case 3:09-cv-05724-rbl document 80 filed 05/04/12 page 1...

Case 3:09-cv-05724-RBL Document 80 Filed 05/04/12 of 83

1

2

3

4

5

6

7

8

9

10

11

12

PLUMBERS AND PIPEFITTERS LOCAL ) UNION NO. 630 PENSION-ANNUITY )

13

TRUST FUND, Individually and on Behalf of ) All Others Similarly Situated, )

14

) Plaintiff, )

15 vs.

16 NORTHWEST PIPE COMPANY, et al.,

17 Defendants.

18

19

20

21

22

23

24

25

26

THE HONORABLE RONALD B. LEIGHTON

No. 3:09-cv-05724-RBL

CLASS ACTION

CONSOLIDATED AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

DEMAND FOR JURY TRIAL

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF WASHINGTON

AT TACOMA

704839_1 CONSOLIDATED AMENDED COMPLAINT FOR ROBBINS GELLER RUDMAN & DOWD LLP

VIOLATION OF THE FEDERAL SECURITIES One Montgomery Street, Suite 1800, San Francisco, CA 94104

Telephone: 415/288-4545 • Fax: 415/288-4534 LAWS (3:09-cv-05724-RBL)


1

TABLE OF CONTENTS

2

Page

3

I. INTRODUCTION ...............................................................................................................1

4

II. JURISDICTION AND VENUE..........................................................................................6

5

III. PARTIES .............................................................................................................................7

6

IV. CONFIDENTIAL SOURCES ...........................................................................................10

7

V. BACKGROUND OF NORTHWEST’S BUSINESS........................................................12

8

A. Water Transmission Division ................................................................................13

9

B. Tubular Products Division.....................................................................................14

10

VI. FALSE AND MISLEADING STATEMENTS.................................................................15

11

A. False and Misleading Financial Results.................................................................15

12

1. False FY06 Financial Results ....................................................................17

13


14


15

4. False 1Q09 Financial Results.....................................................................20

16


17


18


19


20


21


22

B. False and Misleading Statements Regarding Internal Controls.............................23

23

C. Additional Materially False and Misleading Statements.......................................29

24

1. Defendants Deliberately Misled Northwest Shareholders by Stating that Revenue Was Recognized When Products Were “Built” or

25

“Completed” ..............................................................................................29

704839_1

CONSOLIDATED AMENDED COMPLAINT FOR ROBBINS GELLER RUDMAN & DOWD LLP


LAWS (3:09-cv-05724-RBL) - i - Telephone: 415/288-4545 • Fax: 415/288-4534

26


1

2

Page

3

2. Defendants Falsely Told Investors that Contract Penalty Provisions and Other Related Charges Were Recognized “in the Period in

4

Which the Revisions Are Determined”......................................................30

5

3. Defendants Made False and Misleading Statements Regarding Depreciation...............................................................................................31

6 D. The Company’s Restatement Establishes Falsity and Materiality.........................32

7 VII. DEFENDANTS’ DIRECT INVOLVEMENT IN MULTIPLE PERVASIVE AND

8

BASIC ACCOUNTING SCHEMES DEMONSTRATES A STRONG INFERENCE OF SCIENTER ...........................................................................................35

9 A. Defendants Dramatically Inflated the Company’s Reported Revenues by

10

Prematurely Recognizing Millions of Dollars of Revenue from Steel Purchases................................................................................................................35

11 B. Northwest Employees Were Pressured by Defendants to Order Steel

12

Before It Was Needed so that the Company Could Inflate Revenue in Any GivenQuarter.........................................................................................................40

13 C. Northwest Knowingly Failed to Appropriately Account for the

14

Depreciation of Its Assets Throughout the Class Period, Causing the Company to Overstate Its Net Income and Understate Its Cost of Sales...............42

15 D. Defendants Violated the Most Fundamental Principles of Accrual

16

Accounting by Deferring Contract Penalties Until Later Periods .........................46

17

E. Defendants Intentionally Manipulated the Assignment of Costs in Order to Make Unprofitable Contracts Appear Profitable and Manipulated Foreign

18

CurrencyTranslations............................................................................................49

19

F. Defendants Improperly Allocated Overhead and Support Costs Causing the Company to Overstate Gross Profit and Net Income.......................................51

20 G. Defendants Overstated the Company’s Reported Revenue by Prematurely

21

Recognizing Revenue Prior to Contract Contingencies Being Satisfied...............53

22

VIII. ADDITIONAL SCIENTER ALLEGATIONS..................................................................53

23

A. The Nature and Simplicity of the Accounting Manipulations Which Caused the Restatement Combined with Defendants’ Years of Experience

24 as CPAs Supports a Strong Inference of Scienter..................................................54

25

B. The Magnitude of the Restatement Supports a Strong Interference of Scienter..................................................................................................................55

704839_1



LAWS (3:09-cv-05724-RBL) - ii - Telephone: 415/288-4545 • Fax: 415/288-4534

26


1

2

Page

3

C. The Company’s Incentive Compensation Structure Supports a Strong Inference of Scienter..............................................................................................56

4 D. Dunham and Welty’s Resignations and the Unusual Terms of Their

5

Separation Agreement Support a Strong Inference of Scienter.............................58

6

IX. OTHER GAAP VIOLATIONS.........................................................................................60

7

X. LOSSCAUSATION..........................................................................................................62

8

XI. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET...........................................................................................................................70

9 XII

PLAINTIFFS’ CLASS ACTION ALLEGATIONS..........................................................71 10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26



Telephone: 415/288-4545 • Fax: 415/288-4534 LAWS (3:09-cv-05724-RBL) - iii -


1

I. INTRODUCTION

2

1. This is a federal securities class action brought on behalf of all persons who

3 purchased or otherwise acquired the common stock of Northwest Pipe Company (“Northwest” or the

4

“Company”) from April 2, 2007 through December 22, 2011, inclusive (the “Class Period”). This

5 action seeks to recover damages caused by defendants’ violations of §§10(b) and 20(a) of the

6

Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C. §§78j(b), 78t(a)) and Rule 10b-5

7 promulgated thereunder by the Securities and Exchange Commission (“SEC”) (17 C.F.R.

8

§240.10b-5).

9

2. The three defendants in this action are Northwest’s former Chief Executive Officer

10

I (“CEO”) and President Brian W. Dunham (“Dunham”), former Chief Financial Officer (“CFO”) and

11

Senior Vice President of Finance Stephanie J. Welty (“Welty”), and Northwest itself (collectively,

12

I “defendants”). Dunham and Welty are referred to as the “Individual Defendants.”

13

3. Northwest is a manufacturer of large-diameter, high-pressure steel pipeline systems

14

for use in water infrastructure applications, primarily related to drinking water systems. Despite the

15

fact that Dunham and Welty were experienced accountants who spent their entire careers as

16 accounting and auditing professionals, they directly participated in multiple improper accounting

17 schemes and the violation of numerous basic accounting principles while making false and

18 misleading statements to Northwest’s shareholders regarding the Company’s revenues, income,

19 earnings per share (“EPS”) and its overall financial health.

20

4. Throughout the Class Period, defendants engaged in numerous improper accounting

21 manipulations and fraudulent courses of conduct which inflated the Company’s financial results,

22 violated Generally Accepted Accounting Principles (“GAAP”) and SEC disclosure rules, and

23 contradicted the representations made to investors in press releases, investor conference calls, and

24 quarterly and annual filings with the SEC. When defendants’ fraud was exposed, the Company was

25

forced to restate its financial statements twice, wiping out $69.3 million of net income and retained

26 earnings from 2006 through 2Q11. The first restatement reduced net income from 2006 through



LAWS (3:09-cv-05724-RBL) - 1 - Telephone: 415/288-4545 • Fax: 415/288-4534


I 2Q09 by $44 million. The second restatement reduced net income and retained earnings from 2007

I through 2Q11 by $25.3 million.

5. First, defendants improperly accelerated the recognition of revenue from projects in

the Company’s Water Transmission division. While the relevant accounting guidance allowed

Northwest to recognize revenue when materials ( i.e. , raw steel) entered the manufacturing process,

defendants implemented a fraudulent practice and directed others to prematurely recognize revenue

when such materials were purchased – often several months, if not more, before such steel might be

used and properly reported as revenue. As a result, the Company has admitted that Northwest’s

reported revenues and income were materially inflated by millions of dollars during the Class Period.

The impropriety of this deceptive practice was well known throughout the Company, and

Northwest’s employees raised their concerns with the Company’s senior management, only to be

rebuffed.

6. Second, by directing the Company to improperly recognize revenue when steel was

purchased, defendants were able to manipulate and increase the amount of revenue the Company

reported in a given quarter by simply ordering additional steel and stacking it in their plants –

regardless of whether such steel was needed for a particular project at that time. Northwest’s

management systematically pressured the Company’s plant managers to submit orders for steel

months in advance of when the steel would be needed – for the specific purpose of artificially

boosting revenues in certain quarters. Such practices blatantly violate the most fundamental

principles of accrual accounting.

7. Third, defendants artificially inflated the Company’s revenues and earnings by

concealing material liabilities caused by penalty provisions, liquidated damages and back charges

claimed by the Company’s customers as a result of shoddy or late work performed by Northwest.

Instead of correctly accounting for such costs, defendant Dunham, as well as other Northwest

executives, implemented a deceptive practice of concealing the penalties from investors by

converting the penalties into discounts on future work to be performed by Northwest. Such

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


improper arrangements created off-balance sheet liabilities which were never disclosed to investors.

This deceptive practice also allowed Northwest to avoid accruing losses on unprofitable contracts,

and resulted in the artificial inflation of Northwest’s reported “backlog,” which was a critical metric

that investors and Wall Street analysts used to assess the strength of the Company’s future revenues.

8. Fourth, defendants inflated the Company’s revenue and earnings by manipulating

expenses relating to the depreciation of assets throughout the Class Period. Notwithstanding

defendants’ representations that the Company depreciated some equipment over a 3 (or 5) to 18 year

schedule during the Class Period, defendants caused Northwest to depreciate its equipment at a rate

of only approximately 3.6% a year – a rate which is patently inconsistent with the stated useful life

of such equipment, and four to seven times lower than the Company’s competitors. Northwest has

admitted in the first restatement that its net income and/or retained earnings was overstated by $18.5

million as a result of this improper accounting practice. In the second restatement, Northwest

revealed that net income or retained earnings were overstated by $14.5 million from at least 2007

through 2Q11 because the Company understated depreciation expenses primarily by not properly

reevaluating the estimates of future tons of production over the remaining useful lives of equipment. 1

9. Fifth, defendants routinely falsified the assignments of costs in order to make

unprofitable contracts appear profitable. To accomplish this, defendants intentionally assigned costs

from money-losing contracts to profitable contracts, and improperly reassigned labor hours budgeted

for profitable contracts to money-losing contracts. This deceptive practice allowed Northwest to

circumvent accounting rules which require the accrual of a loss on money-losing contracts at the

time a loss is known. The improprieties were executed in Northwest’s headquarters by personnel in

their accounting office, as well as by employees at the Company’s various plants. This practice

1 Northwest reported that retained earnings as of December 31, 2008 was reduced by $9.4 million in the second restatement due to the improper depreciation expense accounting, but did not disclose how many prior years this adjustment covered. Northwest also disclosed that net income in 2007 and 2008 was restated and reduced by $4.2 million, so it appears the restatement of retained earnings as of December 31, 2008 includes periods before 2007.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


I allowed the Company to inflate its revenues and income and, according to American Institute of

I Certified Public Accountants (“AICPA”) accounting literature, is a well-known fraudulent practice

I engaged in by construction contractors who use percentage-of-completion accounting.

10. Sixth, as revealed by the second restatement, defendants caused Northwest to

(a) overstate earnings by $1.3 million because of its failure to record equipment disposal expenses;

and (b) overstate earnings by $5.3 million by failing to record expenses related to a contractual

arrangement with Lucid Energy LLC, capital lease expenses and expenses related to the relocation of

machinery and equipment.

11. The misconduct summarized above is only a subset of the numerous misleading

accounting practices and improper financial manipulations committed by defendants during the

Class Period, which also included: (i) prematurely recognizing revenue on contracts before the

necessary contingencies had been satisfied in violation of GAAP; (ii) improperly accounting for

foreign currency conversion; and (iii) failing to properly allocate manufacturing overhead variances

and indirect support costs in order to understate the cost of sales and inflate income.

12. Numerous Confidential Witnesses (“CWs”) who were former Northwest employees

confirm that defendants were directly involved in, and had knowledge of, the various accounting

improprieties. Because of defendants’ knowledge and participation in such practices, defendants

acted intentionally or with deliberate recklessness in disseminating false and misleading statements

to Northwest’s shareholders for over three years, which: (i) materially overstated the Company’s

revenue, income and earnings; (ii) falsely attested to the adequacy of the Company’s internal

controls; and (iii) failed to disclose defendants’ fraudulent accounting schemes.

13. As a result of defendants’ materially false and misleading financial results and

omissions, Northwest’s common stock traded at artificially inflated prices as high as $63 per share

during the Class Period. Defendants’ fraud began to unravel when the President of the Company’s

Water Transmission division, Gary Stokes (“Stokes”), who knew that the Company was improperly

recognizing revenue on purchased steel, instructed his subordinates to contact Lighthouse Services,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

Inc. (“Lighthouse Services”), a third-party company which Northwest retained to provide an

2

anonymous reporting mechanism for employees to report fraud or workplace problems. Following

3

the whistleblower exposure of the Company’s accounting manipulations, defendants could no longer

4

conceal their improper practices.

5

14. Defendants’ misconduct began to leak out into the market – albeit only partially and

6

incompletely – on November 12, 2009, when Northwest issued a press release abruptly disclosing

7

that the Company had “delayed the filing of its Quarterly Report on Form 10-Q for the quarter ended

8

September 30, 2009, pending the conclusion of an ongoing internal investigation of certain

9

accounting matters, including certain revenue recognition practices , being conducted by the Audit

10

Committee of the Board of Directors with the assistance of independent professionals.”

11

15. As a result of this news, Northwest’s stock price dropped significantly from $31.23

12

I per share on November 11, 2009, to $26.74 per share on November 12, 2009 – a one-day decline

13

of 14.4%.

14

16. On March 16, 2010, after keeping investors in the dark for four months, the Company

15

announced that due to the Company’s investigation of revenue recognition practices, Northwest

16

would be unable to timely file its 2009 Form 10-K with the SEC. The Company also disclosed that

17

the SEC had commenced a formal enforcement investigation. As a result of these additional adverse

18

disclosures, Northwest’s stock price again declined significantly from $24.02 per share on March 16,

19

2010 to $20.12 per share on March 17, 2010 – an additional one-day decline of 16.2%.

20

17. On March 29, 2010, Dunham was forced to resign his position as CEO due to his

21

involvement in the matters under investigation. As a result of Dunham’s resignation, Northwest’s

22

stock price fell from $24.15 per share on March 29, 2010 to $21.50 per share on March 30, 2010 –

23

another one-day decline of 11%, capping an aggregate decline of over 61% from the Class Period

24

high as a result of defendants’ misconduct.

25

18. Incredibly, it took another eight months after Dunham’s ouster as CEO before

26

I Northwest could complete its accounting investigation, submit its delayed SEC filings, and regain





I compliance with NASDAQ (the National Association of Securities Dealers Automated Quotation

I System) listing requirements. During that time, Northwest kept investors in the dark and did not file

a single financial statement or update its financial results for nearly a year.

19. Investors believed that all of the accounting errors had been corrected when

Northwest disclosed the restated financial results on November 4, 2010. But one year later, the

Company announced it was again reviewing previously reported depreciation expenses. Then, on

December 22, 2011, Northwest announced that it would have to restate its financial results again to

correct depreciation expense errors in its financial statements for 2009, 2010 and the first two

quarters of 2011. As a result of this unexpected negative news, the Company’s stock price dropped

6.2% from $26.32 on December 22, 2011 to $24.68 on December 23, 2011.

20. On March 15, 2012, the Company reported preliminary estimates of the restatement

and also revealed that retained earnings as of year end 2008 would have to be restated. On April 27,

2012, Northwest filed its 2011 Form 10-K and amended Forms 10-Q for 1Q11 and 2Q11, in which

the Company publicly disclosed the restatement of its financial statements for 2007, 2008, 2009,

2010 and the first two quarters of 2011.

21. Defendants’ falsification of Northwest’s financial results and their concealment of the

true financial condition of the Company caused tens of millions of dollars of losses to Northwest’s

shareholders, who purchased stock at prices inflated by defendants’ fraud and were damaged when

the relevant truth about defendants’ accounting practices was finally disclosed to investors. This

action seeks to recover for these significant shareholder losses.

II. JURISDICTION AND VENUE

22. Jurisdiction is conferred by §27 of the Exchange Act. The claims asserted herein

arise under §§10(b) and 20(a) of the Exchange Act (15 U.S.C. §§78j(b), 78t(a)) and SEC Rule 10b-5

promulgated thereunder (17 C.F.R. §240.10b-5).

23. Venue is proper in this District pursuant to §27 of the Exchange Act. Many of the

false and misleading statements were made in or issued from this District, and many of the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

fraudulent accounting practices were committed in this District. Northwest’s principal executive

2

offices are also located in this District, at 5721 SE Columbia Way, Suite 200, Vancouver,

3

Washington.

4

III. PARTIES

5

24. The Lead Plaintiff in this action is Plumbers and Pipefitters Local Union No. 630

6

Pension-Annuity Trust Fund, which purchased Northwest common stock at artificially inflated

7 prices during the Class Period, and was damaged when Northwest’s stock price declined as the

8 relevant truth regarding defendants’ misconduct alleged herein was revealed to the market.

9

25. Defendant Northwest is a manufacturer of large-diameter, high-pressure steel pipeline

10 systems for use in water infrastructure applications, primarily related to drinking water systems. The

11

Company’s pipeline systems are also used for hydroelectric power systems, wastewater systems, and

12 other applications. During the Class Period, the Company’s common stock traded on the NASDAQ

13 under the ticker symbol “NWPX.”

14

26. Defendant Dunham was CEO, President and a member of the Board of Directors of

15

Northwest during the Class Period. Dunham is a Certified Public Accountant (“CPA”), and spent

16 nine years (1981-1990) working at Coopers & Lybrand, a national accounting and auditing firm,

17 after which he joined Northwest as its CFO. Dunham was appointed to Northwest’s Board of

18

Directors in 1995. He was named Chief Operating Officer (“COO”) in 1997, became President of

19

Northwest in 1998, and was named CEO in January 2001. In March 2010, during the Company’s

20

internal investigation, Dunham was forced to resign his position as CEO. On October 5, 2010,

21 shortly before the Company’s restated financial filings were filed with the SEC, Dunham was

22 abruptly forced to resign his position as President and a member of the Board of Directors. During

23

the Class Period, Dunham was also a member of the Board of Directors of Avista Corporation

24

(“Avista”), from 2008 until October 26, 2010, when he suddenly resigned from Avista’s Board

25 without explanation.

26





1

27. As CEO, Dunham received a wide variety of detailed accounting and financial

information at both the corporate and plant levels. He received monthly Water Transmission reports

and other detailed reports available on the Company’s SAP database system, as well as Northwest

intranet reporting system, “QlikView,” which allowed users to view a variety of performance data

for all of Northwest’s plants, including sales, quality control data, expenses, accounting and accounts

payable data. According to CW1, 2 Dunham also specifically requested and tracked detailed

information on plant operations, such as how much steel various plants had on hand that had not

been utilized at the end of a given month.

28. Dunham was described by CW1 as a “hands-on” executive who asked detailed

questions. If he “didn’t understand something . . . if numbers didn’t make sense, he’d call you” to

get an answer. Similarly, CW3 described Dunham as “a micro-manager,” who would often ask

questions in e-mails about the progress of specific jobs, and give directions on larger jobs. CW4

described Dunham as a detail-orientated executive who was known for “really being into

accounting.”

29. Defendant Welty was CFO and Senior Vice President of Finance at Northwest.

Welty is a CPA, joined Northwest in November 2007 and resigned in January 2011. Prior to serving

as CFO at Northwest, Welty served as CFO at TriQuint Semiconductor, Inc. (“TriQuint”). Welty

resigned as CFO of TriQuint while the company was under investigation by both the SEC and the

United States Attorneys’ Office in connection with allegations of illegal stock option backdating. As

CFO of Northwest, Welty had access to a wide variety of Company and plant information, including

monthly Water Transmission reports and other reports available on the Company’s SAP system, as

well as Northwest’s intranet reporting system, QlikView, which allowed users to view a variety of

2 Detailed descriptions of the various CWs cited herein are provided in ¶¶29-41.

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


I performance data for all of Northwest’s plants, including sales, quality, expenses, accounting and

accounts payable data. 3

30. During the Class Period, the Individual Defendants, because of their positions within

the Company, were privy to non-public information concerning the Company’s business, finances,

products, markets, and present and future business prospects, through their access to internal

corporate documents, conversations and connections with other corporate officers and employees,

attendance at management and Board of Directors meetings and committees thereof and via reports

and other information provided to them in connection therewith. Because of their possession of such

information and other detailed allegations herein, the Individual Defendants knew or deliberately and

recklessly disregarded the fact that the adverse facts specified herein had not been disclosed to, and

were being concealed from, the investing public.

31. The Individual Defendants, because of their positions of control and authority, were

able to and did control the content of Northwest’s false financial statements, SEC filings, press

releases, conference calls and other public statements pertaining to the Company during the Class

Period. They were provided with copies of the documents alleged herein to be misleading prior to or

shortly after their issuance, and/or had the ability and/or opportunity to prevent their issuance or

cause them to be corrected and made truthful. In each false earnings press release during the Class

Period, Dunham and/or Welty were expressly listed as Northwest’s executive contact persons

regarding the representations and financial results contained in the press release. They also signed

Northwest’s quarterly Forms 10-Q and yearly Forms 10-K submitted to the SEC and investors

throughout the Class Period. Accordingly, the Individual Defendants are responsible for the

accuracy of the public reports and press releases detailed herein, and are primarily liable for the false

financial results, misrepresentations and omissions contained therein.

3 The original complaint filed in case No. 3:09-cv-05791 named William R. Tagmyer (“Tagmyer”), Northwest’s Chairman of the Board of Directors, as a defendant. The Consolidated Complaint does not currently name Tagmyer as a defendant pursuant to a tolling agreement executed by the parties on December 15, 2010.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

IV. CONFIDENTIAL SOURCES

2

32. The allegations pled herein are made, in part, on information and belief, and are

3 supported by first-hand accounts of CWs. These witnesses are comprised of former Northwest

4 employees employed during the Class Period, who occupied a variety of different positions in

5 several different manufacturing and operational facilities at Northwest, and had personal knowledge

6 of the facts reported by them. Each CW’s position, duties and dates of employment are set forth

7

below.

8

33. CW1 was employed at Northwest between 1996 and August 2009. Between

9 approximately 2000 and the time he/she left Northwest, CW1 served as an Operations Manager of

10

Northwest’s Denver, CO facility (the “Denver plant”). Northwest’s Denver plant is a 155,000

11 square-foot plant which is part of Northwest’s Water Transmission division. As of December 31,

12

2008, the Denver plant operated two spiral mills which manufactured steel pipe, a large 120” mill

13 and a smaller 55” mill. As an Operations Manager, CW1 was responsible for, among other things,

14 all of the production activities at the plant, including engineering, scheduling, purchasing,

15 procurement and human resources. CW1 had access to a variety of metrics and databases showing

16

Northwest’s performance and the performance of the Denver plant.

17

34. CW2 was employed at Northwest between 2004 and January 2009. CW2 worked as a

18

Project Manager at Northwest’s Adelanto, CA facility (the “Adelanto plant”). Northwest’s Adelanto

19 plant is its largest manufacturing plant – a 200,000 square-foot plant which is part of Northwest’s

20

Water Transmission division. As of December 31, 2008, the Adelanto plant operated 3 spiral mills

21 which manufactured steel pipe. As a Project Manager, CW2 was primarily responsible for designing

22 pipeline projects after a job had been awarded to Northwest. In this role, CW2 was also involved in

23

determining costs of projects awarded to Northwest, and had access to information regarding the

24 procurement of materials for projects, the estimation and tracking of costs for projects, and

25 negotiations regarding liquidated damages, back charges, and price concessions on projects at the

26

Adelanto plant.





1

35. CW3 was employed at Northwest between 2005 and February 2008, as well as in

earlier periods. Between 2005 and February 2008, CW3 worked as a Project Manager at

Northwest’s Adelanto plant. As a Project Manager, CW3 was responsible for designing a project

after a bid had been awarded to Northwest, as well as requisitioning materials for projects and

monitoring the costs of the projects as work progressed on the projects to which he/she was assigned.

Through his/her position as a Project Manager, CW3 was directly familiar with liquidated damages,

back charges, price concessions and billing practices on Northwest projects. CW3 worked with, and

had regular communications with, the Operations Manager of the Adelanto plant, CW4, who

reported to Stokes, the President of the Water Transmission division. Stokes reported directly to

defendant Dunham. CW3 was familiar with Northwest’s revenue recognition practices with respect

to the procurement and manufacturing of steel and steel pipes at the Adelanto plant through his/her

work as a Project Manager.

36. CW4 was employed at Northwest between 1995 and June 2008. CW4 worked as an

Operations Manager at Northwest’s Adelanto plant. From January 1, 2008 until June 2008, CW4

reported directly to Stokes. As an Operations Manager, CW4 oversaw the project estimating,

engineering, manufacturing and other operations at the Adelanto plant. CW4 participated in monthly

conference calls with other Northwest Operations Managers and Stokes, in which defendant Dunham

would often participate.

37. CW5 was employed at Northwest between 2007 and 2008. CW5 worked as a

I member of Northwest’s accounting department during this time. In this capacity, CW5 was tasked

I with, amongst other things, applying payments to receivables and reconciling cash received and paid

out by the Company.

38. CW6 was employed at Northwest between approximately March 2008 until March

2009. CW6 worked as a Project Manager in the Company’s Pleasant Grove, UT, plant. CW6’s

I responsibilities as a Project Manager were similar to CW3 and CW4, as described above.

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

39. CW7 was employed at Northwest between approximately 1994 and 2009. CW7 had

2

a variety of roles at the Company during his/her tenure, and served as supervisor of several

3

I departments at the Company, including departments responsible for pipe lining and the plant yard.

4

40. CW8 was employed at Northwest between approximately 1990 and 2008. At the

5

time he/she left Northwest, CW8 was a Materials Manager at Northwest’s plant in Houston, Texas,

6

which was one of the three plants that compromised Northwest’s Tubular Products group. As a

7

Materials Manager, CW8 supervised several subordinates and was responsible for requesting

8

purchases of raw materials, overseeing incoming materials, managing inventories of finished goods

9

and performing cost variances with respect to finished goods. Prior to being a Materials Manager,

10

CW8 had been a Plant Supervisor.

11

40. CW9 was employed at Northwest between approximately February 2007 and August

12

2010. CW9 worked as a credit controller and was involved in determining the creditworthiness of

13

I Northwest’s customers. CW9 subsequently worked as an Executive Assistant for Stokes.

14

41. CW10 was employed at Northwest between December 2006 and January 2009.

15

CW10 worked as a Night Plant Supervisor at the Company’s Denver plant. As a Night Plant

16

Supervisor, CW10 was responsible for all production activities at the Denver plant during the

17

evening shift, including fabrication, maintenance and production.

18

V. BACKGROUND OF NORTHWEST’S BUSINESS

19

42. Headquartered in Vancouver, Washington, Northwest is a manufacturing company

20 which primarily produces high-pressure steel piping and tubing for use in water infrastructure

21 projects, hydroelectric power systems, wastewater systems, and other applications. The Company

22

has six main manufacturing plants in Louisiana, Oregon, Colorado, California, West Virginia and

23

Texas. Northwest is a small-cap Company with approximately 1,100 full-time employees as of

24

December 2009. The Company’s headquarters in Vancouver (which houses the accounting

25

department and executive officers) is even smaller, employing approximately 50 people.

26

Throughout the Class Period, the Company had two divisions: (i) Water Transmission; and





1

I (ii) Tubular Products (including a Fabricated Products division that merged into the Tubular

2

I Products division in FY08).

3

A. Water Transmission Division

4

43. The Company’s Water Transmission division focuses on designing and

5 manufacturing large-diameter high-pressure steel pipe. Such pipes, which range in diameter from

6

4.5 inches to 13 feet with wall thickness of 0.135 inches to 2 inches, are used in applications such as

7 water infrastructure projects, as well as for structure piling applications, pipelines for power plants

8 and other industrial applications. These pipes are typically manufactured in spiral mills which uncoil

9

large quantities of steel sheet, bend it into pipe form, and weld the seams to produce lengths of steel

10 pipe. The pipes are then coated with a variety of different linings depending on the pipe’s specific

11 application. The Company markets its products to public water agencies, contractors and

12 engineering firms, and is often involved in assisting contractors and engineering firms in putting

13

together bids for projects which might utilize steel pipes. The Company’s primary customers are

14

installation contractors involved in projects funded by public water agencies.

15

44. Before being awarded a contract to fabricate pipes for a particular project, Northwest

16 personnel prepared an estimate of the project’s costs, and submitted a bid based on such an estimate.

17

If the Company received a letter of intent, or received other definite indications that it would be

18 awarded a project, the job would be placed in the Company’s “backlog,” which was tracked closely

19

by analysts as an indicator of future revenues. Employees in the Company’s Vancouver

20

headquarters were responsible for entering orders into the backlog.

21

45. Once a bid was accepted, responsibility for the job was transferred to Northwest’s

22 engineering group and project managers, who were responsible for designing the project. The

23

Company’s project managers and operations managers tracked the actual costs incurred in

24 connection with each project, and compared the costs against the estimated costs to determine

25 whether the job was being completed according to plan. Frequently, variances arose between the

26

704839_1





costs estimated in connection with a bid and costs incurred when the project was actually designed,

I resulting in projects that at times were far more expensive than had been budgeted.

46. The Company used detailed, real-time and periodic reporting to track the performance

of each of its plants and projects. According to CW1, each month, employees in the Company’s

headquarters consolidated all the specific project performance data from each plant and prepared a

“Water Transmission Report,” which contained detailed amalgamated project costs and revenues for

each plant within the Company and was distributed to all plant managers. The Report was provided

to Dunham and Welty. The Water Transmission reports were based on weekly “Actual Versus

Estimated” reports which detailed the actual costs of each specific job or project underway at each

plant and compared those costs to what had been estimated or projected.

47. Defendants also reviewed monthly P&L statements. The P&L statements were

prepared at the Company’s headquarters and showed the revenue recognized by a plant, as well as

the costs and expenses of a plant, including costs attributable and not attributable to specific projects.

Further, Welty implemented a quarterly “report card” system which set forth each plant’s revenue,

growth, return on assets and quality control metrics for each period.

46. Costs for the Company’s various projects were also reported in Northwest’s real-time

SAP computer system. Each plant sent information into the SAP system regarding the status of

contracts it was working on, including percentage of completion of work accomplished as well as

materials costs that had been incurred. Employees in the Company’s headquarters, including

defendants Welty and Dunham, were involved in deciding when to recognize revenue during the

projects, and for the accounting for individual plants. Dunham and Welty had access to all important

financial data for each project Company-wide at Northwest from a variety of sources, and were the

ultimate authorities responsible for revenue recognition and accounting decisions.

B. Tubular Products Division

47. The Company’s Tubular Products division manufactures products for a variety of

I purposes and markets, including mechanical tubing, agriculture, energy, traffic signpost systems, fire

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


I protection sprinkler systems and structural tubing. Tubular Products are manufactured in facilities

I located in Kansas, Texas and Louisiana, and are marketed through a network of direct sales force

I personnel, sales agents, and independent distributors.

48. In the Company’s Tubular Products division, revenue is recognized when the

products are delivered. During the Class Period, the Company stated that “[r]evenue from our

tubular products segment is recognized when all four of the following criteria have been satisfied:

persuasive evidence of an arrangement exists; delivery has occurred; the price is fixed or

determinable; and collectability is reasonably assured.”

VI. FALSE AND MISLEADING STATEMENTS

49. Throughout the Class Period, defendants issued numerous materially false and

misleading statements (and omitted material facts) which misled the Company’s shareholders about

the financial condition of Northwest. Each quarter and year, defendants: (i) issued false financial

results and certified that the Company’s financial statements fairly represented the financial

condition of the Company; (ii) falsely asserted that defendants had designed, reviewed, and

implemented the Company’s internal controls to ensure accurate financial reporting and protect

against fraud; and (iii) omitted to disclose the numerous unlawful accounting practices defendants

engaged in while falsely claiming that the Company complied with GAAP and SEC disclosure rules.

A. False and Misleading Financial Results

50. On November 4, 2010, Northwest announced the completion of its year-long

investigation resulting in a massive financial restatement of over three years (2006, 2007, 2008,

1Q09 and 2Q09) of false financial results due to improper accounting practices and financial

manipulations at the Company. On April 27, 2012, Northwest announced the results of the second

restatement that impacted the Company’s financial statements for 2007, 2008, 2009, 2010 and the

first two quarters of 2011. The fact that Northwest restated its previous financial statements is an

admission that: (i) the financial results originally issued during the Class Period and the Company’s

public statements regarding those results were materially false and misleading; and (ii) the financial

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

statements reported during the Class Period were false based on information available to defendants

at the time the results were originally reported. The restatements demonstrate that Northwest’s

FY06-2Q11 financial statements, most of which were reviewed, signed and certified by defendants

Welty and Dunham, were materially false and misleading. The chart below (also attached in larger

print) summarizes the material impact of the restatements on Northwest’s financial results: 4

FY06 FY08 FY08 FY09 1Q11 2Q11

Retained FY07 Net Net Retained 1Q09 Net 2Q09 Net Net FY10 Net Net Net Aggregate

($ in thousands) Earnings Income Income Earnings Income Income Income Income Income Income Impact

Net Income or

Retained Earnings - as

Previously Reported $135,130 $20,832 $32,301 $149,205 $2,630 $2,423 ($7,277) ($1,434) $3,566 $5,375

Improper Revenue

Recognition ($4,292) ($926) $1,828 -0- -0- -0- -0- ($3,390)

Improper Allocation of

Certain Overhead &

Support Costs ($7,610) ($3,441) ($4,398) -0- -0- -0- -0- ($15,449)

Improper Capitalization

& Depreciation ($15,299) ($1,816) ($1,377) ($9,430) ($2,062) ($2,366) ($568) ($71) ($32,989)

Lack of Persuasive

Evidence of

Arrangement -0- -0- ($130) ($130)

Improper Foreign

Exchange Accounting ($91) ($2,091) $2,946 $764

Other ($1,890) ($1,730) ($3,005) ($2,783) ($1,243) ($3,682) ($1,736) ($1,640) ($66) ($327) ($18,102)

Net Income or Retained

Earnings - as Restated $105,948 $10,828 $28,165 $136,992 $1,387 ($1,259) ($11,075) ($5,440) $2,932 $4,977

$ Overstatement

(Understatement) $29,182 $10,004 $4,136 $12,213 $1,243 $3,682 $3,798 $4,006 $634 $398 $69,296

% Overstatement

(Understatement) 27.5% 92.4% 14.7% 8.9% 89.6% 292.5% 34.3% 73.6% 21.6% 8.0%

51. As CEO and CFO, defendants Dunham and Welty were responsible for the accuracy

of the Company’s financial statements. As U.S. Auditing Standards (“AU”) §110.03 mandates:

4 The dollar amounts of the “other” restatement adjustments for 2007 and 2008 net income include $1.091 million of downward adjustments in 2007 and $3.173 million of downward adjustments in 2008 that were revealed when Northwest reported the second restatement on April 27, 2012. Northwest did not disclose the specific accounts that were adjusted. The dollar amounts of the adjustments in 1Q09 and 2Q09 are included in “other” because Northwest did not disclose the specific accounts that were adjusted.




704839_1


The financial statements are management’s responsibility . The auditor’s responsibility is to express an opinion on the financial statements. Management is

2

responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, initiate, record, process,

3

and report transactions . . . consistent with management’s assertions embodied in the financial statements. The entity’s transactions and the related assets, liabilities, and

4

equity are within the direct knowledge and control of management . The auditor’s knowledge of these matters and internal control is limited to that acquired through

5

the audit. Thus, the fair presentation of financial statements in conformity with [GAAP] is an implicit and integral part of management’s responsibility .

6 52. Notwithstanding this responsibility, Dunham and Welty deliberately and recklessly

7 reviewed, certified and disseminated admittedly false financial statements which materially

8 misstated the Company’s financial condition and its business prospects.

9 1. False FY06 Financial Results

10

11 53. On April 2, 2007, the Company filed its 2006 financial results on FY06 Form 10-K

12 with the SEC (“FY06 10-K”). The FY06 10-K was signed by Dunham. The FY06 10-K falsely

13 reported retained earnings of $135.1 million. 5 As Northwest’s restatement admits, the FY06 10-K

14 was materially false because it overstated retained earnings by $29.2 million , or 27.5% , as a result of

15 numerous improper accounting manipulations. Northwest’s FY06 10-K incorporated the Company’s

16 quarterly results for 1Q06, 2Q06, 3Q06 and 4Q06, all of which were false and misleading as a result

17 of fraudulent practices alleged herein.

18 54. The Company’s FY06 10-K also materially overstated the Company’s net income, net

19 sales, EPS and retained earnings as a result of defendants’ improper accounting for back charges,

20 liquidated damages and other penalty provisions as set forth in more detail, infra, in ¶¶135-143.

21 55. Defendants’ false financial results and misrepresentations contained in the FY06

22 10-K were also falsely reported to investors in: (i) the Company’s March 21, 2007 press release

23 5 Retained earnings are the accumulated earnings of a company less dividends. GAAP requires that an offsetting

24 adjustment be made to the opening balance of retained earnings for prior-period adjustments. See Statement of Financial Accounting Standards (“SFAS”) No. 154, ¶25. Thus, the $29.2 million adjustment to Northwest’s FY06 retained

25 earnings balance effectively represents the restatement’s impact on net income for all periods prior to 2007. This was necessary since the restated financial statements for those periods were not presented in the SEC filings.

26

704839_1 CONSOLIDATED AMENDED COMPLAINT FOR

ROBBINS GELLER RUDMAN & DOWD LLP

VIOLATION OF THE FEDERAL SECURITIES

One Montgomery Street, Suite 1800, San Francisco, CA 94104



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

I issued by Northwest and Dunham, entitled “Northwest Pipe Reports Record Sales and Net Income”;

I and (ii) the Company’s March 22, 2007 conference call, in which defendant Dunham specifically

I discussed and reiterated the false results to investors.

2. False FY07 Financial Results

56. On March 17, 2008, the Company filed its 2007 financial results on Form 10-K with

the SEC (“FY07 10-K”). The FY07 10-K was signed by defendants Dunham and Welty. In the

FY07 10-K, the Company falsely reported net income of $20.8 million. As Northwest’s

restatements confirm, the Company’s FY07 financial results were materially false and misleading

because they overstated net income by $10.0 million, a 92.4% overstatement of its actual net income

of $10.8 million. The restatement also revealed that gross profit and EPS were overstated by 49.5%

and 91.7%, respectively. Northwest’s FY07 10-K incorporated the Company’s quarterly results for

1Q07, 2Q07, 3Q07 and 4Q07, all of which were false and misleading as a result of fraudulent

practices alleged herein. The chart below sets forth in further detail the false and misleading

financial results reported in the FY07 10-K:

($ in thousands, except EPS) FY07 - Reported FY07 - Restated % Overstated

Cost of Sales $312,609 $317,333 (1.49%) Gross Profit $70,215 $46,981 49.45% Net Income $20,832 $10,828 92.4% Basic EPS $2.32 $1.21 91.7%

57. Further, the Company’s FY07 10-K overstated the Company’s net income, net sales

I and EPS as a result of defendants’ improper accounting for back charges, liquidated damages and

I other penalty provisions as set forth in more detail in ¶¶135-143.

58. Defendants’ false and misleading statements contained in the FY07 10-K were also

I fraudulently disseminated to investors in: (i) the Company’s March 5, 2008 press release issued by

Northwest, Welty and Dunham , entitled “Northwest Pipe Reports Record Results”; and (ii) the

Company’s March 5, 2008 conference call at which defendants Dunham and Welty reiterated and

verbally confirmed the false results to investors and Wall Street analysts.




704839_1


1


2

59. On March 13, 2009, the Company filed its 2008 financial results with the SEC on

Form 10-K (“FY08 10-K”). The FY08 10-K was signed by defendants Dunham and Welty. In the

FY08 10-K, the Company falsely reported net income of $32.3 million. As Northwest’s

restatements confirm, the Company’s FY08 financial results were materially false and misleading

because they overstated gross profit, net income and EPS by 17.4%, 14.7% and 14.6%, respectively.

Northwest’s FY08 10-K incorporated that Company’s quarterly results for 1Q08, 2Q08, 3Q08 and

4Q08, all of which were false and misleading as a result of fraudulent practices alleged herein. The

chart below sets forth in further detail the false and misleading financial results reported in the FY08

10-K:

($ in thousands, % Overstated except EPS) FY08 – Reported FY08 – Restated (Understated) Cost of Sales $346,077 $371,616 (6.87%)

Gross Profit $93,658 $79,803 17.36%

Net Income $32,301 $28,165 14.68%

Basic EPS $3.53 $3.08 14.61%

60. Further, the Company’s FY08 10-K overstated the Company’s net income, net sales

and EPS as a result of defendants’ fraudulent accounting for back charges, liquidated damages and

other penalty provisions for which the Company was liable, but failed to account for, as set forth in

more detail in JJ135-143.

61. Defendants’ false and misleading statements contained in the FY08 10-K were also

falsely disseminated to the public in: (i) the Company’s February 25, 2009 press release issued by

Northwest, Dunham and Welty, entitled “Northwest Pipe Reports Record Results in 2008”; and

(ii) the Company’s February 25, 2009 conference call, in which defendants Dunham and Welty

reiterated and confirmed the false results to investors.

62. The $149.2 million of restated retained earnings as of 2008 was previously reported

in the 3Q09 Form 10-Q and the 2009 Form 10-K, which were both filed on November 4, 2010. On

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


I April 27, 2012, Northwest restated retained earnings in 2008 a second time and reduced them to

I $136.9 million, primarily to correct errors in depreciation expenses.

4. False 1Q09 Financial Results

63. On May 8, 2009, the Company filed a Form 10-Q for 1Q09 with the SEC (“1Q09 10-

Q”). The 1Q09 10-Q was signed by defendants Dunham and Welty. In the 1Q09 10-Q, the

Company reported net income of $2.6 million. As Northwest’s restatements admit, the Company’s

1Q09 10-Q was materially false and misleading because it overstated gross profit, net income and

EPS by at least 51.22%, 89.62% and 93.33% , respectively. The chart below sets forth in further

detail the false and misleading financial results reported in the 1Q09 10-Q:

($ in thousands, 1Q09 – 1Q09 – % Overstated except EPS) Reported Restated (Understated)

Cost of Sales $68,666 $75,807 (9.42%)

Gross Profit $12,737 $8,423 51.22%

Net Income $2,630 $1,387 89.62%

Basic EPS $0.29 $0.15 93.33%

64. Further, the Company’s 1Q09 10-Q overstated the Company’s net income, net sales

I and EPS due to defendants’ improper accounting for back charges, liquidated damages and other

I penalty provisions for which the Company was liable, but failed to account for, as set forth in more

I detail in ¶¶135-143.

65. Defendants’ false and misleading statements contained in the 1Q09 10-Q were also

falsely disseminated to investors in: (i) the Company’s April 28, 2009 press release issued by

Northwest, Dunham and Welty, entitled “Northwest Pipe Reports First Quarter 2009 Results”; and

(ii) the Company’s April 28, 2009 conference call, in which defendants Dunham and Welty reiterated

and confirmed the false results to investors.

66. The restated financial results for 1Q09 included in the 1Q10 Form 10-Q filed on

I November 4, 2010 were also materially false and misleading. On April 27, 2012, Northwest

I reported the second restatement, but did not break down the restatement of its 2009 financial

I statements by quarter.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26


67. On August 7, 2009, the Company filed a Form 10-Q for 2Q09 with the SEC (“2Q09

10-Q”). The 2Q09 10-Q was signed by defendants Dunham and Welty. In the 2Q09 10-Q, the

Company reported net income of $2.4 million. As Northwest’s restatements admit, the Company’s

I 2Q09 10-Q was materially false and misleading because it overstated gross profit, net income and

I EPS by at least 326.83%, 292.24% and 285.71% respectively. The chart below sets forth in further

detail the false and misleading financial results reported in the 2Q09 10-Q:

($ in thousands, 2Q09 – 2Q09 – except EPS) Reported Restated % Overstated

Cost of Sales $64,617 $65,771 (1.75%)

Gross Profit $10,278 $2,408 326.83%

Net Income $2,423 $(1,259) 292.45%

Basic EPS $0.26 $(0.14) 285.71%

68. Further, the Company’s 2Q09 10-Q overstated the Company’s net income, net sales,

retained earnings and EPS due to defendants’ fraudulent accounting for back charges, liquidated

damages and other penalty provisions for which the Company was liable, but failed to account for,

as set forth in more detail in ¶¶135-143.

69. Defendants’ false and misleading statements contained in the 2Q09 10-Q were also

falsely disseminated to investors in: (i) the Company’s July 29, 2009 press release issued by

Northwest, Dunham and Welty, entitled “Northwest Pipe Reports Second Quarter 2009 Results”;

and (ii) the Company’s July 29, 2009 conference call, in which defendant Dunham reiterated and

confirmed the false results to investors.

70. The restated financial results for 2Q09 included in the 2Q10 Form 10-Q filed on

November 4, 2010 were also materially false and misleading. On April 27, 2012, Northwest

reported the second restatement, but did not break down the restatement of its 2009 financial

statements by quarter.




704839_1


1


2

71. On November 12, 2009, the Company filed a Form NT 10-Q for 3Q09 with the SEC

3

(“3Q09 NT 10-Q”). The 3Q09 NT 10-Q was signed by defendant Dunham. In the 3Q09 NT 10-Q,

4

the Company reported preliminary results and a net loss for 3Q09 of $1 million. The Company’s

5

3Q09 NT 10-Q was materially false and misleading because it overstated net income by at least

6

$4.5 million, or 449.4% .

7

72. Further, the Company’s 3Q09 NT 10-Q overstated the Company’s net income and net

8 sales due to defendants’ failure to account for back charges, liquidated damages and other penalty

9

I provisions for which the Company was liable, but failed to account for, as set forth in more detail in

10

¶¶135-143.

11

73. Defendants’ false and misleading statements contained in the 3Q09 NT 10-Q were

12 also disseminated to investors in the Company’s November 12, 2009 press release issued by

13

I Northwest, Dunham and Welty, entitled “Northwest Pipe Announces Preliminary Estimates of Third

14

I Quarter 2009 Results.”

15

74. The financial results for 3Q09 included in the 3Q09 Form 10-Q filed on November 4,

16

2010 and the 3Q10 Form 10-Q filed on November 15, 2010 were also materially false and

17

I misleading. On April 27, 2012, Northwest reported the second restatement, but did not break down

18

I the restatement of its 2009 financial statements by quarter.

19


20 75. The financial results for FY09 originally reported in the 2009 Form 10-K filed on

21 November 4, 2010 and also reported in the 2010 Form 10-K filed on March 22, 2011 were materially

22 false and misleading. On April 27, 2012, Northwest reported the second restatement, which

23 increased the originally reported net loss of $7.277 million to $11.075 million. Thus, the actual net

24 loss was understated by $3.798 million or 34.29%. As detailed in ¶50, $2.062 million of the

25 adjustments related to restated depreciation expenses and $1.736 million of the adjustments related

26 to restated other expenses.





1


2

76. The financial results for FY10 originally reported in a March 22, 2011 press release

and also reported in the 2010 Form 10-K filed on March 22, 2011, the 1Q11 Form 10-Q filed on

May 10, 2011 and the 2Q11 Form 10-Q filed on August 8, 2011, were materially false and

misleading. On April 27, 2012, Northwest reported the second restatement, which increased the

originally reported net loss of $1.434 million to $5.440 million. Thus, the actual net loss was

understated by $4.006 million or 73.64%. As detailed above, $2.366 million of the adjustments

related to restated depreciation expenses and $1.640 million of the adjustments related to restated

other expenses.


77. The financial results for 1Q11 originally reported on May 10, 2011 in a Company

press release and the 1Q11 Form 10-Q were materially false and misleading. On April 27, 2012,

Northwest filed an amended Form 10-Q for 1Q11 and restated the originally reported net income of

$3.566 million to $2.932 million. Thus, actual net income was overstated by $634,000 or 21.62%.

As detailed above, $568,000 of the adjustments related to restated depreciation expenses and

$66,000 related to restated other expenses.


78. The financial results for 2Q11 originally reported on August 5, 2011 in a Company

press release and also included in the 2Q11 Form 10-Q filed on August 8, 2011 were materially false

and misleading. On April 27, 2012, Northwest filed an amended Form 10-Q for 2Q11 and restated

the originally reported net income of $5.375 million to $4.977 million. Thus, actual net income was

overstated by $398,000 or 8.0%. As detailed above, $71,000 of the adjustments related to restated

depreciation expenses and $327,000 related to restated other expenses.

B. False and Misleading Statements Regarding Internal Controls

79. Internal controls are those systems and processes which are designed to ensure the

I accuracy of publicly reported information by, among other things, assuring that balance sheet entries

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


have documented support, and that significant variations from established procedures cannot be

made without multiple levels of review and approval. AU §319.06 entitled, Internal Control in a

Financial Statement Audit , defines internal control as “a process – effected by an entity’s board of

directors, management, and other personnel – designed to provide reasonable assurance regarding

the achievement of objectives in the following categories: (a) reliability of financial reporting,

(b) effectiveness and efficiency of operations, and (c) compliance with applicable laws and

regulations.”

80. Section 13(b)(2) of the Exchange Act states, in pertinent part, that every reporting

company must: “(A) make and keep books, records, and accounts, which, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the issuer; [and]

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable

assurances that . . . transactions are recorded as necessary . . . to permit preparation of financial

statements in conformity with [GAAP].” 15 U.S.C. §78m(b)(2). These provisions require an issuer

to employ and supervise reliable personnel to maintain reasonable assurances that transactions are

executed as authorized, to properly record transactions on an issuer’s books and, at reasonable

intervals, to compare accounting records with physical assets.

81. Management of any public company is responsible for establishing and maintaining

adequate internal control over financial reporting as defined in 15 U.S.C. §78m-o under the

Exchange Act. During the Class Period, Dunham and Welty each attested that they were responsible

for designing and maintaining compliance with adequate internal control procedures, that they had

each reviewed the Company’s Reports on Forms 10-K and 10-Q before they were filed, and that

pursuant to §302 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), they had: (i) ensured that

material information “is made known to us by others” within Northwest during the period covered

by the Report; (ii) personally reviewed and evaluated the effectiveness of those controls within the

last 90 days; and (iii) that any deficiencies in those controls and procedures had been disclosed in the

Forms 10-K and 10-Q, as well as to the Company’s outside auditors and internal audit committee.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


82. For example, on August 7, 2009, the Company filed its 2Q09 10-Q. The 2Q09 10-Q

2

included Sarbanes-Oxley certifications signed by defendants Dunham and Welty, in which each

3

I certified the following regarding the Company’s internal controls and procedures pursuant to

4

Sarbanes-Oxley:

5

1. I have reviewed this quarterly report on Form 10-Q of Northwest Pipe Company;

6 2. Based on my knowledge, this report does not contain any untrue statement

7

of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not

8

misleading with respect to the period covered by this report;

9

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the

10

financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

11 4. The registrant’s other certifying officer and I are responsible for establishing

12

and maintaining disclosure controls and procedures (as defined in Exchange Act [R]ules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as

13

defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

14

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our

15

supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within

16

those entities, particularly during the period in which this report is being prepared;

17

b. designed such internal control over financial reporting, or 18

caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of

19

financial reporting and the preparation of financial statements for external purposes in accordance with [GAAP];

20

c. evaluated the effectiveness of the registrant’s disclosure 21

controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of

22

the period covered by this report based on such evaluation; and

23

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most

24

recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to

25

materially affect, the registrant’s internal control over financial reporting; and

26

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting , to the







registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

2

a. all significant deficiencies and material weaknesses in the 3

design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,

4

summarize and report financial information; and

5

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal

6

control over financial reporting.

7

83. Dunham and Welty signed identical certifications that accompanied Northwest’s

8

Reports on Forms 10-Q and 10-K in 2007, 2008 and 2009.

9

84. The Sarbanes-Oxley certifications in each of Northwest’s Forms 10-Q and 10-K were

10

materially false and misleading because, inter alia, as defendants admitted on November 4, 2010 and

11

April 27, 2012, the Company did not maintain appropriate internal controls in nearly every aspect of

12

its business:

13

We did not maintain an effective control environment , which is necessary

14 for effective internal control over financial reporting, as evidenced by: (i) an

insufficient number of personnel with an appropriate level of GAAP knowledge and experience or ongoing training in the application of GAAP 15 commensurate with the Company’s financial reporting requirements, and (ii) insufficient number of personnel appropriately qualified to perform an 16 appropriately detailed review of the accounting for nonroutine transactions,

17

which resulted in erroneous or unsupported judgments regarding the proper application of GAAP. This control environment weakness also contributed

18 to the additional material weaknesses described below.

19 We did not have effective controls to ensure regular validation of management assumptions used in certain of our accounting estimates. 20 Specifically, the Company did not have sufficient controls in place to ensure

21

that the assumptions included in our method of allocating manufacturing overhead variances and indirect support costs to projects in our Water

22 Transmission segment were properly supported by underlying verifiable data.

23 We did not have effective controls to ensure that the Company maintained complete and accurate business documentation to support certain revenue, 24 property and equipment, foreign exchange and vendor claim transactions,

25

including related assumptions and estimates.

26







1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

• We did not have effective controls over certain accounting system calculations in response to changes in assumptions regarding property and equipment and other items. Specifically, the Company did not have sufficient controls in place to properly identify and validate the changes in assumptions underlying the calculations.

• We did not have effective controls over certain spreadsheets. Specifically, the Company did not have sufficient review procedures in place to ensure an accurate preparation of spreadsheets used to support the calculation of steel inventory value and standard to actual cost adjustments within the Tubular Products segment.

• We did not have effective controls over our cash flow statements. Specifically, we did not have proper preparation and review procedures in place to ensure an accurate preparation of our consolidated statements of cash flows as required by GAAP.

• We did not have effective controls to ensure timely internal notification of business transactions and decisions requiring accounting entries. Specifically, our sales and human resources teams and plant personnel did not communicate to our accounting staff all of the information necessary to make accurate accounting determinations for certain accounts receivable and accrued liability balances.

85. Northwest’s wholesale failure of internal controls demonstrates that the Sarbanes-

Oxley certifications signed by Dunham and Welty were deliberately and recklessly false, and misled

investors to believe that Northwest’s internal controls were adequate to ensure accurate financial

reporting. Indeed, Northwest’s belated disclosures demonstrate that the internal control systems and

practices certified by Dunham and Welty were virtually non-existent. The above practices show a

deliberate and reckless disregard for proper conduct and a pervasive and systematic exploitation of

the lack of controls to facilitate defendants’ myriad accounting manipulations and to inflate

Northwest’s financial results.

86. In the Company’s FY08 Form 10-K, filed with the SEC on March 13, 2009,

I Northwest also claimed its internal control procedures complied with the standards adopted by the

Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The COSO

standards constitute a specific internal control model, and require adopting entities to have: (a) a




704839_1


1

disciplined and structured control environment; (b) direct involvement by management in identifying

2

and analyzing internal control risks, rather than reliance on auditors; (c) formal policies, procedures

3

and practices that ensure control activities are being properly carried out; (d) accurate and timely

4

communication of control responsibilities to employees; and (e) continual monitoring by

5

management of the controls through formalized procedures or checklists.

6

87. Had defendants in fact followed these control guidelines, as they represented they

7

had, it would have been impossible for defendants to engage in the pervasive accounting

8

improprieties admitted in the Company’s FY09 Form 10-K. Moreover, as defendant Dunham was

9

directly involved in many of the accounting violations alleged herein, he had actual knowledge that

10

the Company’s internal controls were defective and allowed Northwest to overstate its income and

11

revenues for years. Accordingly, Dunham’s and Welty’s Sarbanes-Oxley certifications were false

12

and support a strong inference of scienter.

13

88. Additionally, at the start of the Class Period, defendants had already been expressly

14

I informed of material weaknesses in their financial reporting. According to a report from

15

Northwest’s former auditor PricewaterhouseCoopers LLP 6, the Company was warned that:

16

As of December 31, 2006, [the Company] did not maintain effective controls to ensure the validity of certain capitalized costs. Specifically, [it] lacked effective

17

controls over the accumulation of certain internal costs that were initially capitalized in [its] property, plant and equipment account during the combination of [its]

18

Riverside and Adelanto facilities. This control deficiency resulted in an audit adjustment to [its] annual 2006 consolidated financial statements. Additionally, this

19

control deficiency, if not remediated, could result in a misstatement to property, plant and equipment that could result in a material misstatement to the annual or

20

interim consolidated financial statements that would not be prevented or detected . Accordingly, management has determined that this control deficiency constitutes a

21

material weakness.

22

89. Thus, defendants were undeniably aware of the Company’s material problems with

23

I control deficiencies and accounting for product costs, which affected the financial statements and

24

I distorted the Company’s true financial performance.

25 6 Inexplicably, Northwest later changed its auditor from PricewaterhouseCoopers LLP to Deloitte & Touche LLP.

26





C. Additional Materially False and Misleading Statements

2

1. Defendants Deliberately Misled Northwest Shareholders by Stating

3

that Revenue Was Recognized When Products Were “Built” or “Completed”

4 90. On July 23, 2008, Northwest hosted a conference call to discuss the Company’s 2Q08

5 financial results with investors and analysts. Defendants Dunham and Welty led the call. Analysts

6 representing seven major Wall Street brokerage houses participated in and asked questions during

7 the conference call. During the call, Dunham and Welty were specifically asked about the

8 Company’s increase in backlog during the quarter. 7 In response, Dunham falsely stated that the

9 Company recognized revenue only after product was built:

10 Scott Graham - Analyst

11 Here’s my last question. The backlog, which was – really kind of jumped up this quarter, is there a whole bunch of sort of maybe in factories waiting for shipment 12

where the backlog was that high, or this just a real good balance of bookings and sort of spread? I know you’ve got good visibility you think on the second half of the 13 year. Is that more of a backlog issue where you just didn’t get some stuff out the door or – maybe just a little bit more color on the backlog. 14

Brian Dunham - Northwest Pipe - President and CEO 15

Well, I think Stephanie would always say we stack up too much in our plants. 16

But no, I think it’s just a generally good mix. One of the things, as you look into Northwest Pipe, we are defined by the American Institute of Certified Public 17

Accountants as a contractor – construction contractor, and so we’re required to use what’s called [percentage of completion] accounting , which means basically we 18 recognize revenue as we incur the costs. So the shipment date is not really the driver. It’s when it’s built that’s the driver. 19

20

21

22

23 7 Northwest’s backlog “includes confirmed orders, including the balance of projects in process, and projects for

which we have been notified we are the successful bidder even though a binding agreement has not been executed.” The 24

Company’s backlog was an important metric to investors and analysts as an indication of future revenues and earnings. As one analyst explained on July 23, 2007, “[w]ith backlog hitting yet another record at $264 million, we expect

25

Northwest Pipe’s recent earnings momentum to be sustained throughout 2008 and into 2009.” July 23, 2007 Analyst Report from Boenning & Scattergood, Inc.

26







1

91. Similarly, Welty was asked by an analyst about an increase in the Company’s

2

I receivables. In response, Welty stated that the Company recognized revenue when “the work is

3

I completed”:

4

Because we are a construction/accounting house, we recognize revenue as the work is completed , but we don’t usually bill until later down the line. And so, we earn

5

revenues on a pretty steady stream, and we do sometimes have stronger billing periods than others.

6 92. These statements were knowingly misleading because Dunham and Welty knew, or

7 were deliberately reckless in not knowing, that Northwest had – for years – been improperly

8 recognizing revenue when the Company purchased steel, not when the steel entered into the

9 manufacturing process and pipe was “built,” or “completed” as required by GAAP. In fact, as

10 reported by several CWs, Dunham knew the Company had a systematic scheme to intentionally

11 order steel before it was needed to inflate Northwest’s quarterly revenue.

12 2. Defendants Falsely Told Investors that Contract Penalty Provisions

13 and Other Related Charges Were Recognized “in the Period in Which the Revisions Are Determined”

14

15 93. In discussing the Company’s revenue recognition policy in Forms 10-K filed with the

16 SEC on March 17, 2008 and March 13, 2009, Northwest, Dunham and Welty stated that “Changes in

17 I job performance, job conditions and estimated profitability, including those arising from contract

18 I penalty provisions , foreign currency exchange rate movements, and final contract settlements may

19 result in revisions to costs and income and are recognized in the period in which the revisions are

20 determined .”

21 94. This statement was deliberately false and misleading. As set forth in ¶¶135-143,

22 infra, Dunham knew that Northwest had a pattern and practice of intentionally not recognizing

23 changes in job profitability as a result of penalty provisions and back charges in the period in which

24 such revisions were determined. Rather, as described in detail in ¶¶135-143, Dunham, as well as

25 I other Northwest executives, improperly concealed the accounting for penalties by applying them as

26 discounts on future projects. These intentional manipulations of accounting rules created off-balance





I sheet liabilities which were never disclosed to Northwest shareholders, and inflated Northwest’s

I financial results and its backlog.

3. Defendants Made False and Misleading Statements Regarding Depreciation

95. During the Class Period, defendants made false and misleading statements about how

the Company depreciated its assets. In Forms 10-K filed with the SEC on March 17, 2008 and

March 13, 2009, Northwest, Dunham and Welty made the following misrepresentations regarding

how the Company calculated depreciation expenses:

Property and Equipment

Property and equipment is stated at cost. Maintenance and repairs are expensed as incurred and costs of improvements and renewals, including interest [where applicable], are capitalized. Depreciation and amortization on the book value in excess of the salvage value are determined by the units of production method for most equipment, and for the remaining assets by the straight-line method based on the estimated useful lives of the related assets . Upon disposal, costs and related accumulated depreciation of the assets are removed from the accounts and resulting gains or losses are reflected in operations. The Company leases certain equipment under long-term capital leases, which are being amortized on a straight-line basis over the shorter of the lease terms or the estimated useful lives of the assets.

Estimated useful lives by major classes of property and equipment are as follows:

Land improvements 20 – 30 years Buildings 20 – 40 years Equipment [3 or 5] – 18 years

96. This statement, which was repeated throughout the Class Period, was deliberately

false and misleading. As the Company later admitted, “certain equipment carrying values were

overstated and that there were errors in the determination of the economic lives and residual values

of certain equipment.” In the first restatement, Northwest admitted that the failure to properly

account for depreciation expenses caused the Company to overstate net income by $18.5 million.

Further, the Company’s representation that estimated useful lives for equipment was 3 (or 5) – 18

years, was blatantly false. In FY08, Northwest disclosed that it had $241 million of property and

equipment at cost of which $170 million consisted of equipment (excluding accumulated

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

704839_1





depreciation of $48 million). Yet, Northwest’s total depreciation expense originally reported in

FY08 was only $5 million . Even assuming that 70% of the accumulated depreciation (since 70% of

assets were equipment) and the entire depreciation expense was related to equipment, that would

represent a shockingly low 3.6% depreciation rate. At such a rate, it would take the Company nearly

30 years to depreciate its equipment – a far longer period than the 3 (or 5) – 18 years stated by

defendant, or the periods used by Northwest’s competitors.

97. In the second restatement, Northwest admitted that retained earnings in 2008 and net

income in 2009, 2010 and the first two quarters of 2011 were overstated by $14.497 million because

the Company understated depreciation expenses.

D. The Company’s Restatement Establishes Falsity and Materiality

98. As a result of defendants’ widespread accounting manipulations described herein,

Northwest was forced to restate its previously released financial statements twice. The first

restatement covered 2006, 2007, 2008 and the first two quarters of 2009.8 The second restatement

covered 2007, 2008, 2009, 2010 and the first two quarters of 2011. Accordingly, there can be no

dispute about the material falsity of Northwest’s financial statements at the time they were issued.

Additionally, as part of the first restatement, a $29.2 million adjustment was made to retained

earnings as of December 31, 2006, for the cumulative impact of accounting improprieties for periods

prior to January 1, 2007. The restatements had a significant impact on revenue, cost of sales, gross

profit, net income and EPS, as illustrated in the table below:

8 Northwest also had to significantly revise its preliminary estimates of 3Q09 net sales and net loss. In a November 12, 2009 press release, the Company announced estimated 3Q09 net sales of approximately $67 million and a net loss of approximately $1 million. When the 3Q09 Form 10-Q was ultimately filed a year later on November 4, 2010, net sales were reported as $61.4 million (a reduction of 8.4%) and net loss was $5.5 million (an increase of 450%).

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

($ in thousands, Originally Restated/ Amount Overstated/ % Restated Amount except EPS) Reported Adjusted (Understated) Overstated/(Understated)

Year Ended 12/31/07:

Net Sales 382,824 364,314 18,510 5.08%

Cost of Sales 312,609 317,333 (4,724) (1.49%)

Gross Profit 70,215 46,981 23,234 49.45%

Net Income 20,832 10,828 10,004 92.39%

Diluted EPS 2.26 1.17 1.09 93.16%


Net Sales 439,735 451,419 (11,684) (2.59%)

Cost of Sales 346,077 371,616 (25,539) (6.87%)

Gross Profit 93,658 79,803 13,855 17.36%

Net Income 32,301 28,165 4,136 14.68%

Diluted EPS 3.46 3.01 0.45 14.95%


Net Sales 278,654 278,654 -0- -0-

Cost of Sales 266,968 271,970 (5,002) (1.84%)

Gross Profit 11,686 6,684 (5,002) 74.84%

Net Income (loss) (7,277) (11,075) (3,798) (34.29%)

Diluted EPS (0.79) (1.20) (0.41) (34.17%)


Net Sales 386,750 386,750 -0- -0-

Cost of Sales 353,752 357,062 (3,310) (0.93%)

Gross Profit 32,998 29,688 3,310 11.15%

Net Income (1,434) (5,440) (4,006) (73.64%)

Diluted EPS (0.15) (0.59) (0.44) (74.58%)

Quarter Ended 3/31/11:

Net Sales 111,458 111,458 -0- -0-

Cost of Sales 95,874 96,690 (816) (0.84%)

Gross Profit 15,584 14,768 816 5.53%

Net Income 3,566 2,932 634 21.62%

Diluted EPS 0.38 0.31 0.07 22.58%

Quarter Ended 6/30/11:

Net Sales 143,801 143,801 -0- -0-

Cost of Sales 125,872 127,130 (1,258) (0.99%)

Gross Profit 17,929 16,671 1,258 7.55%

Net Income 5,375 4,977 398 8.00%

Diluted EPS 0.57 0.53 0.04 7.55%

99. The fact that Northwest restated its previous financial statements is an admission that:

(i) the financial results originally issued during the Class Period and defendants’ public statements

regarding those results were materially false and misleading; and (ii) the financial statements

704839_1




26


I reported during the Class Period were incorrect based on information available to defendants at the

time the results were originally reported.

100. As noted by the SEC, “GAAP only allows a restatement of prior financial statements

based upon information ‘ that existed at the time the financial statements were prepared ,’” and

“restatements should not be used to make any adjustments to take into account subsequent

information that did not and could not have existed at the time the original financial statements were

prepared.”9 FASB, the governing body that promulgated the accounting rules regarding restatements

of prior financial statements has defined “restatement” as “the process of revising previously issued

financial statements to reflect the correction of an error in those financial statements.” See SFAS

No. 154, ¶2. FASB has also defined the “errors” that may be corrected through a restatement: “an

error in recognition, measurement, presentation, or disclosure in financial statements resulting from

mathematical mistakes, mistakes in the application of GAAP, or oversight or misuse of facts that

existed at the time that the financial statements were prepared .” Id. Indeed, as alleged herein, the

restatements at issue here were not due to a simple mathematical error or honest misapplication of a

standard. Rather, they were due to intentional accounting manipulations and deliberate misuse of the

facts that were known at the time such statements were made.

101. The SEC has reiterated its position that in its investigations of restated financial

statements, it often finds that the persons responsible for the improper accounting acted with

scienter:

[T]he Commission often seeks to enter into evidence restated financial statements, and the documentation behind those restatements, in its securities fraud enforcement actions in order, inter alia, to prove the falsity and materiality of the original financial statements [and] to demonstrate that persons responsible for the original misstatements acted with scienter . . . .

I Sunbeam Brief at 1.

9 In re Sunbeam Sec. Litig. , No. 98-8258-Civ.-Middlebrooks, Brief of the United States Securities and Exchange Commission as Amicus Curiae Regarding Defendants’ Motions in Limine to Exclude Evidence of the Restatement and Restatement Report at 11, 13 (S.D. Fla. Jan. 22, 2002) (“ Sunbeam Brief”).

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

VII. DEFENDANTS’ DIRECT INVOLVEMENT IN MULTIPLE PERVASIVE AND BASIC ACCOUNTING SCHEMES DEMONSTRATES A STRONG INFERENCE OF

2 SCIENTER

3 102. During the Class Period, Northwest was a company dominated by accounting and

4 auditing experts. Defendant Dunham is a CPA, a former auditor at Coopers & Lybrand, and was

5 formerly Northwest’s CFO. Coopers & Lybrand merged with Pricewaterhouse in 1998, becoming

6 PricewaterhouseCoopers – Northwest’s auditor until 2007. Defendant Welty is a CPA and a

7 longtime public company CFO. Defendants used this extensive accounting knowledge to implement

8 routine and systematic violations of basic accounting policies designed to inflate Northwest’s

9 revenues and mislead investors regarding the Company’s financial health and operations.

10 103. As discussed herein, defendants knew, or deliberately and recklessly disregarded, that

11 Northwest was engaged in numerous deceptive accounting practices, including: (i) prematurely

12 recognizing millions of dollars of revenue based on when steel was purchased, instead of when it

13 entered the manufacturing process; (ii) ordering steel long before it was needed for a specific project

14 in order to inflate revenues; (iii) intentionally manipulating and understating the depreciation of

15 assets; (iv) concealing off-balance sheet liabilities, liquidated damage costs and back charges by

16 moving them to future contracts; (v) manipulating the assignment of costs in order to make

17 unprofitable contracts appear profitable; (vi) prematurely recognizing revenue prior to contract

18 contingencies being satisfied; and (vii) improperly allocating overhead and support costs. Each

19 improper accounting manipulation is particularized below. 10

20 A. Defendants Dramatically Inflated the Company’s Reported Revenues by

21

Prematurely Recognizing Millions of Dollars of Revenue from Steel Purchases

22 104. Prior to and during the Class Period, Northwest overstated its revenues resulting in

23 inflated net income and EPS. Northwest accomplished this, in part, by prematurely recognizing the

24

25

10 In addition to the tens of millions of dollars in fictitious revenue, income and earnings reversed by the restatements, the Company has also been forced to spend millions more on the accounting investigation.

26





cost of the steel as a project cost at the time the raw steel was ordered rather than when the steel was

2

actually introduced into the manufacturing process, as required by GAAP and Northwest’s own

3

stated policy.

4

105. This accounting violation was not simply a mistake or error in judgment. It was a

5

I pervasive and deliberate violation of simple and straightforward accounting principles designed

6

I specifically to inflate and accelerate Northwest’s reported revenues and earnings.

7

106. Throughout the Class Period, defendants characterized revenue recognition as one of

8

the Company’s most critical accounting policies. According to defendants, the Company recognized

9

revenue in its Water Transmission segment using the percentage-of-completion method. Under this

10

method, revenue was recognized as costs were incurred in connection with a project:

11

Revenue from construction contracts in our water transmission segment is recognized on the percentage-of-completion method , measured by the costs incurred

12

to date as a percentage of the estimated total costs of each contract. Estimated total costs of each contract are reviewed on a monthly basis by project management and

13

operations personnel for substantially all projects that are fifty percent or more complete except that major projects, usually over $5.0 million, are reviewed earlier if

14

sufficient production has been completed to provide enough information to revise the original estimated total cost of the project. All cost revisions that result in the gross

15

profit as a percent of sales increasing or decreasing by more than two percent are reviewed by senior management personnel . Contract costs include all direct

16

material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation. Selling, general and

17

administrative costs are charged to expense as incurred. While certain contract costs are reported in the consolidated statements of income as selling, general and

18

administrative costs, they are included in total contract costs incurred to date used to recognize revenue.

19 107. As set forth above, Northwest applied the percentage-of-completion accounting

20 principle by measuring “the costs incurred to date as a percentage of the estimated total costs of each

21 contract.” Utilizing percentage-of-completion accounting in this manner, the so-called “cost-to-

22 cost” method is one way to measure contract progress in percentage-of-completion accounting. 11

23

24

25

11 By contrast, at least one of Northwest’s competitors, Ameron International Corp., used a different method of applying percentage of completion of accounting, the units of production method: “Revenue is recognized for the Water

26

Transmission Group primarily under the percentage-of-completion method, typically based on completed units of







However, as accounting and auditing literature make clear, the percentage-of-completion method is

2

an area of accounting that has historically been known to be prone to fraud and manipulation.

3

108. Here, defendants manipulated the “cost-to-cost” method by deliberately disregarding

4

simple and straightforward accounting literature available to defendants which made it clear that

5

Northwest was not entitled to recognize its raw materials (steel) costs in connection with its projects

6

at the time the steel was purchased for the purpose of estimating the percentage of completion.

7

Specifically, Accounting Research Bulletin (“ARB”) No. 45 states that in applying the “cost-to-cost”

8

method, a company should “ exclude, especially during the early stages of a contract, all or a

9

portion of the cost of such items as materials and sub-contracts if it appears that such an exclusion

10

would result in a more meaningful periodic allocation of income.”

11

109. Similarly, in Statement of Position (“SOP”) 81-1, the AICPA further discusses costs

12

which should be excluded from the costs incurred amount used to calculate revenue recognition

13

under the percentage of completion method. The AICPA states that costs such as “uninstalled

14

materials not specifically produced or fabricated for the project,” including “the cost of materials not

15

unique to the project that have been purchased or accumulated at job sites , but that have not been

16

physically installed,” should be “ excluded from cost incurred for the purpose of measuring the

17

extent of progress toward completion. ”

18

110. Notwithstanding this express guidance, the Individual Defendants – both of whom are

19

CPAs and have extensive auditing and/or accounting experience – deliberately included purchased

20

but not utilized raw steel as a cost incurred for the purpose of measuring the progress toward

21

completion. This practice allowed Northwest to prematurely recognize revenue when it purchased

22

steel. Recognizing revenue in such a manner was of tremendous benefit to defendants. Any time the

23 production, since products are manufactured under enforceable and binding construction contracts, typically are designed

24

for specific applications, are not interchangeable between projects, and are not manufactured for stock.”

25

Interestingly, Northwest uses the cost-to-cost method instead of the units of production method for revenue recognition, but uses the units of production method for equipment depreciation.

26







1

Company’s quarterly revenues were lower than what defendants and Wall Street analysts were

2

expecting, defendants could simply order more steel, stack it up in warehouses, and those costs

3

would increase the amount of revenue that could be recognized, thus, instantly making up for any

4

earnings shortfall. This practice violated fundamental GAAP and SEC accounting rules and vastly

5

overstated Northwest’s quarterly revenues and income.

6

111. Defendants knew that they were violating simple accounting rules and overstating the

7

I Company’s revenues by engaging in this fraudulent practice. Indeed, the improper practice was so

8

I blatant that many of the Company’s employees, including the CWs discussed herein, knew that

9

recognizing revenue when steel was ordered was improper.

10

112. According to several former Northwest employees, it was well known within the

11

Company, in at least 2007 and 2008, if not before, that steel normally had to be at least sent through

12

the Company’s mills before any revenue could be recognized. CW3, the Adelanto Plant Project

13

Manager, reported that he received “many lectures” from his supervisor, the Operations Manager of

14

Northwest’s Adelanto, CA plant, that revenue could not be recognized until steel coils were procured

15

and sent to the spiral mills because it “was at that point when the coils were run through the spiral

16

mill” that the materials were introduced into the manufacturing process, thereby allowing for

17

revenue to be recognized.

18

113. Similarly, CW6, the Pleasant Grove Plant Project Manager, reported that part of his

19

budgeting duties as a project manager were to “report[] numbers up the chain,” including

20

information on steel procurement and production. According to CW6, personnel in Northwest

21

corporate headquarters, including defendants Dunham and Welty, were responsible for determining

22

when to recognize revenue. The project budgets reviewed by CW6 showed precisely how and when

23

revenue was being recognized on a per-project basis, and CW6 knew that steel costs were being

24

reported as revenue when the steel was received at the Pleasant Grove plant – often well ahead of

25

when the steel was actually going to be utilized in a project. CW6 recognized that this practice

26

appeared to be “incorrect,” and “didn’t make sense.” For instance, CW6 reported that in some cases,





steel was received for projects that Northwest had not even formally been awarded or received a

contract. 12 In other instances, steel was used for different projects than had originally been

anticipated. During his tenure, from March 2008 until March 2009, CW6 reported these concerns

about revenue recognition to his supervisor. His supervisor acknowledged the problem and

indicated that he had “raised a flag” about the practice “with upper management,” but nothing was

done to change the practice, and the improper accounting continued.

114. As discussed supra, defendants had access to detailed reports which showed when

revenue was improperly being recognized, and had actual knowledge that the Company was

recognizing revenue when steel was purchased, in violation of long-established accounting

principles. Indeed, in Forms 10-K filed throughout the Class Period, defendants assured investors

that they closely monitored the Company’s contract cost estimations and revenue recognition with

respect to Water Transmission contracts, stating that:

Estimated total costs of each contract are reviewed on a monthly basis by project management and operations personnel for substantially all projects that are fifty percent or more complete except that major projects, usually over $5.0 million, are reviewed earlier if sufficient production has been completed to provide enough information to revise the original estimated total cost of the project. All cost revisions that result in the gross profit as a percent of sales increasing or decreasing by more than two percent are reviewed by senior management personnel .

115. Nevertheless, Dunham falsely represented to Northwest’s investors that the Company

recognized revenue when product was “built ,” a statement Dunham knew was false. In a July 23,

2008 conference call, Dunham described the process by which Northwest recognized revenue in its

Water Transmission division, stating that “the shipment date is not really the driver. It’s when it’s

built that’s the driver .” Similarly, Welty was asked by an analyst about an increase in the

12 The Company’s practice of prematurely recognizing revenue on Water Transmission projects prior to when a contract had actually been awarded was acknowledged in the November 4, 2010 Form 10-K, and is plainly prohibited by GAAP.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


I Company’s receivables. In response, Welty, stated that “[b]ecause we are a construction/accounting

I house, we recognize revenue as the work is completed.”

116. These statements (which as described supra were false and misleading) demonstrate

I that Dunham and Welty clearly understood when the Company was supposed to be recognizing

revenue, while participating in Northwest’s wholesale failure to comply with GAAP and properly

I recognize revenue at the appropriate time.

117. Stokes, President of the Company’s Water Transmission group, who reported directly

to Dunham, also recognized that this practice was improper. According to CW9, who served as

Stokes’ Executive Assistant, Stokes “did not think [Northwest was] recognizing revenue correctly.”

As a result, Stokes instructed a subordinate to contact Lighthouse Services, a third-party company

which Northwest retained to provide an anonymous reporting mechanism for employees to report

fraud or workplace problems. Lighthouse Services then reported defendants’ fraud to the Company,

which precipitated the Company’s internal investigation.

118. These allegations, including the reports of CWs described herein, are corroborated by

I the Company’s own admissions regarding its improper revenue recognition practices. In its

I November 4, 2010 Form 10-K, the Company admitted to improper revenue recognition practices,

stating:

Under the Company’s historical method of applying the Percentage-of-Completion Method, the cost of steel was recognized as a project cost at the time the cost was incurred , resulting in the recognition of revenue at that time. The Company has now determined that the cost of steel should not be recognized as a project cost when the cost is incurred but should be recognized as a project cost when the steel is introduced into the manufacturing process .

This practice was well known to the two CPAs and former auditors, Dunham and Welty, but was

concealed from investors during the Class Period.

B. Northwest Employees Were Pressured by Defendants to Order Steel Before It Was Needed so that the Company Could Inflate Revenue in Any Given Quarter

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

119. According to CW1, plant managers would often receive e-mails in the last week of a

quarter, or participate in phone calls, urging them to front-load and move up procurements so that

the Company could improperly record higher revenues. For many projects, this meant prematurely

increasing the amount of steel ordered in a given period, regardless of whether the steel was needed

at that time. Oftentimes, such pressure to order materials prematurely was to compensate for

declines in revenue caused by failing projects, or even other plants that were performing below

expectations. Operations managers, including CW1, indicated that they were uncomfortable with

this practice, stating that it “screwed up” the next quarter when the materials were actually needed.

CW1 stated that the pressure to purchase the steel prematurely “came from Brian Dunham.”

Dunham also specifically tracked the amount of steel that was building up at the Company’s plants

as a result of this practice. CW1 reported that at the end of a given month, Dunham would request

information regarding the amount of steel at the Denver plant that had not yet been utilized. CW3

characterized this practice of prematurely procuring materials as “robbing Peter to pay Paul.” CW3

also confirmed that there was always a push to produce more pipes at the end of any given quarter,

even though such pipes would often sit for months after being fabricated before they were scheduled

to be introduced into the manufacturing process, finished and delivered to customers.

120. The Company’s premature ordering of steel to inflate revenues, and the resulting

accumulation of unneeded steel of Northwest’s plants, was in large part the result of the Company’s

decision to centralize the procurement of steel in the Company’s headquarters – giving ultimate

authority to Dunham. According to CW7, prior to headquarters’ taking over, Northwest’s individual

plants ordered their own steel and the steel was used quickly resulting in less than ten unused coils at

the Adelanto plant at any one time. However, when the Vancouver headquarters began to handle the

purchasing of steel, the plant’s inventory of unused steel skyrocketed, with as many as 200 unused

coils on the plant’s premises. The purchasing of steel, as well as the procurement of other materials,

was handled by the Company’s corporate purchasing group in Vancouver. Vice President of

Purchasing, Greg Carrier, was in charge of this group and reported directly to defendant Dunham.

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

121. As a result of defendants’ improper revenue recognition, reported net sales were

I overstated by tens of millions of dollars and between at least 2% and 9% in various periods prior to

I and throughout the Class Period, and net income was overstated by as much as 152%.

C. Northwest Knowingly Failed to Appropriately Account for the Depreciation of Its Assets Throughout the Class Period, Causing the Company to Overstate Its Net Income and Understate Its Cost of Sales

122. The first restatement included a $18.5 million decrease in net income and retained

earnings as a result of overstated carrying values of certain equipment and “errors in the

determination of the economic lives and residual values of certain equipment.” In the second

restatement, Northwest admitted that net income and retained earnings were overstated by $14.5

million from 2008 through 2Q11 because the Company understated depreciation expenses by not

properly reevaluating the estimates of future tons of production over the remaining useful lives of

equipment.

123. Depreciation accounting is “a system of accounting which aims to distribute the cost

or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of

the unit (which may be a group of assets) in a systematic and rational manner.” See ARB 43,

Chapter 9C, ¶5. Salvage value is the estimated value that an asset will realize upon its sale at the end

of its useful life, and should be periodically reviewed and revised to recognize changes in conditions

other than inflation, but adjustments should be downward only. By overstating salvage values and

by overstating the economic useful lives of assets, defendants were able to inflate income and

earnings by improperly understating depreciation expense prior to and during the Class Period.

124. The cost of goods and services used up in the process of earning revenue is an

expense. Equipment, such as steel mills, forklifts, computers and machinery, are examples of goods

that are purchased in advance, but which are used up gradually over many accounting periods. Each

year, a portion of the usefulness of these assets expires, and a portion of their total cost should be

recognized as depreciation expense – which is a direct reduction to income and earnings. The term

“depreciation” means the systematic allocation of the cost of an asset to expense over the accounting




704839_1


periods comprising the asset’s useful economic life. For example, if a Company spends $20,000 to

buy a forklift which has an estimated ten-year useful lifespan, and no subsequent salvage or residual

value, the Company would record $2,000 a year or 10% of the value as a depreciation expense for

the forklift using a straight-line depreciation method. The $2,000 depreciation expense would also

reduce net income by $2,000.

125. Northwest’s failure to properly account for millions of dollars in depreciation

expenses directly contradicts defendants’ assurances to investors throughout the Class Period that

they “depreciate the net book value in excess of the salvage value using either the units of production

method or a straight-line method depending on the classification of the asset” and that they complied

with GAAP.

126. Additionally, defendants overstated the carrying values of certain equipment by

failing to take impairment charges for impaired or missing equipment. According to GAAP,

impairment is the condition that exists when the carrying amount of a long-lived asset exceeds its

fair value and an impairment loss shall be recognized if the carrying amount of a long-lived asset is

not recoverable and exceeds its fair value. See SFAS No. 144, Accounting for the Impairment or

Disposal of Long-Lived Assets , ¶7. Northwest stated in its SEC filings during the Class Period:

Property and equipment are reviewed for impairment in accordance with SFAS 144, “Accounting for the Disposal of Long-Lived Assets.” We assess impairment of property and equipment whenever changes in circumstances indicate that the carrying values of the assets may not be recoverable. The recoverable value of long-lived assets is determined by estimating future undiscounted cash flows using assumptions about our expected future operating performance. . . . If we determine the carrying value of the property and equipment will not be recoverable, we calculate and record an impairment loss.

By failing to properly account for impaired assets, defendants violated GAAP and the Company’s

own publicly disclosed policy with regard to impairment of property and equipment.

127. The first restatement reduced FY08 net income, FY07 net income and FY06 retained

earnings by $1.4 million, $1.8 million and $15.3 million, respectively, as a result of improper

depreciation practices. The second restatement of depreciation expenses reduced 2008 retained

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


I earnings by $9.43 million, 2009 net income by $2.1 million, 2010 net income by $2.4 million, 1Q11

net income by $568,000 and 2Q11 net income by $71,000.

128. Defendants’ failure to properly account for depreciation expenses was deliberately

reckless and misleading. During the Class Period, depreciation expenses were calculated by

employees in Northwest’s corporate accounting office. Such expenses were also included in the

monthly Water Transmission Report, which Dunham and Welty both received. During the Class

Period, Northwest employees expressed concern to the Company’s management that assets were

being depreciated too slowly. For example, as part of CW8’s duties as a Materials Manager, CW8

was tasked with verifying the existence of physical assets once per quarter at the Company’s

Houston facility. In the process of verifying the existence of physical assets, CW8 was given a

report showing the original purchase price of each asset, and how much each asset had depreciated

since it had been acquired. The assets included in such reports included forklifts, machinery,

computers and printers. According to CW8, the depreciation rate for such assets was inordinately

slow, so much so that CW8 asked the plant’s Operations Manager “all the time” why the assets

depreciated so slowly, only to be told that it was a “corporate decision.”

129. The Company’s failure to properly depreciate assets was clear to defendants. During

the Class Period, defendants represented that the Company depreciated equipment value over a

3 (or 5) to 18-year schedule when using straight-line useful life accounting. Supra, ¶¶95-96.

Notwithstanding such representations, the actual rate that Northwest depreciated its assets was far

lower. For example, in FY08, Northwest disclosed that it had $241 million of property and

equipment at cost of which $170 million consisted of equipment, and accumulated depreciation of

$48 million. Yet, Northwest’s total depreciation expense in FY08 was a mere $5 million. Even

assuming that 70% of the accumulated depreciation and the entire depreciation expense was related

to equipment, that represents a 3.6% depreciation rate. At such a rate, it would take the Company

more than 27 years to depreciate its equipment – far more than the 3 (or 5) – 18 years represented by

defendants.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

130. Notably, just prior to the Class Period, in 2006, Northwest changed its depreciation

method for certain equipment from the straight-line method to the units of production method, which

resulted in reduced depreciation expense and increased earnings. Northwest’s publicly traded

competitors continued to use the straight-line method. Northwest’s depreciation expense as a

percentage of property and equipment was approximately 2.35%-2.56% from 2006 to 2008, a far

lower level than the 9.8%-20.6% depreciation rate for its competitors. Indeed, the first restatement

confirms that Northwest’s net income/retained earnings was overstated by at least $18.5 million as a

result of the failure to properly depreciate assets. The second restatement confirms that Northwest

did not properly account for depreciation expenses under the units of production method and caused

the previously restated income and retained net earnings from 2008 through 2Q11 to be overstated

by $14.5 million.

131. In addition to overstating the value of assets and understating depreciation expenses

(thereby inflating income and EPS), Northwest failed to properly account for its assets. For instance,

in approximately 2007 or 2008, the Company’s plant operations managers were given lists of all the

assets that were supposed to be at their plants. Plant operations managers were asked to review the

lists and make sure they were accurate and up-to-date. According to CW1, the lists contained many

supposed assets which the plants simply did not possess, including, for example, a thirty-year old

water cooler which was “long gone,” and yet still assigned its full value in the inventory list, without

any depreciation shown.

132. Such inventory problems were confirmed by CW10, who stated that the Company

had chronic problems with missing inventory, and that inventory and equipment that was listed in

the SAP system would simply vanish, never to be seen again. Such incidents occurred several times

per week throughout CW10’s tenure. According to CW10, the Company never conducted any

investigation or gave any explanations for such missing inventory.

133. These allegations, including the reports of CWs described herein, are corroborated by

I the Company’s own admissions regarding its improper accounting for assets and depreciation. In its

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

I November 4, 2010 Form 10-K, the Company admitted they had failed to properly account for

I property and equipment in its manufacturing facilities:

[T]he Company determined that certain equipment carrying values were overstated and that there were errors in the determination of the economic lives and residual values of certain equipment. The adjustments required to correct these errors have resulted in the reduction of previously reported net income and of net property and equipment balances, and an increase in previously reported accumulated depreciation, depreciation expense and cost of sales.

134. Additionally, as set forth in ¶88, supra, at the start of the Class Period in connection

with the FY06 audit, Northwest’s former auditor, PricewaterhouseCoopers LLP, reported that the

Company had a “material weakness” in internal controls which allowed the Company to inflate

property, plant and equipment at that time. Thus, defendants were undeniably aware of the

Company’s accounting and control issues pertaining to the property, plant and equipment values and

of control deficiencies within the Company.

D. Defendants Violated the Most Fundamental Principles of Accrual Accounting by Deferring Contract Penalties Until Later Periods

135

Defendants violated GAAP by failing to account for contract penalties which the

I Company discharged by offering discounts on future contracts to dissatisfied customers.

136. The matching of expenses and revenues is the essence of accrual accounting. See

Statement of Financial Accounting Concepts (“SFAC”) No. 6, Elements of Financial Statements ,

¶145. The goal of accrual accounting is to relate and account for revenues and expenses in a period

to reflect an entity’s performance during that period. Id. Improper matching of expenses of one

period with revenue of another period distorts net income. See, e.g. , SFAS 16, Prior Period

Adjustments , ¶26.

137. GAAP provides further clear guidance that expenses are to be recognized in the same

I period(s) as the revenue to which they relate:

Expenses and losses are generally recognized when an entity’s economic benefits are used up in delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations or when previously recognized assets are expected to provide reduced or no further benefits. . . . Some expenses, such as cost of goods sold, are matched with revenues – they are recognized upon




704839_1


1

recognition of revenues that result directly and jointly from the same transactions or other events as the expenses.

2 SFAC No. 5, Recognition and Measurement in Financial Statements of Business Enterprises ,

3 ¶¶85-86.

4 138. Additionally, relating specifically to construction contracts, GAAP is clear that losses

5 need to be recognized immediately:

6 When the current estimates of total contract revenue and contract cost indicate a loss,

7

a provision for the entire loss on the contract should be made. Provisions for losses should be made in the period in which they become evident . . . .

8 * * *

9 Provisions for losses on contracts should be shown separately as liabilities on the

10

balance sheet, if significant.

11

I SOP 81-1, ¶¶85, 89.

12

139. Many of Northwest’s contracts contained back charge or liquidated damages clauses,

13

which resulted in significant charges when Northwest was late in completing projects, or the pipes

14

the Company shipped had defects or failed to meet their customers’ specifications. During the Class

15

Period, defendants falsely represented that any such charges were recorded in the period in which

16

they were known:

17

Provisions for losses on uncompleted contracts are made in the period such losses are known . Changes in job performance, job conditions and estimated

18

profitability, including those arising from contract penalty provisions , foreign currency exchange rate movements, and final contract settlements may result in

19

revisions to costs and income and are recognized in the period in which the revisions are determined .

20 140. These representations were knowingly false. According to CWs, instead of paying

21 the penalties and liquidated damages associated with the Company’s failures to perform according to

22 the terms of their contracts, Northwest executives, including defendant Dunham, negotiated with the

23 Company’s customers and promised discounts on future contracts in lieu of paying liquidated

24 damages and back charges on existing contracts. This practice created millions of dollars of off-

25 balance-sheet liabilities which were deliberately concealed from investors. It also allowed

26 defendants to circumvent GAAP and avoid reporting losses on contracts which inflated income and





earnings. This practice delayed the negative impact on the income statement and resulted in the

distortion of profit margins of the individual projects and the inflation of the Class Period financial

statements, which did not reflect a true picture of the Company’s financial performance as required

by GAAP. CW1 confirmed that back charges incurred by Northwest for failing to meet milestones

or deadlines on a given contract were often resolved by Northwest offering a discount or concession

on a future contract with the same customer. CW2 reported that Northwest incurred “significant”

liquidated damages in connection with several large contracts in 2007 and 2008 at the Company’s

Adelanto plant, and that Northwest avoided paying damages for the delays on such contracts by

negotiating discounts on future contracts.

141. CW3 also confirmed this improper practice, noting a 2007 contract where Northwest

incurred $200,000 in liquidated damages for delays. Instead of giving the customer the $200,000

credit, however, Northwest personnel issued the customer a $75,000 credit, and agreed to give the

customer a $125,000 credit on the next project Northwest completed for them. According to CW3,

other back charges or damages were much larger, including two back charge situations in 2008 that

totaled $6 million. Typically, Northwest would bill a customer the full amount for a subsequent

project where a discount had been given, and the customer would send Northwest a reduced

payment, stating in an accompanying pay estimate that they were applying a previously given

discount. This practice distorted and falsified Northwest’s financial results.

142. Further, according to CW3, Northwest would at times put contracts into its backlog at

the full price of the contract, even when the Company knew that it would be extending a discount to

the customer which would reduce the actual value of the contract. This practice improperly inflated

the Company’s backlog, which was one of the most critical metrics used by the Company’s analysts

to gauge Northwest’s future performance.

143. According to CW3, defendant Dunham was directly involved in resolving larger back

I charge situations. Indeed, according to CW4, Dunham had “final authority” for approving

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

settlements of claims above a certain threshold, and Dunham was specifically told of “every” claim

I that was settled.

E. Defendants Intentionally Manipulated the Assignment of Costs in Order to Make Unprofitable Contracts Appear Profitable and Manipulated Foreign Currency Translations

144. Northwest’s November 4, 2010 Form 10-K admitted that the Company failed to

properly allocate “manufacturing overhead variances and indirect support costs to projects in [the

Company’s] Water Transmission segment.” In addition, the Form 10-K described how the Company

was able to inflate reported revenues through improperly accounting for foreign currency

transactions, stating that “the Company did not properly account for foreign currency translation or

the mark-to-market impact of derivative instruments.” Correcting for these improper foreign

currency practices resulted in a $2.1 million reduction in net income in FY07.

145. Once again, CWs reported that the Company’s overhead and expense allocation

I problems, as well as their foreign currency accounting, were not merely errors, but the result of

I intentional or deliberately reckless misconduct.

146. GAAP requires that “[w]hen the current estimates of total contract revenue and

contract cost indicate a loss, a provision for the entire loss on the contract should be made.

Provisions for losses should be made in the period in which they become evident . . . .” SOP 81-1,

¶85. To avoid reporting a loss, Northwest charged costs on money-losing contracts to contracts

which were profitable, in violation of GAAP.

147. According to the AICPA, the practice of charging costs on jobs that are likely to

result in a loss to more profitable jobs is a well-known fraudulent practice engaged in by

construction-related companies such as Northwest that utilize percentage of completion accounting.

In fact, AICPA Audit and Accounting Guide: Construction Contractors states that “[c]ertain aspects

of the construction industry can create a higher risk of the presence of fraud occurring at the

construction entity.” The very first example describes the same practice that Northwest used during

the Class Period:




704839_1


1

The percentage of completion method requires that loss [contracts] be accrued. There is a strong incentive for contractors to avoid such recognition by charging

2

costs on jobs that are likely to result in losses to more profitable jobs to prevent the loss accrual .

3 148. CW7 confirmed that the Company performed labor in connection with money-losing

4 contracts, and assigned such expenses to jobs that were operating profitably. CW7 reported that this

5 practice occurred on multiple projects in virtually every quarter for several years prior to his/her

6 departure from the Company in 2009, and that virtually each job he/she knew of involved some kind

7 of improper allocation of labor hours.

8 149. Northwest used similar fraudulent tactics to manipulate foreign exchange

9 transactions. Despite disclosing some information about its derivative instruments (five foreign

10 currency forward contracts with a notional value of CAD $20.8 million) and explicitly stating during

11 the Class Period that Northwest revalued the contracts to fair market value ( i.e. , mark-to-market),

12 defendants failed to do this in accordance with GAAP.

13 150. Specifically, SFAS No. 133, “Accounting for Derivative Instruments and Hedging

14 Activities,” requires that “[a]ll derivative instruments shall be measured at fair value.” See SFAS

15 No. 133, ¶17. GAAP also requires that assets, liabilities, revenues, expenses, gains, and losses that

16 are measured or denominated in a foreign currency be translated into a single reporting currency.

17 See SFAS No. 52, “Foreign Currency Translation,” ¶4. Defendants expressly admitted in the

18 restatement that “the Company did not properly account for foreign currency translation or the mark-

19 to-market impact of derivative instruments.” Additionally, the effects of other restatement

20 adjustments also necessitated additional foreign currency translation adjustments. As a result of

21 defendants’ improper accounting, reported net sales and net income were affected. The improper

22 accounting served to overstate net income in 2007 and prior periods by $2.2 million.

23 151. CW5 described how he/she was instructed to misapply cash payments from foreign

24 I currency transactions to make money-losing contracts appear profitable. CW5 was an employee in

25 I Northwest’s accounting department assigned with applying cash payments to specific receivables.

26 I CW5 reported that during 2007, he/she was instructed by an Assistant Controller, who had a very





close professional relationship with defendant Dunham, to assign payments from profitable contracts

to money-losing projects so that those contracts would appear to be performing profitably. Such

cash applications involving foreign exchange funding were related to what the Company described

in their Form 10-K as “foreign exchange” errors. CW5 was very uncomfortable with this practice

and expressed his/her concerns to Northwest’s Human Resources department, but nothing was done

to change the practice.

F. Defendants Improperly Allocated Overhead and Support Costs Causing the Company to Overstate Gross Profit and Net Income

152. Northwest has admitted that prior to and during the Class Period, the Company failed

to record manufacturing costs to projects in the Company’s Water Transmission segment and the

Tubular Products segment. Defendants also admitted to other accounting improprieties related to

assumptions regarding total estimated Water Transmission project costs. These improprieties served

to understate the Company’s reported cost of sales 13 and overstate its reported net sales, gross profit,

net income and EPS. Northwest accomplished this by improperly failing to allocate manufacturing

overhead variances and indirect support costs to specific Water Transmission projects, and failing to

properly relieve such variances and costs when the projects were completed.

153. Manufacturing overhead (also commonly known as factory overhead, factory burden

or indirect manufacturing costs) are all manufacturing costs that cannot be identified specifically

with or traced to the cost object in an economically feasible way. For construction contracts, indirect

costs allocable to contracts include the costs of indirect labor, contract supervision, tools and

equipment, supplies, quality control and inspection, insurance, repairs and maintenance, depreciation

and amortization and, in some circumstances, support costs, such as central preparation and

processing of payrolls. See SOP 81-1, ¶72b. A manufacturing overhead variance is the difference

13 As applied to inventories, cost is the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an item to its existing condition and location, as defined by ARB No. 43, Chapter 4, Statement 3.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

between the budgeted/applied amount of overhead allocated to a product or project commonly

2

referred to as standard cost and the actual/incurred amount (actual cost). GAAP requires that

3

financial statements report the actual costs, not the standard costs, of inventories and costs of goods

4

sold (cost of sales). GAAP requires that overhead variances must ultimately be allocated to cost of

5

sales or prorated among cost of sales, work-in-process inventory and finished goods inventory.

6

Unallocated overheads are recognized as an expense in the period in which they are incurred. See

7

SFAS No. 151, Inventory Costs – an amendment of ARB No. 43, Chapter 4 , ¶2.

8

154. Defendants’ improper accounting for overhead costs violated the fundamental

9

I matching principle of accounting. GAAP, specifically ARB No. 43, Chapter 4, ¶4, states,

10

In accounting for the goods in the inventory at any point of time, the major objective is the matching of appropriate costs against revenues in order that there may be a

11

proper determination of the realized income. Thus, the inventory at any given date is the balance of costs applicable to goods on hand remaining after the matching of

12

absorbed costs with concurrent revenues.

13

155. Defendants’ failure to allocate manufacturing overhead costs to specific Water

14

Transmission projects and to properly relieve such variances and costs when the projects were

15

completed ( i.e. , include them in cost of sales expense), resulted in understated cost of sales

16

throughout the Class Period. In each period, the Company restated cost of sales by as much as

17

10%-12% in some quarters. Because increases in cost of sales are a direct reduction of income, the

18

understated cost of sales resulted in inflated gross profit, net income and earnings throughout the

19

Class Period, and also negatively affected certain previously reported current asset and liability

20

balances, including inventory, costs and estimated earnings in excess of billings on uncompleted

21

contracts (asset), and billings in excess of costs and estimated earnings on uncompleted contracts

22

(liability). The first restatement reduced 2008 net income, 2007 net income and December 31, 2006

23

retained earnings by $4.4 million, $3.4 million and $7.6 million, respectively, as a result of these

24

improprieties.

25

156. Defendants knew they had a history of inflating net income by improperly hiding

26

costs in inventory instead of including them as cost of sales. In 2006, Northwest’s former auditor





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

I PricwaterhouseCoopers forced the Company to record an audit adjustment of $150,052 to adjust for

costs that were improperly capitalized into inventory.

157. Once again, defendants’ improper accounting was a common area of exploitation for

construction companies that utilize percentage of completion accounting, and was known, or

I deliberately disregarded, by defendants. As the AICPA Audit and Accounting Guide: Construction

I Contractors warns:

Because the percentage of completion method of accounting for long-term construction-type contracts is required whenever contractors have the ability to make reasonably dependable estimates, the estimate of total contract costs (incurred and to be incurred) is uniquely critical to the revenue recognition process in the industry. Underestimation of total contract cost would present the contract as more complete than it is and, as a consequence, would result in excess gross profit on the job and overstated operating results for the entity . Because of the subjective nature inherent in estimating total costs and costs to complete, the contractor is in a unique position to influence those estimates and, as a direct consequence, the operating results of the period.

G. Defendants Overstated the Company’s Reported Revenue by Prematurely Recognizing Revenue Prior to Contract Contingencies Being Satisfied

158

Northwest has admitted that it restated revenue that had been prematurely recognized

in 2008 due to the fact that the contract documentation on certain Water Transmission projects did

not provide persuasive evidence that all contract contingencies had been satisfied.

159. GAAP expressly prohibits the recognition of revenue when contingencies exist:

“Contingencies that might result in gains usually are not reflected in the accounts since to do so

might be to recognize revenue prior to its realization.” SFAS No. 5, Accounting for Contingencies ,

¶17a. Similarly, SFAS No. 48, Revenue Recognition When Right of Return Exists , and SEC Staff

Accounting Bulletin No. 104 also address the fact that revenue may not be recognized when

contingencies exist. This portion of the restatement reduced 2008 net income by $130,000.

VIII. ADDITIONAL SCIENTER ALLEGATIONS

160. In addition to defendants’ direct knowledge and participation in the Company’s

accounting manipulations described above, a strong inference of scienter is supported by numerous




704839_1


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

I other factors which considered collectively, demonstrate that the Company’s misstatements and

omissions were intentional or deliberately reckless.

A. The Nature and Simplicity of the Accounting Manipulations Which Caused the Restatement Combined with Defendants’ Years of Experience as CPAs Supports a Strong Inference of Scienter.

161. Northwest’s restatements were not due to simple mathematical errors or honest

misapplication or oversight of complex accounting standards. They were due to deliberate misuse of

the facts and pervasive manipulation of financial results. For example, as alleged herein, defendants

knew they were improperly recognizing the cost of steel as a project cost prior to the steel being

introduced into the manufacturing process which enabled them to improperly recognize revenue.

They also knew from the Company’s physical inventory counts that its fixed assets were materially

inflated on the Company’s books, but refused to make the required corrective accounting

adjustments because it would increase expenses and reduce net income.

162. Further, the improper accounting corrected by the restatements did not occur as a

result of good faith differences in accounting judgments, or interpretations of complicated or vague

accounting rules. The accounting rules and precepts violated by Northwest were long-established,

basic accounting standards and concepts, such as the fundamental rule of expensing the cost of

manufacturing a product in the same period the revenue is recognized. The accounting violations

committed by Northwest are as old and basic as they come – namely, the premature recognition of

revenue and improper delaying of expenses to later periods to inflate short term results to beat Wall

Street expectations. Indeed, the AICPA’s auditing guide for the construction industry, AICPA Audit

and Accounting Guide: Construction Contractors, expressly lists many of the accounting violations

committed by defendants as well-known fraudulent practices in the industry.

163. Lastly, the improper accounting was not a result of inexperienced accounting

managers who did not understand accounting rules, nor can it be blamed solely on poor accounting

controls. To the contrary, Northwest’s CEO and its CFO were both experienced CPAs and Certified

Management Accountants (“CMAs”), and are seasoned financial professionals with significant




704839_1


accounting, auditing and SEC reporting experience at the most prominent accounting firms.

Defendant Dunham, prior to becoming CEO, served as Northwest’s CFO and COO, and was trained

and employed as a CPA with a predecessor “Big Four” accounting firm for nine years. As a result of

his “Big Four” accounting and auditing background and CFO experience, he is an expert in the

GAAP at issue in this case. Similarly, defendant Welty, the CFO, was a licensed CPA and CMA,

and prior to joining Northwest, in 2007, held a number of accounting, controller and CFO positions

at other public companies. As such, defendants were thoroughly versed in revenue recognition,

percentage of completion accounting, cost accounting procedures, financial reporting and internal

accounting controls.

B. The Magnitude of the Restatement Supports a Strong Interference of Scienter

164. As more fully detailed above, the restatements were not the result of a few mistakes

during a single quarter or even a single year. Northwest restated more than five years of financial

statements to correct numerous separate fraudulent accounting practices from periods prior to 2007

through 2Q11. Net income and retained earnings were overstated by more than $69.3 million from

2006 through 2Q11.

165. Perhaps most notably, defendants’ various accounting schemes drastically inflated

EPS results by such large amounts that without the accounting manipulations, Northwest would have

missed Wall Street expectations, which would have devastated the stock price. For example, in

1Q08, defendants’ improper accounting allowed the Company to report $0.54 EPS, in line with Wall

Street’s consensus expectations. Based on the first restatement, EPS in 1Q08 was only $0.28 per

share – a massive $0.26 miss that would have been catastrophic for Northwest’s stock price.

Similarly, in 1Q09 and 2Q09, defendants’ false accounting allowed Northwest to report inflated EPS

results of $0.28 and $0.26, respectively, beating Wall Street’s $0.23 consensus expectations in 1Q09

by $0.05, and meeting the Company’s 2Q09 expectations of $0.26. Without defendants’ deceptive

accounting techniques, the first restatement shows that Northwest would have reported $0.15 EPS in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

I 1Q09 (a $0.08 miss). In 2Q09, the impact of the false accounting was even more significant. But

2

for the improper financial manipulations, Northwest would have reported a shocking $0.14 net loss

3

in 2Q09, a $0.40 miss of Wall Street’s consensus EPS expectations. Defendants’ fraudulent

4

I accounting practices literally transformed the entire financial condition of the Company, misled

5

investors about the success of its business and masked significant losses at Northwest.

6

166. The circumstances surrounding the Company’s investigation and restatements also

7

support a strong inference of scienter. This was not a case where defendants self-reported their

8

misconduct in an attempt to correct an honest mistake. Rather, according to CW9, one of

9

Northwest’s own officers blew the whistle on Dunham’s improper practices. When defendants’

10

fraud was reported, it took the Company almost an entire year to unwind the systematic and

11

widespread accounting misconduct and to issue truthful financial reports.

12

C. The Company’s Incentive Compensation Structure Supports a Strong Inference of Scienter

13

14 167. Defendants were motivated to engage in the fraud alleged herein in part due to the

15 structure of the Company’s incentive compensation plans. According to Northwest, the principal

16 components of executive compensation at the Company were: (i) base salary; (ii) performance-

17 based incentive compensation; (iii) long-term incentive compensation; (iv) retirement benefits; and

18 (v) perquisites and other personal benefits.

19 168. Performance-based incentive compensation made up a significant portion of

20 defendants’ compensation. As the Company stated, this bonus program “ places a significant

21 percentage of each executive officer’s compensation at risk .” Awards were based on the

22 “achievement of certain financial performance measures for the year, including sales and net income

23 measures .”

24 169. The charts below show Dunham’s and Welty’s (i) base compensation; (ii) bonus and

25 incentive compensation for FY06-FY08, exclusive of stock and option awards; and (iii) total annual

26





1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

compensation. The data illustrates that almost every year, defendants’ incentive-based bonus

compensation exceeded their base salary, sometimes by as much as 60%:

Bonus + Incentive Plan Total Annual Dunham Base Salary ($) Compensation ($) Compensation ($)

FY06 520,000 418,601 1,028,126

FY07 545,000 613,948 1,240,235

FY08 570,000 962,097 1,881,097

Bonus + Incentive Plan Total Annual Welty Base Salary ($) Compensation ($) Compensation ($)

FY07 40,000 50,000 92,815

FY08 245,000 295,784 617,429

170. Because such a significant portion of defendants’ annual compensation was directly

tied to the Company’s financial performance, and specifically the Company’s net income (which

was artificially inflated throughout and prior to the Class Period), defendants had a strong motivation

to distort Northwest’s financial results. Had Northwest issued honest financial results throughout the

Class Period, defendants’ bonus compensation would have been significantly reduced, if not

eliminated.

171. Further, the fact that defendants have not returned their bonus and incentive-based

compensation received during the period covered by the restatement is another indication of their

disregard for Northwest’s shareholders. Enacted in the wake of the accounting scandals of Enron

Corp. and WorldCom, §304 of Sarbanes-Oxley, 15 U.S.C. §7243, requires that a CEO and CFO

“shall reimburse the issuer for [] any bonus or other incentive-based or equity-based compensation

received by that person from the issuer” during the 12-month period following the first restated

period, as well as “any profits realized from the sale of securities of the issuer during that 12-month

period.”




704839_1


1

172. Sarbanes-Oxley §304 is self-executing, and does not require personal misconduct by

2

the executive to whom it applies. 14 Rather, it provides that a covered executive “ shall” return any

3

covered compensation when a restatement is required as a result of misconduct by the issuer. The

4

SEC has defined “misconduct” to mean “improper behavior,” a standard far less than fraud or

5

extreme recklessness.

6

173. Here, there can be no doubt that Northwest’s massive restatements were the result of

7

improper conduct by individuals at Northwest. The Individual Defendants’ continuing violation of

8

Sarbanes-Oxley §304, through their failure to return millions of dollars of incentive compensation

9

earned during the period that Northwest has now been forced to restate, supports a strong inference

10

of scienter.

11

D. Dunham and Welty’s Resignations and the Unusual Terms of Their

12 Separation Agreement Support a Strong Inference of Scienter

13 174. On March 29, 2010, during the pendency of the Company’s internal investigation,

14 Dunham abruptly resigned his position as CEO of Northwest. After previously stating to

15 Northwest’s shareholders that the Company’s “success depends on the management and leadership

16 skills of our senior management team,” and that the “loss of any of these individuals, particularly

17 Brian W. Dunham . . . could prevent us from fully implementing our business strategy,” Dunham

18 resigned as CEO without explanation.

19 175. Shortly before the Company filed their restated financial result with the SEC, on

20 October 8, 2010, Dunham suddenly resigned his position as President and a member of the Board of

21 Directors. Again, no explanation was given to shareholders for Dunham’s departure.

22 176. In connection with his forced resignation, Dunham entered into a separation

23 I agreement with Northwest. While the agreement provided for payment of one year’s worth of

24

25

14 While the SEC has the power to “exempt any person from the application of” §304, the SEC has not done so in this case and is currently investigating the Company.

26





Dunham’s salary, it also contained an unusual provision which required Dunham to repay the

2

amount in the event that he was found to have committed any “ intentional or reckless illegal

3

activity ” in connection with the Company’s restatement:

4

Dunham agrees to repay all amounts he received as severance under this Section 2 in the event Dunham is found by a court of competent jurisdiction to have

5

engaged in intentional or reckless illegal activity in connection with any of the items of accounting practice, policy, procedures or disclosures that are related to the

6

investigation being conducted by the Audit Committee of the Company’s Board of Directors.

7 177. On October 26, 2010, Dunham also resigned from the Board of Directors at Avista,

8 where he had served as a member of the Board since 2008. Again, no explanation was given for

9 Dunham’s abrupt and sudden departure. However, a proxy statement filed with the SEC on

10 March 31, 2010 suggests that Dunham was forced to resign his position on the Board of Avista

11 because of his misconduct at Northwest. The March 31, 2010 proxy statement discusses the

12 Company’s investigation in its discussion of Dunham’s resignation:

13 On November 12, 2009, Northwest Pipe Company announced that it had

14

delayed the filing of its quarterly Form 10-Q for the third quarter ending September 30, 2009, pending the conclusion of an ongoing internal investigation of

15

certain accounting matters, including certain revenue recognition practices, being conducted by the Audit Committee of the Board of Directors with the assistance of

16

independent professionals. . . . [T]wo separate Federal Securities Class Actions on behalf of all persons who purchased or otherwise acquired the common stock of

17

Northwest Pipe Company from April 23, 2008 through November 11, 2009 (Class period) inclusive were filed alleging the defendants, including Mr. Dunham, issued

18

materially false and misleading statements regarding the company’s business and financial results, thereby causing the company’s stock to trade at artificially inflated

19

prices throughout the Class period and causing the plaintiffs’ damages. . . . In addition to the class action suit, a shareholder derivative complaint was also filed

20

against the officers alleging breach of fiduciary duty, waste of corporate assets and unjust enrichment. The investigation is ongoing and the cases are pending.

21 178. Dunham’s abrupt and unexplained resignations from both Northwest and Avista

22 support a strong inference of scienter. Northwest would not have fired Dunham, whom they had

23 previously singled out as the most important member of their management team, if the restatement

24 was merely related to the correction of unintentional oversights. Nor would they have required

25 Dunham to repay his severance if they did not have reason to believe that he might indeed be found

26 “to have engaged in intentional or reckless illegal activity” by a court of competent jurisdiction.







1

179. On January 20, 2011 Welty resigned as CFO. In connection with her resignation,

2

Welty entered into a separation agreement with Northwest similar to Dunham’s separation

3

agreement which required Welty to repay the amount in the event that she was found to have

4

committed any “intentional or reckless illegal activity ” in connection with the Company’s

5

restatement.

6

IX. OTHER GAAP VIOLATIONS

7

180. In addition to the GAAP and SEC violations described above, the Company also

8

I violated the following fundamental GAAP principles:

9 (a) The principle that interim financial reporting should be based upon the same

10 accounting principles and practices used to prepare annual financial statements was violated

11

12 (Accounting Principles Board Opinion No. 28, ¶10);

13 (b) The principle that revenues generally are not recognized until realized or

14 realizable and earned (SFAC No. 5, ¶¶83-84);

15

(c) The principle that financial reporting should provide information that is useful

16 to present and potential investors and creditors and other users in making rational investment, credit

17 and similar decisions was violated (SFAC No. 1, ¶34);

18 (d) The principle that financial reporting should provide information about the

19

20 economic resources of an enterprise, the claims to those resources, and effects of transactions, events

21 and circumstances that change resources and claims to those resources was violated (SFAC No. 1,

22

¶40);

23

(e) The principle that financial reporting should provide information about how

24 I management of an enterprise has discharged its stewardship responsibility to owners (stockholders)

25 for the use of enterprise resources entrusted to it was violated. To the extent that management offers

704839_1




26


1

securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

2

I accountability to prospective investors and to the public in general (SFAC No. 1, ¶50);

3 (f) The principle that financial reporting should provide information about an

4 I enterprise’s financial performance during a period was violated. Investors and creditors often use

5

6 information about the past to help in assessing the prospects of an enterprise. Thus, although

7 I investment and credit decisions reflect investors’ expectations about future enterprise performance,

8 those expectations are commonly based at least partly on evaluations of past enterprise performance

9

(SFAC No. 1, ¶42);

10 (g) The principle that financial reporting should be reliable in that it represents

11 I what it purports to represent was violated. That information should be reliable as well as relevant is

12 a notion that is central to accounting (SFAC No. 2, ¶¶58-59);

13

14 (h) The principle of completeness, which means that nothing is left out of the

15 information that may be necessary to insure that it validly represents underlying events and

16

I conditions was violated (SFAC No. 2, ¶79); and

17

(i) The principle that conservatism be used as a prudent reaction to uncertainty to

18 I try to ensure that uncertainties and risks inherent in business situations are adequately considered

19 was violated. The best way to avoid injury to investors is to try to ensure that what is reported

20 I represents what it purports to represent (SFAC No. 2, ¶¶95, 97).

21

22 181. Additionally, defendants’ improper accounting for revenue was material, given the

23 SEC’s guidance on materiality. SEC Staff Accounting Bulletin (“SAB”) Topic 1M, Materiality,

24

summarizes GAAP definitions of materiality. SAB Topic 1M represents the codification of certain

25

I SAB’s, including SAB No. 99, Materiality, as of May 9, 2003. SAB No. 99 became effective

26 I August 12, 1999. SAB Topic 1M says, inter alia, “[a] matter is ‘material’ if there is a substantial





1

likelihood that a reasonable person would consider it important.” It also stresses that materiality

2

I requires qualitative, as well as quantitative, considerations. For example, considerations such as

3 whether a misstatement changes income into a loss or whether the misstatement arises from an item

4 I capable of precise measurement are factors that should be taken into account in determining the

5

6 materiality of the misstatement.

7 I X. LOSS CAUSATION

8 182. The materially false and misleading statements detailed supra in §VI artificially

9 inflated the price of Northwest’s stock, or kept the Company’s stock price from declining as far as it

10 would have if defendants had reported honest results to investors.

11 183. On March 21, 2007, the Company issued a press release announcing its false financial

12 results for FY06. On this news, Northwest’s stock price increased 4% to close at $36.32 on March

13 22, 2007. By comparison, the Russell 2000 Index increased by only 0.1% on March 22, 2007. 15

14 Northwest FY06 10-K incorporated that Company’s quarterly results for 1Q06, 2Q06, 3Q06 and

15 4Q06, all of which were false and misleading as a result of fraudulent practices alleged herein, and

16 resulted in the artificial inflation of the Company’s stock price.

17 184. On March 5, 2008, the Company issued a press release announcing its false financial

18 results for FY07. On this news, Northwest’s stock price remained artificially inflated, closing at

19 $39.11 on March 5, 2008. Northwest FY07 10-K incorporated that Company’s quarterly results for

20 1Q07, 2Q07, 3Q07 and 4Q07, all of which were false and misleading as a result of fraudulent

21 practices alleged herein, and resulted in the artificial inflation of the Company’s stock price.

22 185. On February 25, 2009, the Company issued a press release announcing its false

23 financial results for FY08. Although the stock price declined because of certain disappointing

24 15 The Russell 2000 Index is an index which measures the performance of the small-cap segment of the U.S.

25 equities market. Northwest used the Russell 2000 Index to compare the performance of its common stock in Forms 10-K filed with the SEC throughout the Class Period.

26

704839_1





1

results (which were still overstated due to accounting improprieties), the false financial results

2

disseminated to investors maintained the artificial inflation of Northwest’s stock price and caused it

3

not to fall as significantly as it would have but for defendants’ improper financial manipulations.

4

Northwest’s FY08 10-K incorporated that Company’s quarterly results for 1Q08, 2Q08, 3Q08 and

5

4Q08, all of which were false and misleading as a result of fraudulent practices alleged herein, and

6

resulted in the artificial inflation of the Company’s stock price.

7

186. On April 28, 2009, the Company issued a press release announcing its false financial

8

results for 1Q09. On this news, Northwest’s stock price increased 14.7% to close at $37.17 on April

9

28, 2009. By comparison, the Russell 2000 Index increased by only 0.7% on April 28, 2009.

10

187. On July 29, 2009, the Company issued a press release announcing its financial results

11

I for 2Q09. Although the stock price declined because of the Company’s disappointing performance,

12

the false financial results disseminated to investors maintained the artificial inflation of Northwest’s

13

I stock price and caused it not to fall as significantly as it would have but for defendants’ improper

14

I financial manipulations.

15

188. On November 12, 2009, the Company issued a press release announcing its

16

preliminary financial results for 3Q09, which were drastically lower than investors expected (a loss

17

of $0.10 per share versus an expectation of a gain of $0.29 per share). The Company also revealed

18

that it could not timely file its 3Q09 Form 10-Q, pending an internal accounting investigation into

19

certain “revenue recognition” practices. On this news, Northwest’s stock price decreased by 14.4%

20

to close at $26.74 on November 12, 2009. Although this disclosure partially removed some of the

21

artificial inflation that had built up in the stock price as a result of defendants’ fraudulent accounting

22

practices, the stock price remained artificially inflated because the full extent, pervasiveness and

23

economic impact of defendants’ accounting practices were not yet disclosed to investors.

24

189. Subsequently, Northwest filed a Form NT 10-Q with the SEC, stating that:

25

Northwest Pipe Company (the “Company”) has delayed the filing of its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, pending

26

the conclusion of an ongoing internal investigation of certain accounting matters, including certain revenue recognition practices , being conducted by the Audit





Committee of the Board of Directors with the assistance of independent professionals. The Company plans to file its Quarterly Report on Form 10-Q for the

2

quarter ended September 30, 2009 as soon as practicable after the completion of the Audit Committee’s investigation and the completion of the additional accounting

3

work, if any, required as a result of the Audit Committee’s investigation, but does not currently expect that it will be filed before the fifth calendar day following its

4

original due date as prescribed by Rule 12b-25.

5

190. As a result of this news, Northwest’s common stock fell from $31.23 per share on

6

November 11, 2009 to $26.74 per share on November 12, 2009 – a one-day decline of 14% on

7

volume of 591,200 shares, some six times the three-month daily average.

8

191. Following the November 12, 2009 disclosures, analysts were decidedly negative

9

concerning the Company’s future. According to one report by Boenning & Scattergood, Inc., “[a]s a

10

result of the ongoing investigation and uncertainty regarding previously stated results, we lack

11

conviction on the future earnings power of the business pending additional information from the

12

company.”

13

192. On March 16, 2010, the Company filed a Form 8-K with the SEC. The Form 8-K

14

stated that due to the Company’s investigation of revenue recognition practices, Northwest would be

15

unable to timely file its Form 10-K with the SEC. Further, the Form 8-K disclosed that the SEC had

16

commenced a formal investigation of Northwest:

17

As previously disclosed, the Audit Committee of the Board of Directors of Northwest Pipe Company (the “Company”), with the assistance of independent

18

professionals, is conducting an ongoing internal investigation of certain accounting matters, including certain revenue recognition practices. Pending the completion of

19

the Audit Committee’s investigation, the Company is unable to complete the preparation of its Annual Report on Form 10-K for the year ended December 31,

20

2009 (the “Form 10-K”), including the consolidated financial statements required to be presented in the Form 10-K. The Company plans to file the Form 10-K as

21

soon as practicable after the completion of the Audit Committee’s investigation, the completion of any additional accounting work required as a result of the Audit

22

Committee’s investigation, the completion of the Company’s consolidated financial statements for the year ended December 31, 2009 and the completion of the audit of

23

such consolidated financial statements by the Company’s independent registered public accountants. The Company does not expect that the Form 10-K will be filed

24

before the fifteenth calendar day following its original due date as prescribed by Rule 12b-25.

25 The Company has been advised by the staff of the Securities and Exchange

26

Commission (the “SEC”) that the SEC has commenced a formal investigation. The Company intends to cooperate fully with the SEC investigation.







1

193. As a result of this news, Northwest’s common stock fell from $24.02 per share on

2

March 16, 2010 to $20.12 per share on March 17, 2010 – a one-day decline of 16.2% on volume of

3

1,340,700 shares.

4

194. Recognizing the significance of these events, Northwest’s analysts downgraded the

5

I Company, citing the ongoing accounting review and the SEC investigation. An analyst report issued

6

I by Jefferies & Company, Inc. and published on March 18, 2010 stated:

7

Moving to a Neutral Stance on the Shares

8

Investment Summary

9

We are lowering our rating to Hold from Buy. The lack of clarity on business conditions for the water transmission business coupled with uncertainty regarding the

10

outcome and timing of completion of the internal accounting review makes it difficult for us to advocate committing new money into the shares.

11 Event

12 Due to the ongoing internal accounting review NWPX has announced it is

13

going to miss the 10-K filing deadline. Additionally, the SEC is launching an official investigation into the accounting issues at NWPX.

14 195. On March 29, 2010, Dunham was forced to resign his position as CEO of Northwest.

15 That same day, Richard A. Roman took over as CEO. As described in a Form 8-K filed by

16 I Northwest on April 2, 2010:

17 On March 29, 2010, Brian W. Dunham resigned his position as the Chief

18

Executive Officer of Northwest Pipe Company (the “Company”). Mr. Dunham will continue to serve as the Company’s President and as a member of the Company’s

19

Board of Directors.

20

Also on March 29, 2010, the Company entered into an Executive Employment Agreement (the “Employment Agreement”) with Richard A. Roman

21

pursuant to which Mr. Roman will serve as the Company’s Chief Executive Officer.

22

196. As a result of Dunham’s resignation, Northwest’s common stock fell from $24.15 per

23

share on March 29, 2010 to $21.50 per share on March 30, 2010 – a one-day decline of 10.9% on

24

I volume of 620,700 shares.

25

197. On June 1, 2010, Northwest made a number of admissions which confirmed the

26

extent and economic consequences of the fraud.

704839_1





198. On July 30, 2010, the Company filed a Form 8-K updating the market on the status of

2

3

4

5

6

7

8

9

10

11

The Audit Committee investigation and related accounting analyses have primarily focused on issues related to the Company’s application of the percentage-

12

of-completion, cost-to-cost revenue recognition methodology (the “Percentage-of- Completion Method”) in its Water Transmission segment. . . . These efforts

13

culminated in a determination by the Audit Committee and the Company that there was a material error in the Company’s historical method of applying the Percentage-

14

of-Completion Method. Specifically, under the Company’s historical method of applying the Percentage-of-Completion Method, the cost of steel was recognized as a

15

project cost at the time the cost was incurred, resulting in the recognition of revenue at that time. The Company has now determined that the cost of steel should not be

16

recognized as a project cost when the cost is incurred but should be recognized as a project cost when the steel is introduced into the manufacturing process. The

17

Company intends to restate certain of its previously issued consolidated financial statements in order to correct the error in its historical method of applying the

18

Percentage-of-Completion Method. . . .

19 * * *

20

The Company has determined that errors in its method of allocating manufacturing overhead variances and indirect support costs to projects in the Company’s Water

21

Transmission segment, as well as errors in related assumptions and judgments, including those regarding total estimated project costs, have resulted in the material

22

overstatement of the Company’s previously reported CEEEB balance. . . .

23

Historically, the Company has capitalized and depreciated the costs related to certain major maintenance and improvement activities for fixed assets in its Water

24

Transmission and Tubular Products manufacturing facilities. . . . The Company has determined that certain equipment carrying values were overstated and that there

25

were errors in the determination of the economic lives and residual values of certain equipment. The adjustments required to correct these errors will result in the

26

material reduction of previously reported net income and of net property, plant and

its internal investigation. In the Form 8-K, the Company claimed that it had uncovered a number of

improper practices, including: (i) ”that there was a material error in the Company’s historical method

of applying the Percentage-of-Completion [accounting] Method”; (ii) errors in “the allocation of

certain overhead and support costs in the Water Transmission segment and the capitalization and

depreciation of certain costs in the Water Transmission and Tubular Products segments”; and

(iii) ”that certain equipment carrying values were overstated and that there were errors in the

determination of the economic lives and residual values of certain equipment.” The Company

announced that as a result of these “errors,” they would be required to restate their previously issued

financial statements by $37-$47 million:







equipment balances, and an increase in previously reported accumulated depreciation, depreciation expense and cost of sales.

2 . . . [B]ased upon the Company’s preliminary analyses, the Company’s

3

current preliminary estimate is that the adjustments required as a result of the restatement would reduce previously reported aggregate net income of $91,591,000

4

for the period from January 1, 2005 through June 30, 2009 by approximately $17,000,000 to $22,000,000. The Company also estimates that adjustments to

5

retained earnings as of January 1, 2005, which reflect net income adjustments for prior years, would reduce previously reported retained earnings of $105,112,000 by

6

approximately $20,000,000 to $25,000,000. . . .

7

Based on the foregoing, the Audit Committee concluded on July 24, 2010 that the Company’s audited consolidated financial statements and related financial

8

information for the fiscal years ended December 31, 2008, 2007 and 2006, and the related reports of the Company’s independent registered public accounting firm

9

thereon, and the unaudited condensed consolidated financial statements for each of the quarters in the years then ended and the quarters ended March 31, 2009 and June

10

30, 2009, should no longer be relied upon. Similarly, related press releases, reports and shareholder communications describing the Company’s financial statements for

11

these periods should no longer be relied upon.

12

199. On October 8, 2010, the Company filed a Form 8-K with the SEC, announcing that

13

Dunham had resigned as President and a member of the Board of Directors at Northwest. While

14

Northwest agreed to pay Dunham $570,000 in severance, the separation agreement specifically

15

required Dunham to repay such monies to the Company in the event that he was found to have acted

16

illegally in connection with Northwest’s investigation and restatement:

17

Dunham agrees to repay all amounts he received as severance under this Section 2 in the event Dunham is found by a court of competent jurisdiction to have

18

engaged in intentional or reckless illegal activity in connection with any of the items of accounting practice, policy, procedures or disclosures that are related to the

19

investigation being conducted by the Audit Committee of the Company’s Board of Directors.

20 200. Shortly after his resignation from Northwest, Dunham also resigned from his position

21 as a member of a Board of Directors at Avista, a position he had held since 2008.

22 201. On November 4, 2010, Northwest filed the 3Q09 Form 10-Q, the 2009 Form 10-K,

23 the 1Q10 Form 10-Q and the 2Q10 Form 10-Q, which investors believed contained restated financial

24 results for 2006, 2007 and 2008 that complied with GAAP, and the originally reported financial

25 results for 3Q09, FY09, 1Q10 and 2Q10 that investors also believed complied with GAAP. The

26 next day, the Company’s stock price increased 19.1% from $19 per share to $22.62 per share.







1

202. On November 15, 2010, Northwest filed its 3Q10 Form 10-Q, which included the

2

I Company’s financial results for the three and nine months ending September 30, 2010.

3

203. On March 22, 2011, Northwest issued a press release reporting the Company’s FY10

4

I results, and the same day filed its 2010 Form 10-K with the SEC. The Company’s stock price

5

I increased 3.3% to $23.25 on March 22, 2011.

6

204. On May 10, 2011, Northwest issued a press release reporting the Company’s 1Q11

7

I results. The same day, Northwest filed its 1Q11 Form 10-Q with the SEC. The Company’s stock

8

I price increased 6.4% the following day, increasing from $22.98 on May 10, 2011 to $24.45 on May

9

11, 2011.

10

205. On Friday, August 5, 2011, Northwest issued a press release reporting the Company’s

11

2Q11 results. On Monday, August 8, 2011, Northwest filed its 2Q11 Form 10-Q with the SEC. The

12

Company’s stock price increased 10.6%, increasing from $24.92 on August 10, 2011 to $27.55 on

13

August 11, 2011.

14

206. On November 10, 2011, Northwest filed a Form NT 10-Q with the SEC disclosing

15

I that it would not timely file its 3Q11 Form 10-Q because it was again reviewing the Company’s

16

depreciation expenses.

17

As part of its evaluation of the assumptions relied upon in determining depreciation expense for equipment using the units of production method, Northwest

18

Pipe Company (the “Company”) is conducting an analysis of the assumptions used in prior years. Additional time is required to complete this analysis and the preparation

19

and review of its Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (the “Form 10-Q”). The Company’s delay in filing its Form 10-Q could not

20

be eliminated without unreasonable effort or expense. The Company plans to file the Form 10-Q as soon as practicable.

21 207. The Company’s stock price declined 8.7% on November 9, 2011, indicating this

22 information was leaked. The stock price declined another 0.3% on November 10, 2011.

23 208. On December 22, 2011, Northwest filed a Form 8-K with the SEC disclosing that it

24 would have to restate its 2009, 2010, 1Q11 and 2Q11 financial statements to correct additional

25 depreciation expense errors but had not yet quantified the errors. The Company reported that “there

26 was a material error in the Company’s historical method of systematically and rationally allocating





1

equipment depreciation” and that “[p]rincipally, assumptions utilized in the adoption in 2006 of the

2

Units of Production Method related to estimated future tons of production over the remaining useful

3

lives of equipment were not properly re-evaluated subsequent to that time.” It also reported that

4

Northwest intended to correct historical estimates of salvage values.

5

209. The Company did not quantify the impact of the restatement but did report that it

6

believed the adjustments required to correct the errors would increase previously reported cost of

7

sales, reduce the amount of property and equipment and reduce previously reported net income. It

8

warned that additional accounting errors could be discovered and that it expected to report the

9

restated financial results when it filed the 2011 Form 10-K.

10

210. Following this unexpected negative news, the Company’s stock price declined 6.2%

11

I from $26.32 on December 22, 2011 to $24.68 on December 23, 2011.

12

211. On March 15, 2012, the Company reported preliminary estimates of the restatement

13

and also revealed that (1) there were additional accounting errors (losses on disposals, improperly

14

recording expenses as a note receivable and improperly accounting for capital leases as operating

15

leases); and (2) retained earnings as of year end 2008 would have to be restated. The preliminary

16

estimates included:

17 S

Increasing the previously reported net loss of $7.3 million for the year ended December 31, 2009 by approximately $2 to $4 million;

18 S

Increasing the previously reported net loss of $1.4 million for the year ended 19

December 31, 2010 by approximately $3 to $5 million;

20 S

Decreasing the previously reported net income of $3.6 million for the three months ended March 31, 2011 by approximately $0.6 to $1.2 million;

21 S

Decreasing the previously reported net income of $5.4 million for the three months 22

ended June 30, 2011 by approximately $0.4 to $1.0 million; and.

23 S

Decreasing retained earnings at December 31, 2008 of $149.2 million by approximately $10 to $12 million.

24 212

On April 27, 2012, Northwest filed its 2011 Form 10-K with the SEC, which included 25

I the restated financial statements for 2007, 2008, 2009, 2010, 1Q11 and 2Q11. 26





1 I XI. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET

213. Plaintiffs’ claims for securities fraud are asserted under the fraud-on-the-market

theory of reliance. The market price of Northwest securities, including common stock, regularly

traded on the NASDAQ, was artificially inflated by the false and misleading statements complained

of herein, including Northwest’s numerous false financial statements which the Company was forced

to restate. Defendants’ false statements inflated the price of Northwest securities during the Class

Period, including by maintaining the price of those securities at a level they would not have traded

at, had the true financial condition and other matters concealed from investors been revealed at an

earlier date, as alleged herein.

214. At all relevant times, the market for Northwest’s common stock was an efficient

I market for the following reasons, among others:

(a) Northwest’s stock met the requirements for listing, and was listed and actively

I traded on the NASDAQ, a highly efficient and automated market;

(b) As a regulated issuer, Northwest filed periodic public Reports with the SEC

I and the NASDAQ;

(c) Northwest regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases on

the national circuits of major newswire services, publications on its website and other Internet sites,

and through other wide-ranging public disclosures, such as through conference calls,

communications with the financial press and other similar reporting services;

(d) During the Class Period, Northwest was followed by securities analysts

employed by major brokerage firms, including Boenning & Scattergood, Inc., D.A. Davidson & Co.

and Jefferies & Company, Inc. Analysts covering Northwest wrote reports based upon the publicly

available information disseminated by defendants about Northwest. These reports were distributed

to the sales force and certain customers of their respective brokerage firms;

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26




704839_1


1

(e) Northwest had substantial institutional ownership during the Class Period (as

2

I much as 96%). Each of these institutions regularly analyzed and reported on the publicly available

3

I information about Northwest and its operations; and

4

(f) Through the foregoing mechanisms, the information publicly disseminated by

5

defendants about Northwest and its operations, and the import thereof, became widely available to

6

and was acted upon by investors in the marketplace such that, as a result of their transactions in

7

Northwest stock, the information disseminated by defendants, including the false and misleading

8

statements described above, became incorporated into and were reflected by the market price of

9

Northwest’s publicly traded securities.

10

215. As a result of the foregoing, the market for Northwest’s common stock promptly

11

digested current information regarding Northwest from all publicly available sources, and reflected

12

such information in Northwest’s stock price. Under these circumstances, all purchasers of

13

Northwest’s common stock during the Class Period suffered similar injury through their purchase of

14

Northwest’s common stock at artificially inflated prices and its subsequent decline in value, and a

15

presumption of reliance applies.

16

XII. PLAINTIFFS’ CLASS ACTION ALLEGATIONS

17

216. Plaintiffs bring this action as a class action pursuant to Rules 23 of the Federal Rules

18

of Civil Procedure on behalf of a class, consisting of all persons who purchased or otherwise

19

acquired the common stock of Northwest during the Class Period, and who were damaged thereby

20

(the “Class”). Excluded from the Class are defendants and their family members, the officers and

21

directors of the Company, at all relevant times, members of their immediate families and their legal

22

representatives, heirs, successors or assigns and any entity in which defendants have or had a

23

controlling interest.

24

217. The members of the Class are so numerous that joinder of all members is

25

I impracticable. Northwest has over 9.2 million shares of common stock outstanding. Throughout the

26

I Class Period, Northwest’s common stock was actively traded on the NASDAQ. While the exact





1

I number of Class members is unknown to plaintiffs a this time and can only be ascertained through

2

appropriate discovery, plaintiffs believe that there are at least hundreds, if not thousands, of members

3

in the proposed Class. Members of the Class may be identified from records maintained by

4

Northwest and/or its transfer agent and may be notified of the pendency of this action by mail, using

5

a form of notice similar to that customarily used in securities class actions.

6

218. Plaintiffs’ claims are typical of the claims of the members of the Class, as all

7

members of the Class were similarly affected by defendants’ wrongful conduct in violation of

8

federal law that is complained of herein.

9

219. Plaintiffs will fairly and adequately protect the interests of the members of the Class

10

and have retained counsel competent and experienced in class action securities litigation.

11

220. Common questions of law and fact exist as to all members of the Class and

12

predominate over any questions solely affecting individual members of the Class. Among the

13

questions of law and fact common to the Class are:

14

(a) Whether the federal securities laws were violated by defendants’ acts and

15

omissions as alleged herein;

16

(b) Whether statements made by defendants to the investing public during the

17

Class Period misrepresented and/or omitted material facts about the business, financial performance

18

and management of Northwest;

19

(c) Whether the price of Northwest common stock was artificially inflated during

20

the Class Period; and

21

(d) The extent to which the members of the Class have sustained damages and the

22

proper measure of damages.

23

221. A class action is superior to all other available methods for the fair and efficient

24

adjudication of this controversy, since joinder of all members is impracticable. Furthermore, as the

25

damages suffered by individual Class members may be relatively small, the expense and burden of

26





1

I individual litigation make it impossible for members of the Class to individually redress the wrongs

2

done to them. There will be no difficulty in the management of this action as a class action.

3

COUNT I

4

For Violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5 Against All Defendants

5 222. Plaintiffs repeat and reallege each and every allegation contained above as if fully set

6 I forth herein.

7 223. During the Class Period, each of the defendants carried out a plan, scheme and course

8 of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

9 public, including plaintiffs and other Class members, as alleged herein; and (ii) cause plaintiffs and

10 other members of the Class to purchase Northwest common stock at artificially inflated prices. In

11 furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, were

12 substantially participants in the fraudulent conduct set forth herein.

13 224. During the Class Period, defendants, with knowledge of or reckless disregard for the

14 truth, disseminated or approved the false statements specified above, which were misleading in that

15 they contained misrepresentations and failed to disclose material facts necessary in order to make the

16 statements made, in light of the circumstances under which they were made, not misleading.

17 225. Defendants have violated §10(b) of the Exchange Act and SEC Rule 10b-5 in that

18 they:

19 (a) Employed devices, schemes and artifices to defraud;

20 (b) Made untrue statements of material facts and/or omitted to state material facts

21 necessary in order to make the statements made, in light of the circumstances under which they were

22 I made, not misleading; or

23 (c) Engaged in acts, practices and a course of business that operated as a fraud or

24 deceit upon plaintiffs and others similarly situated in connection with their purchases of Northwest

25 common stock during the Class Period.

26





1

226. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of

2

the market, they paid artificially inflated prices for Northwest stock, which subsequently declined in

3

value as a result of the revelation of adverse facts, practices, and other disclosures relating to the

4

misrepresentations and omissions alleged herein. Plaintiffs and the Class would not have purchased

5

Northwest stock at the prices they paid, or at all, if they had been aware that the market prices had

6

been artificially and falsely inflated by defendants’ false and misleading statements.

7

227. As a direct and proximate result of the defendants’ wrongful conduct, plaintiffs and

8

I the other members of the Class suffered damages in connection with their purchases of Northwest

9

common stock during the Class Period.

10

COUNT II

11

For Violation of Section 20(a) of the Exchange Act Against All Defendants

12 228. Plaintiffs repeat and reallege each and every allegation contained above as if fully set

13 I forth herein.

14 229. The Individual Defendants acted as controlling persons of Northwest within the

15 meaning of §20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions,

16 participation in and/or awareness of the Company’s operations and/or intimate knowledge of the

17 false financial statements filed by the Company with the SEC and disseminated to the investing

18 public, the Individual Defendants had the power and authority to cause the Company to engage in

19 the wrongful conduct complained of herein. Northwest controlled the Individual Defendants and all

20 of its other employees.

21 230. By reason of such wrongful conduct, defendants are liable pursuant to §20(a) of the

22 I Exchange Act. As a direct and proximate result of the defendants’ wrongful conduct, plaintiffs and

23 I other members of the Class suffered damages in connection with their purchases of the Northwest

24 common stock during the Class Period.

25 PRAYER FOR RELIEF

26 WHEREFORE, plaintiffs pray for relief and judgment as follows:





1

A. Determining that this action is a proper class action and certifying plaintiffs as Class

2

representatives under Rule 23 of the Federal Rules of Civil Procedure;

3

B. Awarding compensatory damages in favor of plaintiffs and the other Class members

4

against all defendants, jointly and severally, for all damages sustained as a result of defendants’

5

wrongdoing in an amount to be proven at trial, including interest thereon;

6

C. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this

7

action, including counsel fees and expert fees; and

8

D. Such other and further relief as the Court may deem just and proper.

9

JURY TRIAL DEMAND

10

Plaintiffs hereby demand a trial by jury on all issues.

11

DATED: May 4, 2012 ROBBINS GELLER RUDMAN & DOWD LLP

12

CHRISTOPHER P. SEEFER CHRISTOPHER M. WOOD

13

14 s/ Christopher P. Seefer

15

CHRISTOPHER P. SEEFER

16

Post Montgomery Center One Montgomery Street, Suite 1800

17

San Francisco, CA 94104

18 415/288-4534 (fax) Telephone: 415/288-4545

Email: [email protected] 19 Email: [email protected]

20 Lead Counsel for Plaintiff

21 DATED: May 4, 2012

HAGENS BERMAN SOBOL SHAPIRO LLP

22

KARL P. BARTH, WSBA No. 22780

23

24 s/ Karl P. Barth KARL P. BARTH

25

26





1 1918 Eighth Avenue, Suite 3300

2

Seattle, WA 98101 Telephone: 206/623-7292

3

206/623-0594 (fax) Email: [email protected]

4 Liaison Counsel

5 SUGARMAN & SUSSKIND

6

HOWARD S. SUSSKIND 100 Miracle Mile, Suite 300

7

Coral Gables, FL 33134 Telephone: 305/529-2801

8

305/447-8115 (fax)

9

Additional Counsel for Plaintiff

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

704839_1




26

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


CERTIFICATE OF SERVICE

I hereby certify that on May 4, 2012, I authorized the electronic filing of the foregoing with

the Clerk of the Court using the CM/ECF system which will send notification of such filing to the

e-mail addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I

caused to be mailed the foregoing document or paper via the United States Postal Service to the non-

CM/ECF participants indicated on the attached Manual Notice List.

I certify under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct. Executed on May 4, 2012.

s/ Christopher P. Seefer CHRISTOPHER P. SEEFER


Post Montgomery Center One Montgomery Street, Suite 1800 San Francisco, CA 94104 Telephone: 415/288-4545 415/288-4534 (fax) E-mail:[email protected]

704839_1




26

WAWD CM/ECF Version 4.2- https://ecf.wawd.uscourts.gov/cgi-bin/MailList.pl?579928057785135-L_555_0-1


Mailing Information for a Case 3:09-cv-05724-RBL

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

• Inessa Baram-Blackwell [email protected] ,[email protected]

• Karl Phillip Barth [email protected],[email protected]

• Douglas J Clark [email protected],[email protected]

• Larry Steven Gangnes [email protected],[email protected] ,[email protected] ,[email protected]

• Barry M Kaplan [email protected],[email protected],[email protected]

• George H Mernick , III [email protected]

• Darren J Robbins [email protected]

• Ignacio E Salceda [email protected],[email protected]

• Christopher P Seefer [email protected],[email protected],[email protected],[email protected]

• Tanya Durkee Urbach [email protected],[email protected]

• Robin Wechkin [email protected],[email protected]

5/4/2012 9:07 AM

WAWD CM/ECF Version 4.2- https://ecf.wawd.uscourts.gov/cgi-bin/MailList.pl?579928057785135-L_555_0-1


Erin M. Wilson [email protected],[email protected],[email protected],[email protected]

• Christopher M Wood [email protected],[email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who therefore require manual noticing). You may

wish to use your mouse to select and copy this list into your word processing program in order to create notices or labels for these recipients.

• (No manual recipients)

5/4/2012 9:07 AM

case 3:09-cv-05724-rbl document 80 filed 05/04/12 page 1...

Documents