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From Securities Regulation Daily, March 16, 2017
By Rebecca Kahn, J.D.
Some Exchange Act Section 10(b) fraud allegations survived a motion to dismiss a putative class action against a solar energy company over alleged false and misleading public statements about involvement in a Chinese government subsidy program. But the California district court granted leave to amend only some allegations. (Knox v. Yingli Green Energy Holding Co. Ltd., March 15, 2017, Wright, O.).
Clawbacks and cancellation. Beginning in 2010, solar energy company Yingli’s sales shifted from Europe to China, primarily due to the "Golden Sun" (GSP) program. Under the GSP, the Chinese government subsidized up to 70 percent of the cost of approved solar power projects in China. Between December 2010, and March 2013, Yingli continued to tout its involvement in—and attributed its success in the Chinese market to—the GSP.
In March 2013, negative media reports emerged and industry experts predicted that the Chinese government would discontinue the GSP, causing Yingli’s stock price to fall 22.2 percent. Clawback notices were issued, demanding repayment of between RMB 7 and 10 billion. In June 2013, the Chinese National Audit Office estimated that 29 percent of the GSP subsidies awarded between 2009 and 2011 were "procured through intentional fraud." The GSP was cancelled in December 2013.
A lawsuit followed, alleging that Yingli’s statements misled investors by failing to disclose the inevitable termination of the GSP due to widespread fraud or China’s right to claw back subsidy awards from developers that did not meet project deadlines.
Accounting fraud. The complaint further alleged that Yingli delayed recognition of doubtful accounts in the wake of the GSP’s collapse (in particular an account of Shanghai Chaori Solar Energy Science & Technology Co. Ltd. (Chaori), whom Yingli pursued into bankruptcy). Yingli’s 2013 Form 20-F report established "an allowance for doubtful accounts for the estimated loss on receivables when collection may no longer be reasonably assured." But according to a former Yingli employee, the company delayed making this allowance until long after collection was no longer assured and Yingli had obtained permission to write off those debts.
No fraud by hindsight. The California district court ruled that the complaint failed to show that the risk of clawbacks was material at the time Yingli made the optimistic statements about the GSP. Section 10(b) does not require that companies predict the future and a plaintiff may not plead fraud by hindsight. Although Section 10(b) does require disclosure of a risky future event if that risk is material, such as the possibility that China would claw back subsidies if projects exceeded their deadlines, neither the GSP fraud nor the Chaori receivable demonstrated a likelihood that Yingli’s customers would not complete their projects on time. There was nothing to show that clawbacks presented a material risk to Yingli’s involvement in the GSP when the statements were made. Therefore, Yingli need not have disclosed that risk and the court dismissed these claims without leave to amend.
Materiality. However, the court agreed that there was always a material risk that the government would take drastic measures once it uncovered the fraud. Yingli issued multiple statements attributing its Chinese market success to the GSP and predicting that its future success would come from the program. Such statements were sufficient for the court to infer that any discontinuation would have had a materially negative effect on Yingli’s future performance. Thus, the complaint adequately alleged that the failure to warn of the risk of termination of the GSP constituted a material omission.The court granted leave to amend this theory as additional facts could be pleaded that would establish a securities fraud claim.
Chaori fraud theory survives. The complaint alleged accounting fraud based on the Chinese government’s clawback of hundreds of millions in GSP subsidies from Yingli’s customers in 2013; the clawbacks rendered debts uncollectible and should have been recognized as such in 2013, but Yingli delayed doing so until 2014. The only sum sufficiently linked to the GSP in the complaint was the RMB 75 million Chaori receivable. As such, the court allowed amendment for this issue, but dismissed with prejudice all other accounting fraud theories.
The case is No. 2:15-cv-04003.
Attorneys: Lionel Zevi Glancy (Glancy Prongay & Murray LLP) for Kevin T. Knox. Chet A. Kronenberg (Simpson Thacher & Bartlett LLP) for Yingli Green Energy Holding Co. Ltd.
Companies: Yingli Green Energy Holding Co. Ltd.
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