Arizona District Court Upholds 1934 Act Claims Against First Solar
On December 17, 2012, Judge David G. Campbell of the United States District Court for the District of Arizona upheld all allegations that First Solar had fabricated not only solar panel modules and power systems, but also the company’s performance. First Solar’s entire business model was built upon a promise to improve the efficiency of its solar panels and reduce their manufacturing costs to the point of making them competitive with fossil fuels. First Solar allegedly failed to fulfill this promise, but hid its failings from investors for years in order to maintain its inflated share price and enable its founder to sell nearly all of his shares for over $400 million.
As recounted in Judge Campbell’s order, lead plaintiffs Mineworkers’ Pension Scheme and British Coal Staff Superannuation Scheme alleged, among other things, that defendants manipulated First Solar’s publicly reported cost-per-watt (“CPW”) metric, covered up the existence and extent of defects in First Solar’s solar panels and manufacturing processes, and concealed the drastically increased failure rates First Solar’s panels suffered in hot climates. Defendants’ alleged misstatements and concealment of adverse facts caused First Solar’s stock price to reach artificially high levels during the class period (April 30, 2008 to February 28, 2012, inclusive), only to sink as the market absorbed defendants’ prior misrepresentations and fraudulent conduct, causing widespread loss to company shareholders.
Judge Campbell addressed and rejected each of the grounds defendants advanced for dismissal of the First Amended Complaint for Violation of the Federal Securities Laws, and concluded that lead plaintiffs had set forth the elements of their claims with the particularity demanded by the applicable pleading standard. In doing so, Judge Campbell focused on lead plaintiffs’ allegations regarding the CPW metric, which “was central to First Solar’s business plan” because it reflected First Solar’s progress toward viability without government subsidies.
Information from a former member of First Solar’s internal audit team was particularly critical to demonstrating First Solar’s brazen manipulation of the CPW metric. This former auditor recalled a whistleblower’s allegations regarding a specific directive from First Solar’s Vice President of Financial Planning and Analysis, who had directed his staff to “do whatever is necessary” to achieve the CPW number that First Solar reported publicly. The former auditor informed one of the individual defendants, former CFO Jens Meyerhoff, of this illicit directive, but Meyerhoff did nothing to prevent its execution. This confidential witness and others, as well as allegations regarding the individual defendants’ insider sales, convinced Judge Campbell that lead plaintiffs had met the applicable heightened pleading standards regarding defendants’ fraudulent intent.
In addition to crediting the information from lead plaintiffs’ confidential witnesses when denying defendants’ motion to dismiss, Judge Campbell also addressed a separate motion from lead plaintiffs regarding First Solar’s use of confidentiality agreements to discourage other witnesses from coming forward with additional information. Specifically, lead plaintiffs asked Judge Campbell to limit First Solar’s confidentiality agreements so as to prevent First Solar from using them to suppress information concerning defendants’ alleged fraud. Judge Campbell rejected First Solar’s argument that lead plaintiffs lacked standing to pursue such a motion, but requested further briefing before ruling on it. First Solar subsequently agreed to inform its former employees that, notwithstanding the terms of their confidentiality agreements, they are permitted to speak with lead plaintiffs’ counsel, who agreed to maintain the confidentiality of any information they receive.
Smilovits v. First Solar, Inc., No. 2:12-CV-00555-DGC, 2012 U.S. Dist. LEXIS 178802 (D. Ariz. Dec. 17, 2012).