Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 1 of 81
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
DAVE LENARTZ, et al., Individually and on
Behalf of All Others Similarly Situated,
Plaintiffs,
Lead Case No. 1:11-cv-10582-WGY
(Consolidated )
CLASS ACTION
vs.
AMERICAN SUPERCONDUCTOR
CORPORATION, et al.,
Defendants.
SECOND CONSOLIDATED AMENDED COMPLAINT
FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS – LEAVE TO FILE GRANTED
ON FEBRUARY 13, 2012
Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 2 of 81
Lead Plaintiff Plumbers and Pipefitters National Pension Fund (“Lead Plaintiff” or
“Plaintiff”) alleges the following based upon Plaintiff’s individual and personal knowledge as to
Plaintiff’s own acts, and the investigation undertaken by Plaintiff’s counsel as to all other matters,
which included a review of United States Securities and Exchange Commission (“SEC”) filings by
American Superconductor Corporation (“American Superconductor” or the “Company”), as well as
regulatory filings and reports, securities analysts’ reports and advisories about the Company, press
releases and other public statements issued by the Company, media reports about the Company, and
interviews with former employees of the Company. Plaintiff believes that substantial additional
evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for
discovery. In accordance with the Court’s prior rulings, the required sources for factual allegations
are identified in brackets, by code, after each clause. Where no source is identified for a clause, the
next citation to a source applies to that clause as well ( i.e. , to all prior clauses after the previous
citation). Appendix A to this Complaint provides the definition for each code.
NATURE OF THE ACTION 1
1.
This is a securities class action on behalf of: (a) purchasers of American
Superconductor common stock during the period from July 29, 2010 through July 11, 2011,
inclusive (the “Class Period”), against American Superconductor and certain of its officers and
directors for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rule 10b-5 promulgated thereunder; and (b) purchasers in American
Superconductor’s public offering, commencing on November 12, 2010, pursuant to which the
Company sold 4.6 million shares of common stock and raised $163 million (the “Secondary
1
Unless otherwise noted, for purposes of ¶¶1-16, 39(c) and 40-63 of the Complaint, the term
“Defendants” does not refer to the Underwriter Defendants (defined below).
Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 3 of 81
Offering”), against American Superconductor, certain of its officers and directors, and the
underwriters of the Secondary Offering for violations of Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 (the “Securities Act”). <LP>
2.
Defendant American Superconductor is a power technologies company that offers an
array of proprietary technologies and solutions spanning the electric power infrastructure, from
generation to delivery to end use. The Company derives the majority of its revenue from the sale of
wind turbine electrical control systems to customers in North America, Europe and the Asia-Pacific
region. American Superconductor’s fiscal year begins on April 1 and ends on March 31.
<10K2009>
3.
During the Class Period, the Company’s revenues were primarily derived from one
customer – Sinovel Wind Group Co., Ltd. (“Sinovel”) – a manufacturer of wind turbines based in
China. Sales to Sinovel represented 72% of the Company’s reported revenues for the first fiscal
quarter of 2010, 79% of the Company’s reported revenues for the second fiscal quarter of 2010, and
73% of the Company’s reported revenues for the third fiscal quarter of 2010. <10Q6/30/10,
10Q9/30/10, 10Q12/31/10>
4.
Unbeknownst to investors, during the Class Period, Defendants artificially inflated
American Superconductor’s financial results by prematurely recognizing revenue on shipments to
Sinovel and other Chinese customers, which violated the Company’s stated revenue recognition
policy. <IB, 10K2009, 8K6/11/08> In particular, prior to and during the Class Period, American
Superconductor was shipping product to Sinovel without having first received a letter of credit
assuring payment, although its contract with Sinovel required Sinovel to provide “an irrevocable
letter of credit in the amount of 95% of each shipment value” two weeks before shipment, and
provided that if the letter of credit was delayed, American Superconductor must postpone delivery.
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<IB, 8K6/11/08> By continuing to make contractual shipments to Sinovel despite Sinovel’s failure
to furnish a letter of credit, <IB> or to pay for prior shipments, <IB, PR4/5/11> Defendants were
violating American Superconductor’s revenue recognition policy, which stated that the Company
recognized revenue only if payment was “reasonably assured.” <IB, 10K2009>
5.
Defendants’ fraudulent scheme enabled American Superconductor to report record
revenues and financial results during the Class Period. <PR, PF> Defendants attributed the
Company’s purported success and bright future prospects to its “strong” partnership with Sinovel
and high demand for its wind turbine components, while repeatedly raising and reaffirming the
Company’s full year 2010 guidance. <PR, TR> In truth, the reported revenues were fictitious and
American Superconductor was not performing as well as it was representing to investors.
6.
Defendants’ scheme enabled American Superconductor to raise $163 million in
proceeds in a Secondary Offering on November 12, 2010, at the artificially inflated price of $35.50
per share. <PS11/12/10> Defendants planned to use those proceeds to fund acquisitions that would
enable American Superconductor to lessen its dependence on Sinovel – before investors discovered
that the Company’s primary customer was not credit-worthy. <IB, PS11/9/10>
7.
In response to a December 11, 2010 Barron’s article warning that Sinovel’s
preliminary prospectus for its upcoming IPO in China revealed discrepancies between American
Superconductor’s reported sales to Sinovel and Sinovel’s reported purchases, Defendant Yurek
falsely stated that he did not “see any issues there,” and that the Company’s “revenues are going to
continue to grow, going forward.” <BA12/11/10>
8.
As late as February 2011, Defendants were still telling investors that the Company’s
“very strong relationship with Sinovel . . . continue[d] to get stronger,” <TR2/16/11> and were
reaffirming the Company’s full year 2010 guidance. <TR2/16/11, TR2/23/11> As Defendants have
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now admitted, at the time these statements were made, the Company’s revenues for the quarters
ended September 30 and December 31 were overstated by an estimated $74.7 million .2 <PR11/2/10,
PR2/1/11, PR7/11/11>
9.
Just two weeks before the end of American Superconductor’s fiscal year, on March
14, 2011, Defendants warned of an expected slowdown in the Company’s business with Sinovel, but
falsely attributed it to the “transition” to a new contract with Sinovel <IB, TR3/14/11> – a contract
with identical payment terms to those that American Superconductor and Sinovel had secretly been
flouting. <IB, 8K5/17/10> Indeed, Defendants hoped to continue concealing the truth about the
Company’s business with Sinovel for long enough to fund the acquisition of The Switch Engineering
Oy (“The Switch”) (announced the same day) with a combination of artificially inflated Company
stock and cash raised in the Secondary Offering. <IB, PR3/14/11>
10.
Defendants’ scheme began to unravel on April 5, 2011 – the day before the newly-
public Sinovel filed its annual report with Chinese regulators <Ard4/6/11> – when Defendants were
forced to reveal that Sinovel had refused delivery of contracted shipments, and had “fail[ed] to
pay . . . for certain contracted shipments made in fiscal 2010.” Defendants also slashed the
Company’s full year revenue guidance from $430 million to “less than $355 million,” and
announced that American Superconductor was “reviewing the appropriateness of the timing of its
revenue recognition on approximately $56 million of unpaid shipments in the second, third and
fourth quarters of fiscal 2010.” <PR4/5/11>
11.
Then, on May 31, 2011, American Superconductor announced that it would delay
filing its 2010 annual report while it completed a review and audit “of certain revenues associated
2
All emphasis is added unless otherwise noted.
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with shipments to customers in China during the second, third and fourth fiscal quarters,” and
“expect[ed] to reverse the recognition of a material amount of revenue that it had included when
estimating [full year] revenues of ‘less than $355 million’” on April 5, 2011. <PR5/31/11>
12.
On July 11, 2011, American Superconductor issued a press release announcing that
its financial statements for the second and third quarters, ended September 30, 2010 and December
31, 2010, “should no longer be relied upon.” The press release also represented that the Company’s
improper revenue recognition practices were not limited to Sinovel, and included certain other
“Chinese customers.” The Company admitted that it had improperly recognized revenue “based
upon customer receipt of shipments but prior to . . . receipt of payment” and should not have
recognized revenue “until [the Company] is paid, or payment is otherwise reasonably assured” for
unpaid shipments to Sinovel after September 30, 2010, and for unpaid shipments to “certain [other]
Chinese customers” after August 31, 2010. <PR7/11/11> As a result, American Superconductor
expected to restate its second quarter revenues by an estimated $3.5 million and its third quarter
revenues by an estimated $71.2 million, and expected to report full year 2010 revenues of only
$307 million. <PR11/2/10, PR2/1/11, PR7/11/11>
13.
In a Form 8-K filed with the SEC the same day, Defendants further admitted that the
Company “may have one or more material weaknesses in its internal control over financial reporting
to ensure the accuracy of revenue recognition in China.” Specifically, American Superconductor
admitted to: (i) “deficiencies in its controls to evaluate and monitor customer creditworthiness”; and
(ii) deficiencies in “its controls over the identification and evaluation of revenue transactions which
deviated from contractually established payment terms” <8K7/11/11> – i.e., the payment terms in
the Company’s contracts with Sinovel and other Chinese customers requiring a letter of credit prior
to shipment. <IB, 8K6/11/08>
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14.
After investors reacted to these adverse disclosures, American Superconductor stock
closed at $8.12 per share on July 12, 2011 – a dramatic decline of more than 78% from the Class
Period high of $38.09 per share, reached on October 13, 2010. <YHO, PI>
15.
Before investors learned the full truth about Defendants’ fraudulent scheme,
American Superconductor insiders, including Defendants Yurek, Henry and McGahn, sold hundreds
of thousands of their personally-held shares of American Superconductor stock, generating proceeds
of more than $14.9 million. <PF>
16.
As of the date of the filing of this Complaint, American Superconductor’s restatement
and audit of its financial results remains ongoing, and the Company has not filed financial statements
for the fourth quarter and full year 2010, or for the first quarter of 2011, ended June 30. <PR, PI>
JURISDICTION AND VENUE
17.
The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the
Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder [17 C.F.R.
§240.10b-5] and Sections 11, 12(a)(2) and 15 of the Securities Act [15 U.S.C. §§77k, 77l(a)(2) and
77o]. <LP>
18.
This Court has jurisdiction over the subject matter of this action pursuant to Section
27 of the Exchange Act [15 U.S.C. §78aa], Section 22 of the Securities Act [15 U.S.C. §77v] and 28
U.S.C. §1331. <LP>
19.
Venue is proper in this District pursuant to Section 27 of the Exchange Act, Section
22 of the Securities Act and 28 U.S.C. §1391(b) and (c). <LP> The Company maintains its
executive offices in this District and many of the acts complained of herein, including the
preparation and dissemination of materially false and misleading information, occurred in substantial
part in this District. <PR, PF, IB>
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20.
In connection with the acts and conduct complained of herein, Defendants, directly or
indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,
the United States mails, interstate telephone communications, and the facilities of the national
securities markets. <PF, IB>
PARTIES
21.
Lead Plaintiff Plumbers and Pipefitters National Pension Fund purchased American
Superconductor common stock during the Class Period and in the Secondary Offering, as set forth in
the certification and loss chart previously filed with the Court and incorporated herein by reference,
<PK, TC> and was damaged thereby. <LP, IB>
22.
Defendant American Superconductor is a power technologies company, founded in
1987, that offers a range of technologies and solutions spanning the electric power infrastructure,
including wind turbine designs and electrical control systems, superconductor power cable systems,
and high temperature superconductor wire. <PF> The Company’s executive offices are located at
64 Jackson Road, Devens, Massachusetts 01434, and its common stock trades on the NASDAQ
Global Select Market (“NASDAQ”) under the ticker symbol “AMSC.” <PF, YHO>
23.
Defendant Gregory J. Yurek (“Yurek”) served as Chief Executive Officer (“CEO”)
and Chairman of the Board of Directors of American Superconductor at all relevant times, until the
time of his retirement on June 1, 2011. <PF, PR5/24/11>
24.
Defendant David A. Henry (“Henry”) was, at all relevant times, American
Superconductor’s Senior Vice President and Chief Financial Officer (“CFO”). <PF>
25.
Defendant Daniel McGahn (“McGahn”) served as American Superconductor’s
President and Chief Operating Officer (“COO”) until June 1, 2011, when he assumed the position of
CEO upon Defendant Yurek’s retirement. <PF, PR5/24/11>
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26.
Defendant Vikram S. Budhraja (“Budhraja”) was, at all relevant times, a director of
American Superconductor and signed the Company’s Registration Statement that was used to
effectuate the Secondary Offering documents. <S311/8/10>
27.
Defendant Peter O. Crisp (“Crisp”) was, at all relevant times, a director of the
Company and signed the Secondary Offering documents. <S311/8/10>
28.
Defendant Richard Drouin (“Drouin”) was, at all relevant times, a director of the
Company and signed the Secondary Offering documents. <S311/8/10>
29.
Defendant David R. Oliver, Jr. (“Oliver”) was, at all relevant times, a director of the
Company and signed the Secondary Offering documents. <S311/8/10>
30.
Defendant John B. Vander Sande (“Vander Sande”) was, at all relevant times, a
director of the Company and signed the Secondary Offering documents. <S311/8/10>
31.
Defendant John W. Wood, Jr. (“Wood”) was, at all relevant times, a director of the
Company and signed the Secondary Offering documents. <S311/8/10>
32.
Defendants Yurek, Henry, McGahn, Budhraja, Crisp, Drouin, Oliver, Vander Sande
and Wood are collectively referred to herein as the “Individual Defendants.”
33.
Defendants Morgan Stanley & Co., Inc. (“Morgan Stanley”), Deutsche Bank
Securities (“Deutsche Bank”) and Jefferies & Co (“Jefferies”) are investment banks that served as
underwriters for the Secondary Offering. <PS11/12/10> Defendants Morgan Stanley, Deutsche
Bank and Jefferies are collectively referred to herein as the “Underwriter Defendants.”
CLASS ACTION ALLEGATIONS
34.
Plaintiff brings this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of itself and all persons who purchased American
Superconductor common stock during the Class Period or in the Secondary Offering and were
damaged thereby (the “Class”). Excluded from the Class are Defendants, the officers and directors
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of the Company at all relevant times, members of their immediate families and their legal
representatives, heirs, successors or assigns and any entity in which Defendants have or had a
controlling interest. <LP>
35.
The members of the Class are so numerous that joinder of all members is
impracticable. <LP> American Superconductor sold 4.6 million shares in the Secondary Offering
<PS11/12/10> and had more than 50 million shares of stock outstanding during the Class Period,
which were actively traded on the NASDAQ. <YllO, PI> While the exact number of Class
members is unknown to Plaintiff at this time and can only be ascertained through appropriate
discovery, Plaintiff believes that there are hundreds, if not thousands, of members in the proposed
Class. Thus, the disposition of their claims in a class action will provide substantial benefits to the
parties and the Court. Record owners and other members of the Class may be identified from
records maintained by American Superconductor or its transfer agent or the underwriters to the
Secondary Offering. Notice can be provided to such record owners by a combination of published
notice and first-class mail, using techniques and a form of notice similar to those customarily used in
class actions arising under the federal securities laws. <IB>
36.
Plaintiff will fairly and adequately represent and protect the interests of the members
of the Class. Plaintiff has retained competent counsel experienced in class action litigation under the
federal securities laws to further ensure such protection and intends to prosecute this action
vigorously. <LP, PK>
37.
Plaintiff’s claims are typical of the claims of the other members of the Class because
Plaintiff and all the Class members’ damages arise from and were caused by the same false and
misleading representations and omissions made by or chargeable to Defendants. <LP, PK as to
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Plaintiff, IB as to Class> Plaintiff does not have any interests antagonistic to, or in conflict with, the
Class. <LP, PK>
38.
A class action is superior to other available methods for the fair and efficient
adjudication of this controversy. Since the damages suffered by individual Class members may be
relatively small, the expense and burden of individual litigation make it virtually impossible for the
Class members to seek redress for the wrongful conduct alleged. Plaintiff knows of no difficulty that
will be encountered in the management of this litigation that would preclude its maintenance as a
class action. <IB>
39.
Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting solely individual members of the Class. Among the
questions of law and fact common to the Class are:
(a)
whether the federal securities laws were violated by Defendants’ acts as
(b)
whether Defendants omitted and/or misrepresented material facts, including
alleged herein;
those facts necessary to make the statements made, in light of the circumstances under which they
were made, not misleading;
(c)
whether Defendants knew or recklessly disregarded that their statements were
false and misleading;
(d)
whether the Registration Statement issued by Defendants to the investing
public in connection with the Secondary Offering omitted and/or misrepresented material facts about
American Superconductor;
(e)
whether the price of American Superconductor common stock was artificially
inflated during the Class Period; and
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(f)
the extent of injuries sustained by members of the Class and the appropriate
measure of damages. <LP, IB>
SUBSTANTIVE ALLEGATIONS
The Company and Its Business
40.
Defendant American Superconductor describes itself as a global power technologies
company that offers an array of proprietary technologies and solutions spanning the electric power
infrastructure, from generation to delivery to end use. The Company provides megawatt-scale wind
turbine designs and electrical control systems, and also offers a host of “smart grid” technologies for
power grid operators, including superconductor power cable systems, grid-level surge protectors and
power electronics-based voltage stabilization systems. The Company conducts its operations
through two business segments, Power Systems and Superconductors. <10K2009>
41.
In recent years, the significant driver of the Company’s growth has been the sale of
electrical control systems, which power wind turbines, to wind turbine manufacturers through the
Company’s Power Systems business unit. <PF, PR>
42.
The Power Systems business unit, which accounted for 96% of the Company’s
revenues in fiscal 2009, licenses proprietary wind turbine designs and provides various consulting
and support services to wind turbine manufacturers, in order to enable the Company’s customers to
quickly get into wind turbine production. <10K2009> American Superconductor – which
analogizes its business model to “Intel Inside “ <TR2/16/11> – then manufactures and sells to those
®
customers electrical control systems and components for the wind turbines, which utilize the
Company’s proprietary power electronic converters and enabling software. <10K2009> American
Superconductor typically enters into contracts with its wind turbine manufacturer customers which
provide the Company with a “right of first refusal” to supply the customer with wind turbine
components. <PF, TR11/16/10>
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43.
The Company maintains offices and operations in 11 countries around the world,
including Austria, China, India, South Korea and the United States. <10Q9/30/10, 10Q12/31/10>
44.
During the Class Period, American Superconductor’s revenues were primarily
derived from one customer, Sinovel, a manufacturer of wind turbines based in China. <PF> Sinovel
is the largest wind turbine maker in China, and the third-largest in the world. <TR11/2/10> Sales to
Sinovel represented 72%, 79% and 73% of the Company’s reported revenues for the first, second
and third fiscal quarters of 2010, respectively. <10Q6/30/10, 10Q9/30/10, 10Q12/31/10>
45.
American Superconductor’s dependence on Sinovel has grown steadily each year,
with Sinovel representing approximately 51%, 67%, and 70% of the Company’s total revenues for
fiscal 2007, 2008 and 2009, respectively. In fact, Sinovel was the only customer responsible for
more than 10% of the Company’s total revenues for those fiscal years. <PF>
Background of American Superconductor’s
Fraudulent Revenue Recognition Scheme
46.
The majority of American Superconductor’s reported revenues from Sinovel during
the Class Period were for shipments of electrical control system components for 1.5 megawatt wind
turbines pursuant to a 36-month, $450 million contract entered into with Sinovel in June 2008, for
purchases during calendar years 2009 through 2011 (the “June 2008 Purchase Contract”). 3 <TR,
8K6/11/08> Scheduled shipments under the June 2008 Purchase Contract were ultimately shortened
to 28 months (through April 2011), and the contract price was increased to $470 million.
<8K7/30/09>
3
The June 2008 Purchase Contract was filed with the SEC on Form 8-K on June 11, 2008.
<8K6/11/08>
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47.
The June 2008 Purchase Contract contained a payment provision which stated, in
pertinent part, as follows:
8. Payment Terms
95% by letter of credit at sight
Two (2) weeks before each shipment date, an irrevocable letter of credit in the
amount of 95% of each shipment value shall be issued by a first class Chinese
bank. If the L/C [letter of credit] is delayed, the delivery time will be postponed
accordingly .4 <8K6/11/08>
48.
Based upon information and belief, Lead Plaintiff alleges that prior to and during the
Class Period, unbeknownst to investors, American Superconductor was in breach of this payment
provision. <IB> Specifically, Sinovel was not providing American Superconductor with an
irrevocable letter of credit in the amount of 95% of each shipment value two weeks before each
scheduled shipment. Despite this, American Superconductor was continuing to ship wind turbine
components to Sinovel without having received a letter of credit assuring payment – in breach of the
June 2008 Purchase Contract’s provision that if the Company did not timely receive a letter of credit,
the Company was required to postpone delivery. <IB, 8K6/11/08>
49.
By doing so, Defendants were not only in breach of the June 2008 Purchase Contract,
but were also violating American Superconductor’s publicly disclosed revenue recognition policy,
contained in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010 (the
“2009 Form 10-K”), which stated that the Company recognized revenue “upon customer
acceptance,” provided, among other things, that “collectability [of payment] is reasonably assured .”
4
In May 2010, prior to the start of the Class Period, American Superconductor announced that
it had entered into a new 30-month, $445 million contract to supply Sinovel with 1.5 megawatt wind
turbine components through 2013. <8K5/17/10> That contract, which Defendants repeatedly
highlighted during the Class Period, contained identical payment terms. <8K5/17/10, PR, TR>
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<10K2009> Indeed, Defendants knew that Sinovel’s credit-worthiness was questionable because
Sinovel was not providing the requisite letters of credit, and, therefore, American Superconductor
was recognizing revenues on shipments when collectability was not “reasonably assured.” <IB,
10K2009, 8K7/11/11>
50.
Lead Plaintiff’s allegations are supported by Defendants’ admission, in connection
with American Superconductor’s ongoing restatement of its financial results for the second and third
fiscal quarters of 2010, that the Company “may have one or more material weaknesses in its internal
control over financial reporting to ensure the accuracy of revenue recognition in China.”
Specifically, American Superconductor has admitted to: (i) “deficiencies in its controls to evaluate
and monitor customer creditworthiness”; and (ii) deficiencies in “its controls over the identification
and evaluation of revenue transactions which deviated from contractually established payment
terms .” <8K7/11/11>
51.
Upon information and belief, the “revenue transactions which deviated from
contractually established payment terms” refers to the recognition of revenues on shipments to
Sinovel and other Chinese customers without receipt of a letter of credit, in violation of the June
2008 Purchase Contract and similar payment terms in the Company’s purchase contracts with other
Chinese customers. <IB>
American Superconductor’s Fraudulent
Financial Reporting
52.
During the Class Period, Defendants represented that American Superconductor’s
financial statements were presented in conformity with Generally Accepted Accounting Principals
(“GAAP”) and that the Company maintained a sound system of internal controls over its financial
reporting. <PF>
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53.
Compliance with GAAP is a basic fundamental obligation of publicly traded
companies. As set forth in SEC Rule 4-01(a) of SEC Regulation S-X, “[f]inancial statements filed
with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be
misleading or inaccurate.” 17 C.F.R. §210.4-01(a)(1).
54.
Defendants have now admitted that such representations were false and that American
Superconductor’s previously issued financial statements for the quarters ended September 30, 2010
and December 30, 2010 were materially misstated and “should no longer be relied upon.”
<PR7/11/11> As a result, Defendants have also tacitly acknowledged that their representations
about the soundness of the Company’s system of internal controls over its financial reporting during
the Class Period were also materially false and misleading. See, e.g ., Public Company Accounting
Oversight Board Auditing Standard No. 5.
55.
Generally, GAAP provides that the conditions for revenue recognition ordinarily are
met when the seller’s price to the buyer is substantially fixed or determinable at the date of sale; the
buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not
contingent on resale of the product; the buyer’s obligation to the seller is not changed in the event of
theft or physical destruction of the product; the buyer has economic substance apart from the seller;
the seller does not have significant future performance obligations to the buyer; and the amount of
future returns, if any, can be reasonably estimated. See, e.g., Accounting Standards Codification
605.
56.
Accordingly, in its 2009 Form 10-K, American Superconductor disclosed that, except
for long-term contracts accounted for utilizing the percentage-of-completion method (here, such
contracts are not at issue), the following, in part, was the Company’s policy of revenue recognition:
The Company recognizes revenue for other product sales upon customer
acceptance , which can occur at the time of delivery, installation or post-installation,
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provided persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable and the collectability is reasonably assured .
<10K2009>
57.
Defendants have now admitted that, during the Class Period, American
Superconductor violated this policy, and GAAP, because it recognized revenue on shipments “to
certain Chinese customers” when they knew, misused, or overlooked facts that were then in
existence indicating that the collectability of the revenues on such shipments was not reasonably
assured. <PR7/11/11, 8K7/11/11>
58.
By virtue of their decision to restate the financial statements included in American
Superconductor’s Form 10-Qs for the quarters ended September 30, 2010 and December 31, 2010
(the “Q2 and Q3 2010 financial statements”), <PR7/11/11> Defendants have now admitted that there
was an “oversight or misuse of facts” about the bona-fides of American Superconductor’s reported
sales at the time that the Q2 and Q3 2010 financial statements were prepared. See, e.g ., Accounting
Standards Codification 250. Had that not been the case, American Superconductor would have been
precluded under GAAP from restating the Q2 and Q3 2010 financial statements, and the Company
would have written off its receivables on such “sales” in the ordinary course of business when it
became probable that the receivables would be uncollectible. Id.
59.
In fact, Defendants knew the Q2 and Q3 2010 financial statements materially
overstated American Superconductor’s operating results when they, for no reason other than to cause
American Superconductor to prematurely record tens of millions of dollars in sales to Sinovel,
allowed the Company to ship product to Sinovel prior to receiving an irrevocable letter of credit
associated with the shipped product. <IB>
60.
Accordingly, Defendants failed to safeguard tens of millions of dollars of the
Company’s assets when they made shipments to Sinovel prior to receiving a letter of credit, as
required by the June 2008 Purchase Contract. Indeed, the payment terms set forth in the June 2008
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Purchase Contract were designed to safeguard the Company’s assets and ensure that Sinovel would
pay American Superconductor. Nonetheless, in order to prematurely inflate the Company’s
operating results, Defendants caused American Superconductor to ship tens of millions of dollars of
product to Sinovel, even though the Purchase Contact provided that “[i]f the L/C [letter of credit] is
delayed, the delivery time will be postponed accordingly.” <IB, 8K6/11/08>
61.
In doing so, Defendants breached their duties to investors, put the Company’s assets
at risk and violated the provisions of Exchange Act Section 13(b)(2)(B), which requires, in part, that
every issuer subject to Section 12 of the Exchange Act:
devise and maintain a system of internal accounting controls sufficient to provide
reasonable assurances that –
A.
transactions are executed in accordance with management’s general
or specific authorization ;
B.
transactions are recorded as necessary (I) to permit preparation of
financial statements in conformity with generally accepted accounting principles
or any other criteria applicable to such statements, and (II) to maintain accountability
for assets;
C.
access to assets is permitted only in accordance with management’s
general or specific authorization .
62.
In addition, American Superconductor violated GAAP and its publicly disclosed
policy of revenue recognition, <10K2009> which, as Defendants have now admitted, resulted in the
approximate overstatement of the Company’s reported revenue by 4% and 166% during the quarters
ended September 30, 2010 and December 31, 2010, respectively. <10Q9/30/10, 10Q12/31/10,
PR7/11/11> Lead Plaintiff estimates that American Superconductor’s operating income during the
quarter ended September 30, 2010 was overstated by approximately 10% and that the reported
operating profit during the quarter ended December 31, 2010 of $21.5 million was actually a loss of
$7.5 million. <IB, 10Q9/30/10, 10Q12/31/10, PR7/11/11>
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63.
Defendants were motivated to engage in this unlawful practice in order to overstate
American Superconductor’s financial results during the Class Period, thereby facilitating the
Secondary Offering and enabling it to be conducted at the best available terms. <IB>
EXCHANGE ACT COUNT ALLEGATIONS
64.
For the purposes of this section of the Complaint, the term “Defendants” refers only
to Defendants American Superconductor, Yurek, Henry and McGahn.
MATERIALLY FALSE AND MISLEADING STATEMENTS
ISSUED DURING THE CLASS PERIOD
65.
The Class Period begins on July 29, 2010. On that date, American Superconductor
issued a press release announcing its financial results for the first quarter of fiscal 2010, the period
ended June 30, 2010. The press release reported increased backlog as of June 30, 2010 of
approximately $952 million compared with approximately $588 million as of March 31, 2010,
related primarily to a multi-year order worth approximately $445 million that the Company received
in May 2010 from Sinovel. 5 In addition, the Company increased its financial guidance for the full
year fiscal 2010. Defendants commented on the results, stating, in pertinent part, as follows:
Defendant Yurek:
American Superconductor has achieved six consecutive quarters of rapid,
profitable growth, and we are now well positioned to exceed our original forecasts
for revenues and earnings for full fiscal 2010. We achieved a record level of
backlog in our first quarter, which gives us very good visibility to continued
profitable growth over the next several years. The bulk of our sales during this
period are expected to continue to be to Asian wind turbine manufacturers who are
building out capacity to meet increased domestic demand and who are also
preparing to export wind turbines to Western markets
.
5
Backlog represents the value of contracts and purchase orders received, less the revenue
recognized to date on those contracts and purchase orders. <10K2009>
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Defendant Henry:
We are increasing our revenue forecast for full year fiscal 2010 from a range of
$415 million to $425 million to a range of $420 million to $430 million. We also
are increasing our net income forecast for the full fiscal year from a range of $37.5
million to $40.0 million, or $0.80 to $0.85 per diluted share, to a range of $39.5
million to $42.0 million, or $0.85 to $0.90 per diluted share. Our non-GAAP net
income guidance is similarly increased from a range of $54.0 million to $56.5
million, or $1.15 to $1.20 per diluted share, to a range of $56.0 million to $58.5
million, or $1.20 to $1.25 per diluted share. <PR7/29/10>
66.
Later that day, Defendants held a conference call with analysts and investors, during
which Defendant Yurek commented on the Company’s relationship with Sinovel, in pertinent part,
as follows:
Defendant Yurek:
Leading our pack of customers, of course is Sinovel, China’s largest and the
world’s third largest wind turbine manufacturer. Sinovel installed approximately
3,500 megawatts of wind power in 2009, accounting for about 25% market share in
China and about 10% globally. Sinovel has publically stated it intends to increase its
market share and [is] nearly doubling its installations in 2010. And we’re right there
beside them providing the advanced wind turbine designs, power electronics and
control systems they need to accomplish their goal of being number one in the
market globally.
On the design side, following the highly successful 3 megawatt product launch with
Sinovel, our full attention has recently been on the company’s new 5 megawatt
wind turbine platform. We are currently going through factory testing of Sinovel’s
first 5 megawatt turbine , which will be China’s most powerful domestically
produced wind turbine.
*
Having said that, Sinovel has recently stated it expects to deploy both 3 megawatt
and 5 megawatt turbines onshore, which we expect will account for the bulk of their
growth in sales in the next couple of years. And . . . we now are developing a whole
new range of wind turbines for Sinovel. This new product development effort will
cover multiple power rings and new drive trains. For competitive reasons, we’re
not permitted to discuss which drive trains will be utilized . . . .
Of course, each new wind turbine platform we develop creates a new channel to
market for our power electronics and control systems, which is what really drives
our top and bottom lines. In May, we announced that we extended our supply of
core components for Sinovel’s 1.5 megawatt wind turbines out through September,
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2013 under a new $445 million contract. Over the next 12 months, we expect to
bring in significant f[i]ll on core component contracts for Sinovel’s 3 megawatt
and 5 megawatt wind turbines.
67.
Also during the call, Defendant Henry commented on American Superconductor’s
favorable financial results and increased guidance, in pertinent part, as follows:
Higher wind turbine component shipments were the main factor in our sequential
and year-over-year growth. AMSC power systems contributed $94.9 million or
[98%] of our total first quarter revenues. This is a 34% increase from $70.7 million
in power systems revenues for the year ago quarter. . . . Sales [to Sinovel]
represented 72% of total revenues in the first fiscal quarter , with wind in total
representing 84% of total revenues. Geographically, we generated 94% of our
revenues outside of the U.S.
*
*
*
. . . Based on the strength of our first fiscal quarter and our core markets, we are
increasing our revenue and EPS forecasts for the full fiscal year.
68.
Defendant Henry also discussed payments received from Sinovel, stating, in pertinent
part, as follows:
. . . As of June 30, 2010 AMSC had $120.7 million in cash, cash equivalents,
marketable securities and restricted cash. This is compared with $155.1 million as of
March 31, 2010. As we experienced two quarters ago, the decline in cash was driven
primarily by timing differences [in] payments from Sinovel .
*
I’d like to point out that a sizable portion of receivables 6 we have with Sinovel as of
June 30 are subsequently requested in July . . . .
69.
During the call, analysts questioned Defendants about American Superconductor’s
business with Sinovel, and Defendants responded, in pertinent part, as follows:
6
“Receivables” refers to the Company’s accounts receivable, which are comprised of amounts
owed by commercial companies and government agencies. <10K2009>
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Ben Kallo – Baird – Analyst:
. . . As Sinovel becomes more of a larger portion of your revenue and the orders get
bigger and you sign on different types of turbines with them how should we think
about margins going directionally there? Is there any pressure on pricing
there? . . .
Defendant Yurek:
So we really have not seen the pricing pressure that you might be thinking about or
might guess about in these orders with Sinovel or others. And I think the reason for
that is we are providing a highly proprietary, highly differentiated set of – product,
the core components the control systems for these wind turbines. So it hasn’t been
there, and don’t anticipate it will be there. . . .
*
*
*
JinMing Liu – Ardour Capital – Analyst:
. . . David, can you give us any color on the power amount last on the receivable
collected by Sinovel in July?
*
*
*
Defendant Henry:
Yeah. On the receivables, we received a payment from Sinovel as I mentioned,
roughly around the first week of July . . . . [I]t was north of $20 million that we
received.
70.
During the call, in response to an analyst’s question about growth in the wind turbine
market, Defendants commented, in pertinent part, as follows:
Defendant Henry:
. . . Sinovel, has talked about substantially increasing their production capacity this
year. And just to be clear, that’s really not dependent upon anything going on in the
U.S. market. That’s really for internal consumption in China. So Sinovel is
preparing in terms of their capacity, meeting the demands that they see in terms of
their backlog and the growth of the China market specifically.
Defendant Yurek:
. . . Sinovel is about a 25% market share in China as of now. And we all see that
growing. So there’s going to be growth. I mentioned in my remarks Sinovel [is]
probably talking about doubling its output this year, which gets them up around 7
gigawatts. And so as the China market for wind continues to grow strongly , look for
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Sinovel and I think our other Chinese licensees to continue to take more market
share. So right now we’re in more than 25% of the wind turbines in China. On a
going-forward basis, we see that going up the 50% plus range.
71.
During the call, the following exchange occurred when an analyst asked about
American Superconductor’s backlog:
Ben Kallo – Baird – Analyst:
Guys, in the past you’ve given a percentage of your revenue guidance that’s [already]
in backlog. Could you update us on that?
Defendant Yurek:
Well, we typically give that at the beginning of the year, and we don’t typically
update that on a quarter-to-quarter basis, but we do have fill, but we still need to get
some in terms of orders we need to get in turn them the rest of this year, but we
wouldn’t have updated our revenue guidance today if we didn’t feel, you know,
pretty confident about getting those orders, booking them and being able to ship
them. <TR7/29/10>
72.
The statements in the July 29, 2010 press release and conference call referenced
above in ¶¶65-71 were each materially false and misleading when made because they misrepresented
and failed to disclose the following adverse facts, which were known to Defendants or recklessly
disregarded by them:
(a)
that Sinovel was not providing American Superconductor with “an irrevocable
letter of credit in the amount of 95% of each shipment value” two weeks before shipment, as
required by the June 2008 Purchase Contract; <IB, 8K6/11/08>
(b)
that American Superconductor was continuing to make contracted shipments
to Sinovel without having received a letter of credit assuring payment, in breach of the June 2008
Purchase Contract’s provision that if the Company did not timely receive a letter of credit, it was
required to postpone delivery; <IB, 8K6/11/08>
(c)
that Sinovel and certain other Chinese customers were not paying American
Superconductor for contracted shipments; <IB, PR4/5/11, PR7/11/11>
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(d)
that American Superconductor was violating its publicly disclosed revenue
recognition policy by recognizing revenue when collectability of payment was not “reasonably
assured” because the Company had not received a letter of credit; <IB, 10K2009>
(e)
that as a result, American Superconductor was improperly recognizing
revenue on contracted shipments to Sinovel and to certain other customers in China; <IB,
PR7/11/11>
(f)
that as a result, Defendants’ statements and opinions concerning American
Superconductor’s projected revenues and earnings were knowingly false when made; <IB> and
(g)
that based on the foregoing, Defendants lacked a reasonable basis for their
positive statements about the Company, its relationship with Sinovel, demand for its products, and
its prospects and growth. <IB>
73.
On August 5, 2010, American Superconductor filed its quarterly report for the period
ended June 30, 2010 with the SEC on Form 10-Q (the “First Quarter 10-Q”). The First Quarter 10-Q
reiterated that the Company’s backlog had increased from approximately $588 million to
approximately $952 million, due primarily to “a substantial new order received from our largest
customer, [Sinovel,]” and represented that, “ [bJased on this level of backlog and our pipeline of
business, we believe we will be able to continue growing revenue in fiscal 2010.
74.
”
The statements in the First Quarter 10-Q referenced above in ¶73 were each
materially false and misleading when made for the reasons stated in ¶72.
75.
On August 9, 2010, Defendant Henry, speaking at the Needham & Company
Inaugural Clean Technology Conference, boasted about American Superconductor’s business with
Sinovel, stating, in pertinent part, as follows:
So now let me talk about Sinovel. They are our largest customer. They represented
72% of our revenues in the first quarter and our relationship started back in 2005, and
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since that time we worked very closely with them, providing them 24 by 7 on site
support . . . for the 1.5 megawatt, 3 megawatt and 5 megawatt turbines. Thousands
of these have been installed to-date, mostly 1.5 megawatt, every single one of them
operated by our proprietary power electronics that [include] hardware and software.
All that represents more than 1 billion orders . . . to-date and Sinovel as result of the
efforts to . . . help them, move along in the market. They are now the number three
wind turbine producer in the world and number one in China and last year they
installed more than 3900 megawatts in 2009. Their aim, their public aim is to be
number one in the world in the next several years. Just to give you an idea what’s
happening that would probably requiring a doubling of that production from the 3900
megawatts that they had in 2009, and our relationship with Sinovel keeps getting
stronger.
In May 2010, we entered into a new multi-year contract $445 million for 1.5
megawatt, core electrical components. Shipments under that contract are expected
to begin in April of 2011 and that contract will go until September 2013. On 5
megawatt they’ve ordered . . . six additional electrical control systems. For 5
megawatt turbines, we are under a contract today; a $100 million contract for 3
megawatts electrical components, that expires in December 2011 and we just
recently also announced an expansion of our relationship with Sinovel, we’re
going to be providing them designs for different drive trains and we [are not
allowed] to disclose what those drive trains are for competitive reasons. But, expect
that those models would go into the production sometime in the 2012 timeframe. So,
the bottom-line is that the Sinovel is a very important customer to us. They are
growing rapidly and we would expect that those revenues will continue to grow
going forward. <TR8/9/10>
76.
The statements referenced above in ¶75 were each materially false and misleading
when made for the reasons stated in ¶72.
77.
The following day, on August 10, 2010, Defendant Henry spoke at the Pacific Crest
Securities Technology Leadership Forum. Defendant Henry continued to highlight American
Superconductor’s relationship with Sinovel and favorable financial prospects, stating, in pertinent
part, as follows:
But our relationship with Sinovel keeps getting stronger . In May 2010, we signed a
new $445 million contract with them that is to provide core electrical components
starting in April 2011 out to September of 2013. So we are a high-growth company
but we also have a lot of visibility in terms of our backlog which now is close to $1
billion. And obviously the majority of that is with Sinovel .
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But that is not only just 1.5 megawatt components but also 3 megawatts as well. We
are selling electrical components to them for their 3-megawatt turbines. Sinovel
turbines are up right now in Shanghai Harbor, a demonstration project for the expo.
So this is China’s largest offshore project. Those are Sinovel turbines and our
components inside of those products.
And then also we are selling – the 5 megawatt is expected to enter production here
towards the end of the year and they have ordered their first set of electrical control
systems for those. So we have a large – Sinovel has got a large product line. We
have also entered into licenses with them to sell them additional technologies, and
while I’m not at liberty to disclose what those additional technologies are for
competitive reasons, but suffice to say the relationship with Sinovel is broadening.
It is getting stronger and we expect our revenues with Sinovel to grow going
forward .
*
. . . Our revenue has been growing very strongly over the last several years at a
68% growth rate. We have guided to $420 million to $430 million of revenue this
year . That is above – over the $315 million of revenue we had last fiscal year. And
that is supported by an overall backlog that’s close to $1 billion. This is firm
backlog. These aren’t forecasts. These are firm contracts that we have in place .
And that translates into earnings-per-share growth of roughly 75% this year to $1.20
to $1.25 a share on a non-GAAP basis.
So the business is moving along nicely. We’ve had 14 consecutive quarters of
revenue growth, six consecutive quarters of earnings growth. We have got a strong
backlog, strong balance sheet. And we are positioned well to continue growing in
the future.
78.
During the conference, when an analyst expressed concerns about pricing pressure
from Sinovel, and Defendant Henry provided the following reassurances:
Well, I think when we signed the new contract with Sinovel for $445 million,
obviously we – Sinovel saw it and we did provide a price reduction for them . But
one of the things you need to keep in mind when you think about our relationship
with Sinovel is that . . . we are not just a component supplier .
So if we were just a component supplier, I think the price pressure on us would be a
lot greater. But we provide them other value than just selling them parts. So we
are part of their engineering team. We are part of their R&D team. We have
helped them grow to the point where they are today. And they realize that value
.
and then we remind them of that value when we are talking about things like price
*
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So there are many opportunities that are untapped still for cost savings, and we think
that concerns about price pressures and the fact that we may not have leverage
with Sinovel, those concerns are largely unfounded . . . . <TR8/10/10>
79.
The statements referenced above in ¶¶77-78 were each materially false and
misleading when made for the reasons stated in ¶72.
80.
On November 2, 2010, American Superconductor issued a press release announcing
its financial results for the second quarter of fiscal 2010, the period ended September 30, 2010. For
the quarter, the Company reported that revenues increased 36% to $101.5 million, as compared to
$74.7 million reported in the second quarter of fiscal 2009. Net income increased to $10 million, or
$0.22 per diluted share, as compared to net income of $4.3 million, or $0.10 per diluted share for the
second quarter of fiscal 2009, and non-GAAP net income increased to $14.6 million, or $0.32 per
diluted share, as compared to non-GAAP net income of $8.7 million, or $0.19 per diluted share for
the second quarter of fiscal 2009. Gross margins increased to 40.7%, from 38.9% in the second
quarter of fiscal 2009. The press release reported record backlog as of September 30, 2010 of
approximately $956 million compared with approximately $952 million reported for the previous
fiscal quarter. In the press release, the Company once again increased its financial guidance for the
full year fiscal 2010. Defendants commented on the results, stating, in pertinent part, as follows:
Defendant Yurek:
In the second quarter – our fifteenth consecutive quarter of sequential revenue
growth – we generated new quarterly records for both gross margin and earnings
.
*
Defendant Henry:
We are increasing our fiscal 2010 financial forecast for both revenues and
earnings. Our revenue forecast for the full fiscal year has increased from a range
of $420 million to $430 million to a range of $430 million to $440 million ,
representing growth in excess of 36 percent compared with fiscal 2009. Our net
income forecast for the full fiscal year has increased from a range of $39.5 million
to $42.0 million, or $0.85 to $0.90 per diluted share, to a range of $44.0 million to
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$46.5 million, or $0.95 to $1.00 per diluted share. Our non-GAAP net income
guidance also is being increased from a range of $56.0 million to $58.5 million, or
$1.20 to $1.25 per diluted share, to a range of $60.5 million to $63.0 million, or
$1.30 to $1.35 per diluted share . <PR11/2/10>
81.
Later that day, Defendants held a conference call with analysts and investors to
discuss the Company’s second quarter financial results. During the call, Defendants made positive
statements regarding the Company’s business and relationship with Sinovel. Defendant Yurek
stated, in pertinent part, as follows:
In the second fiscal quarter, we also increased our total backlog quarter-overquarter to a new record level of $956 million. This backlog provides us with great
visibility into what we expect will be a strong second half of fiscal 2010, as well as
providing a solid base for continued growth in fiscal 2011. We are raising our
financial forecast again for the fiscal year, and now expect to grow revenues in
excess of 36% year-over-year while increasing non-GAAP net income by more
than 86% year-over-year. Our wind power segment continues to be the primary
driver of this strong growth today .
*
With five Chinese wind turbine manufacturers as AMSC customers, we are
benefiting in a substantial way from this growth and expect to continue to benefit
for many years to come. One important reason for this, is our close relationship
with Sinovel .
*
We, of course, will continue to do everything we can to support Sinovel in its
mission to be number one globally. Through June 30, 2010, we have helped
Sinovel successfully scale production of 1.5 megawatt and 3 megawatt wind
turbines that utilize doubly fed induction drive trains, and we have already longterm contracts in place with Sinovel for the supply of core electrical components
and control systems for those wind turbines. More orders for 3 megawatt wind
turbine core electrical components and control systems are expected from Sinovel
in the next 6 to 12 months .
*
Sinovel’s 5 megawatt turbine was of course designed by and co[-]developed with
AMSC. So we also expect a first volume order for 5 megawatt core electrical
components over the next 6 to 12 months. And the future growth of the Sinovel
AMSC juggernaut doesn’t stop there, by any means. A few months ago, we
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disclosed that we are working with Sinovel on a whole new range of multimegawatt wind turbines that incorporated different drive trains
.
*
*
*
In order to effectively serve the global market, however Sinovel plans to offer an
array of both drive trains and power ratings. To help Sinovel achieve this objective,
we are now working with them to develop a doubly fed induction wind turbine with
an even higher power rating of 6 megawatt which Sinovel sees as a way to further
differentiate itself in the all-important Chinese wind market. In addition, we are
now developing for Sinovel 2, 3, 5 and 6 megawatt systems that incorporate stateof-the-art full conversion drive trains .
*
*
*
As many of you know, we have always been Sinovel’s preferred supplier of core
electrical components and control systems. For all of the new full conversion wind
turbine platforms, however; AMSC is the exclusive supplier of core electrical
components and control systems. So, we expect to continue to grow our sales to
Sinovel for years to come .
82.
Defendant Henry commented on American Superconductor’s favorable financial
results and increased guidance, stating, in pertinent part, as follows:
. . . As you’ve all heard, AMSC delivered its strongest financial performance to date
in the second fiscal quarter. We generated a 36% year-over-year increase in
revenues and achieved our 15th consecutive quarter of sequential revenue growth
.
We also maintained solid gross and operating margins which helped us grow our
earnings to a new record level. AMSC generated $101.5 million in revenues for the
second quarter of fiscal year 2010. This is up approximately 4% from $97.2
million for the first quarter of fiscal 2010, and 36% from $74.7 million for the
second quarter of fiscal 2009 .
Shipments of our wind turbine power electronic control systems and components to
customers in the Asia-Pacific region accounted for the majority of this growth. We
expect this market to continue to be very strong for us through the remainder of
this year, next year, and beyond. Sales to Sinovel represented 79% of total
revenues in the second fiscal quarter, with wind representing 91% of total
revenues .
*
The payments we receive from Sinovel increased in the second quarter compared
to the first quarter, however; billings increased as well resulting in higher
receivables compared to second quarter. Our days of inventory for the second
quarter of 2010 increased to 69 days from 64 days in Q1 of fiscal 2010. This was
primarily the result of inventory growth to support third quarter shipments.
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. . . Based on the orders we received in the second quarter, strong visibility into our
business pipeline , and favorable foreign exchange tailwinds from the recent
strengthening of the Renminbi, we are increasing our fiscal 2010 financial forecast
for both revenues and earnings. Our revenue forecast for the full fiscal year has
increased from a range of $420 million to $430 million to a range of $430 million
to $440 million, representing growth in excess of 36% compared with fiscal 2009.
We have 99% of the orders needed to reach the low-end of this guidance range
either shipped or on backlog as of September 30 .
*
Looking forward to the second half of the full fiscal year, we expect continued
sequential revenue growth with revenues up modestly in the third quarter and
stronger growth for the fourth quarter. And we expect growth to continue in our next
fiscal year because of our focus on the Chinese and broader Asia Pacific wind energy
and power grid markets.
83.
During the call, analysts asked about the Company’s pipeline of business from
Sinovel, and Defendants responded, in pertinent part, as follows:
Carter Shoop – Deutsche Bank – Analyst:
. . . [W]as there any noticeable shift at Sinovel in the quarter sequentially between the
3 megawatt and 1.5 megawatt shipments in the quarter, and then as a follow-up can
you discuss your outlook for 3 megawatt turbines for the onshore market in China
over the next 6 to 12 months . . . ?
Defendant Yurek:
So, we’re shipping core electrical components and control systems for both 1.5
megawatt and 3 megawatt on predetermined schedules , Carter, so there’s been no
shift from our contracts that are in place here . Of course you know, Sinovel has
always surprised us by accelerating things in the past, but that’s not the case right
now, we’re shipping on schedule for both of those.
As I said earlier in the call though, and I think this may be partly what you’re getting
at, and that is the new offshore tender that Sinovel won, 600 megawatt is all going to
be 3 megawatt wind turbines, so as soon as those get going that will flood in off of
the current orders and we said, we expect more orders for 3 megawatt wind turbines
in the next 6 to 12 months. We think Sinovel has clearly stated it’s also going to
deploy 3 megawatt for onshore applications in China as well . . . .
84.
In response to an analyst’s question regarding the difference between a preferred
supplier and exclusive supplier, Defendant Yurek stated, in pertinent part:
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Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 31 of 81
So, preferred supplier, we’ve always used the term right of first refusal, it turns out
when you go back and look at the contracts, it actually says we are the preferred
supplier . . . . So what does it mean? It means that we are going to be supplying the
core electrical components and control systems for Sinovel as we have been.
*
*
*
. . . In the new contract [with Sinovel], on the full conversion systems, we made
sure the language was exclusive supplier. Because even with all those protections
in there, I don’t like the wording, so I like exclusive. Sinovel acknowledges that we
should be the exclusive supplier and has so named us in the contracts. . . .
<TR11/2/10>
85.
Defendants’ positive statements caused the Company’s stock price to rise from a
closing price of $32.50 per share on November 1, 2010, to close at $36.55 per share on November 2,
2010 – an increase of approximately 12%. <YHO, PI>
86.
The statements in the November 2, 2010 press release and conference call referenced
above in ¶¶80-84 were each materially false and misleading when made because they misrepresented
and failed to disclose the following adverse facts, which were known to Defendants or recklessly
disregarded by them:
(a)
that Sinovel was not providing American Superconductor with “an irrevocable
letter of credit in the amount of 95% of each shipment value” two weeks before shipment, as
required by the June 2008 Purchase Contract; <IB, 8K6/11/08>
(b)
that American Superconductor was continuing to make contracted shipments
to Sinovel without having received a letter of credit assuring payment, in breach of the June 2008
Purchase Contract’s provision that if the Company did not timely receive a letter of credit, it was
required to postpone delivery; <IB, 8K6/11/08>
(c)
that Sinovel and certain other Chinese customers were not paying American
Superconductor for contracted shipments; <IB, PR4/5/11, PR7/11/11>
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(d)
that American Superconductor was violating its publicly disclosed revenue
recognition policy by recognizing revenue when collectability of payment was not “reasonably
assured” because the Company had not received a letter of credit; <IB, 10K2009>
(e)
that as a result, American Superconductor was improperly recognizing
revenue on contracted shipments to Sinovel and to certain other customers in China, and the
Company’s second quarter revenues were overstated by at least $3.5 million; <PR11/2/10,
PR7/11/11>
(f)
that the Company lacked adequate internal and financial controls; <IB,
(g)
that as a result, American Superconductor’s financial statements for the
8K7/11/11>
second quarter of fiscal 2010, as Defendants have now admitted, “should no longer be relied upon,”
were not fairly presented in conformity with GAAP and were materially false and misleading; <IB,
PR7/11/11>
(h)
that as a result, Defendants’ statements and opinions concerning American
Superconductor’s projected revenues and earnings were knowingly false when made; <IB> and
(i)
that based on the foregoing, Defendants lacked a reasonable basis for their
positive statements about the Company, its relationship with Sinovel, demand for its products, and
its prospects and growth. <IB>
87.
On November 4, 2010, American Superconductor filed its quarterly report for the
period ended September 30, 2010 with the SEC on Form 10-Q (the “Second Quarter 10-Q”). The
Second Quarter 10-Q, which was signed by Defendants Yurek and Henry, repeated American
Superconductor’s financial results for the second quarter of fiscal 2010, which were represented to
have been presented in conformity with GAAP. The Second Quarter 10-Q also reiterated that the
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Company’s backlog had increased to approximately $956 million, and represented that: “The
increase in backlog was primarily the result of a substantial new order received from our largest
customer, Sinovel . . . . Based on this level of backlog and our pipeline of business, we believe we
will be able to continue growing revenue in the remainder of fiscal 2010.
88.
”
In the Second Quarter 10-Q, Defendants Yurek and Henry also certified the
effectiveness of American Superconductor’s internal and disclosure controls, pursuant to §302 of the
Sarbanes-Oxley Act of 2002, as follows:
I, [Defendants Yurek and Henry], certify that:
I have reviewed this report on Form 10-Q of American Superconductor
Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
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external purposes in accordance with generally accepted accounting
principles;
5.
89.
c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control
over financial reporting that occurred during the registrant’s most
recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over
financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant’s
internal control over financial reporting. <10Q9/30/10>
The statements in the First Quarter 10-Q referenced above in ¶¶87-88 were each
materially false and misleading when made for the reasons stated in ¶86.
90.
On November 16, 2010, Defendant McGahn, speaking at the Jefferies Global Clean
Technology Conference, boasted about Sinovel’s growing business and the strength of American
Superconductor’s relationship with Sinovel, stating, in pertinent part, as follows:
. . . [WJe have almost $1 billion in sales backlog, and backlog to us means firm
orders with delivery dates, specific products, specific customer, that kind of thing
.
*
*
*
. . . Sinovel is the number one player today in wind in China. That’s happened, as I
mentioned, just over the past four or five years. They have about 25% market share
coming out of 2009. We expect that this year will be even better for Sinovel, and on
a worldwide basis they’re number three with 9% global market share.
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*
The stated external goal of Sinovel is to be the number one worldwide wind turbine
manufacturer within five years.
*
. . . [T]he 1.5-megawatt and the 3-megawatt turbine, that’s what’s in production
today. Those are doubly-fed drive trains. They’re fielding . . . a 5-megawatt
prototype this year that’ll go into production with the 5 megawatt next year, then
we’ll get the 6 megawatt to prototype next year. So, you can see they’re rapidly
growing and they’re also looking to overtake, on a technology basis, what people
are doing in the West, and AMSC is an enabler of making that happen.
We announced recently, just in the past few weeks, we have an additional
relationship with Sinovel to license them a 2, a 3, a 5 and a 6 with a full conversion
drive train. So, they’re diversifying their product base, we’re helping them to do
that. . . . [T]he two turbines in production, the 1.5 and the 3, to date we received
more than $1 billion in orders for our electrical systems.
And going forward, we have the exclusive right for the drive train for the full
conversion to supply our electrical systems. In each of our partnerships, we either
have a right of first refusal to supply the electrical systems or an exclusive right to
supply. A lot of people ask, “This sounds like a wonderful business, you’re growing
very rapidly. How do you make sure, as the management team that we protect this
business and we allow it to continue to grow?” We do that on multiple fronts, so it
starts with a contract. Usually in many other cases with customers and the contracts
we secure, we do multiple years. That allows us to insulate ourselves from pricing
pressure year-to-year. And as I mentioned, either there’s some exclusive right to
supply or a right of first refusal to supply the electrical systems.
91.
During the conference, Defendant McGahn also commented on the Company’s
revenue growth and backlog, stating, in pertinent part, as follows:
From a financial standpoint, one of the unique aspects of the company is we’re
growing and we’re consistently growing quarter-to-quarter. Over the past 15
quarters, we’ve demonstrated revenue growth.
We’re the only publicly-traded
power technologies company globally that has this track record. We’ve been able to
sustain this rapid growth even though the economy, as I said, hasn’t been the best of
times. You can see our revenue where we’ve gone from 50 or so million back in
2006, now with visibility in excess of 430 million in 2010. Our backlog today for
2010 represents 99% of that number. Our fiscal year ends at the end of March.
So, we’re very close to being able to say we have all of the revenue for this year
already in backlog. <TR11/16/10>
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92.
The statements referenced above in ¶¶90-91 were each materially false and
misleading when made for the reasons stated in ¶86.
93.
On Saturday, December 11, 2010, Barron’s ran a story in which it reported that
American Superconductor might be in for a decline. Specifically, Barron’s reported that information
contained in documents that were filed in anticipation of Sinovel’s January 6, 2011 initial public
offering in China revealed that Sinovel was suffering from a glut of inventory, and that there were
discrepancies between American Superconductor’s reported sales to Sinovel and Sinovel’s reported
purchases. Defendant Yurek, however, denied that there were any problems and specifically
informed the Barron’s reporter that: “We don’t see any issues there.” As reported by Barron’s:
Greg Yurek kept American Superconductor aloft through two decades as a public
company, searching for a profitable market for its high-power wire. The company
rode the dot-com surge to a $75 share price, then back down to $3.50 as it amassed
$400 million in losses and one of the Nasdaq’s highest short interests.
Four years ago, the superconductor specialists bought an Austrian firm called
Windtec that designs wind-turbine generators. Now, sales are growing at a 70%
annual clip, to an expected $450 million for the fiscal year ending March 2011.
AMSC supplies China’s leading wind-turbine maker in that nation’s construction of
a great wall of wind power.
Yurek’s persistence has been rewarded. “It’s growth, growth, growth, says the chief
executive, who co-founded AMSC in 1987. “ Our revenues are going to continue
to grow, going forward. I don’t see any slowdown .”
But the optimism in Yurek’s outlook, and in AMSC’s high valuation, may be
giving insufficient weight to signs that China’s boom in wind power is slowing.
Wind farms stand idle because the power grid doesn’t yet reach them. An industry
of well-capitalized wind-turbine makers has arisen with the collective capacity to
more than satisfy their nation’s needs; in consequence, prices are dropping while
receivables and inventories pile up on manufacturers’ balance sheets. These
worrisome trends are all visible in an initial offering prospectus just filed on the
Shanghai exchange by Sinovel Wind Group, the turbine maker that has accounted
for almost 80% of AMSC revenues.
Sinovel’s production has steadily outstripped its sales. Sooner or later, Sinovel will
have to rationalize its levels of production and inventory – and in turn, its
voracious purchases from AMSC. That risk isn’t priced into AMSC shares.
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*
On Friday, Sinovel got state approval for its $525 million initial public offer. It also
has a $6.5 billion commitment from a Chinese bank. According to the prospectus,
sales grew about 70% in the first half of 2010 and new contract awards have built its
backlog to 10 gigawatts worth of turbines.
But as fast as Sinovel has grown, the prospectus shows that its production has
outpaced shipments by about a third. Consequently . . . average inventories piled
up in the six months ended June to more than 270 days’ cost of materials. The
Chinese prospectus reports Sinovel’s purchases from AMSC for [the] last few
years, and those numbers roughly track the sales to Sinovel reported by AMSC.
The only exception is the first half of calendar year 2010, when Sinovel shows
some $70 million worth of purchases. AMSC reported selling about twice that
amount. The prospectus also shows that Sinovel has been buying electroniccontrol systems from another company.
“We don’t see any issues there ,” says AMSC’s Yurek. His electronics will be in
the bigger turbines that Sinovel is planning for China’s offshore wind farms. Within
five years, Sinovel aims to be the world’s leading turbine maker.
Now that Sinovel plans to go public, AMSC investors can see if that growth matches
AMSC’s towering valuation. <BA12/11/10>
94.
In response to the Barron’s article, American Superconductor common stock fell
from a closing price of $33.48 per share on Friday, December 10, 2010, to close at $30.72 per share
on Monday, December 13, 2010 – a decline of $2.76 per share, or more than 9%. <YHO, PI>
95.
Defendant Yurek’s reassurances in the Barron’s article, referenced above in ¶93, that:
“[o]ur revenues are going to continue to grow, going forward. I don’t see any slowdown” and “[w]e
don’t see any issues there” were materially false and misleading for the reasons stated in ¶86. Those
materially false and misleading reassurances had the intended effect of preventing a more substantial
decline in the price of American Superconductor stock.
96.
On January 11, 2011, during the Needham & Company Growth Conference,
Defendant Yurek continued to make positive statements about the Company’s relationship with
Sinovel, stating, in pertinent part, as follows:
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At the same time, we are growing aggressively in wind in the Asia-Pacific
region. . . . We have a major customer in Sinovel Wind . You may have heard of
them through us or otherwise, but they are our largest customer. They are 70% of
our revenues year-to-date through September. And so that’s a substantial amount of
our revenues.
And we do a lot to diversify away from them in terms of customers and markets
and products of course. Sinovel keeps giving us big orders. And I’m not going to
turn down any of these big orders. Now, more of those . . . are going to be coming
this year, I believe. So we’ll keep taking those orders.
*
They’re continuing to get orders for 3 megawatt wind turbines, quite a bit of them,
a lot of gigawatts’ worth have been announced in the last month.
We had an order from Sinovel for the core components for 3 megawatt wind
turbines back in September of 2009, about an $100 million order, that goes
through the December of 2011. With those new orders Sinovel already has – for
the new orders they have for 3 megawatt machines, that more than takes up the
order that they had previously given us.
So we have been telling people – we told people this back in November at the
offering – the stock offering we did, in the next 6 to 12 months look for the next big
order from Sinovel for 3 megawatt machines. They’re going to need them and we
expect to get that order.
For 5 megawatt machines we have helped Sinovel go through the factory testing.
The prototype has been erected. And we expect – they expect to be in volume
production of 5 megawatt wind turbines by the end of this year. So look in that
same 6 to 12 month period of time for the first volume order for 5 megawatt
machines. So they will continue to grow.
97.
Defendant Yurek also made the following positive statements about American
Superconductor’s financial prospects:
And in fact, when we look at our five-year model , which we update on a very regular
basis, as a company, that five-year model says we are at $1 billion in revenue in
year five with in excess of 20% operating margins . . . .
We think we can accelerate that. We can cut some time off of that and get to the
$1 billion, 20% plus operating margins sooner . <TR1/11/11>
98.
The statements referenced above in ¶¶96-97 were each materially false and
misleading when made for the reasons stated in ¶86.
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Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 39 of 81
99.
On February 1, 2011, American Superconductor issued a press release announcing its
financial results for the third quarter of fiscal 2010, the period ended December 31, 2010. For the
quarter, the Company reported that revenues increased 42% to $114.2 million, as compared to
$80.7 million reported in the third quarter of fiscal 2009. Net income increased to $16 million, or
$0.33 per diluted share, as compared to net income of $5.2 million, or $0.11 per diluted share for the
third quarter of fiscal 2009, and non-GAAP net income increased to $19.8 million, or $0.40 per
diluted share, as compared to non-GAAP net income of $9.1 million, or $0.20 per diluted share for
the third quarter of fiscal 2009. Gross margins increased to 40.7%, from 37.5% in the third quarter
of fiscal 2009. The press release reported backlog as of December 31, 2010 of approximately
$883 million compared with approximately $956 million reported for the previous fiscal quarter.
100.
In the press release, Defendant Yurek commented that the results were the
Company’s “sixteenth consecutive quarter of sequential revenue growth
” and that “[s]ales in the
wind energy market, particularly in Asia, are expected to continue to be the growth engine for our
company in the near term. ” Finally, the press release announced that the Company was once again
increasing its financial guidance for the full year fiscal 2010. Defendants commented, in pertinent
part, as follows:
Defendant Yurek:
Until recently, our longer term plan has been to achieve $1 billion in total revenues
with operating margins in excess of 20 percent in our fiscal year 2015.
However,
with the capital we raised in our November 2010 equity offering, the strong global
business and technology platforms we have built in the wind energy and power grid
sectors, and the new growth strategies we are implementing, we believe we will be
able to accelerate achievement of this objective by at least one year.
Defendant Henry:
We expect to end our fiscal 2010 with another quarter of sequential revenue
growth and strong profitability. For the full year, we continue to expect revenues
in the range of $430 million to $440 million. However, we are raising our net
income forecast for the full fiscal year, which we expect will enable us to more
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than offset the dilutive effect of our recent stock offering on our earnings per
share. Our net income forecast is being increased from a range of $44.0 million to
$46.5 million, or $0.95 to $1.00 per diluted share, to a range of $48.0 million to
$50.0 million, or $0.99 to $1.04 per diluted share. We also are increasing our nonGAAP net income guidance from a range of $60.5 million to $63.0 million, or $1.30
to $1.35 per diluted share, to a range of $64.5 million to $66.5 million, or $1.33 to
$1.38 per diluted share . <PR2/1/11>
101. Later that day, Defendants held a conference call with analysts and investors, during
which they continued to positively portray American Superconductor’s relationship with Sinovel, as
well as the Company’s financial condition and prospects, stating, in pertinent part, as follows:
Defendant Yurek:
. . . We are proud to be reporting to you on our 16th consecutive quarter of revenue
growth, and a record quarter of profitability here at AMSC. . . . [WJe expect to end
fiscal year 2010 in powerful fashion, as we achieve another quarter of sequential
revenue growth with gross and operating margins at or near record levels in our
fourth fiscal quarter.
*
One way that we expect to capture a greater share of the market in China
specifically is through our largest customer, Sinovel. Sinovel . . . just completed a
successful IPO on the Shanghai Exchange, raising $1.4 billion. Sinovel’s stated use
of proceeds from its IPO is to help it fuel its production of multi-megawatt wind
turbines that were developed with AMSC and powered by AMSC power electronics
and controls.
We expect to close follow-on orders from Sinovel in the next three to nine months
for 3 megawatt and 5 megawatt wind turbine core electronic components and
control systems, which bodes well for our business later in fiscal 2011 and beyond.
We believe Sinovel is well positioned to capture a market share north of 30% in
China in the years ahead. . . . [WJe will do all we can to support their growth plans
both within China and in western markets.
*
So, fiscal 2010 has been a tremendous success thus far. We look forward to
closing the year in strong fashion and are working aggressively to meet our
objective of achieving $1 billion in revenues with operating margins in excess of
20% within four fiscal years.
*
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Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 41 of 81
. . . We’ve had another excellent quarter to report to you today and we expect to
end fiscal 2010 in strong fashion by increasing both revenues and earnings yearover-year to new record levels. 38% growth in revenue year-over-year at the
midrange, 100% growth in earnings per share at the midrange as well .
Defendant Henry:
. . . This marked our 16th consecutive quarter of sequential revenue growth, and
was also a record earnings quarter. In fact, our net income for the third fiscal
quarter more than tripled year-over-year. Revenues for the third quarter of fiscal
year 2010 were a record $114.2 million. This is up approximately 12% from
$101.5 million for the second quarter of fiscal 2010, and 42% from $80.7 million
for the second quarter of fiscal 2009.
. . . [SJhipments of wind turbine power electronics and control systems accounted
for the majority of our year-over-year revenue growth
. . . . We generated
....
approximately 82% of our third quarter revenues in the wind power sector
*
*
*
Sales to China’s Sinovel Wind represented 73% of total revenues for the third
fiscal quarter, down from the previous quarter because of the increase in power grid
revenues in third quarter compared with second quarter. Our backlog as of
December 31, 2010 stood at approximately $883 million , down from $956 million
as of September 30, 2010, and up from $546 million as of December 31, 2009. As
we said in the past, that due to the long-term nature of many of our customer
contracts, bookings tend to be lumpy on a quarter-to-quarter basis. In the third
fiscal quarter, our bookings were in excess of $50 million .
*
*
*
We expect to enter our new fiscal year 2011 on April 1, 2011 with a strong total
backlog, will which give us very good visibility to fiscal 2011 revenues, and beyond.
*
*
*
This guidance implies a forecast of fourth quarter non-GAAP net income in a
range of $17.2 million to $19.2 million or $0.32 to $0.37 per diluted share.
It is important to note that we expect that both gross and operating margins in the
fourth fiscal quarter will be at or near record levels on record revenues.
102. Defendant Henry also commented on the Company’s accounts receivable and
payments from Sinovel, in pertinent part, as follows:
I would like to take a moment and address our accounts receivable. For most of this
fiscal year, Sinovel has been paying us between 60 and 90 days after shipment. All
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Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 42 of 81
shipments to Sinovel during the third quarter occurred within the last 60 days of
the quarter . So, while DSO, based on average accounts receivable, increased from
76 days in the second fiscal quarter to 83 days in the third fiscal quarter, payments
have not been delayed despite the reported increase in accounts receivable. So far
this quarter we received $30 million from Sinovel and more is expected soon .
<TR2/1/11>
103. The statements in the February 1, 2011 press release and conference call referenced
above in ¶¶99-102 were each materially false and misleading when made because they
misrepresented and failed to disclose the following adverse facts, which were known to Defendants
or recklessly disregarded by them:
(a)
that Sinovel was not providing American Superconductor with “an irrevocable
letter of credit in the amount of 95% of each shipment value” two weeks before shipment, as
required by the June 2008 Purchase Contract; <IB, 8K6/11/08>
(b)
that American Superconductor was continuing to make contracted shipments
to Sinovel without having received a letter of credit assuring payment, in breach of the June 2008
Purchase Contract’s provision that if the Company did not timely receive a letter of credit, it was
required to postpone delivery; <IB, 8K6/11/08>
(c)
that Sinovel and certain other Chinese customers were not paying American
Superconductor for contracted shipments; <IB, PR4/5/11, PR7/11/11>
(d)
that American Superconductor was violating its publicly disclosed revenue
recognition policy by recognizing revenue when collectability of payment was not “reasonably
assured” because the Company had not received a letter of credit; <IB, 10K2009>
(e)
that as a result, American Superconductor was improperly recognizing
revenue on contracted shipments to Sinovel and to certain other customers in China, the Company’s
third quarter revenues were overstated by at least $71.2 million, and the Company’s second and third
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quarter revenues were overstated by a total of at least $74.7 million; <PR11/2/10, PR2/1/11,
PR7/11/11>
(f)
that the Company lacked adequate internal and financial controls; <IB,
(g)
that as a result, American Superconductor’s financial statements for the
8K7/11/11>
second and third quarter of fiscal 2010, as Defendants have now admitted, “should no longer be
relied upon,” were not fairly presented in conformity with GAAP and were materially false and
misleading; <IB, PR7/11/11>
(h)
that as a result, Defendants’ statements and opinions concerning American
Superconductor’s projected revenues and earnings were knowingly false when made; <IB> and
(i)
that based on the foregoing, Defendants lacked a reasonable basis for their
positive statements about the Company, its relationship with Sinovel, demand for its products, and
its prospects and growth. <IB>
104. On February 3, 2011, American Superconductor filed its quarterly report for the
period ended December 31, 2010 with the SEC on Form 10-Q (the “Third Quarter 10-Q”). The
Third Quarter 10-Q, which was signed by Defendants Yurek and Henry, repeated American
Superconductor’s financial results for the third quarter of fiscal 2010, which were represented to
have been presented in conformity with GAAP. The Third Quarter 10-Q also reiterated that the
Company’s backlog as of December 31, 2010 was approximately $883 million, and represented that:
“The increase in backlog was primarily the result of a substantial new order received from our
largest customer, Sinovel . . . . Based on this level of backlog and our pipeline of business, we
believe we are well positioned to continue our growth
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Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 44 of 81
105.
The Third Quarter 10-Q contained certifications of the effectiveness of American
Superconductor’s internal and disclosure controls, signed by Defendants Yurek and Henry, identical
to the certification quoted above in ¶87. <10Q12/31/10>
106.
The statements in the Third Quarter 10-Q referenced above in ¶¶104-05 were each
materially false and misleading when made for the reasons stated in ¶103.
107.
On February 16, 2011, Defendant Yurek, speaking at the Deutsche Bank Small &
Mid-Cap Conference, highlighted Sinovel’s growth prospects and the Company’s relationship with
Sinovel, stating, in pertinent part, as follows:
. . . So in 2010, Sinovel, which was not in the business of making wind turbines in
China in 2005 started up in 2006 and now are the third largest wind turbine
manufacturer in the world behind Vestas number one and GE number two. They are
the largest in China for the last two years, as a matter of fact, producing 1.5
megawatt and 3-megawatt doubly-fed induction machines . . . . So that’s been a key
part of our growth story over the last couple of years.
*
[In] 2011, Sinovel expands to now include 5-megawatt machines into production.
*
As we go out to the next year, 2012, we estimate that Sinovel will be in production
with their 6-megawatt machine. They just announced this past week, in fact that they
expect this year to have their first 6-megawatt machines up and through factory
testing and so forth. So next year, we expect them to be in volume production.
*
. . . They just raised $1.4 billion in an IPO, January 6th of this year. So they have
plenty of cash, they have about US$6.5 billion line of credit from a Chinese bank to
develop their business outside of China. They have a clear stated goal to be number
one in the world in the next few years.
*
So we received over $1 billion worth of orders from Sinove l. As I said, they are our
largest customer. They are going to continue to grow. We’ve added . . . new
designs for them including that 6-megawatt full conversion system they expect to
be in production next year. So [a] very strong relationship with Sinovel that
continues to get stronger as we move forward.
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Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 45 of 81
108.
In addition, Defendant Yurek reaffirmed the Company’s guidance:
. . . Our fiscal year 2010, which started April 1st 2010, ends in about a month and a
half. We forecasted $430 million to $440 million in revenue; that will be about a
38% growth year-over-year in revenue. At the same time, we have very good
operating margins; as I said, we’re profitable, we’re generating cash, as of the yearto-date through December 31, our consolidated operating margin is about 17%.
*
*
*
So we’re looking at a very strong, nearly 100% growth in our earnings year-overyear as well, in the current fiscal year, which ends [in] a month and a half. So we
expect to continue growing the top line and the bottom line next year and get into
those billion dollar in excess of 20% operating margins within four years . . . .
<TR2/16/11>
109.
The statements referenced above in ¶¶107-08 were each materially false and
misleading when made for the reasons stated in ¶103.
110.
The following week, on February 23, 2011, Defendant Yurek spoke at the Jefferies
Global Clean Technology Conference. Defendant Yurek continued to boast about American
Superconductor’s business with Sinovel, and once again reaffirmed the Company’s guidance,
stating, in pertinent part, as follows:
. . . This year Sinovel continues in production with the 1.5 and 3 megawatt wind
turbines and adds in there the 5 megawatt wind turbines. So, in terms of the 3
megawatt systems , which they’ve been producing and by the way are using [in] the
first off-shore wind farm in China, in 2010. We expect to see a next volume order
from Sinovel come through in the next three to nine months period of time ,
because they have new orders for 3 megawatt wind turbines, they’re going to have to
re-supply – or get [a] re-supply from us of the core components for the 3 megawatt
systems.
They’ve been through the factory testing and field testing of the 5 megawatt system.
They expect to start volume production later this year, so look for that first small
volume production order from Sinovel for 5 megawatt systems.
*
*
*
As we go to the following year, and 2012 is only one year from now, we’d expect
Sinovel to expand into their 6 megawatt . . . .
*
*
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*
Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 46 of 81
. . . We expect them to have their first wind turbines up and running here in the
United States in 2011. . . . So they are getting the reference sites here in the United
States this year, look for them to grow their sales for wind turbines in the United
States in 2012 and beyond. They have about 15 gigawatts of contracts in their
pipeline, so we expect them to continue to grow – we expect to continue to grow
with them on a going forward basis.
*
*
*
. . . We forecasted $430 million to $440 million for the fiscal year that ends March
31, . . . 2010, which is most of calendar 2010. You’ll notice that our operating
margins have grown nicely over the last few years. We’re at 17% operating margin
year-to-date. And as we look forward . . . our FY ‘14 target [is] to be at $1 billion in
revenue and on the right hand chart here, well in excess of 20% operating margins
off that $1 billion worth of revenues .
*
*
*
Our earnings are expected to continue to grow this year; we guide it to $1.33 to
$1.38 non-GAAP earnings per share.
*
*
*
So we’re continuing to grow on the top line and we expect to continue to grow
profitability in our next fiscal year and beyond . . . . <TR2/23/11>
111.
The statements referenced above in ¶110 were each materially false and misleading
when made for the reasons stated in ¶103.
112.
On March 14, 2011, American Superconductor issued a press release announcing that
it had signed a definitive agreement to acquire The Switch, a power technologies company
headquartered in Finland, for €190 million (or approximately $265 million based on current
exchange rates). 7 According to the press release, the acquisition of The Switch, which sells power
converter systems and permanent magnet generators to wind turbine manufacturers in China,
Europe, Korea and the U.S., would “[s]ignificantly [e]xpand” the Company’s wind business and
7
The press release reported that approximately $186 million would be paid in cash, and the
remainder (approximately $79 million) would be paid in the form of American Superconductor
stock.
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“diversify [the Company’s] customer base and channels to market” – thereby decreasing its
dependence upon Sinovel. In addition to discussing the benefits of the planned acquisition, the press
release updated American Superconductor’s guidance for fiscal year 2010, the period ended March
31, 2011, and provided preliminary guidance for fiscal year 2011. The press release stated, in
pertinent part, as follows:
In conjunction with today’s announcement, AMSC is updating its guidance for fiscal
year 2010 (ending March 31, 2011). The company expects that its revenues will be
toward the lower end of its $430 million to $440 million forecast range. Due
primarily to anticipated one-time costs related to the acquisition, AMSC is
reducing its net income guidance from a range of $48.0 million to $50.0 million, or
$0.99 to $1.04 per diluted share, to a range of $44.0 million to $46.0 million, or
$0.91 to $0.95 per diluted share . . . . The company’s non-GAAP net income
guidance is being reduced from a range of $64.5 million to $66.5 million, or $1.33
to $1.38 per diluted share, to a range of $63.5 million to $65.5 million, or $1.31 to
$1.35 per diluted share. . . .
“We expect to achieve another record year of revenues and earnings in fiscal 2010,”
said Yurek. “However, AMSC’s organic revenues and earnings are expected to
decline sequentially in the first quarter of fiscal 2011 from the fourth quarter of fiscal
2010 before growth resumes in subsequent quarters. For full fiscal 2011, we expect
organic revenue growth to slow to about 5 to 10 percent year over year before
increasing again in fiscal 2012. We also expect our organic non-GAAP earnings per
share to decline by as much as 15 percent year over year due to a higher share count,
somewhat lower gross margin related primarily to product mix, foreign exchange
headwinds, and a full year of dilution from minority investments.
“Fiscal 2011 will be a transition year for AMSC – one in which we continue to
develop and deploy new products, book new orders, and implement new strategies
for growth while continuing to grow our top line and generate solid profits.
*
*
*
The Switch is expected to play a key role in our Wind business and serve as a
catalyst for growth both in the near and long term. As a result, our combined
company is expected to grow more rapidly and profitably beyond fiscal 2011 to
achieve our target of US$1 billion in revenues and operating margins in excess of
20% by fiscal 2014,” Yurek concluded.
Assuming a closing date of August 31, 2011 for the acquisition of The Switch,
AMSC currently anticipates that its combined revenues will grow by 30 percent to 35
percent for full fiscal year 2011 while combined non-GAAP earnings per share are
expected to remain roughly flat year over year. <PR3/14/11>
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113. Following the press release, American Superconductor held a conference call with
analysts and investors. During the conference call, Defendant Yurek explained that the downward
revision in the Company’s full year guidance (just two weeks before the end of the fiscal year) and
slowing long-term outlook were not due solely to the acquisition of The Switch, but were also based
on an expected reduction in sales to Sinovel. <TR3/14/11> However, Defendants concealed the
true cause of the expected slowdown in business with Sinovel – namely, that the supposedly strong
relationship which Defendants had continuously highlighted throughout the Class Period was on thin
ice because Sinovel was chronically failing to provide a letter of credit in advance of shipment or to
pay for contracted shipments. <IB> Instead, they falsely attributed <IB> the reduced outlook to the
“transition” to the Company’s previously-announced $445 million contract for the sale of
components for 1.5 megawatt turbines to Sinovel, and to slowing growth in the Chinese wind turbine
market. <TR3/14/11> Defendant Yurek stated, in pertinent part, as follows:
We expect to achieve our 17th consecutive quarter of revenue growth in our fourth
quarter of fiscal 2010 ending March 31, 2011. This will result in another record
year of both revenues and earnings in fiscal 2010 .
*
*
*
There are two primary reasons why we expect our organic growth rate to slow
.
The first reason is that we now see the rate of growth of wind turbine sales in China
remaining flat or decreasing in 2011. . . .
*
*
*
The second reason we expect our growth rate to slow is the transition in our
contracts with Sinovel for the sale of core electrical components for 1.5 megawatt
wind turbines . Our current 1.5 megawatt contract, which is in place through March
2011, is sized at $470 million and shipments increased by plan through this
contract’s 28-month life.
Our new contract, which goes into effect in April, is slightly smaller at $445 million
and shipments are scheduled to take place over 30 months instead of 28 months in
the original contract. More importantly, unlike the past contract which had monthly
shipments increasing over time, shipments in the new contract are linear over the 30month period.
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So just based on the terms of this known contract shipments in the June 2011
.
quarter are expected to be well below our shipments in the March 2011 quarter
And of course 1.5 megawatt shipments for full fiscal year 2011 are scheduled to be
below fiscal 2010 shipments. Combine that with the potential for China
installations in 2011 to be flat to down and we must conclude that Sinovel is
unlikely to accelerate shipments under the new 1.5 megawatt contract as they have
done so many times in the past .
Now we do still expect to receive a follow-on order for 3 megawatt and 5 megawatt
core components from Sinovel in the next few months .
*
Over the past 12 months Sinovel has in fact won more than . . . 2 gigawatts worth
of 3 megawatts wind turbine orders. However, we now expect the increase in our 3
megawatt and 5 megawatt shipments to Sinovel in fiscal 2011 will only partially
offset the decline in the 1.5 megawatt shipments .
Net-net we currently expect that our revenues from Sinovel will be roughly flat
year over year in fiscal 2011 .
114. During the call, analysts questioned Defendants about their revised expectations for
American Superconductor’s business with Sinovel, and Defendants responded, in pertinent part, as
follows:
Theodore O’Neil – Wunderlich Securities – Analyst:
. . . So one issue is on the 3 and 5 megawatt turbine ramp for Sinovel, it’s not
obviously immediately offsetting the change from a ramping of 1.5 to a linear. Can
you give us any comfort on the how the 3 and 5 megawatt is ramping with Sinovel?
*
Defendant Yurek:
. . . [T]he 3 and 5 megawatt wind turbines that Sinovel is now producing – or about
to produce in terms of the 5 megawatt – just let me repeat. We expect to receive a 3
megawatt follow-on order within the next few months and over the summer a
first . . . initial volume production order for 5 megawatts from Sinovel. So nothing
has changed there , Theodore.
What we said here is that . . . Sinovel has over 2 gigawatts of backlog in 3 megawatt
wind turbines, so they’re going to continue to grow that business. But our current
estimate is that we won’t see any uptick in sales of 3 megawatt core components to
Sinovel until maybe our last fiscal quarter. So again, with the wind market in China
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still being very strong, but maybe being flat or maybe even slightly down over 2010,
it’s not going to be driving really strong growth as it has in the past.
*
Paul Clegg – Mizuho – Analyst:
. . . [W]hat portion of 2011 revenues would you now expect from Sinovel?
Unidentified Company Representative:
. . . Sinovel is expected to be flat basically in fiscal 2011 compared to fiscal 2010
from a revenue standpoint. And our growth from the wind side when we talked
about our overall 5% to 10% revenue increase of year over year is going to come
primarily from non-Sinovel wind customers , that’s on the organic side. . . .
Defendant Yurek:
. . . I think with the addition of The Switch to American Superconductor and the
organic growth that we’re expecting to pick up throughout fiscal 2011 and
certainly be back on track in 2012, we’re feeling pretty good about our ability to
achieve that $1 billion in excess of 20% operating margins here . <TR3/14/11>
115.
The statements in the March 14, 2011 press release and conference call referenced
above in ¶¶112-14 were each materially false and misleading when made for the reasons stated in
¶103.
116.
On April 5, 2011, after the close of the market, American Superconductor stunned
investors by issuing a press release revealing that on March 31, 2011, the last day of the Company’s
fiscal year, Sinovel had refused to accept delivery of contracted shipments of wind turbine
components, and the Company believed that Sinovel intended “to reduce its level of inventory before
accepting further shipments.” The press release also revealed that Sinovel had “fail[ed] to pay
[American Superconductor] for certain contracted shipments made in fiscal year 2010
” and that
American Superconductor was “ reviewing the appropriateness of the timing of its revenue
recognition on approximately $56 million of unpaid shipments in the second, third and fourth
quarters of fiscal 2010. ” As a result, the Company would suffer a net loss in the fourth quarter of
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fiscal 2010 and its revenues and earnings for the full fiscal year would be substantially below
previous forecasts. The press release stated, in pertinent part, as follows:
On March 31, 2011, Sinovel Wind Group Co., Ltd. (Sinovel) refused to accept
contracted shipments of 1.5 megawatt (MW) and 3 MW wind turbine core
electrical components and spare parts that AMSC was prepared to deliver. AMSC
believes that Sinovel intends to reduce its level of inventory before accepting
further shipments .
These delayed shipments are the primary cause for lower-than-anticipated
financial results for AMSC’s fourth quarter and full fiscal year 2010. AMSC
currently expects total revenues for its fourth fiscal quarter will be less than $42
million and that it will generate a net loss for the fourth quarter on both a GAAP
and non-GAAP basis. As a result, AMSC currently expects its full year fiscal 2010
revenues to be less than $355 million. This compares with the company’s prior
forecast for fiscal 2010 revenues of $430 million to $440 million. AMSC also
expects that its GAAP and non-GAAP earnings for full year fiscal 2010 will be well
below the company’s previous forecasts .
AMSC estimates that its balance of cash, cash equivalents, marketable securities and
restricted cash as of March 31, 2011 was approximately $240 million. This is down
from $260.5 million as of December 31, 2010. AMSC’s cash balance was
negatively impacted by an increased inventory level related to the refusal of
shipments by Sinovel, and Sinovel’s failure to pay AMSC for certain contracted
shipments made in fiscal year 2010. As a result of both accumulated aged
accounts receivable due to payment delays and Sinovel’s recent refusal to accept
March deliveries, AMSC is reviewing the appropriateness of the timing of its
revenue recognition on approximately $56 million of unpaid shipments in the
second, third and fourth quarters of fiscal 2010 .
AMSC continues to have active discussions with Sinovel to determine when Sinovel
will accept further shipments and when it will pay for past shipments. In the
meantime, AMSC has taken certain actions to reduce expenses, and the company is
in the process of implementing plans to better align spending with near-term
revenues while continuing to maintain a high level of service and support for its
global Wind and Grid customers. <PR4/5/11>
117. As a result of these disclosures, the price of American Superconductor common stock
plummeted $10.41 per share, or nearly 42%, from a closing price of $24.88 per share on April 5,
2011, to close at $14.47 per share on April 6, 2011, on unusually heavy trading volume of more than
37,000 shares traded. The price of American Superconductor stock continued to decline the
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following day, as the market absorbed the adverse news, closing at $13.30 per share on April 7,
2011, for a total decline of nearly 47%. <YHO, PI>
118.
Analysts issued reports expressing surprise and confusion over American
Superconductor’s sudden announcements, with an April 6, 2011 Wunderlich Securities analyst
report noting that “[n]o satisfying answers came out of the discussion we had with management,”
<Wund4/6/11> and a Capstone Investments analyst report cautioning that “AMSC would lose a ton
of credibility if this turns out to be a fundamental shift in their partnership with Sinovel.”
<Cap4/6/44> An April 6, 2011 Ardour Capital Investments report noted that Sinovel’s annual
report, issued that day, showed that Sinovel “was able to sell every turbine it made” during the
second half of 2010, and “did not report any payables older than a year with AMSC.” Based on
these facts, the analyst report concluded that American Superconductor’s “ explanation for the
rejection of shipment . . . [was] unreasonable .” <Ard4/6/11>
119.
Analysts also downgraded American Superconductor stock and slashed their expected
price targets. For example, a ThinkEquity LLC analyst report dated April 6, 2011 downgraded
American Superconductor stock from “Buy” to “Hold” and cut its price target for the Company’s
stock from $36 to $13, citing “the uncertainty around AMSC’s accounting, [and the] potential for
further losses . . . .” <Think4/6/11> Likewise, an April 6, 2011 Jefferies analyst report downgraded
the Company’s stock from “Buy” to “Underperform” and slashed its price target from $30 to $16,
based on the Company’s “[d]ramatic reduction to F4Q revenue guidance with no floor” and “[n]o
visibility to start of second $445M contract . . . .” The report concluded, “[g]iven that Sinovel
accounted for ~70% of revenue, we assume this revenue is gone until shipments resume.”
<Jeff4/6/11>
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120.
On April 9, 2011, Barron’s published an article entitled Supersized Cause for Worry ,
which stated, in pertinent part, as follows:
When we read the Shanghai prospectus for Sinovel Wind Group, we began to worry
for the shareholders of a U.S. company that was getting 80% of its revenue from the
wind-turbine maker: American Superconductor (ticker: AMSC).
The prospectus showed that Sinovel’s inventories were rising faster than its sales.
And the amounts that the prospectus showed for Sinovel’s 2010 purchases from
American Superconductor didn’t jibe with the U.S. outfit’s reports.
There were
hints that Sinovel had found another component supplier.
Our concerns were dreadfully warranted. Late Tuesday, American Superconductor
issued a bizarre announcement saying that Sinovel had refused the U.S. company’s
end-of-quarter deliveries. As a result, the Devens, Mass., supplier expects to report
less than $42 million in March-quarter revenue, instead of the nearly $120 million
that Wall Street had anticipated. Sell-side analysts yanked their recommendations
and, on Wednesday, the shares plunged 41% to $14.47. That’s less than half the
$33.50 that American Superconductor shares were fetching when our story
(“Flagging Winds From China”) was published on Dec. 11, 2010. <BA4/9/11>
121.
Thereafter, on May 24, 2011, American Superconductor announced that Defendant
Yurek was retiring from his position as CEO, effective June 1, 2011, and would be succeeded by
Defendant McGahn, then-President and Chief Operating Officer. <PR5/24/11>
122.
One week later, after the market closed on May 31, 2011, American Superconductor
announced that it would not be able to timely file its Annual Report on Form 10-K because
“[a]dditional time [was] required to complete the preparation and audit of the [C]ompany’s financial
statements for fiscal 2010, including a review of certain revenues associated with shipments to
customers in China during the second, third and fourth fiscal quarters.” The Company also stated
that it “expects to reverse the recognition of a material amount of revenue that it had included
when estimating revenues of ‘less than $355 million’ for the full fiscal year ended March 31, 2011
in the [C]ompany’s press release dated April 5, 2011.
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Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 54 of 81
123.
In response to these announcements, American Superconductor common stock
declined an additional 24%, from a closing price of $10.69 per share on May 31, 2011, to close at
$8.11 per share on June 1, 2011, on heavy trading volume. <YllO, PI>
124.
On July 11, 2011, after the close of the market, American Superconductor issued a
press release announcing “that its financial statements included in the Quarterly Reports on Form
10-Q for the fiscal quarters ended September 30, 2010 and December 31, 2010 should no longer be
relied upon.” The press release also revealed that the Company’s improper revenue recognition
practices were not limited to Sinovel, and included certain other “Chinese customers.” The press
release stated, in pertinent part, as follows:
AMSC has determined that revenues associated with unpaid shipments to certain
Chinese customers, excluding Sinovel . . ., after August 31, 2010 should not be
recognized until AMSC is paid, or payment is otherwise reasonably assured, for
such shipments. With respect to Sinovel, AMSC has determined that this cashbased method of accounting should have been applied for shipments after
September 30, 2010. AMSC had previously recognized revenues in the second and
third fiscal quarters based upon customer receipt of shipments but prior to its
receipt of payment for such shipments . AMSC reported that no shipments were
made to Sinovel and no payments were received from this customer during the first
quarter of fiscal 2011. <PR7/11/11>
125.
The press release announced that American Superconductor expected that reported
revenues for the second quarter of fiscal 2010, ended September 30, would be reduced to
approximately $98 million <PR7/11/11> (from previously-reported revenues of $101.5 million),
<PR11/2/10> and expected that reported revenues for the third quarter of fiscal 2010, ended
December 31, would be reduced to approximately $43 million <PR7/11/11> (from previouslyreported revenues of $114.2 million) <PR2/1/11> – total expected restatement of $74.7 million .
<PR11/2/10, PR2/1/11, PR7/11/11>
126.
The press release also reported that “[f]or the fiscal year ended March 31, 2011, the
[C]ompany expects that revenues will be approximately $307 million” <PR7/11/11> – compared to
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American Superconductor’s estimate on April 5, 2011 of less than $355 million, <PR4/5/11> and the
Company’s previous guidance of $430 to $440 million. <PR11/2/10> Finally, the press release
stated that these amounts were “preliminary,” that American Superconductor was “in the process of
determining the impact of the errors in revenue on other financial statement balances” and that the
Company “intends to file restated financial statements . . . as soon as practicable.” <PR7/11/11>
127.
Also on July 11, 2011, American Superconductor filed a Form 8-K with the SEC,
which provided additional information about the reasons for the expected restatement. The Form
8-K stated, in pertinent part, as follows:
On July 6, 2011, the Audit Committee of the Board of Directors of the Company
concluded that the financial statements contained in the Company’s Quarterly
Reports on Form 10-Q for the fiscal quarters ended September 30, 2010 and
December 31, 2010 should no longer be relied upon. The Company has determined
that revenues were incorrectly recorded as collectability was not reasonably
assured at the time of shipment for certain of the Company’s customers in China
during these quarters . For these customers, the Company plans to restate revenues
based on a cash basis of accounting and expects to record revenues only to the extent
that payment was received or otherwise reasonably assured during the quarter.
*
In connection with these restatements, management is in the process of evaluating
deficiencies in its internal control over financial reporting and has preliminarily
determined that the Company may have one or more material weaknesses in its
internal control over financial reporting to ensure the accuracy of revenue
recognition in China. In particular, the Company identified deficiencies in its
controls to evaluate and monitor customer creditworthiness and in its controls over
the identification and evaluation of revenue transactions which deviated from
contractually established payment terms in accordance with United States
generally accepted accounting principles. As a result of these deficiencies, the
Company’s disclosure controls and procedures were not effective as of the fiscal
quarters ended September 30, 2010 and December 31, 2010 . Currently, the
Company is in the process of designing and implementing controls to remediate these
deficiencies, which have not been remediated as of the fiscal year ended March 31,
2011. <8K7/11/11>
128.
Following these announcements, the price of American Superconductor common
stock fell 4.8%, from a closing price of $8.53 per share on July 11, 2011, to close at $8.12 per share
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on July 12, 2011. The price of the stock continued to decline over the next week, closing at $7.22
per share on July 18, 2011 – a total decline of more than 11%. <YHO, PI>
129.
In response to the Company’s disclosures, Jefferies issued an analyst report on July
11, 2011 slashing its expected price target for American Superconductor stock from $16 per share to
$6 per share. The report advised that, “ [w]e consider the stock to be uninvestable given the lack of
reliable financial statements and no resolution from Sinovel” and concluded that “[w]ith the drastic
reduction in revenue, AMSC will likely return to pre-Sinovel unprofitability.” <Jeff7/11/11> A
Capstone Investments analyst report issued on July 12, 2011 noted that, “[i]mportantly, the
restatement . . . highlights that the revenue recognition problem extended beyond . . . Sinovel” and
advised that, “ we question whether AMSC knew the collectability of its shipments was achievable
[and] cannot help thinking there was some channel stuffing .” <Cap7/12/11>
Additional Scienter Allegations
130.
As alleged herein, Defendants acted with scienter in that Defendants knew, or
recklessly disregarded, that the public documents and statements they issued and disseminated to the
investing public in the name of the Company or in their own name during the Class Period were
materially false and misleading. Defendants knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements and documents as primary violations of the
federal securities laws. Defendants, by virtue of their receipt of information reflecting the true facts
regarding American Superconductor, their control over, and/or receipt and/or modification of
American Superconductor’s allegedly materially misleading misstatements, were active and culpable
participants in the fraudulent scheme alleged herein. <LP, IB>
131.
Defendants knew and/or recklessly disregarded the falsity and misleading nature of
the information which they caused to be disseminated to the investing public. The fraudulent
scheme described herein could not have been perpetrated during the Class Period without the
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knowledge and complicity or, at least, the reckless disregard of the personnel at the highest levels of
the Company, including Defendants Yurek, Henry and McGahn. <LP, IB>
132.
Defendants Yurek, Henry and McGahn, because of their positions with American
Superconductor, controlled the contents of the Company’s public statements during the Class Period.
Each Defendant was provided with or had access to copies of the documents alleged herein to be
false and/or misleading prior to or shortly after their issuance and had the ability and opportunity to
prevent their issuance or cause them to be corrected. Because of their positions and access to
material non-public information, these Defendants knew or recklessly disregarded that the adverse
facts specified herein had not been disclosed to and were being concealed from the public and that
the positive representations that were being made were false and misleading. As a result, each of
these Defendants is responsible for the accuracy of American Superconductor’s corporate statements
and are therefore responsible and liable for the representations contained therein. <LP, IB>
133.
The scienter of the Defendants is underscored by the Sarbanes-Oxley mandated
certifications of Defendants Yurek and Henry, which acknowledged their responsibility to investors
for establishing and maintaining controls to ensure that material information about American
Superconductor was made known to them and that the Company’s disclosure related controls were
operating effectively. <LP, IB, 10Q9/30/10, 10Q12/31/10>
134.
Defendants were motivated to engage in the fraudulent course of conduct alleged
herein in order to complete the Secondary Offering on November 12, 2010 at the artificially inflated
price of $35.50 per share, thereby raising over $163 million in proceeds. <LP, IB, PS11/12/10>
Those proceeds would have been unobtainable if not for Defendants’ fraudulent concealment of the
fact American Superconductor was shipping product to Sinovel without having first received a letter
of credit, as required by the June 2008 Purchase Contract, and was recognizing revenue on those
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shipments and shipments to other Chinese customers even though collectability of payment was not
reasonably assured. <IB, 8K6/11/08, 8K7/11/11>
135.
Indeed, Defendants have admitted that they should not have recognized revenue until
American Superconductor was paid, or payment was reasonably assured, with respect to shipments
made to certain Chinese customers after August 31, 2010 , and with respect to shipments made to
Sinovel after September 30, 2010 . <PR7/11/11> Thus, Defendants pushed forward with the
Secondary Offering at a time when they knew that as much as 79% of the Company’s revenues were
in jeopardy because its primary customer (among other customers), was not paying for contracted
shipments. <IB> Rather than updating the marketplace about the true state of the Company’s
business, Defendants permitted the Secondary Offering to occur at a price that was based upon an
inaccurate perception of the Company’s financial performance. <LP, IB>
136.
In addition, Defendants were motivated to continue concealing their fraudulent
scheme so that American Superconductor could fund the planned acquisition of The Switch with
$79 million in artificially inflated Company stock, together with the cash raised in the Secondary
Offering. Defendants hoped that the acquisition of The Switch would allow American
Superconductor to diversify its customer base and decrease its reliance upon Sinovel, before
Defendants were forced to reveal the truth about the Company’s business with Sinovel. <LP, IB,
PR3/14/11>
137.
Defendants were further motivated to engage in this fraudulent course of conduct in
order to allow Defendants Yurek, Henry and McGahn, and one other high-level Company insider to
collectively sell 427,522 shares of their personally-held American Superconductor common stock for
proceeds in excess of $14.9 million during the Class Period. <LP, IB, PF>
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138. American Superconductor insiders represented that these sales were made pursuant to
a stock trading plan that was adopted in accordance with Rule 10b5-1 of the Exchange Act, in part,
to avoid concerns about whether they had material, non-public information when they sold their
stock. However, American Superconductor insiders were in possession of material adverse inside
information, and adopted and/or amended such stock trading plan to take advantage of inflation in
the price of American Superconductor stock. <IB, PF> Specifically, these insider sales were made
while Company insiders were in possession of material, non-public information about American
Superconductor’s practice of shipping wind turbine components to Sinovel and other Chinese
customers without having first received a letter of credit assuring payment, in breach of contractually
established payment terms, and in violation of the Company’s stated policy of not recognizing
revenue until payment was reasonably assured. <LP, IB, 10K2009, 8K7/11/11> The following
chart sets forth the insider trading:
Insider
Defendant
Henry
Date
Shares Price
10/06/10 8,000
$36.05
05/13/11
11,600
$11.49
19,600
Proceeds
$288,400
$133,284
$421,684
25.03%
05/12/11 900
05/17/11 11,500
12,400
$11.56
$11.16
$10,404
$128,340
$138,744
9.32%
Angelo
Santamaria,
Officer
05/16/11 2,000
05/17/11
10,000
12,000
$11.30
$11.15
$22,600
$111,500
$134,100
22.28%
Defendant
Yurek
10/06/10
10/08/10
10/11/10
10/12/10
10/12/10
10/13/10
57,074
$36.01
73,856
$36.56
71,372
$36.55
136,256 $37.91
28,972
$36.57
15,992
$38.81
383,522
$2,055,235
$2,700,175
$2,608,647
$5,165,465
$1,059,506
$620,650
$14,209,677 68.42%
Total:
427,522
$14,904,205
Defendant
McGahn
<PF>
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Case 1:11-cv-10582-WGY Document 86 Filed 02/13/12 Page 60 of 81
139.
Notably, during October 2010, at the same time that American Superconductor was
improperly recognizing revenue – as Defendants have now admitted <PR7/11/11> – Defendants
Yurek and Henry made substantial insider sales. <PF>
140.
All of Defendant Yurek’s Class Period sales took place during a single week in
October 2010, when he sold 383,522 shares of his personally-held American Superconductor
common stock – more than 68% of his stock holdings – for proceeds in excess of $14.2 million .
Prior to October 2010, Defendant Yurek had not sold stock since February 2010, when he sold just
7,500 shares for proceeds of $242,896.
141.
During that same week, on October 6, 2010, Defendant Henry sold 8,000 shares of
his personally-held American Superconductor common stock for proceeds of $288,400. Defendant
Henry’s only other Class Period sale was on May 13, 2011, when he sold 11,600 shares for proceeds
of $133,284.
142.
In total, Defendant Yurek sold more than 68% of his stock holdings during the Class
Period, Defendant Henry sold more than 25% of his stock holdings during the Class Period,
Defendant McGahn sold more than 9% of his stock holdings during the Class Period, and Company
insider Angelo Santamaria sold more than 22% of his holdings during the Class Period. <PF>
Loss Causation/Economic Loss
143.
During the Class Period, as detailed herein, Defendants engaged in a scheme to
deceive the market and a course of conduct that artificially inflated American Superconductor’s
stock price and operated as a fraud or deceit on Class Period purchasers of American Superconductor
common stock. <LP> By failing to disclose that American Superconductor was shipping product to
Sinovel without having first received a letter of credit, as required by the June 2008 Purchase
Contract, <IB, 8K6/11/08> and was recognizing revenue on those shipments even though
collectability of payment was not reasonably assured, <IB, 8K7/11/11> among other adverse facts
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detailed herein, Defendants presented a misleading picture of American Superconductors’ business
and prospects. <LP, IB> Defendants’ false and misleading statements had the intended effect and
caused American Superconductor’s stock to trade at artificially inflated levels throughout the Class
Period, <LP> reaching as high as $38.09 per share on October 13, 2010. <YllO, PI>
144.
As detailed above, when Defendants’ prior misrepresentations and fraudulent conduct
were disclosed and became apparent to the market, the price of American Superconductor stock
declined precipitously as the prior artificial inflation came out of the price of American
Superconductor stock. <LP, PI> As a result of their purchases of American Superconductor
common stock during the Class Period, Plaintiff and other members of the Class suffered economic
loss, i.e., damages, under the federal securities laws. <LP>
145.
On April 5, 2011, after the close of the market, American Superconductor revealed
that: (i) on March 31, 2011, Sinovel had refused to accept contracted shipments of wind turbine
components, and the Company believed that Sinovel intended “to reduce its level of inventory before
accepting further shipments”; (ii) Sinovel had “fail[ed] to pay [American Superconductor] for certain
contracted shipments made in fiscal year 2010”; (iii) American Superconductor was “reviewing the
appropriateness of the timing of its revenue recognition on approximately $56 million of unpaid
shipments in the second, third and fourth quarters of fiscal 2010”; and (iv) the Company would
suffer a net loss in the fourth quarter of fiscal 2010 and its revenues and earnings for the full fiscal
year would be substantially below previous forecasts, with expected full year revenues of “less than
$355 million.” <PR4/5/11>
146.
In response to these announcements, the price of American Superconductor common
stock plummeted $10.41 per share, or nearly 42%, from a closing price of $24.88 per share on
April 5, 2011, to close at $14.47 per share on April 6, 2011, on unusually heavy trading volume of
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more than 37,000 shares traded. The Company’s stock continued to decline the following day, as the
market absorbed the adverse news, closing at $13.30 per share on April 7, 2011, for a total decline of
nearly 47%. <YbO, PI>
147.
Then, on May 31, 2011, after the close of the market, American Superconductor
announced that it would not be able to timely file its Annual Report on Form 10-K because
“[a]dditional time [was] required to complete the preparation and audit of the [C]ompany’s financial
statements for fiscal 2010, including a review of certain revenues associated with shipments to
customers in China during the second, third and fourth fiscal quarters.” The Company also stated
that it “expects to reverse the recognition of a material amount of revenue that it had included when
estimating revenues of ‘less than $355 million’ for the full fiscal year ended March 31, 2011 in the
[C]ompany’s press release dated April 5, 2011.” <PR5/31/11> In response to these disclosures,
American Superconductor common stock declined an additional 24%, from a closing price of $10.69
per share on May 31, 2011, to close at $8.11 per share on June 1, 2011, on heavy trading volume.
<YbO, PI>
148.
On July 11, 2011, after the close of the market, American Superconductor issued a
press release announcing “preliminary” results of the restatement. The press release revealed,
among other things, that: (i) American Superconductor’s “financial statements included in the
Quarterly Reports on Form 10-Q for the fiscal quarters ended September 30, 2010 and December 31,
2010 should no longer be relied upon”; (ii) the Company’s improper revenue recognition practices
were not limited to Sinovel, and included certain other “Chinese customers”; (iii) for those Chinese
customers, including Sinovel, American Superconductor should have utilized a cash-based method
of accounting, whereby revenues were not recognized until the Company was paid, or payment was
reasonably assured; (iv) the Company expected revenues to be reduced to $98 million and
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$43 million in the second and third quarters of fiscal 2010, respectively <PR7/11/11> – a total
expected revenue reduction of $74.7 million; <PR11/2/10, PR2/1/11, PR7/11/11> and (v) for fiscal
2010, the Company expected to report revenues of approximately $307 million – compared to its
April 5, 2011 estimate of less than $355 million, <PR4/5/11> and previous guidance of $430 to
$440 million. <PR11/2/10>
149.
In a Form 8-K filed with the SEC the same day, American Superconductor further
revealed, among other things, that it had “identified deficiencies in its controls to evaluate and
monitor customer creditworthiness and in its controls over the identification and evaluation of
revenue transactions which deviated from contractually established payment terms in accordance
with [GAAP].” As a result, “the Company’s disclosure controls and procedures were not effective”
as of the second and third quarters of fiscal 2010. <8K7/11/11> In response to these
announcements, American Superconductor common stock fell 4.8%, from a closing price of $8.53
per share on July 11, 2011, to close at $8.12 per share on July 12, 2011. The Company’s stock
continued to decline over the next week, closing at $7.22 per share on July 18, 2011 – a total decline
of more than 11%. <YITO, PI>
150.
The precipitous decline in the price of American Superconductor stock was a direct
result of the nature and extent of Defendants’ fraud finally being revealed to investors and the
market. <LP> The timing and magnitude of the decline in the price of American Superconductor
stock negates any inference that the loss suffered by Plaintiff and other Class members was caused
by changed market conditions, macroeconomic or industry factors or Company-specific facts
unrelated to the Defendants’ fraudulent conduct. <LP, YITO, PI> The economic loss, i.e., damages,
suffered by Plaintiff and other Class members was a direct result of Defendants’ fraudulent scheme
to artificially inflate American Superconductor’s stock price and the subsequent significant decline
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in the value of American Superconductor’s stock when Defendants’ prior misrepresentations and
other fraudulent conduct were revealed. <LP>
Applicability of Presumption of Reliance:
Fraud on the Market Doctrine
151. At all relevant times, the market for American Superconductor common stock was an
efficient market for the following reasons, <LP> among others:
(a)
American Superconductor common stock met the requirements for listing, and
was listed and actively traded on the NASDAQ, a highly efficient and liquid global market; <PI, IB>
(b)
as a public company, American Superconductor filed periodic public reports
with the SEC; <PF>
(c)
American Superconductor regularly communicated with public investors via
established market communication mechanisms, including through regular disseminations of press
releases on the national circuits of major newswire services and through other wide-ranging public
disclosures, such as communications with the financial press and other similar reporting services;
<PF, PR> and
(d)
American Superconductor was followed by several securities analysts
employed by major brokerage firms who wrote reports which were distributed to the sales force and
certain customers of their respective brokerage firms. Each of these reports was publicly available
and entered the public marketplace. <PI>
152. As a result of the foregoing, the market promptly digested current information
regarding American Superconductor from publicly available sources and reflected such information
in the price of American Superconductor stock. Under these circumstances, all purchasers of
American Superconductor common stock during the Class Period suffered similar injury through
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their purchase of American Superconductor common stock at artificially inflated prices and a
presumption of reliance applies. <LP, IB>
No Safe Harbor
153.
The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
<LP> Many of the specific statements pleaded herein were not identified as “forward-looking
statements” when made. <PF, PR> To the extent there were any forward-looking statements, there
were no meaningful cautionary statements identifying important factors that could cause actual
results to differ materially from those in the purportedly forward-looking statements. Alternatively,
to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded
herein, Defendants are liable for those false forward-looking statements because, at the time each of
those forward-looking statements was made, the particular speaker knew that the particular forwardlooking statement was false, and/or the forward-looking statement was authorized and/or approved
by an executive officer of American Superconductor who knew that those statements were false
when made. <PF, PR, LP>
154.
By virtue of the foregoing, Defendants have violated Section 10(b) of the Exchange
Act, and Rule 10b-5 promulgated thereunder. As a direct and proximate result of Defendants’
wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection with
their respective purchases and sales of the Company’s securities during the Class Period. <LP>
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COUNT I
Violation of Section 10(b) of the Exchange
Act and Rule 10b-5 Promulgated Thereunder
Against Defendants American Superconductor,
Yurek, Henry and McGahn
155. Plaintiff repeats and realleges each and every allegation contained above as if fully set
forth herein. <LP>
156. In this Count, the term “Defendants” refers only to Defendants American
Superconductor, Yurek, Henry and McGahn.
157. During the Class Period, Defendants disseminated or approved the false statements
specified above, which they knew or recklessly disregarded were misleading in that they contained
misrepresentations and failed to disclose material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading. <LP>
158. Defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 in that they:
(a)
employed devices, schemes, and artifices to defraud;
(b)
made untrue statements of material facts and/or omitted to state material facts
necessary in order to make the statements made, in light of the circumstances under which they were
made, not misleading; and
(c)
engaged in acts, practices, and a course of business that operated as a fraud or
deceit upon Plaintiff and others similarly situated in connection with their purchases of American
Superconductor common stock during the Class Period. <LP>
159. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of
the market, they paid artificially inflated prices for American Superconductor common stock. <LP>
Plaintiff and the Class would not have purchased American Superconductor common stock at the
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prices they paid, or at all, if they had been aware that the market prices had been artificially and
falsely inflated by Defendants’ misleading statements. <LP, IB>
160.
As a direct and proximate result of these Defendants’ wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their purchases of American
Superconductor common stock during the Class Period. <LP>
COUNT II
Violation of Section 20(a) of the Exchange Act
Against Defendants Yurek, Henry and McGahn
161.
Plaintiff repeats and realleges each and every allegation contained above as if fully set
forth herein. <LP>
162.
In this Count, the term “Defendants” refers only to Defendants Yurek, Henry and
McGahn.
163.
Defendants Yurek, Henry and McGahn acted as controlling persons of American
Superconductor within the meaning of Section 20(a) of the Exchange Act. <LP> By virtue of their
positions and their power to control public statements about American Superconductor, Defendants
Yurek, Henry and McGahn had the power and ability to control the actions of American
Superconductor and its employees. <LP, IB> By reason of such conduct, Defendants Yurek, Henry
and McGahn are liable pursuant to Section 20(a) of the Exchange Act. <LP>
SECURITIES ACT COUNT ALLEGATIONS
The Secondary Offering
164.
On or about November 8, 2010, American Superconductor filed the Registration
Statement with the SEC. The Registration Statement was filed on a Form S-3 and offered to sell,
over time, common stock of the Company. <S311/8/10> Accordingly, the Secondary Offering was
considered to be a “shelf registration” that allowed the Company to register securities for sale while
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leaving them on the “shelf” until it determined to conduct the offering, provided, however, that the
Registration Statement met all the requirements proscribed under applicable securities regulations,
including that the information contained therein be current. <LP, PI>
165.
Also on or about November 8, 2010, American Superconductor filed the Prospectus
that formed part of the Registration Statement associated with the Secondary Offering.
<Prosp11/8/10>
166.
On or about November 9, 2010, American Superconductor filed the Prospectus
Supplement, which offered 4.6 million common shares to the public. <PS11/9/10> On or about
November 12, 2010, American Superconductor amended the Prospectus Supplement to, among other
things, set the price of the Secondary Offering at $35.50 per share. On or about November 12, 2010,
the Registration Statement, which incorporated the Prospectus and the Prospectus Supplements,
became effective and at least 4.6 million shares of American Superconductor common stock were
sold to the public at $35.50 per share. <PS11/12/10>
167.
The proceeds American Superconductor received from the Secondary Offering were
in excess of $163 million. <PS11/12/10> The Prospectus and Prospectus Supplements represented
that the Company intended to use the proceeds from the Secondary Offering to expand its
superconductor manufacturing capacity, to pursue strategic business relationships, including
minority investments and acquisitions, and for other general corporate purposes. <Prosp11/8/10,
PS11/9/10, PS11/12/10>
The Registration Statement Was Materially False
and Misleading and Failed to Disclose Facts Required to Be Stated Therein
168.
The Registration Statement, which incorporated the Prospectus and the Prospectus
Supplements, issued in connection with the Secondary Offering was negligently prepared, and as a
result, contained numerous untrue statements of material fact and omitted to disclose material
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information which was required to be disclosed pursuant to the regulations governing its preparation.
<LP, IB>
Failure to Disclose “Material Changes”
169.
As noted above, American Superconductor filed the Registration Statement on Form
S-3, which is a streamlined registration statement for certain well-capitalized, widely followed
issuers. <LP, PI, S311/8/10> Such issuers are permitted to file scaled down registration statements
and incorporate by reference their prior periodic filings – e.g. , Forms 10-K and 10-Q. Pursuant to
Instruction 11(a) of Form S-3, an issuer utilizing Form S-3 must disclose “ any and all material
changes in the registrant’s affairs which have occurred since the end of the latest fiscal year for
which certified financial statements were included in the latest annual report to shareholders and
which have not been described in a report on Form 10-Q or Form 8-K filed under the Securities
Exchange Act of 1934.” <LP, PI>
170.
Accordingly, an issuer utilizing Form S-3 is required to update the information in its
periodic filings including information concerning “known trends and uncertainties” with respect to
“net sales or revenues or income from continuing operations” which is required to be disclosed in
SEC periodic filings pursuant to Item 303(a) of Regulation S-K. Under Item 303(a) an issuer is
required to “describe any known trends or uncertainties that have had or that the registrant
reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or
income from continuing operations.” <LP, PI>
171.
Here, the Registration Statement negligently failed to disclose several “material
changes” to American Superconductor’s continuing operations which were required to be disclosed
pursuant to Instruction 11(a). None of these “material changes” were disclosed in the SEC filings
that American Superconductor incorporated by reference in the Registration Statement and,
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therefore, the Registration Statement omitted to state material facts required to be stated therein in
violation of the Securities Act. <LP, IB>
172.
Specifically, at the time of the Secondary Offering, American Superconductor was
shipping product to Sinovel and to certain other Chinese customers without having first received a
letter of credit, as required by the June 2008 Purchase Contract and similar payment terms in
contracts with other Chinese customers. <IB, 10K2009> Further, American Superconductor was
improperly recognizing revenue on those shipments even though collectability of payment was not
reasonably assured because the Company had not received a letter of credit. <IB, 8K7/11/11> As a
result, American Superconductor was violating the revenue recognition policy set forth in the 2009
Form 10-K, which was incorporated by reference in the Registration Statement, which stated that the
Company recognized revenue “upon customer acceptance,” provided, among other things, that
“collectability [of payment] is reasonably assured .” <IB, 10K2009>
173.
Since American Superconductor’s practice of shipping product to Sinovel and certain
other Chinese customers without first receiving a letter of credit assuring payment, and improperly
recognizing revenue on those shipments was then having, and would have, a material unfavorable
impact on the Company’s revenues and operating income, it was required to be disclosed in the
Registration Statement. The disclosure of these facts would have materially altered the total mix of
information available to investors in the Secondary Offering as it would have provided information
necessary for an informed investment decision about the Company’s revenues and operating income.
<LP, IB>
174.
On July 11, 2011, American Superconductor disclosed, among other things, that it
should have utilized a cash-based method of accounting for shipments to certain Chinese customers
after August 31, 2010, and for shipments to Sinovel after September 30, 2010, and thus should not
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have recognized revenue until the Company was paid, or payment was reasonably assured.
<PR7/11/11> The facts and circumstances that caused the Company to acknowledge that it had
improperly recognized revenue existed on November 12, 2010, the date of the Secondary Offering,
and were, therefore, required to be disclosed in the Registration Statement, but were not. <LP, IB>
Misleading Risk Disclosures
175.
Pursuant to Item 3 of Form S-3 the Registration Statement was required to furnish the
information pursuant to Item 503 of Regulation S-K [17 C.F.R. §229.303], including, among other
things, a “discussion of the most significant factors that make the offering risky or speculative.”
<LP, PI>
176.
The Registration Statement incorporated by reference the “Risk Factors” set forth in
American Superconductor’s 2009 Form 10-K. <10K2009, S311/8/10> None of these so-called risk
disclosures were meaningful or advised investors in the Secondary Offering that American
Superconductor was shipping product to Sinovel and certain other Chinese customers without first
receiving a letter of credit assuring payment, as required by the June 2008 Purchase Contract and
similar payment terms in other contracts, or that the Company was improperly recognizing revenue
on those shipments even though collectability of payment was not reasonably assured, in violation of
the revenue recognition policy set forth in the 2009 Form 10-K. <LP, IB, 8K6/11/08, 10K2009,
8K7/11/11>
177.
Accordingly, the Registration Statement negligently failed to disclose the most
significant factors that made the Secondary Offering risky or speculative as required by Item 3 of
Form S-3. <LP, IB>
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Inaccurate Financial Statements
178.
As noted above, the Registration Statement and the Prospectus incorporated by
reference the financial statements contained in American Superconductor’s Second Quarter 10-Q.
<S311/8/10, 10Q9/30/10>
179.
At the time of the Secondary Offering, Defendants knew or negligently ignored – as
they have now admitted – that American Superconductor should have utilized a cash-based method
of accounting for shipments to certain Chinese customers after August 31, 2010, and for shipments
to Sinovel after September 30, 2010, and thus should not have recognized revenue until the
Company was paid, or payment was reasonably assured. <IB, PR7/11/11>
180.
Accordingly, American Superconductor’s financial statements contained in the
Second Quarter 10-Q, which were incorporated by reference in the Registration Statement, were not
fairly presented in conformity with GAAP and were materially false and misleading. <IB,
S311/8/10, 10Q9/30/10> Specifically, American Superconductor’s reported revenues in the Second
Quarter 10-Q were overstated by at least $3.5 million, or approximately 4%. <10Q9/30/10,
PR7/11/11> In addition, Lead Plaintiff estimates that the Company’s operating income during the
second quarter was overstated by approximately 10%. <IB, 10Q9/30/10, PR7/11/11>
181.
The Second Quarter 10-Q also contained knowing or negligent misrepresentations
regarding American Superconductor’s backlog and expected revenues from Sinovel. <IB,
10Q9/30/10> The Second Quarter 10-Q represented that the Company’s backlog had increased to
approximately $956 million, and stated that: “The increase in backlog was primarily the result of a
substantial new order received from our largest customer, Sinovel . . . . Based on this level of
backlog and our pipeline of business, we believe we will be able to continue growing revenue in the
remainder of fiscal 2010.” <10Q9/30/10>
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182.
The statements referenced above in ¶181 were inaccurate statements of material fact
because Sinovel was not providing American Superconductor with “an irrevocable letter of credit in
the amount of 95% of each shipment value” prior to shipment, as required by the June 2008
Purchase Contract, and was not paying American Superconductor for contracted shipments. <IB,
8K6/11/08> As a result, the backlog from Sinovel would not enable American Superconductor to
“continue growing revenue in the remainder of fiscal 2010.” <IB, 10Q9/30/10>
183.
In addition, Defendants knew or negligently ignored that, at the time of the Secondary
Offering, American Superconductor lacked adequate internal and financial controls. <IB,
8K7/11/11> Therefore, Defendant Yurek’s and Defendant Henry’s certifications of the effectiveness
of the Company’s internal and disclosure controls, contained in the Second Quarter 10-Q, were
materially false and misleading. <IB, 10Q9/30/10>
COUNT III
Violation of Section 11 of the Securities Act
Against All Defendants
184.
Plaintiff incorporates herein ¶¶1, 17-45 and 164-83 by reference. <LP>
185.
This Count is brought pursuant to Section 11 of the Securities Act, 15 U.S.C. §77k,
against all Defendants. <LP> For purposes of this Count, Plaintiff affirmatively states that it does
not claim that Defendants committed intentional or reckless misconduct or that Defendants acted
with scienter or fraudulent intent. <LP, PK>
186.
Plaintiff purchased shares of American Superconductor common stock directly in the
Secondary Offering. <PK, TC>
187.
The Registration Statement, Prospectus and Prospectus Supplements for the
Secondary Offering were defective and inaccurate, contained untrue statements of material facts,
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omitted to state other facts necessary to make the statements made not misleading, and omitted to
state material facts required to be stated therein. <LP>
188.
Defendant American Superconductor is the registrant for the Secondary Offering.
<LP, S311/8/10> As such, American Superconductor is strictly liable for the materially inaccurate
statements contained in the Registration Statement, Prospectus and Prospectus Supplements and the
failure of the Registration Statement, Prospectus and Prospectus Supplements to be complete and
accurate. <LP>
189.
The Individual Defendants each caused the issuance of the Registration Statement
and/or signed the Registration Statement, either personally or through an Attorney-in-Fact. <LP,
S311/8/10> The Individual Defendants each had a duty to make a reasonable and diligent
investigation of the truthfulness and accuracy of the statements contained in the Registration
Statement. They had a duty to ensure that such statements were true and accurate and that there
were no omissions of material facts that would make the statements misleading. <LP> In the
exercise of reasonable care, the Individual Defendants knew or should have known of the material
misstatements and omissions contained in the Registration Statement, Prospectus and Prospectus
Supplements and also should have known of the omissions of material fact necessary to make the
statements made therein not misleading. <LP, IB> As such, the Individual Defendants are liable to
Plaintiff and the Class. <LP>
190.
The Underwriter Defendants were each underwriters, as that term is used in Section
11(a)(5) of the Securities Act, with respect to the Secondary Offering and the Company’s securities
sold through the Registration Statement. <LP, PS11/12/10> The Underwriter Defendants were
required to investigate with due diligence the representations contained therein to confirm that they
did not contain materially misleading statements or omit material facts. None of the Underwriter
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Defendants made a reasonable investigation or possessed reasonable grounds for the belief that the
statements described herein, which were contained in the Registration Statement, Prospectus or
Prospectus Supplements, were true, were without omission of any material facts, and/or were not
misleading. <LP, IB>
191.
Lead Plaintiff acquired American Superconductor common stock in the Secondary
Offering or traceable thereto in reliance upon the defective Registration Statement, Prospectus or
Prospects Supplements and without knowledge of the untruths and/or omissions alleged herein.
<PK, TC> Plaintiff and the Class sustained damages when the price of American Superconductor
common stock declined substantially due to material misstatements and/or omissions in the
Registration Statement, Prospectus and Prospectus Supplements. <LP, IB, YllO>
192.
By reasons of the conduct herein alleged, each Defendant violated, and/or controlled
a person who violated, Section 11 of the Securities Act. <LP>
193.
This action was brought within one year after the discovery of the untrue statements
and omissions and within three years of the date of the Secondary Offering. <LP, IB, PI>
COUNT IV
Violation of Section 12(a)(2) of the Securities Act
Against All Defendants
194.
Plaintiff incorporates herein ¶¶1, 17-45 and 164-93 by reference. <LP>
195.
This Count is brought pursuant to Section 12(a)(2) of the Securities Act, 15 U.S.C.
§77l, against all Defendants. <LP> For purposes of this Count, Plaintiff affirmatively states that it
does not claim that Defendants committed intentional or reckless misconduct or that Defendants
acted with scienter or fraudulent intent. <LP, PK>
196.
Defendants issued, caused to be issued and/or signed the Registration Statement in
connection with the Secondary Offering. <LP, S311/8/10> The Registration Statement contained a
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Prospectus and Prospectus Supplements which were used to induce investors, such as the Lead
Plaintiff and the other members of the Class, to purchase American Superconductor common stock.
<LP, Prosp11/8/10, PS11/9/10, PS11/12/10>
197.
The Prospectus and Prospectus Supplements contained untrue statements of material
fact, omitted to state other facts necessary to make the statements made not misleading, and omitted
material facts required to be stated therein. <LP> The Individual Defendants’ actions of solicitation
to promote the Secondary Offering included the preparation of a defective and inaccurate Prospectus
and Prospectus Supplements. <LP, IB>
198.
Defendant American Superconductor and the Underwriter Defendants, acting through
their employees, agents and others, solicited such purchases for their personal financial gain through
the preparation and/or dissemination of the Prospectus and Prospectus Supplements. <LP, IB>
199.
Pursuant to the Prospectus Supplements, the Underwriter Defendants purchased at
least 4.6 million shares of American Superconductor common stock at the public offering price, less
an underwriting discount, in the Secondary Offering. <PS11/9/10, PS11/12/10>
200.
The Underwriter Defendants participated in the preparation and dissemination of the
defective and inaccurate Prospectus and Prospectus Supplements for their own financial benefit. But
for their participation in the Secondary Offering, including their solicitation as set forth herein, the
Secondary Offering could not and would not have been accomplished. <LP, IB> Specifically, the
Underwriter Defendants:
(a)
made the decision to conduct the Secondary Offering and do it at the price set
forth in the offering documents. The Underwriter Defendants drafted, revised and/or approved the
Prospectus and Prospectus Supplements. The Prospectus and Prospectus Supplements were
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calculated to create interest in American Superconductor common stock and were widely distributed
by or on behalf of the Underwriter Defendants for that purpose;
(b)
finalized the Prospectus and Prospectus Supplements and caused them to
become effective; and
(c)
conceived and planned the Secondary Offering and orchestrated all activities
necessary to affect the sale of these securities to the investing public, by issuing securities,
promoting the securities and supervising their distribution and ultimate sale to the investing public.
<IB>
201.
As set forth more specifically above, the Prospectus and Prospectus Supplements
contained untrue statements of material fact and omitted to state material facts necessary in order to
make the statements, in light of circumstances in which they were made, not misleading. <LP>
202.
Plaintiff and the other Class members did not know, nor could they have known, of
the untruths or omissions contained in the Prospectus and Prospectus Supplements. <PK as to
Plaintiff, IB as to the Class>
203.
The Defendants named in this Count were obligated to make a reasonable and diligent
investigation of the statements contained in the Prospectus and Prospectus Supplements to ensure
that such statements were true and that there was no omission of material fact required to be stated in
order to make the statements contained therein not misleading. <LP> None of the Defendants
named in this Count made a reasonable investigation or possessed reasonable grounds for the belief
that the statements contained in the Prospectus and Prospectus Supplements were accurate and
complete in all material respects. Had they done so, these Defendants would have known of the
material misstatements and omissions alleged herein. <IB>
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204.
By reason of the conduct alleged herein, these Defendants violated Section 12(a)(2)
of the Securities Act. <LP> Accordingly, Lead Plaintiff and members of the Class who hold
American Superconductor common stock that was purchased in the Secondary Offering have the
right to rescind and recover the consideration paid for their American Superconductor common
shares <LP> and hereby elect to rescind and tender their American Superconductor common stock
to the Defendants sued herein. <PK as to Plaintiff, IB as to the Class> Plaintiff and Class members
who have sold their American Superconductor common stock are entitled to rescissory damages.
<LP>
COUNT V
Violation of Section 15 of the Securities Act
Against the Individual Defendants
205.
Plaintiff incorporates herein ¶¶1, 17-45 and 164-204 by reference. <LP>
206.
This Count is brought pursuant to Section 15 of the Securities Act, 15 U.S.C. §77o,
against the Individual Defendants. <LP> For purposes of this Count, Plaintiff affirmatively states
that it does not claim that the Individual Defendants committed intentional or reckless misconduct or
that the Individual Defendants acted with scienter or fraudulent intent. <LP, PK>
207.
Each of the Individual Defendants acted as controlling persons of American
Superconductor within the meaning of Section 15 of the Securities Act by virtue of his position as a
director and/or senior officer of American Superconductor. <LP> By reason of their senior
management positions and/or directorships at the Company, as alleged above, these Individual
Defendants, individually and acting pursuant to a common plan, had the power to influence and
exercised the same to cause American Superconductor to engage in the conduct complained of
herein. By reason of such conduct, the Individual Defendants are liable pursuant to Section 15 of the
Securities Act. <LP>
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208. Each of the Individual Defendants was a culpable participant in the violations of
Sections 11 and 12(a)(2) of the Securities Act alleged in Counts III and IV above, based on their
having signed the Registration Statement and/or having otherwise participated in the process which
allowed the Secondary Offering to be successfully completed. <LP>
PRAYER FOR RELIEF
WHEREFORE, Plaintiff, on behalf of itself and the Class, prays for judgment as follows:
A.
Determining that this action is a proper class action, certifying Plaintiff as class
representative and designating Lead Counsel as Class Counsel under Rules 23(a), (b)(3) and (g) of
the Federal Rules of Civil Procedure;
B.
Awarding compensatory damages in favor of Plaintiff and the other Class members
against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’
wrongdoing, in an amount to be proven at trial, including interest thereon;
C.
With respect to Count IV, ordering that the Secondary Offering be rescinded;
D.
Awarding Plaintiff and the Class their reasonable costs and expenses incurred in this
action, including attorneys’ fees, accountants’ fees and experts’ fees and other costs and
disbursements; and
E.
Awarding Plaintiff and the Class such other and further relief as the Court may deem
just and proper under the circumstances. <LP>
JURY DEMAND
Plaintiff hereby demands a trial by jury.
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DATED: February 13, 2012
ROBBINS GELLER RUDMAN
& DOWD LLP
SAMUEL H. RUDMAN
ERIN W. BOARDMAN
/s/ Samuel H. Rudman
SAMUEL H. RUDMAN
58 South Service Road, Suite 200
Melville, NY 11747
Telephone: 631/367-7100
631/367-1173 (fax)
srudman@rgrdlaw.com
eboardman@rgrdlaw.com
Lead Counsel for Plaintiff
SHAPIRO HABER & URMY LLP
THOMAS G. SHAPIRO (BBO # 454680)
ADAM M. STEWART (BBO # 661090)
53 State Street
Boston, MA 02109
Telephone: 617/439-3939
617/439-0134 (fax)
tshapiro@shulaw.com
astewart@shulaw.com
Liaison Counsel
O’DONOGHUE & O’DONOGHUE LLP
LOUIS P. MALONE
4748 Wisconsin Avenue, N.W.
Washington, DC 20016
Telephone: 202/362-0041
202/362-2640 (fax)
lmalone@odonoghuelaw.com
Additional Counsel for Plaintiff
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CERTIFICATE OF SERVICE
I hereby certify that this document filed through the CM/ECF system will be sent
electronically to the registered participants as identified on the Notice of Electronic Filing (NEF)
and paper copies will be sent to those indicated as non-registered participants on February 13, 2012.
/s/ Samuel H. Rudman
SAMUEL H. RUDMAN