Fund v. First Solar, Inc.

• Decision Date: 27 November 2018
• Docket Number: No. CV15-1156-PHX-DGC,CV15-1156-PHX-DGC
• Parties: Maverick Fund, L.D.C.; Maverick Fund USA, Ltd.; Maverick Fund II, Ltd., Maverick Neutral Fund, Ltd.; Maverick Neutral Levered Fund, Ltd.; Maverick Long Fund, Ltd.; and Maverick Long Enhanced Fund, Ltd., Plaintiff, v. First Solar, Inc.; Michael J. Ahern; Robert J. Gillette; Mark R. Widmar; Jens Meyerhoff; James Zhu; Bruce Sohn; and David Eaglesham Defendants.
• Court: U.S. District Court — District of Arizona

Maverick Fund, L.D.C.; Maverick Fund USA, Ltd.; Maverick Fund II, Ltd.,
Maverick Neutral Fund, Ltd.; Maverick Neutral Levered Fund, Ltd.;
Maverick Long Fund, Ltd.; and Maverick Long Enhanced Fund, Ltd., Plaintiff,
v.
First Solar, Inc.; Michael J. Ahern; Robert J. Gillette; Mark R. Widmar;
Jens Meyerhoff; James Zhu; Bruce Sohn; and David Eaglesham Defendants.

No. CV15-1156-PHX-DGC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

November 27, 2018

ORDER

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

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I. Background.

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

A. The Parties.

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

B. Factual Allegations.

Between May 4, 2011 and December 15, 2011, Plaintiffs purchased millions of First Solar common stock. Id. ¶ 16. Plaintiffs purchased these shares relying on Defendants' misrepresentations that First Solar would reach grid parity through advanced technology and large scale solar power plants in the southwest.¹ See Id. ¶¶ 15, 215, 236.

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Plaintiffs also relied on statements by Defendants that although Defendants experienced problems with defective and underperforming panels throughout 2009 to 2011, the problems were minimal and would not affect First Solar's earnings or grid parity goals. Doc. 1 ¶ 215, 236.

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

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

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

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

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mentioned issues involving panel performance in high heat environments or possible heat degradation in panels. Id. ¶ 185.

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

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

C. The Complaint.

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

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earnings forecasts accordingly (id. ¶ 120); and Defendants issued false financials and violated the Generally Accepted Accounting Principles ("GAAP") (id. ¶ 128).

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

II. Plaintiffs' § 10(b) Claim.

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

A. Pleading Standard.

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

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

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strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A).

B. Elements of 10b-5 Claim.

To state a claim under § 10(b) and Rule 10b-5, a plaintiff must plead: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a...