In re AES Corp. Securities Litigation

• Decision Date: 25 June 1993
• Docket Number: Master No. 92 Civ. 4640 (WCC).
• Citation: 825 F. Supp. 578
• Parties: In re the AES CORPORATION SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

825 F. Supp. 578

In re the AES CORPORATION SECURITIES LITIGATION.

Master No. 92 Civ. 4640 (WCC).

United States District Court, S.D. New York.

June 25, 1993.

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Schoengold & Sporn, P.C., New York City (Samuel P. Sporn, Jessica B. Sporn, Joel P. Laitman, of counsel), Abbey & Ellis, New York City (Arthur N. Abbey, Jill S. Abrams, of counsel), for plaintiffs.

Chadbourne & Parke, New York City (Donald I. Strauber, Donald W. Rose, Eric D. Welsh, Brian A. Miller, of counsel), for defendants The AES Corp., Roger W. Sant, Dennis W. Bakke, Robert F. Hemphill, Jr., Frank Jungers, Henry R. Linden, C. Arthur Rolander, Russell E. Train, Thomas I. Unterberg, Robert H. Waterman, Jr. and Barry J. Sharp.

Davis Polk & Wardwell, New York City (Frank S. Moseley, of counsel), for defendants Donaldson, Lufkin & Jenrette Securities Corp., J.P. Morgan Securities, Inc. and Unterberg Harris, L.P.

WILLIAM C. CONNER, District Judge.

This class action suit is brought by plaintiffs on behalf of all individuals who purchased securities of the AES Corporation ("AES") between June 25, 1991, and June 23, 1992, pursuant to two public offerings. The First Amended Class Action Complaint ("Complaint") alleges violations of Sections 11 and 12(2) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; and common law fraud against AES, a number of its officers and directors (the "AES defendants"), and the investment banking firms which underwrote the public offerings (the "underwriter defendants").¹ The action is currently before the Court on defendants' motion to dismiss pursuant to Rule 12(b)(6), Fed.R.Civ.P.

BACKGROUND

AES is a corporation which constructs and operates cogeneration power facilities.² Compl. ¶ 13. The dispute in this case centers around two securities offerings. AES made public offerings of $4,770,000 of common stock ("the equity offering"), and $50,000,000 of 6.5% convertible debentures due in 2002 ("the debt offering"), pursuant to registration statements and prospectuses filed with the Securities and Exchange Commission ("SEC") on June 25, 1991, and March 12, 1992, respectively. Compl. ¶ 1. Plaintiffs allege that the prospectuses contain false and misleading statements that give rise to claims for federal securities violations and common law fraud.

The complaint cites passages from each prospectus, along with statements in AES's annual report and public statements from AES officers, in which the company asserts its commitment to the "shared values" of "integrity," "fairness," and "social responsibility" with regard to economic and business matters. Compl. ¶ 40. The prospectuses represent that AES at times pursued these ethical values at the expense of profits. Compl. ¶ 42. In addition, plaintiffs quote passages from each prospectus in which AES represented that it was a leader in the area of environmental compliance; that its emissions levels were often below the levels required by its permits; that the company had the technology and expertise to comply with environmental laws and regulations; and that the company emphasized the use of technology to foster clean production of power. Compl. ¶¶ 46-48. Finally, the complaint points to three letters written to AES shareholders by defendants Rodger W. Sant (co-founder, chairman of the board, and chief executive officer of AES) and Dennis W. Bakke (co-founder, president, director, and chief operating officer of AES) for the quarters ending June 30, 1992, and September 30, 1991, and for the year of 1991, which discussed the financial performance of the company for those periods. Compl. ¶¶ 49-51.³ The complaint claims that these statements, along with specific statement regarding AES's Cedar Bay, Florida Facility, Shady Point, Oklahoma Facility, and Bucksport, Maine Facility were materially false and misleading because of undisclosed occurrences at each project which, if disclosed, would have negatively affected stock prices. The allegations as to each facility are as follows.

The Cedar Bay Facility

The Cedar Bay Facility in Jacksonville, Florida, was an AES project designed to sell electricity to a Florida utility and steam to the neighboring paper mill run by Seminole Kraft Corporation ("SKC"). Compl. ¶ 68. In order to construct and operate this facility, AES and SKC made a joint application to the Florida Department of Environmental Regulation ("FDER") to obtain a "Site Certification" which was granted on February 17, 1991, by the Governor and his cabinet sitting as the Florida Public Power Siting Board ("FPPSB"). Compl. ¶ 3(b). On June 30, 1991, Sant and Bakke, in a letter to the AES shareholders, stated that financing had been obtained for the facility and construction had begun and was proceeding well, and in subsequent letters AES represented that the project was either on or ahead of schedule. Compl. ¶¶ 53-54. Plaintiffs claim that these statements and those in both prospectuses were false or misleading because AES failed to disclose that the Site Certification was fraudulently obtained.

In both the public relations campaign surrounding the Site Certification process and the Site Certification application itself, AES depicted the Cedar Bay Facility as a project which would improve the air quality in the Jacksonville area by shutting down SKC's existing boilers and replacing them with those employing more environmentally sound technology. Compl. ¶¶ 68-70. AES submitted its Site Certification application in November of 1988 which is quoted in the complaint as follows:

Eight existing boilers at the mill will be shut down; three oil-fired and two bark-fired power boilers and three Kraft recovery boilers. The new CFB boilers will replace the power boilers process steam generation and the old Kraft recovery boilers will be replaced with a modern lowodor unit.

. . . . .

By shutting down old equipment at the paper mill, utilization of modern technology and installation of stacks consistent with good engineering practices, the project will result in numerous benefits to the environment.

Compl. ¶ 69(a). However, on September 6, 1990, AES and SKC entered into a steam purchase agreement in which they agreed, subject to state approval, to maintain SKC's old boilers if the repowering would not conflict with the Site Certification. Compl. ¶¶ 3(b), 71; Strauber Aff., Ex. E ¶ I.(N). The Site Certification ultimately issued by the FPPSB on February 17, 1991, included a provision requiring that the boilers be shut down. The complaint quotes the Site Certification as follows:

This certification and any individual air permits issued subsequent to the final order of the Board certifying the power plant site under 403.509, F.S., shall require, that the following Seminole Kraft Corporation sources be permanently shut down and made incapable of operation, and shall turn in their operation permits to the Division of Air Resources Management's Bureau of Air Regulation, upon completion of the initial compliance tests on the AESCB boilers: the No. 1 PB (power boiler), the No. 2 PB, the No. 3 PB, the No. 1 BB (bark boiler) and the No. 2 BB. BESD shall be specifically informed in writing within thirty days after each individual shut down of the above referenced equipment. This requirement shall operate as a joint and individual requirement to assure common control for purpose of ensuring that all commitments relied on are in fact fulfilled.

Compl. ¶ 72.

In late 1991, a question arose as to whether AES actually intended to shut down the SKC boilers, and local Jacksonville officials petitioned the state to re-open the Cedar Bay Facility's Site Certification process, claiming that AES misled the FPPSB. Compl. ¶¶ 79-80. Florida State Attorney General, Robert A. Butterworth, responded to the local pressure in early January 1992, by directing FDER Secretary Browner to determine whether AES or SKC had taken actions in violation of the Site Certification. Compl. ¶¶ 82-83. On January 16, 1992, Secretary Browner determined that the operation of the boilers would be a violation of the Site Certification, but that there was no evidence to support revoking the Certification. Compl. ¶ 84.

However, on March 3, 1992, Secretary Browner reported to Florida Governor Lawton Chiles that AES "may" have made material misstatements during the Site Certification process. Compl. ¶ 85. On March 6, 1992, the Governor directed Attorney General Butterworth to appoint Special Counsel, Denis Dean, to investigate. Compl. ¶ 86. AES is alleged to have intentionally withheld its agreement to sell steam to SKC from Dean's investigation because the letter was not produced pursuant to Dean's March 30, 1992 general request for documents and was only produced upon specific request on May 1, 1992. Compl. ¶¶ 88-89. On May 4, 1992, Butterworth wrote to the Governor, explaining that the undisclosed letter of intent indicated that the FDER and FPPSB had been grossly misled by AES's Site Certification application, and he recommended that they commence proceedings to suspend the Certification. Compl. ¶ 90.⁴ As a result, on May 5, 1992, financing of the Cedar Bay Facility was withdrawn, and AES was forced to sell the project. Compl. ¶ 92.

The Shady Point Facility

The AES facility in Shady Point, Oklahoma sold electricity to Oklahoma Gas and Electric Company beginning in January of 1991, and it was therefore subject to state and federal environmental regulations. These regulations required the plant to monitor and control its wastewater discharge into Oklahoma waterways, and they also imposed record-keeping requirements upon the company. Compl. ¶¶ 94-97. In June of 1992, AES disclosed to the federal and state agencies and to the general public that, from the time the Shady Point Facility had begun operations, employees had been intentionally falsifying wastewater discharge reports so that it would appear that the plant...