SEC Charges Infrastructure Company Granite Construction and Former Executive with Financial Reporting Fraud
Litigation Release No. 25507 / September 15, 2022
Securities and Exchange Commission v. Dale Swanberg, No. 5:22-cv-04859 (N.D. Cal. filed Aug. 25, 2022)
Securities and Exchange Commission v. Granite Construction Incorporated, No. 5:22-cv-04857 (N.D. Cal. filed Aug. 25, 2022)
The Securities and Exchange Commission charged Granite Construction, Incorporated and its former Senior Vice President, Dale Swanberg, with fraud for inflating the financial performance of the major subdivision Swanberg managed. In 2021, Granite restated its financial statements from 2017 through 2019 to correct revenue and profit margin errors allegedly caused by Swanberg's misconduct. The company agreed to pay $12 million to settle the SEC's charges.
In separate administrative proceedings, the company's former CEO, James H. Roberts, and former CFOs, Laurel Krzeminski and Jigisha Desai, while not charged with misconduct, agreed to return more than $1.4 million, $327,000, and $176,000, respectively, in bonuses and compensation to Granite. These clawbacks were made pursuant to Section 304 of the Sarbanes-Oxley Act (SOX), which requires executives to reimburse certain compensation when an issuer is required to restate its financials as a result of misconduct.
The SEC's complaint against Swanberg alleges that, beginning in 2017, he faced demands within Granite to turn around the flagging performance of his group and to improve its financial metrics. Swanberg and his group, however, allegedly encountered significant increases in expected costs for their construction projects that, if recorded, would have decreased the group's earned revenues. The complaint alleges that Swanberg, when faced with these competing demands, orchestrated a scheme to manipulate profit margins and improperly defer the recording of expected costs to hide the group's flagging performance. The scheme allegedly unraveled in mid-2019 when several construction projects neared completion and Swanberg could no longer defer recognition of the cost increases.
The SEC's complaint against Granite is premised on Swanberg's alleged misconduct. The complaint charges Granite with violations of 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The complaint credits Granite with self-reporting to the Commission and undertaking remediation by, among other things, redesigning its internal accounting controls and policies and procedures to increase the transparency and accuracy of expected costs for construction projects. Without admitting or denying the SEC's findings, Granite agreed to be enjoined from violating Section 10(b) of the Securities Exchange Act of 1934 and other provisions of the securities laws, and to pay a civil penalty of $12 million. The proposed judgment is subject to court approval.
The SEC's complaint against Swanberg, which was filed in federal district court in the Northern District of California, charges him with violations of 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5(a), 10b-5(c), and Rule 13b2-1 thereunder. The complaint also charges Swanberg with aiding-and-abetting Granite's violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules 10b-5(b) 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The complaint seeks disgorgement plus prejudgment interest, civil penalties, and an officer and director bar, among other relief.
Without admitting or denying the SEC's findings, Roberts, Krzeminski, and Desai each agreed to cease and desist from violating Section 304 of SOX. Roberts's order provides that he will return an aggregate $1.4 million, including $627,000 in cash and 27,527 shares to Granite. In connection with the orders, Krzeminski and Desai have already returned $327,708.50 and $176,100.51, respectively, to Granite.
The SEC's investigation was conducted by David Zhou, Ellen Chen, and Anthony Moreno of the SEC's San Francisco Regional Office. It was supervised by Jennifer J. Lee. The litigation against Swanberg will be led by Susan LaMarca, Mr. Zhou, and Mr. Moreno.