenzweig, 332 F.3d at 867. Appropriate motive and opportunity allegations
may, however, “meaningfully enhance the strength of the inference of scienter.”
Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 368 (5th Cir.
2004) (quoting Nathenson, 267 F.3d at 412). Finally, this court has rejected the
group pleading approach to scienter and instead looks to the state of mind of the
individual corporate official or officials “who make or issue the statement (or
order or approve it or its making or issuance, or who furnish information or
language for inclusion therein, or the like) rather than generally to the collective
knowledge of all the corporation’s officers and employees acquired in the course
of their employment.” Id. at 366. Consequently, “it is only necessary for us to
address the allegations claimed to adequately show [scienter] on the part of the
[named officers]” to determine whether the complaint sufficiently pleads
scienter. Id. at 367.
With this landscape in mind, we turn to examine the scienter allegations
pertinent to each category of alleged misstatements and then to the attempted
motive and opportunity bolstering allegations against Bernhard and Belk.
A. Accounting Irregularities
The vast bulk of allegations in a very bulky complaint relate to Shaw’s
alleged abuse of or failure to follow GAAP. The accounting irregularities are of
two types: those relating to the way in which Shaw treated its acquisition of two
large companies from bankruptcy proceedings; and those relating to the
percentage of completion method of recognizing revenue from Shaw’s
performance of long-term contracts. Plaintiffs’ bottom line assertion is that
these irregularities allowed Shaw artifically to inflate its earnings by “hundreds
of millions” of dollars during the class period. This court follows the general

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rule3 and has stated repeatedly that “[t]he mere publication of inaccurate
accounting figures, or a failure to follow GAAP, without more, does not establish
scienter.” Barrie v. Intervoice-Brite, Inc., 397 F.3d 249, 264 (5th Cir.), modified
and reh’g denied, 409 F.3d 653 (5th Cir. 2005) (quoting Fine v. Am. Solar King
Corp., 919 F.2d 290, 297 (5th Cir. 1990)); see also Fin. Acquisition Partners LP
v. Blackwell, 440 F.3d 278, 290 (5th Cir. 2006) (“[F]ailure to follow accounting
standards, without more, does not establish scienter.”).
To plead scienter adequately, plaintiffs must state with particularity facts
giving rise to a strong inference that the “party [knew] that it [was] publishing
materially false information, or the party [was] severely reckless in publishing
such information.” Barrie, 397 F.3d at 264 (quoting Fine, 919 F.2d at 297).
1. Acquisition Accounting
Plaintiffs allege that Shaw misused the purchase method of accounting for
the acquisitions of the assets of two large companies, Stone & Webster and the
IT Group, out of their respective bankruptcy proceedings in July 2000 and May
2002. Shaw portrayed the acquisitions as critical to consolidating the company’s
market position and to its diversification efforts. Shaw fully disclosed its

3
See, e.g., Ferris, Baker Watts, Inc. v. Ernst & Young, LLP, 395 F.3d 851, 855 (8th Cir.
2005) (“Allegations of GAAP violations are insufficient, standing alone, to raise an inference
of scienter. Only where these allegations are coupled with evidence of corresponding
fraudulent intent might they be sufficient.”); Pirraglia v. Novell, Inc., 339 F.3d 1182, 1191
(10th Cir. 2003) (“Claims of accounting irregularities or violations of [GAAP] support a claim
of scienter only when coupled with evidence that the violations or irregularities were the result
of the defendant’s fraudulent intent to mislead investors.” (internal quotation marks omitted);
Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1208 (11th Cir. 2001) (“[A]llegations of violations
of GAAS or GAAP, standing alone, do not satisfy the particularity requirement of Rule 9(b).”);
In re Comshare Inc. Sec. Litig., 183 F.3d 542, 553 (6th Cir. 1999) (“The failure to follow GAAP
is, by itself, insufficient to state a securities fraud claim.”); Chill v. Gen. Elec. Co., 101 F.3d
263, 270 (2d Cir. 1996) (“Allegations of a violation of GAAP provisions or SEC regulations,
without corresponding fraudulent intent, are not sufficient to state a securities fraud claim.”).

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application of the relevant accounting principles. The plaintiffs assert, however,
that Shaw artifically inflated the recorded reserves and goodwill associated with
the purchase method and thereafter used such accounts to “pad” Shaw’s
earnings. Shaw also established reserves for pending contracts acquired from
these companies that, according to the plaintiffs, “bore no reasonable
relationship to the fair market value of the acquired assets,” and were used as
“cookie jar” reserves to inflate its reported earnings. Plaintiffs finally allege
irregularities in Shaw’s accounting for adjustments to the fair value of the
acquired assets; its failure to disclose the basis for pre-acquisition contingencies
bearing on such adjustments; and its failure to write off impaired goodwill.
(Plaintiffs’ Consolidated Amended Complaint (“Compl.”) ¶ 98.) All of these
allegations are tied to the statements in Shaw’s periodic financial reports during
the class period, and voluminous citations to accounting rules are included.
No direct allegations of fraudulent conduct or intent on the part of
Bernhard or Belk are alleged. Instead, plaintiffs rely, as they are permitted to
do, on circumstantial allegations. They assert that the individual defendants
must have known of the irregularities because of their executive positions in the
company, and they emphasize Bernhard’s “hands-on management style,” and the
magnitude and extent of the accounting standards violations. None of these
assertions withstands analysis. First, this court’s caselaw makes clear that
“pleading[s] of scienter may not rest on the inference that defendants must have
been aware of the misstatement based on their positions with the company.”
Abrams, 292 F.3d at 432.4 Second, Bernhard’s management style, coupled with

4
See also Blackwell, 440 F.3d at 287 (“Corporate officers are not liable for acts solely
because they are officers, even where their day-to-day involvement in the corporation is
pleaded.”); Nathenson, 267 F.3d at 424-25 (“We recognize that normally an officer’s position

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his alleged boast that “there is nothing in this company that I don’t know,” are
insufficient to support a strong inference of scienter. See Goldstein v. MCI
WorldCom, 340 F.3d 238, 251 (5th Cir. 2003). Such statements lack specificity
about what Bernhard may have known or, for that matter, was reckless not to
have known, about the details of the company’s accounting practices. That these
allegations derive from confidential sources further detracts from their weight
in the scienter analysis. Following Tellabs, courts must discount allegations
from confidential sources. Higginbotham v. Baxter Int’l Inc., 495 F.3d 753,
756-57 (7th Cir. 2007). Such sources afford no basis for drawing the plausible
competing inferences required by Tellabs. Id. at 757 (“Tellabs requires judges
to weigh the strength of plaintiffs’ favored inference in comparison to other
possible inferences; anonymity frustrates that process.”). At the very least, such
sources must be described “with sufficient particularity to support the
probability that a person in the position occupied by the source . . . would possess
the information pleaded . . . .” ABC Arbitrage Plaintiffs Group v. Tchuruk,
291 F.3d 336, 353 (5th Cir. 2002); see also Central Laborers, 497 F.3d at 552
(same).
The final assertion, that Bernhard, Belk and through them, Shaw must
have known of the alleged accounting irregularities because they are so massive,
disproves itself. This case is quite unlike most securities fraud cases, which are
precipitated when the company announces such revelations as a restatement in
earnings due to accounting mistakes or the discovery and correction of material
errors or misdeeds in a subsidiary. Here, there was no mea culpa from the
company in the form of acknowledged wrongdoing or restated financial reports,

with a company does not suffice to create an inference of scienter.”).

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nor was there any auditor qualification to those aspects of the reports made the
basis of this complaint, nor any publicly expressed reservations by the auditors
to the financials. There is no single event or fact that the executives can be
alleged to have known and concealed from the public. In Central Laborers, by
contrast, the company disclosed material weaknesses in its internal controls that
eventually required restatement of two and a half fiscal years of financial
results. 497 F.3d at 549. This court concluded that the defendant’s “public
statements and subsequent restatement due to GAAP violations provide[d] some
basis to infer scienter.” Id. at 552. But that is lacking here.
Moreover, while plaintiffs strenuously argue that the “cookie jar” reserves
and other devices enabled Shaw to pad its earnings massively, they make no
attempt to estimate by how much the earnings were inflated. There is no
standard of comparison to what the correct numbers would have been.
Valuations of assets, especially contracts and assets acquired from bankrupt
companies, as well as the application of sophisticated accounting standards like
“fair value,” leave broad scope for judgment and informed estimation; this is
another way of saying that determinations on such matters can differ reasonably
and sizably. See Greebel v. FTP Software, Inc., 194 F.3d 185, 205 (1st Cir. 1999)
(“‘Generally accepted accounting principles’ . . . tolerate a range of ‘reasonable’
treatments, leaving the choice among alternatives to management.” (quoting
Thor Power Tool Co. v. Comm’r of Internal Revenue, 439 U.S. 522, 544, 99 S. Ct.
773, 787 (1979)). Plaintiffs cannot transform inherently nuanced conclusions
into fraudulent misstatements or omissions simply by saying that there were
abuses or misuses of the GAAP rules. See DiLeo v. Ernst & Young, 901 F.2d 624,
627 (7th Cir. 1990) (“At one time the firm bathes itself in a favorable light. Later

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the firm discloses that things are less rosy. The plaintiff contends that the
difference must be attributable to fraud. ‘Must be’ is the critical phrase, for the
complaint offers no information other than the differences between the two
statements of the firm’s condition.”). Likewise, plaintiffs cannot make
allegations that strongly support the defendants’ guilty knowledge of securities
fraud, on the issues of acquisition accounting here raised, by throwing out large
numbers with no factual basis for ascertaining what the “truth” was. See In re
Stone & Webster, Inc., Sec. Litig., 414 F.3d 187, 199 (1st Cir. 2005) (holding that
alleged overstatement of financial results did not contribute to an inference of
scienter because complaint gave “no indication whatsoever what the size of the
alleged overstatement of current profits was”).
For all these reasons, we cannot derive a strong inference of scienter
against Bernhard, Belk and Shaw. Plaintiffs have failed to allege a sufficient
basis for defendants’ knowledge or severe recklessness as to the accuracy of the
accounting standards for the Stone & Webster and IT Group acquisitions.
2. Percentage of Completion Accounting
Plaintiffs allege that Shaw inflated its earnings by prematurely
recognizing revenue on long-term contracts. A substantial portion of the
company’s business derives from the performance of long-term engineering,
procurement and construction contracts, each of which is, by plaintiffs’
admission, unique and complicated. The preferred accounting standard for such
contracts is the “percentage of completion” method, used and disclosed by Shaw
in its financial reports, whereby a company records revenue as it performs work
on a contract. The company first estimates the total cost of contract performance
and then compares the estimate with actual costs over the life of the contract.
As work proceeds, the company records the corresponding percent of the revenue

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that should be recorded on the company’s books. When, however, reasonably
dependable estimates cannot be made or “inherent hazards” relating to contract
conditions make profit predictions unreliable, the “completed-contract” method
becomes preferable; it recognizes revenue and expenses incurred on a contract
only in the year of completion. In re Stone & Webster, 414 F.3d at 196-97.
Shaw allegedly prematurely recognized revenue on long-term contracts in
violation of GAAP. Shaw’s management pressured, coerced and if necessary,
forced employees to inflate the percentage of completion of their projects and
accelerate earnings recognition. (Compl. ¶ 98.) Second, Shaw lacked the
internal controls necessary to estimate the percentage of completion accurately
because its proprietary software program for project tracking, Shaw-Trac, did
not work.5 Because Shaw could not make reasonably dependable estimates, the
plaintiffs contend that it should have used the completed contract method and
deferred recognizing revenue until the contracts were completed.
Overriding the specific allegations, which will be discussed below, are
systematic deficiencies and an inherent contradiction in the pleadings. The
plaintiffs rely heavily on confidential sources for their allegations. But they
generally fail to provide sufficient details about their sources to credit their
statements and fail to tie those statements to the large scale accounting fraud
that allegedly took place. Further, the fact that the company’s internal
accounting controls did not work properly does not necessarily lead to the

5
Shaw described Shaw-Trac in its annual report as follows: “SHAW-TRAC is a
web-based, proprietary earned value application that enables the Company to effectively
manage and integrate the many phases of a capital project, from estimating to engineering
through construction and start-up. Users from around the world consistently access Shaw-Trac
through the public networks in order to update and understand the real-time financial position
of respective projects.” (Compl. ¶ 56.) (quoting Shaw Group Inc., Annual Report (Form 10-K),
at 4 (Nov. 27, 2002)).

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conclusion that revenues were consistently overstated on the company’s financial
reports. Because errors could bias the figures down as well as up, the inference
that such errors demonstrate an intent to defraud is weak. Finally, as with the
company’s acquisition accounting, Shaw has never corrected, repudiated or
recalculated its use of the percentage of completion method on its long-term
contracts.
To support the allegations of scienter on the part of Bernhard and Belk,
plaintiffs contend that Shaw pressured employees to inflate the percentage of
completion numbers; that Bernhard and Belk knew about Shaw-Trac’s
deficiencies; that they had access to allegedly incriminating internal reports; and
that they must have known about the alleged overstatement of contract
revenues. Each of these subjects requires discussion.
The only pleadings that connect either of these defendants to pressuring
of employees are two statements attributed to Bernhard. It is asserted that
Bernhard told several Shaw executives during a dinner conversation that, “We
have got to show more progress,” on Shaw’s construction projects. (Compl. ¶ 8).
Plaintiffs would draw the inference that he was advising the others to report
higher completion rates on the construction projects than had actually been
achieved. Second, in or about June 2002, a “former confidential insider” heard
Bernhard scream at a company financial analyst named Scott Roussell because
Shaw’s revenue numbers were too low and he “needed to do something to fix
that.” (Compl. ¶ 280.) After this incident, the confidential source claims to have
“heard Roussell call various operations centers in order to get them to increase
their percentages of completion on Shaw’s projects to ‘help with the numbers.’”
(Compl. ¶ 280.)

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The dinner table remark is insufficient to support an inference of scienter
on Bernhard’s part. Initially, plaintiffs offer no source, documentary or personal,
for this comment. See ABC Arbitrage, 291 F.3d at 358. Plaintiffs fail to allege
with particularity when this comment was made. See Southland, 365 F.3d at
376-77. But even if Bernhard made the statement, a more likely, nonculpable
inference, absent any other details, is that Bernhard was commenting on the
need to improve the company’s business performance.
Bernhard’s “do something to fix that” statement suffers from similar
deficiencies. The confidential source is not identified sufficiently by his title,
work location, or dates of employment to reassure the reader that he heard and
understood the meaning of the remark. See Central Laborers, 497 F.3d at 552.
Further, the statement cannot contribute to a strong inference of scienter
because it is “susceptible to many interpretations, including innocent ones.”
In re Integrated Elec. Servs., Inc., No. 4:04-CV-3342, 2006 WL 54021, at *4 (S.D.
Tex. Jan. 10, 2006) (unpublished) (holding that comment by corporate manager
to employee was too ambiguous to support strong inference of scienter), aff’d,
Central Laborers, 497 F.3d 546 (5th Cir. 2007). Bernhard may have simply been
pointing out an error that needed to be corrected.
Bernhard and Belk allegedly knew about Shaw-Trac’s malfunction in
several ways. The complaint alleges that in May 2002, a letter detailing
problems with Shaw-Trac was sent to “senior Shaw insiders responsible for
Shaw-Trac’s development.” (Compl. ¶ 71.) Whether Bernhard and Belk were
among the recipients or how they may have learned of its contents, however, is
not stated, nor does the complaint allege who wrote the letter or just what it
said. This allegation is too vague to allow an inference of scienter.

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More pointedly, plaintiffs allege that “Bernhard knew that Shaw-Trac was
not functional” when Shaw began using the program in mid-2001. They claim
that Bernhard insisted on rolling out Shaw-Trac because he wanted to use it as
a marketing tool with potential customers. By 2003, it is alleged, Shaw began
to move away from the program because it did not work, and Bernhard then
directed the company IT department to develop Shaw-Trac Lite, a simplified new
program that also failed to work. (Compl. ¶ 74.) Plaintiffs do not, however,
supply documentary or personal sources for the majority of these allegations.6
This court has explained that “general allegations and conclusory statements,
such as stating [defendants] knew . . . adverse material” do not contribute to a
strong inference of scienter. See Blackwell, 440 F.3d at 289-90. Because there
is no factual support for the allegation that Bernhard knew that Shaw-Trac was
dysfunctional when it was rolled out, the allegation fails to support a strong
inference of scienter.7 Compare In re Stone & Webster, 414 F.3d at 205 (holding

6
Two of plaintiffs’ allegations about Bernhard’s involvement with Shaw-Trac have
sources: (1) the claim made by an anonymous former Shaw employee that Bernhard rolled out
Shaw-Trac because he saw it as a marketing tool, and (2) the claim made by an anonymous
former Shaw employee that Shaw-Trac Lite was a stripped-down version of Shaw-Trac. Both
confidential sources are insufficiently identified to determine whether someone in their
positions would have access to the information alleged. Nonetheless, these claims are
innocuous. There is nothing fraudulent about a company marketing its software programs to
attract new customers or changing its software programs. See, e.g., Abrams, 292 F.3d at 433
(“A planned improvement or upgrade [to an internal controls program] does not mean that the
prior system was necessarily producing bad data. A perfectly reasonable explanation for
implementing [the new program] was to improve efficiency and lower costs.”).
7
Plaintiffs argue on appeal that their complaint identifies a confidential source, a
former project controls manager who assisted in the design and implementation of Shaw-Trac,
who stated that Bernhard knew Shaw-Trac did not work. The complaint, however, does not
indicate the source of the allegation. (Compl. ¶ 61.) “Needless to say, in reviewing a Rule
12(b)(6) dismissal, we review only the well-pleaded facts in the complaint. This new allegation
may not be considered.” Blackwell, 440 F.3d at 289.

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allegations of communications from customer to defendant were “too vague to
support a strong inference” that defendants “were aware of them or, if so, were
reckless in failing to take them seriously”). Further, the allegation of Shaw-
Trac’s problems may indicate corporate mismanagement, but the securities laws
do not protect investors against negligence. See Tuchman v. DSC Commc’ns
Corp., 14 F.3d 1061, 1070 (5th Cir. 1994) (“[C]orporate mismanagement does not,
standing alone, give rise to a 10b-5 claim . . . .”); Acito v. IMCERA Group, Inc.,
47 F.3d 47, 53 (2d Cir. 1995) (same).8 Plaintiffs do not state facts that support
an inference that Bernhard rolled out Shaw-Trac with intent to deceive or with
severe disregard of its potential to mislead investors.
Belk is alleged to have been “informed, in great detail, by a former Baton
Rouge project controls manager, of all the problems associated with the use of
Shaw-Trac.” (Compl. ¶ 73.) In Southland, this court found wanting a similar
scienter allegation. 365 F.3d at 375-76. There, securities fraud plaintiffs alleged
that corporate insiders, including named individual defendants, were repeatedly
told by programmers and developers that one of the company’s technology
products would not work as represented. Id. The court held this allegation
“insufficient because it fail[ed] to state when, where or on what occasion or
occasions this occurred, fail[ed] to in any way identify the [company’s]
programmers and developers involved, and [did] not indicate whether their
statements were oral or written or give[] any meaningful particulars as to what
was stated.” Id. at 376. In this case, plaintiffs’ allegation also lacks
particularity concerning when, how and what the confidential source told Belk,

8
See also Abrams, 292 F.3d at 433 (stating that the nature of accounting problems that
lead to restatement could “easily arise from negligence, oversight or simple mismanagement,
none of which rise to the standard necessary to support a securities fraud action”).

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and it lacks sufficient detail to support the probability that the source was in a
position to know about “all of the problems” related to Shaw-Trac or that these
problems pervaded the company. See ABC Arbitrage, 291 F.3d at 353; see also
Cal. Pub. Employees’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 155 (3d Cir. 2004)
(rejecting use of statements from local branch office employees to substantiate
allegations about nationwide company practices).
Finally, plaintiffs allege that the defendants knew or were severely
reckless in not knowing about Shaw-Trac’s problems because, according to
numerous confidential sources, the problems were widely known throughout the
company. (Compl. ¶¶ 26, 72.) The “defendants must have known” allegation
was rejected by this court in Abrams, 292 F.3d at 432, as too vague to support
a strong inference of scienter.
Turning to more general allegations that the executive defendants knew
or should have known that Shaw was prematurely recognizing revenue from its
long-term contracts, plaintiffs first point to their receipt of monthly reports on
the progress of contracts, which were discussed at meetings. (Compl. ¶ 24-29.)
The complaint does not, however, allege that the reports or the meetings
included information at odds with Shaw’s public statements. See Abrams,
292 F.3d at 433.9 In fact, the complaint alleges that the reports were already
inaccurate when prepared because they contained allegedly unreliable data
derived from Shaw-Trac.10 Thus, these allegations do not substantiate an

9
See Tuchman, 14 F.3d at 1069 (holding that plaintiffs could not satisfy their pleading
burden on scienter without “alleg[ing] any facts that show that [any of defendant’s alleged]
statements were belied by his actual knowledge of contradictory facts”).
10
The complaint states: “[B]ecause Shaw-Trac did not work, any data obtained from
Shaw-Trac and any reports created by Shaw-Trac, including the One-Page Reports, were

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inference that Bernhard and Belk knew they contained false information, nor
does the mere fact that they received the reports imply that they knew of any
inaccuracy.
Plaintiffs also assert that the magnitude and egregiousness of Shaw’s
premature revenue recognition create an inference of scienter by Bernhard and
Belk. According to their brief, Shaw “improperly recognized millions of dollars
of revenue on every single one of its EPC contracts,” and because of their size,
“even minimal percentage increases caused material overstatement[s] of Shaw’s
income.” Such bold statements cannot substitute for factual assertions
connecting the corporate executives to specific contracts or accounting or
management practices that led to the alleged overstatements. Yet particularized
assertions are lacking here.11 Moreover, a single confidential source identified
as a “former independent contractor for [Stone & Webster] and then Shaw”
contributed these allegations, but the complaint does not state how long the
contractor worked for Shaw, when he learned the information alleged, or how he
was in a position to know the practices of every superintendent on every Shaw
project. See ABC Arbitrage, 291 F.3d at 353. Without such details, we cannot
credit these allegations as a basis for a strong inference of scienter. The only

corrupt and inherently unreliable.” (Compl. ¶ 26.)
11
In Shushany v. Allwaste, Inc., this court held that plaintiffs failed to state a claim for
fraud based on accounting irregularities because “the complaint did not identify who in
particular was instructing the employees to make the arbitrary accounting adjustments, what
particular adjustments were made, how those adjustments were improper in terms of
reasonable accounting practices, how those adjustments were incorporated into [the
defendant’s] financial statements, and if incorporated, whether those adjustments were
material in light of Allwaste’s overall financial position. Although we need not identify which
of these deficiencies, standing alone, might render the complaint insufficient under Rule 9(b),
we hold that altogether, they do.” 992 F.2d 517, 522 (5th Cir. 1993).

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specific observation by this source is that he saw a construction superintendent
incorrectly record that 200 feet of pipe had been installed when, in fact, only 120
feet had been. (Compl. ¶ 277.) And even the location and date of this allegation
are not pinpointed.
After considering plaintiffs’ scienter allegations together, we conclude they
do not state with particularity facts giving rise to a strong inference that the
defendants knew or were severely reckless in not knowing that Shaw was
prematurely recognizing revenue on its long-term contracts.
B. Viability of the LSP-Pike Project
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’

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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.

20
 No. 06-30908

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

12
In Winer Family Trust v. Queen, 503 F.3d 319, 330 (3d Cir. 2007), the court rejected
similar allegations that a company’s press release was misleading because it omitted
information about the history of its relationship with a business partner. There, Pennexx
announced that an equity investment made by Smithfield Foods helped facilitate Pennexx's
common stock registration. Id. Plaintiffs argued that this statement was misleading because
Pennexx failed to disclose that a prior venture between Pennexx and Smithfield had been
disastrous. Id. The court concluded that plaintiffs failed to explain why this omission made
the press release misleading or untrue. Id. Winer is analogous to the present case.

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 No. 06-30908

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.
C. Inflated Backlog and Slow/No Pay of Vendors
The complaint alleges that Shaw misrepresented its financial condition by
including in its backlog figures projects that were “contingent, potential,

13
The complaint states: “In April 2002, the former controls manager convened a special
meeting at [Shaw’s] Baton Rouge headquarters to discuss the serious problems with the
LSP-Pike project concerning millions of dollars of outstanding invoices and NRG’s failure to
grant Shaw a full notice to proceed.” (Compl. ¶ 86.)

22
 No. 06-30908

uncommitted and not documented” and by maintaining a widespread company
practice of delaying or not paying vendors toward the end of each fiscal quarter
to artificially inflate its cash flow reports. The complaint states no facts with
particularity that suggest the inference that Bernhard or Belk knew about or
sanctioned or ordered these alleged practices. Moreover, plaintiffs’ brief does not
argue how these claims might be salvaged. We deem the un-briefed claims to be
abandoned.
D. Motive and Opportunity Allegations
To buttress whatever other inferences of scienter might be drawn from
their substantive allegations, the plaintiffs allege that Bernhard and Belk had
both motive and opportunity to engage in the charged securities fraud. To
demonstrate motive, plaintiffs must show “concrete benefits that could be
realized by one or more of the false statements and wrongful nondisclosures
alleged. Merely alleging facts that lead to a strained and tenuous inference of
motive is insufficient to satisfy the pleading requirement.” Phillips v. LCI Int’l,
Inc., 190 F.3d 609, 621 (4th Cir. 1999) (internal quotation marks and citation
omitted). As high-ranking corporate officers, the defendants had an opportunity
to commit fraudulent acts. The question here is whether plaintiffs sufficiently
alleged as motives that the defendants sold their stock at “inflated” prices,
earned bonuses during the class period, sought to use artificially inflated stock
as currency for corporate acquisitions, and aimed to maintain the company’s
favorable credit rating.
Because corporate executives are often paid in stock and stock options,
they will naturally “trade those securities in the normal course of events,” and
courts “will not infer fraudulent intent from the mere fact that some officers sold

23
 No. 06-30908

stock.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir.
1997) (Alito, J.). Insider stock sales may be probative of scienter, however, if
they occur in “suspicious amounts or at suspicious times.” Abrams, 292 F.3d at
435. Suspicion may be generated if the “sales are out of line with prior trading
practices or [made] at times calculated to maximize personal profit.” Central
Laborers, 497 F.3d at 553 (quoting Abrams, 292 F.3d at 435). Pursuant to
Tellabs, of course, both culpable and nonculpable explanations for stock sales,
as revealed in the pleadings and associated documents, must be considered.
During the first nine months of the class period, Bernhard and Belk sold
large blocks of Shaw stock. Bernhard’s sales occurred in January and July 2001,
while Belk’s sole large sale took place in January 2001. Plaintiffs assert that
these sales were suspicious because they took place near the market peak for
Shaw stock (if up to $20 below the market high is near the “peak”), and they far
exceeded these defendants’ previous trades in company stock. Placed in context,
the allegations are overstated and innocuous. When Bernhard sold in January
2001, only a few days had passed after the expiration of his “lock-up” agreement
not to sell shares for ninety days following Shaw’s October 2000 equity offering.
During the “lock-up” period, Shaw stock split two-for-one and doubled his
holdings. See Shaw Group, Inc., Quarterly Report (Form 10-Q), at 7 n.2 (Jan. 16,
2001). It is quite plausible that Bernhard sold stock in January to take a profit
on some of his newly acquired shares. His July sale followed a positive earnings
announcement by Shaw, but he missed the immediate price spike following the
announcement. See Southland, 365 F.3d at 369 (stating that insider’s stock
sales were not suspicious, in part, because they did not come immediately after
an allegedly misleading statement caused spike in share price).

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Plaintiffs allege that Belk sold fifty-seven percent of his Shaw stock
immediately after the positive earnings announcement in January 2001,
marking only his second sale of company shares. But plaintiffs tell only half the
story. Shaw’s SEC filings, referenced in the complaint, reveal that Belk had
actually sold Shaw stock twice before the block sale in question, and a February
2000 sale disposed of approximately sixty-five percent of his holdings at that
time. See Shaw Group, Inc., Statement of Change in Beneficial Ownership of
Securities (Form 4) (Sept. 11, 2000); Shaw Group, Inc., Statement of Change in
Beneficial Ownership of Securities (Form 4) (Feb. 25, 2000). Thus, the amount
of his January sale was not out of line with his past actions or timing. Further,
the sale allowed him to capitalize on the expiration of his own ninety-day lock-up
period and the Shaw stock split.
Insofar as their executive compensation packages were tied to company
performance, and both men received bonuses during the class period, Bernhard
and Belk are in no different position than the vast majority of corporate
executives. Consequently, this court has held that incentive compensation “can
hardly be the basis on which an allegation of fraud is predicated.” Tuchman,
14 F.3d at 1068 (internal quotation marks omitted); see also Abrams, 292 F.3d
at 434. Incentive compensation packages may be considered in conjunction with
other scienter allegations, Barrie, 397 F.3d at 264, but only in an extraordinary
case is it probative. See MCI WorldCom, 340 F.3d at 250 (holding that
compensation package was probative where MCI WorldCom CEO Bernard
Ebbers had a unique pay package and stood to lose millions if WorldCom’s stock
price dropped significantly). Bernhard’s and Belk’s packages of bonus and stock

25
 No. 06-30908

options during the class period, while generous, were hardly extraordinary; as
a motivation to fraud, they were minor.
Plaintiffs wind up their general motive allegations by asserting that
Bernhard and Belk wanted to maintain Shaw stock at artificially high prices to
increase its value in acquiring companies like IT Group, Scott Sevin & Shaffer,
and Technicomp during the class period, and they wanted to maintain its credit
ratings. Scienter in a particular case may not be footed solely on motives
universal to corporate executives. See Novak v. Kasaks, 216 F.3d 300,
307 (2d Cir. 2000). The outlier to the acquisition proposition, however, is MCI
WorldCom, whose need to complete a “crucial” $129 billion merger with Sprint
gave the company a motive to inflate its financial results. MCI WorldCom,
340 F.3d at 242, 250. Shaw’s acquisitions are comparatively modest. Plaintiffs
also allege that defendants refused to write off impaired goodwill following the
Stone & Webster and IT Group acquisitions because they feared an impact on
Shaw’s debt covenants and a consequent downgrade of its credit rating. “The
desire to maintain a high credit rating is universally held among corporations
and their executives and consequently does not contribute significantly to an
inference of scienter.” Fla. State Bd. of Admin. v. Green Tree Fin. Corp.,
270 F.3d 645, 664 (8th Cir. 2001).
E. Sarbanes-Oxley Act Certifications
Almost as an afterthought, plaintiffs allege that the Sarbanes-Oxley
certifications signed by Bernhard and Belk, which attest to the accuracy of
Shaw’s SEC filings, contribute to a strong inference of scienter. Under the
Sarbanes-Oxley Act, senior executives of public companies must certify the
accuracy of quarterly and annual financial reports. See 15 U.S.C. § 7241(a). The

26
 No. 06-30908

report must identify the officer’s basis for making the certification and each
officer must certify that he and other officers are “responsible for establishing
and maintaining internal controls.” 15 U.S.C. § 7241(a)(4)(A). Moreover, the
officers must certify that they have “evaluated the effectiveness of the issuer’s
internal controls” within the previous ninety days and have “presented in the
report their conclusions about the effectiveness of their internal controls.”
15 U.S.C. § 7241(a)(4)(C), (D). Bernhard and Belk both signed Sarbanes-Oxley
certifications from 2002 on, as certifications were attached to the quarterly and
annual reports. According to plaintiffs, the certifications were false because the
defendants knew that Shaw’s internal accounting controls were defective and its
financial statements misleading.
In Garfield v. NDC Health Corp., 466 F.3d 1255, 1266 (11th Cir. 2006), the
court concluded that a Sarbanes-Oxley certification, standing alone, is not
indicative of scienter. This court has cited the Garfield analysis approvingly.
Central Laborers, 497 F.3d at 555. To hold otherwise, the Eleventh Circuit
reasoned, would mean that “scienter would be established in every case where
there was an accounting error or auditing mistake made by a publicly traded
company, thereby eviscerating the pleading requirements for scienter set forth
in the PSLRA.” Garfield, 466 F.3d at 1266. Instead, the court held that “a
Sarbanes-Oxley certification is only probative of scienter if the person signing
the certification was severely reckless in certifying the accuracy of the financial
statements.” Id. There must be, in other words, facts establishing that the
officer who signed the certification had a “reason to know, or should have
suspected, due to the presence of glaring accounting irregularities or other ‘red
flags,’ that the financial statements contained material misstatements or

27
 No. 06-30908

omissions.” Id. From the foregoing analysis of all of plaintiffs’ allegations, no
such facts placed Bernhard or Belk on notice of glaring irregularities or red
flags.
F. Section 20(a) Control Person Liability
Although the plaintiffs alleged that Bernhard and Belk are liable as
control persons under Section 20(a) of the Securities Exchange Act of 1934,
“[c]ontrol person liability is secondary only and cannot exist in the absence of a
primary violation.” Southland, 365 F.3d at 383. Because we have found the
pleadings of Section 10(b) and Rule 10b-5 liability inadequate, and because
plaintiffs have furnished no independent briefing on this claim, it must be
dismissed.
CONCLUSION
Whether analyzed as separate claims or in toto, plaintiffs’
allegations satisfy neither Tellabs’ nor this court’s standards, construing the
PSLRA, for pleading facts that create a strong inference of scienter necessary to
pursue further their securities fraud claims. The district court erred in denying
the motion to dismiss the complaint. Its judgment is REVERSED, and the case
REMANDED WITH INSTRUCTIONS TO DISMISS.

28