o Previously: Investors in Northwest Pipe Co. updated their lawsuit against the company in December 2010, adding allegations of wrongdoing and fraud.
o What’s new: Attorneys for the company and two former executives responded on Feb. 25, asking a judge to dismiss the complaint.
o What’s next: Attorneys representing shareholders are scheduled to file their opposition to dismissing the case by May 3.
Attorneys for Northwest Pipe Co. and two former company executives accused of accounting fraud are asking a judge to throw out the case, arguing the lawsuit filed by investors contains “neither facts nor logic” and relies on the “meaningless” testimony of confidential witnesses.
o Previously: Investors in Northwest Pipe Co. updated their lawsuit against the company in December 2010, adding allegations of wrongdoing and fraud.
o What's new: Attorneys for the company and two former executives responded on Feb. 25, asking a judge to dismiss the complaint.
o What's next: Attorneys representing shareholders are scheduled to file their opposition to dismissing the case by May 3.
The counter arguments by the Vancouver-based steel pipe manufacturer and the former executives mark their first public responses to allegations contained in a class-action shareholder lawsuit that was first filed in late 2009 and updated late last year.
Attorneys for the company, Brian Dunham, former chief executive and president, and Stephanie Welty, former chief financial officer and senior vice president of finance, filed three separate motions on Feb. 25 asking U.S. District Court Judge Ronald Leighton to toss out the lawsuit.
One major argument threads through all of the motions to dismiss the case — that the lawsuit against Dunham, Welty and the company fails to show that the defendants intended to mislead shareholders or had knowledge of such wrongdoing.
Under U.S. securities law, plaintiffs must allege particular facts and “create a strong inference of intentional misconduct,” and the allegations against Northwest Pipe fail to do that, argue Robin Wechkin and George Mernick, attorneys for the company.
“Again and again, the facts and circumstances point to accounting error, not accounting fraud,” according to the filing by Wechkin and Mernick. The company’s accounting problems arose from its “interpretation of a complex and nuanced accounting rule — an interpretation, moreover, that was fully disclosed to the company’s auditors, the (U.S. Securities and Exchange Commission) and the investing public.”
Eli Greenstein, a San Francisco attorney representing shareholders, could not be reached for comment Tuesday. However, plaintiffs are slated to file their rebuttal of motions to throw out their complaint by May 3, according to court documents.
The legal battle traces its history to November 2009. That’s when Northwest Pipe announced it had delayed its third-quarter earnings report until it could resolve an internal investigation of accounting matters. Shareholders sued the company in December 2009, accusing it of making “false and misleading” statements that inflated the company’s stock. Shareholders later updated their suit, adding allegations of wrongdoing and fraud by company executives.
In May 2010, Northwest Pipe announced it was unable to timely file several financial reports. Two months later, it disclosed through the SEC that it had overstated its profits by $37 million to $47 million over the course of a number of years. In October 2010, the company said Dunham had resigned as president, more than six months after he stepped down as chief executive. In November 2010, the company finally brought itself up to speed with its financial reports.
In January, Northwest Pipe announced Welty had resigned from the company.
The lawsuit by shareholders contends the company improperly recognized revenue, causing “tens of millions of dollars of losses” to shareholders who had bought stock at inflated prices, according to court documents. It also alleges Dunham and Welty were motivated to engage in improper accounting methods because their annual compensation was “directly tied” to the company’s financial performance.
Attorneys for Dunham and Welty argue there were no such incentives.
Dunham’s separation agreement with Northwest Pipe requires him to return his severance pay if he’s found by a court to have engaged in illegal activity. Rather than proof of Dunham’s culpability, as the shareholder lawsuit argues, that agreement shows Dunham’s “firm belief that he had done nothing wrong and thus would not have to return the payment,” Dunham’s Seattle attorneys argued.
Attorneys from another Seattle law firm are representing Welty. They argue that the attempt by the shareholders’ lawsuit to transform the fact that Welty has a background in accounting and was CFO of Northwest Pipe “into a suggestion that she is automatically liable for securities fraud” is a tactic that has been “repeatedly rejected by courts.”
