According to the SEC’s complaint, filed Aug. 25 in federal district court in the Northern District of California, Granite Construction’s former Senior Vice President Dale Swanberg was under pressure to turn around “flagging performance” and improve his group’s financial metrics, beginning in 2017. At this time, however, Swanberg and his group encountered “significant increases” in costs to complete several construction projects, which, if recorded, would have decreased the firm’s revenues and profit margins, the SEC stated.
“Faced with these competing demands, Swanberg orchestrated a scheme to hide the deteriorating performance of his group’s projects,” the SEC complaint stated. He did this by, in some cases, manipulating his group’s financials “by directing his subordinates to use specific, rosier profit margin numbers, regardless of whether those numbers were justified based on the project team’s estimate of the total expected costs,” according to the SEC complaint. At other times, Swanberg “directed his subordinates to defer recording certain increases to the total expected costs, which had the effect of overstating revenues and profit margins,” the complaint continued.
The scheme unraveled in mid-2019, when several construction projects neared completion, and Swanberg could no longer defer recognition of the cost increases. As a result, in 2021, Granite was forced to restate its 2017 through 2019 financial statements to correct the revenue and profit margin errors.
“Swanberg’s alleged manipulation of financial metrics to hide deteriorating performance inflated Granite’s stock. And, predictably, the price plunged after there was full disclosure resulting in significant harm to investors,” said Monique Winkler, Regional Director of the SEC’s San Francisco Regional Office. “When executives hide material facts from investors, as alleged in our complaint, the SEC will take action against companies and individuals to ensure we maintain fair and open markets.”
The SEC’s complaint against Swanberg charges him with violating the antifraud and other provisions of the federal securities laws and seeks disgorgement plus prejudgment interest, civil penalties, and an officer and director bar, among other relief.
Granite Allegations
The SEC’s complaint against Granite, premised on Swanberg’s alleged misconduct, credited Granite with self-reporting to the Commission regarding the potential revenue-recognition issues, once identified, 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, in addition to paying a $12 million civil penalty. The proposed judgment is subject to court approval.
SOX 304 Clawbacks
In separate administrative proceedings, the company’s former CEO, James 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 304), which requires executives to reimburse certain compensation when an issuer must restate its financials as a result of misconduct.
“We are committed to using SOX 304 as Congress intended: to incentivize a culture of compliance at public companies by ensuring that senior executives are not rewarded when their firms violate core reporting requirements,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. “Executives should be on notice that we view SOX 304 as broad authority in seeking all forms of compensation that should be reimbursed to the company.”
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. 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.