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From Securities Regulation Daily, April 28, 2016

Light bulb case flickers back to life on reconsideration

By Rodney F. Tonkovic, J.D.

Two months after ordering dismissal with prejudice, a district court has vacated its judgment and reinstated a securities fraud action brought against a manufacturer of lighting products. The court had dismissed the action with prejudice for failure to state a claim, but found upon reconsideration that it adequately pleaded misrepresentations under both the Securities Act and the Exchange Act (Sohol v. Yan, April 27, 2016, Polster, A.).

According to the complaint, Ellis Yan and his brother formed TCP International Holdings, Ltd. in the late 1980s. TCP focused on lighting products, and in 1996 introduced a new type of compact fluorescent lamp. Over time, the company introduced more advanced designs, including a first-generation LED, and boosted production. In 2014, TCP went public.

In February 2015, TCP's former general counsel sued TCP and Yan, alleging numerous instances of alleged misconduct by Yan. The market reacted, and, on the following day, TCP's share price dropped to 75 percent below the IPO price.

Soon afterward, the complaint in this case was filed, alleging that the offering documents accompanying TCP's IPO made misrepresentations and failed to disclose material facts. Much of the alleged misconduct was revealed in the general counsel's suit. Specifically, the complaint asserted that the offering materials made misleading statements regarding Underwriters Laboratory (UL) and Energy Star approval of TCP's products. Among other actions, Yan allegedly caused the company to submit "golden samples" for testing; that is, non-representative samples that had been built and tested to meet industry standards. The complaint alleged further that TCP's product labels indicated UL and Energy Star approval when no such approvals had been received.

Plug pulled. In February 2016, the court found no actionable allegations regarding any pre-IPO wrongdoing. According to the court, the second amended complaint failed to describe any wrongful acts that occurred prior to the IPO or any misconduct that rose above the level of corporate mismanagement. The court dismissed the action with prejudice for failure to state a claim, and the investors moved for reconsideration.

Reconsideration. On reconsideration, the court found that the complaint pleaded sufficient facts to support its claims under Sections 11 and 12(a)(2) of the Securities Act. The court noted that it had overlooked allegations related to TCP's 2014 Form 10-K, which supported the idea that TCP was experiencing irregularities at the time of the IPO, and which undermined the veracity of the challenged statements in the offering materials. Specifically, the Form 10-K noted issues with Yan's management style and that TCP needed to improve its process for securing UL listings. The court concluded that the Form 10-K disclosures, plus the alleged post-IPO conduct, created a reasonable inference of pre-IPO material misconduct.

Finally, the court did not address the complaint's Exchange Act claims in its earlier order but found in this instance that fraud was adequately alleged against Yan. Regarding Yan, there was no dispute as to any element of fraud except for whether there was a material misrepresentation or omission. The court found that statements about TCP's product quality, Energy Star compliance, and internal controls were sufficiently alleged to be false when they were made.

The case is No. 1:15-cv-00393.

Attorneys: Laurence M. Rosen (The Rosen Law Firm, P.A.) for Santokh Sohal. Charles F. Smith, Jr. (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates) for Ellis Yan.

Companies: TCP International Holdings, Ltd. Companies: TCP International Holdings, Ltd.

MainStory: TopStory FraudManipulation OhioNews SecuritiesOfferings

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