A federal judge has dismissed a class action lawsuit against MBTA General Manager Luis Ramirez regarding financial filings during his tenure at a Texas-based firm. At the same time, the ruling found there was evidence that Ramirez had knowingly misrepresented financial information to the public.
The lawsuit stemmed from years of financial misstatements the company, Global Power Equipment Group, made in its public filings. Ramirez was president and CEO of Global Power from July 2012 through March 2015. Within weeks after Ramirez left the firm, Global Power notified the Securities and Exchange Commission (SEC) that its financial statements for 2014 "should not be relied upon because of accounting errors." A subsequent investigation found errors dating back to 2012.
The corrected 2014 filings, published in March 2017, had large discrepancies from the original filings. For example, the company had originally reported a net income of $11 million for 2014, but the company actually had a net loss of $47 million — an overstatement of 524 percent.
Plaintiffs argued that Ramirez and other executives at Global Power violated the federal securities laws by knowingly publishing false and misleading financial reports. The plaintiffs focused on accounting errors in one of Global Powers' business units, the Electrical Solutions Segment, and deficiencies in internal controls over financial reporting.
Earlier this month, Chief District Judge Barbara M.G. Lynn in Texas dismissed the suit. She wrote that "allegations support the conclusion that [Chief Financial Officer Raymond] Guba and Ramirez knew they were publishing false information" starting in April 2014. And, she went on to write, "There is no question that the restatement materially changed Global Power’s financial results."
But, the judge writes, "the complaint has stopped short of showing that the pleader is plausibly entitled to relief."
The judge writes that while there is evidence that Ramirez and others knew about the false information for 2013 and continued to publish that information anyway, there is not enough evidence that they were knew the errors were significant enough to affect a "reasonable" investor's decision on whether to buy shares of the company.
"The judge is explaining that this segment had two problems, but the problems were small," explained Andrew Vollmer, director of the the law and business program at the University of Virginia School of Law and a former deputy general counsel at the SEC.
The accounting errors within that one business unit, Electrical Services, only explained a relatively small amount of the company's financial errors in 2013 — about 2.36 percent of the total revenue, according to the ruling. There were also other reasons the company had the wrong numbers, including incorrectly accounting for goodwill for the sale of a subsidiary company, Deltak.
"The judge did not say that the other problems were small. The other problems were much bigger," Vollmer said. Potentially, plaintiffs could have a valid claim against the company regarding those bigger problems, if there was proof people in the company knew the larger accounting misstatements were false.
Late last year, the judge had dismissed a previous version of the lawsuit, writing that the plaintiffs failed to establish that Ramirez and other executives had knowingly acted "with intent to deceive, manipulate, or defraud." The judge even went so far as to write that some of the allegations in that earlier version of the complaint suggested "that Guba and Ramirez took steps to make sure that financial information was reported accurately."
Meanwhile, in 2017 SEC filings, Global Power said the SEC concluded its investigation into possible securities laws violations and that, in a letter dated March 8, 2018, "the SEC Enforcement Staff do not intend to recommend an enforcement action."
Officials from the MBTA, the state Department of Transportation, the governor's office, and the MBTA Fiscal Management Control Board all declined to comment. Ramirez was touted as a turnaround specialist when he was selected to lead the MBTA a year ago.
However, the recent SEC filings also show Global Power continues to struggle. Late last year, Global Power sold off two of its business units — including the Electrical Services segment — and a manufacturing facility in Mexico in order to pay down its debt. The company said the financial restatements have cost Global Power nearly $10 million in 2016 and 2017 in legal and accounting costs.
The company also reports operating losses of $22 million in 2017, and "we may still fail to meet our goal of achieving and maintaining profitability in the future."
Note: This story has been updated to reflect analysis from a securities expert.
This article was originally published on September 25, 2018.