United States District Court, D. Arizona
Maverick Fund, L.D.C.; Maverick Fund USA, Ltd.; Maverick Fund II, Ltd., Maverick Neutral Fund, Ltd.; Maverick Neutral Levered Fund, Ltd.; Maverick Long Fund, Ltd.; and Maverick Long Enhanced Fund, Ltd., Plaintiff,
First Solar, Inc.; Michael J. Ahern; Robert J. Gillette; Mark R. Widmar; Jens Meyerhoff; James Zhu; Bruce Sohn; and David Eaglesham Defendants.
G. Campbell Senior United States District Judge.
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.
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.
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. ¶
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. 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.
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.
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,
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.
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.
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.
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
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).
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.
Plaintiffs' § 10(b) Claim.
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.
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).
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).
Elements of 10b-5 Claim.
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).
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.
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).
Plaintiffs' General Allegations.
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.
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.
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.
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.
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.
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.
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.
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.
Defendants' Specific False Statements.
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.
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.
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 ...