Maverick Fund, L.D.C. v. First Solar, Inc.

          ORDER

          David G. Campbell Senior United States District Judge.

         Maverick Fund, L.D.C., Maverick Fund USA, Ltd., Maverick Fund II, Ltd., Maverick Neutral, Ltd., Maverick Neutral Levered Fund, Ltd., Maverick Long Fund, Ltd., and Maverick Long Enhanced Fund, Ltd. (“Maverick” or “Plaintiffs”) sued First Solar, Inc., Michael Ahearn, Robert J. Gillette, Mark R. Widmar, Jens Meyerhoff, James Zhu, Bruce Sohn, and David Eaglesham (collectively “Defendants”) for violations of federal and state securities laws, common law fraud, and negligent misrepresentation. Doc. 1. Defendants move to dismiss under Rule 9(b) and 12(b)(6), and under the Private Securities Litigation Reform Act, 15 U.S.C. § 78u et. seq. (“PSLRA”). Doc. 17. The motions are fully briefed, and oral argument will not aid the Court's decision. See Fed. R. Civ. P. 78(b); LRCiv 7.2(f); Docs. 17, 20, 21. For the reasons that follow, the Court will grant Defendants' motion in part, and deny in part.

         I. Background.

         The Court accepts Plaintiff's factual allegations as true for purposes of this motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). This case has been stayed pending an interlocutory appeal to the Ninth Circuit that took more than two years to resolve. As a result, allegations in the complaint are a bit dated, but nonetheless appear to be relevant to the claims asserted in this case.

         A. The Parties

         Plaintiffs are private investment funds managed by non-party Maverick Capital, Ltd. Doc. 1 ¶ 14. Defendants are First Solar, Inc. and individuals who served managing roles for First Solar over the last ten years. First Solar designs and manufactures solar panel modules. Doc. 1 ¶ 17. Defendant Ahearn founded First Solar and serves as chairman of the board of directors. Id. ¶ 18. Defendant Gillette served as First Solar's CEO until his resignation on October 25, 2011. Id. ¶ 19. Defendant Widmar served as First Solar's chief financial officer (“CFO”) from April 2011 through the “remainder of the relevant period into 2012.” Id. ¶ 20. Defendant Meyerhoff served as First Solar's CFO until December 2010 and as president of the utility systems business group until August 17, 2011. Id. ¶ 21. Defendant Zhu served as the interim CFO from June 2007 to October 2009 and then as First Solar's chief accounting officer until January 2012. Id. ¶ 22. Defendant Sohn was First Solar's president of operations until April 30, 2011. Id. ¶ 23. Defendant Eaglehsam was the chief technology officer from November 2009 to May 2012. Id. ¶ 24.

         B. Factual Allegations.

         Between May 4, 2011 and December 15, 2011, Plaintiffs purchased millions of First Solar common stock. Id. ¶ 16. Plaintiffs purchased these shares relying on Defendants' misrepresentations that First Solar would reach grid parity through advanced technology and large scale solar power plants in the southwest.^[1] See Id. ¶¶ 15, 215, 236. Plaintiffs also relied on statements by Defendants that although Defendants experienced problems with defective and underperforming panels throughout 2009 to 2011, the problems were minimal and would not affect First Solar's earnings or grid parity goals. Doc. 1 ¶ 215, 236.

         Beginning in 2009, First Solar announced a plan to reach grid parity by 2010-2012. Doc. 1 ¶¶ 101-02. Eaglesham, Sohn, Ahearn, and Meyerhoff presented a detailed Grid Parity Roadmap at First Solar's 2009 annual analyst and investor meeting. Id. ¶ 103. The plan involved reducing First Solar's cost per watt (CpW) by reducing module costs, reducing balance of system costs, and then building and selling large scale solar power farms at a “huge margin on each watt of electrical production capacity built and sold.” Id. ¶¶ 103-04. After reaching grid parity, demand for solar panels would soar, allowing First Solar to maintain healthy gross and operating margins. Id. ¶ 103.

         To lower its CpW, First Solar initiated construction of several large scale solar power plants in the southwest. See Doc. 1 ¶ 102, 170, 179, 220. In 2010-2011, First Solar became aware that the plants were not producing the quantity of energy projected due to poor performance in high heat environments. See Doc. 1 ¶¶ 56, 67, 80, 91.

         In July 2010, First Solar released a statement that it had a “manufacturing excursion” from June 2008 to June 2009. Doc. 1 ¶ 29. According to First Solar's release, four percent of the modules produced during that period could experience premature power loss. Id.

         On several occasions from 2010 to 2011, First Solar announced robust earnings projections, positive expectations for construction of solar power plants, reduction of CpW, and progress on achieving grid parity. See Doc. 1 ¶¶ 147, 149, 153, 157, 160, 162, 170-71, 178, 185-91, 197-205, 209, 212, 220-22, 229. During these announcements, Defendants also said that they were remedying the manufacturing excursion and that its effect continued to be minimal. See id. ¶¶ 150, 177, 193, 221, 225. Defendants never mentioned issues involving panel performance in high heat environments or possible heat degradation in panels. Id. ¶ 185.

         On September 13, 2011, Plaintiffs met with Gillette to discuss First Solar. Id. ¶ 215. Gillette assured Plaintiffs that the projects in the southwest would drive profits despite cheap imports from China. Id. Gillette also reassured plaintiffs that First Solar was on track to achieve grid parity. Id. ¶ 216.

         Over the second half of 2011, First Solar made several announcements regarding high-level executives leaving the company and delays in construction of solar power plants, which caused the stock value to dip. See Doc. 1 ¶¶ 251-59. In late 2011, First Solar reduced its earnings projections and announced that it would have to slash its operation margins to achieve grid parity. Doc. 1 ¶¶ 260-61. By the beginning of 2012, First Solar announced a net loss of $39.5 million for 2011, an additional $125.8 million warranty reserve cost for the manufacturing excursion, and an additional $37.8 million for handling heat degradation issues in panels. Doc. 1 ¶ 266. The excursion warranty charges in the fourth quarter represented more than half of the total warranty charges incurred. Id. ¶ 267. This was also the first release to include a charge for heat degradation effects. Id. ¶ 266. As a result of these announcements, Plaintiffs' stock value dropped precipitously. Doc. 1 ¶ 263.

         C. The Complaint.

         Plaintiffs allege that they purchased First Solar common stock and suffered substantial losses after relying on Defendants' false and misleading statements. Doc. 1 ¶ 15. Plaintiffs allege that Defendants concealed the existence and severity of known defects in First Solar's panels; (id. ¶ 28) Defendants misrepresented panel degradation rates and concealed heat-related problems with panels and systems (id. ¶ 16); Defendants manipulated their CpW metric reported to investors (id. ¶ 24); Defendants concealed cost overruns and misrepresented the value of the First Solar's projects (id. ¶ 90); Defendants falsely described First Solar as close to reaching grid parity (id. ¶ 101); Defendants knew there would be an oversupply of cheap panels in the market, but refused to adjust earnings forecasts accordingly (id. ¶ 120); and Defendants issued false financials and violated the Generally Accepted Accounting Principles (“GAAP”) (id. ¶ 128).

         Plaintiffs allege six causes of action: (1) violation of § 10(b) of the Securities Exchange Act of 1934 (id. ¶ 275); (2) violation of § 20(a) of the Securities Exchange Act of 1934 (id. ¶ 289); (3) common law fraud (id. ¶ 291); (4) violation of A.R.S. § 44-1991(A)(2)-(2) and A.R.S. § 44-2003(A) (id. ¶ 299); (5) violation of A.R.S. § 44-1999(B) (id. ¶ 306); and (6) negligent misrepresentation under New York common law (id. ¶ 310).

         II. Plaintiffs' § 10(b) Claim.

         Defendants argue that Plaintiffs' § 10(b) claim should be dismissed for three reasons. Doc. 17. First, Plaintiffs failed to plead that Defendants made actionable false or misleading statements. Id. at 10. Second, Plaintiffs have not pled sufficient facts to establish loss causation. Id. at 12. Third, Plaintiffs have not pled sufficient facts to establish scienter. Id. at 15. The Court will address each argument in turn.

         A. Pleading Standard.

         To avoid a Rule 12(b)(6) dismissal, the complaint must plead enough facts to state a claim for relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). “To allege fraud with particularity, a [claimant] . . . must set forth an explanation as to why the statement or omission complained of was false or misleading.” In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994).

         Securities claims must also meet the heightened pleading requirements of the PSLRA. 15 U.S.C. § 78u-4(b)(1-2); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320 (2007). When plaintiffs allege misleading statements or omissions, the PSLRA requires that the complaint “specify each statement alleged to have been misleading” and “the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1)(B). Plaintiffs must also “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A).

         B. Elements of 10b-5 Claim.

         To state a claim under § 10(b) and Rule 10b-5, a plaintiff must plead: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Janus Capital Group, Inc., 131 S.Ct. 2296, 2301, n.3 (2011); see also Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005).

         C. False Statements.

         Defendants argue that Plaintiffs fail to plead actionable false statements for three reasons: (1) Defendants' grid parity statements are too generalized and conclusory to state a claim under the PSLRA; (2) Defendants' statements are inactionable “forward-looking” statements (3) Defendants' statements are “merely vague statements of optimism and feel good monikers that are not actionable.” Doc. 17 at 4-6.

         To plead falsity, a plaintiff must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). Statements must be pled with specificity to say how and why they are false. Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1071 (9th Cir. 2008); see also In re Vantive Corp. Sec. Litig., 283 F.3d at 1086 (“[A]lthough the complaint alleges that over the fifteen-month class period, [defendant] continually and deliberately mislead investors by stating that its sales-cycle was ‘holding steady at three to six months,' much of the complaint fails to allege any facts to indicate why this statement would have been misleading at the several points at which it was alleged to have been made.”); Ronconi v. Larkin, 253 F.3d 423, 429-32 (9th Cir. 2001).

         1. Plaintiffs' General Allegations.

         Plaintiffs allege, based on confidential witnesses and circumstantial evidence, that Defendants knew the manufacturing excursion would be more extensive than they reported. Doc. 1 ¶ 32. After First Solar's manufacturing excursion release, Defendants assured investors throughout 2010 and 2011 that the manufacturing excursion was limited, First Solar had adequate reserves to cover defective panels, and panels were reliable and of the highest quality. Doc. 1 ¶¶ 29, 31, 142, 154, 182, 193. Defendants “repeatedly and falsely” stated that First Solar took corrective action and nearly remediated all of the defective panels. Id. ¶ 31, 177, 221, 225. But Plaintiffs allege that Defendants knew the rate of decline for the panels was more than originally predicted and more than First Solar told its customers. Id. ¶¶ 75-76; see also id. ¶ 79. In July 2010, Defendants falsely stated that it would cost $23.4 million to fix the defective panels, but, by the end of 2011, the remediation costs had reached $215 million. Id. ¶ 32.

         Plaintiffs allege, based on confidential witnesses and circumstantial evidence, that First Solar knew about the panels' high-heat-performance issues and possible heat degradation before reporting issues in 2012. Doc. 1 ¶ 54. Confidential witness eight (“CW 8”) stated that First Solar's senior executives received regular reports about the degraded and damaged panels and were well aware of the problem by the third quarter of 2011. Id. ¶ 72; see also ¶ 38 (Confidential witness two (“CW 2”) stated that individually named defendants - Gillette, Ahearn, and Sohn - received defect reports noting “anything significant.”). Confidential witnesses three and four (“CW 3” and “CW 4”) stated that the company developed a protocol for dealing with defective panels as early as late 2009 to early 2010. Doc. 1 ¶¶40-46. CW 4 stated that every time a panel was defective its bar code went into a computer system so that it could be tracked. Id. ¶ 47.

         Plaintiffs allege that First Solar concealed the damaged and defective panels. Id. ¶ 28. Confidential witness one (“CW 1”), who worked as a First Solar global supply quality engineer, indicated that First Solar went to great lengths to keep all known defects in the panels from being revealed to the public. Id. ¶ 33. CW 1 was specifically told to keep confidential any of the personally witnessed defects with the solar panels. Id. ¶¶ 33-35. CW 3 described defective modules set aside but then later shipped to customers. Id. ¶ 44. Plaintiffs maintain that the extent to which the company tracked and managed these defective panels demonstrates First Solar's awareness and concealment of the issue.

         Plaintiffs allege that the panels' heat degradation issues impacted First Solar's ability to build profitable solar power plants in the southwest, leading to First Solar's 2011 publicly reported poor economic performance and affecting First Solar's grid parity progress. Doc. 1 ¶¶ 53, 83. Plaintiffs further allege that First Solar knew about this effect, but continued to represent the projects as performing as expected and on track to achieve grid parity. Doc. 1 ¶90; see, e.g., ¶¶ 149, 164, 168, 173. Confidential witness seven (“CW 7”) investigated significant cost overruns from the end of 2010 throughout 2011. Id. ¶ 91. CW 7 reported directly to a senior finance manager, who reported serious cost overruns to First Solar's CEO Gillette. Id. And employees were told not to share information about cost overruns with the public. Id. ¶ 97.

         Plaintiffs further allege, based on information from CW 2, that Ahearn, Gillette, Meyerhoff, Zhu, and Widmar were personally and regularly involved in heat-related problems at First Solar's El Dorado plant from 2009 to 2010. Id. ¶ 55. El Dorado's heat-related problems were not disclosed to the investing public during quarterly report calls. Id. ¶ 59. Confidential witness five (“CW 5”), a First Solar development engineer, also indicated that the solar power farms failed to meet promised wattage commitments during his 2009 to 2011 tenure. Id. ¶¶ 60-61. According to CW 5, these issues were reported to First Solar's senior management. Id. In September 2010, CW 5 presented the data from the solar farms at First Solar headquarters. Id. ¶ 63. First Solar's “high-level executives” asked for the meeting. Id. ¶ 64. Plaintiffs allege that concerns over these panel issues held up construction of the Antelope Valley solar farm. Id. ¶¶ 73-74.

         Plaintiffs allege that beginning in late 2010 and throughout 2011, Defendants repeatedly made false and misleading statements about First Solar's grid parity progress. See, e.g. Id. ¶¶ 170-75, 183, 188, 195, 199, 201. In December 2010, Defendants stopped talking about grid parity in the future tense and began indicating that First Solar was already very close to grid parity. Id. ¶ 107. For example, on May 17, 2011, First Solar's vice president of investor relations told investors that First Solar was close to achieving the goals set forth in the Grid Parity Roadmap. Id. ¶ 108. Plaintiffs allege that on August 4, 2011, Gillette stated that “[o]ur [Levelized Cost of Energy (“LCOE”)] is approaching grid parity, which should drive elasticity and demand and a growth of sustainable markets.” Id. ¶ 109. But due to excessive costs associated with building the large scale solar farms, heat degradation and defects in the panels, “runaway balance of system costs, ” and other costs, Defendants knew they were not close to achieving grid parity. Id. ¶ 110. According to CW 7, the employees did not think that First Solar would achieve grid parity by 2014, but the CEO kept insisting it would happen. Id. ¶ 112; see also ¶¶ 114-16 (confidential witnesses who agree that First Solar was not close to reaching grid parity). Defendants continued to assure investors that First Solar was on track to achieve the goals in the Grid Parity Roadmap through November 2011. Id. ¶¶ 117, 215. On December 14, 2011, First Solar revealed that to reach grid parity it would have to slash its profit margins. Id. ¶ 118.

         Plaintiffs allege that First Solar manipulated its CpW metric to appear close to grid parity. Id. ¶ 83. Defendants repeatedly told investors that First Solar's “low cost per watt manufacturing and technology was ‘significantly less than those of traditional crystalline silicon solar module manufacturer' [which] enabled First Solar to ‘maintain [its] cost advantage over traditional crystalline silicon solar module manufacturers.'” Id. In February 2010, a whistleblower complained that the vice president of financial planning told a group of his subordinates what the publicly reported CpW number should be. Id. ¶ 86. The vice president then directed attendees of the meeting to “do what was necessary to come up with that number.” Id. The confidential witness brought the complaint to Meyerhoff. Id. ¶ 87. Plaintiffs allege that there are other witnesses who know about First Solar's manipulation of the CpW, but they are unwilling to discuss such matters because of signed confidentiality agreements. Id. ¶ 89.

         Plaintiffs allege that, by ignoring defect issues, First Solar failed to properly account for the true costs associated with their modules, in violation of GAAP. Id. ¶ 129. First Solar violated GAAP when it made materially false and misleading statements regarding revenues and modules sold in hot climates. Id. First Solar materially understated warranty reserves and related liabilities in violation of GAAP, and First Solar failed to make required disclosures regarding the extent of the costs the company would ultimately incur. Id. ¶¶130-31.

         2. Defendants' Specific False Statements.

         Based on the above general allegations, Plaintiffs allege the falsity of a numerous public statements made by Defendants. Plaintiffs allege that these statements were misleading and false because they minimized the impact of the manufacturing excursion, overstated how close First Solar was to achieving grid parity, and omitted any discussion of the solar plant cost overruns and heat degradation issues. Id. ¶ 185.

         Plaintiffs allege that during a conference call on October 28, 2010, in which Gillette, Meyerhoff, and Sohn participated, Gillette concealed First Solar's cost overruns and heat degradation problems by stating that construction on the Cimarron and Copper Mountain solar projects was progressing well. Id. ¶¶ 147, 149. Sohn also falsely reassured investors that the manufacturing excursion was under control. Id. ¶ 150. On November 1, 2010, First Solar filed a third quarter Form 10-Q, signed by Zhu, in which Defendants falsely reassured investors that they were reducing CpW. Id. ¶ 153.

         On December 8, 2010, Gillette informed investors at the Barclays Capital Global Technology Conference that First Solar was making great progress toward lowering its per-module cost and achieving grid parity. Id. ¶ 157. On December 14, 2010, First Solar hosted a conference call in which Gillette, Meyerhoff, and Sohn reassured investors that First Solar was on track to achieve the goals on the Grid Parity Roadmap by the end of 2014. Id. ¶ 162. Gillette also told investors that First Solar completed the farm at Copper Mountain without disclosing the ...