United States District Court, D. South Carolina, Columbia Division
ORDER AND OPINION
Margaret B. Seymour, Senior United States District Judge
On
March 30, 2018, Plaintiffs West Virginia Investment
Management Board and Stichting Blue Sky Equity Active Low
Volatility Fund and Stichting Blue Sky Active Large Cap
Equity USA Fund, individually and on behalf of themselves and
others similarly situated, filed a consolidated class action
complaint against SCANA Corporation (“SCANA”),
and Kevin B. Marsh, SCANA's former Chief Executive
Officer (“CEO”) and Chairman of SCANA's Board
of Directors; Jimmy E. Addison, CEO and former Chief
Financial Officer (“CFO”) and Executive Vice
President of SCANA; Stephen A. Byrne, SCANA's former
Executive Vice President; and Harold C. Stowe, D. Maybank
Hagood, and James W. Roquemore, members of the Board of
Directors (“Individual Defendants” (collectively,
“Defendants”). Plaintiffs seek certification of a
class of all persons and entities who purchased, or otherwise
acquired, SCANA'S publicly traded securities from October
27, 2015 through December 20, 2017, and were damaged as a
result of Defendants' alleged misrepresentations and
omissions with respect to the abandonment of a nuclear
reactor construction project at the V.C. Summer nuclear
generating station in Fairfield County, South Carolina.
Plaintiffs allege the following causes of action: violation
of Section 10(b) of the Securities Exchange Act of 1934 (the
“Act”) and Rule 10b-5 (against all Defendants)
(Count One); and violation of Section 20(a) of the Act
(against Individual Defendants) (Count Two).
On
March 4, 2019, this matter came before the court for a
hearing on the following motions to dismiss:
• Motion to dismiss for failure to state a claim filed
by Jimmy Addison on June 4, 2018. Plaintiffs filed an omnibus
response on August 9, 2018. Addison filed a reply on
September 18, 2018.
• Motion to dismiss for failure to state a claim filed
by Stephen Byrne on June 4, 2018. Plaintiffs filed an omnibus
response on August 9, 2018. Byrne filed a response on
September 19, 2018.
• Motion to dismiss for failure to state a claim filed
by Kevin Marsh on June 4, 2018. Plaintiffs filed an omnibus
response on August 9, 2018. Marsh filed a reply on September
18, 2018.
• Motion to dismiss for failure to state a claim filed
by Maybank Hagood, James Roquemore, SCANA Corporation, and
Harold Stowe. Plaintiffs filed an omnibus response on August
9, 2018. These Defendants filed a reply on September 18,
2018.
For the
reasons set forth below, Defendants Addison's,
Byrne's and Marsh's motions to dismiss are denied.
SCANA's motion to dismiss is denied in part and granted
in part.
I.
FACTS
In May
2008, SCANA's subsidiary, South Carolina Electric and Gas
Company (“SCE&G”), and the South Carolina
Public Service Authority (“Santee Cooper”)
entered into an agreement to construct two nuclear reactors
at an estimated cost of $9.8 billion (the
“Project”). To finance the Project, SCANA
expected to qualify for tax credits under the Energy Policy
Act of 2005, 42 U.S.C. §§ 15801, et seq., which
would provide tax credits worth approximately $2.2 billion if
the Project were completed by January 1, 2021. In addition,
SCANA relied on the Base Load Review Act, SC Code Ann.
§§ 58-33-210, et seq. (“BLRA”), which
allowed the South Carolina Public Service Commission
(“PSC”) to approve utility rate increases to
cover construction costs of new nuclear reactors. Under the
BLRA, SCANA was required to demonstrate to the PSC that costs
were prudently incurred and decisions prudently made
considering the information available to SCANA at the time.
See S.C. Code Ann. § 58-33-225. SCANA selected
Westinghouse Electric Company (“Westinghouse”) as
its lead contractor and CBI Stone & Webster
(“CB&I”), as supporting
contractor.[1] Construction commenced in March 2013.
According
to Plaintiffs, the Project was immediately beset by cost
overruns and delays. In September 2015, the PSC approved a
twenty-seven month extension of the construction schedule, as
well as addition costs of $698 million. Plaintiffs allege
that Defendants repeatedly assured the public, investors, and
the PSC that SCANA was acting in a transparent and
responsible manner, and that the initial risks and challenges
of the construction had been overcome.
Plaintiffs
contend SCANA purposely did not publicly disclose that, in
early 2015, SCANA, through counsel, had retained Bechtel
Corporation (“Bechtel”), an engineering,
construction, and project management company, to assess the
Project's viability. In October 2015, Bechtel submitted a
preliminary report that provided the following summary and
contained a number of recommendations:
• The objective of the assessment was to assist the
Owners [SCE&G and Santee Cooper] to better understand the
current status and potential challenges of the project and to
help ensure the project is on the most cost efficient
trajectory to completion.
• Based on our assessment, the current schedule is at
risk. Significant issues include:
To-go scope quantities, installation rates, productivity, and
staffing levels all point to completion later than current
forecast.
While EPC[2] plans and schedules are integrated; the
plans and schedules are not reflective of actual project
circumstances.
The Consortium lacks project management integration needed
for EPC.
There is a lack of a shared vision, goals, and accountability
between the Owners and the Consortium.
The WEC-CB&I [Westinghouse-CB&I] relationship is
extremely poor, caused to a large extent by commercial
issues.
The Contract does not appear to be serving the Owners or the
Consortium particularly well. The issued design is often not
constructible resulting in a significant number of changes.
• The oversight approach taken by the Owners does not
allow for real-time, appropriate cost and schedule
mitigation.
ECF No. 95-12, 4.
Bechtel's
preliminary findings indicated that the commercial operation
date for Unit 2 should be adjusted by eighteen to twenty-six
months, or to December 2020 to August 2021 (as compared to
the then-current commercial operation date of June 2019); and
the commercial operation date for Unit 3 should be adjusted
by twenty-four to thirty-six months, or to June 2022 to June
2023 (as compared to the then-current commercial operation
date of June 2020).
Also in
October 2015, SCE&G, Santee Cooper, Westinghouse, and
CB&I entered into an agreement (the “EPC
Amendment”). ECF No. 95-13. The EPC Amendment contained
a provision permitting Westinghouse to contract with Fluor
Corporation, an engineering and construction firm
(“Fluor”),
for additional construction support. The EPC Amendment
contained new Guaranteed Substantial Completion Dates
(“GSCDs”) of August 31, 2019 for Unit 2 and
August 31, 2020 for Unit 3. The EPC Amendment provided for
bonuses for on-time completion as well as liquidated damages
for delay of construction for each unit in the amounts for
$200, 000/day for the first thirty days; $300, 000/day for
the next thirty-one to ninety days; $400, 000/day for the
next ninety-one to one hundred fifty days; $500, 000/day for
the next one hundred fifty-one to seven hundred thirty days;
and $0/day for each seven hundred thirty-one days or beyond.
Id. at 4-5. The parties further agreed to allow
SCE&G and Santee Cooper the option to convert the EPC
Amendment to a fixed price contract no later than November 1,
2016. If exercised, the contract price would be adjusted to
$6.082 billion and payments made to complete the Project
after June 30, 2015 would be credited against the $6.082
billion amount. ECF No. 95-13, 23.
On
October 27, 2015, SCANA filed a Form 8-K with the Securities
and Exchange Commission (SEC). ECF No. 95-14. The Form 8-K
summarized the EPC Amendment, including that the GSCDs had
been extended to August 31, 2019 and August 31, 2020, and
reported that substantially all outstanding disputes with
Westinghouse had been resolved. A press release attached to
the Form 8-K stated that the fixed option price would
increase to approximately $7.601 billion. SCANA also
completed a Form 10-Q on November 6, 2015, which informed
investors that the nuclear reactors would be operational by
the end of 2020 and the Project would qualify for the Energy
Policy Act tax credits. ECF No. 95-17.
On
November 9, 2015, Bechtel provided a formal assessment (the
“First Bechtel Report”). ECF Nos. 105-4, 105-5.
Among other things, Bechtel noted that the Project had been
achieving a 0.5% progress per month rather than the
anticipated 1% per month. Bechtel indicated that future needs
were 2.5% to 3% per month. Bechtel reiterated its assessment
that the anticipated commercial operation date for Unit 2 was
December 2020 to August 2021, and for Unit 3 was June 2022 to
June 2023. On February 5, 2016, Bechtel submitted a revised
report (the “Second Bechtel Report”) at the
request of SCANA's outside counsel. The Second Bechtel
Report removed information regarding the delays in commercial
operation dates for the Project. ECF Nos. 105-7, 105-8. The
First Bechtel Report and the Second Bechtel Report were
denominated privileged work product prepared in anticipation
of litigation.
Plaintiffs
assert that Bechtel reviewed the EPC Amendment, which was
signed five days after the Bechtel preliminary assessment.
According to Plaintiffs, Bechtel concluded that the EPC
Amendment would further delay the schedule. Plaintiffs also
dispute that Defendants addressed most of Bechtel's
concerns in the EPC Amendment, including the existing
engineering design and the deficient oversight approach.
Plaintiffs contend that Bechtel found there was no credible
path for SCANA to complete the Project by the end of 2020;
thus, the schedule was not simply “at risk, ” it
was impossible to achieve. Plaintiffs allege that Santee
Cooper urged SCANA to implement Bechtel's
recommendations, including the need for new project
management and leadership. Plaintiffs contend that the
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