GT Solar fends off IPO class action suits
GT Solar International is the target of several class action lawsuits, charging that it misled investors by failing to disclose that it was in danger of losing its primary customer before the launch a little more than a month ago of its half-billion-dollar initial public offering.
The Merrimack-based firm, its board of directors, its underwriters, its top executives and a private equity firm that controls it are all targets of four suits filed in U.S. District Court in Concord. The company manufactures furnaces that create materials used in making solar energy cells.
The day after the July 24 IPO was launched with much fanfare – executives rang the Nasdaq’s opening bell in New York’s Times Square — LDK Solar Co., a Chinese firm that represented 62 percent of GT Solar’s sales in fiscal 2008, announced that it had signed a major contract with a competitor, the China-based JYT Corp.
The contract, which expanded LDK’s solar production capacity, caused LDK’s stock price to soar, but it caused GT Solar’s fledgling stock price to sour. The company, which opened its IPO with some 30 million shares selling at $16.50 a share, tumbled to as low as $9.30 at one point.
GT Solar hastily issued a press release aimed at reassuring investors that LDK only represented 20 percent of the company’s $1.3 billion backlog, and that only 8 percent of that backlog was made up of LDK furnaces that were being contracted out to somebody else.
That helped the stock bounce back somewhat, but that also added fuel to the lawsuits, one of which said it was further evidence that GT Solar already knew it was losing its major customer and withheld that fact from investors.
The four lawsuits were filed between Aug. 1 and Aug. 12, with the first three already being consolidated. The suits were filed by local firms, but they represent the work of larger law firms from Boston, San Diego, and two from New York City.
In addition, four other law firms, from New York, Oklahoma, New Orleans and Baltimore, put out press releases indicating that they also were planning to get in on the action, but none of those firms has filed yet.
“We deny claims in the recent suits and will vigorously defend against any and all allegations,” said Ned Lewis, GT Solar’s general counsel and a defendant in two of the lawsuits. “In the meantime, management continues to remain focused on executing its business strategy.”
Lewis declined any further comment, citing the 40-day “quiet period” required by federal regulations, which forbid companies from talking up or down a newborn security.
GT Solar started in 1994 in the basement of Kedar Gupta and John Talbott and quickly became a success story, eventually attracting private equity. In 2006, the firm was acquired by a holding company controlled by GFI Energy Ventures LLC, a private equity investment firm focused on the energy sector, and Oaktree Capital Management L.P., a global alternative and nontraditional investment manager.
After several aborted attempts to take the company public, GT Solar filed with the Securities and Exchange Commission in June a rough draft of the prospectus to provide the company’s financial background so would-be investors could make up their mind as to whether they wanted to invest in the company.
The prospectus explained that the original stockholders, including the private equity firms, would retain control of 78 percent of the stock, and the money raised would go shareholders.
The company did not plan to pay dividends, except for a one-time $90 million dividend that would be paid to existing investors. Founders Gupta and Talbot would get a $65 million and $21 million cash payment out of the deal, respectively, with CEO Thomas Zarrella collecting $8.5 million. The cost of the IPO, much of which would go to the underwriters, was $4 million.
But it was other details in the document — what is said and not said about risk — that is at heart of the class action litigation.
It isn’t that the prospectus didn’t warn investors about what could go wrong. It said that, despite this explosive growth, the company had always been dependent on the contracts of a few companies, and most of those companies centered in China, which dominates the solar energy industry, accounting for more than a third of the world’s production in 2007.
“In each fiscal year, we depend on a small number of customers for a substantial part of our sales and revenue,” the company warned, mentioning the aforementioned 62 percent of revenue accounted for by one customer — LDK.
In the same paragraph, it added, “we had a $1.3 billion order backlog, of which $769 million was attributable to three customers. … There is a risk that existing customers will elect not to do business with us in the future.” The statement did not name the customers to which it was referring.
But GT Solar had to know LDK was in trouble, according to one complaint drafted by the Boston firm of Shapiro, Haber & Urby and filed Aug. 5.
“In light of the … critical importance of LDK Solar as a customer of GT Solar, GT Solar had to have had constant communications with LDK regarding sales to LDK of DSS furnaces and other products,” the complaint reads. “Based upon those communications, if LDK was preparing to enter into, or had entered into, a contract to purchase DSS furnaces from JYT Corporation, and to publicly disclose that contract on July 25, 2008, then, GT Solar would have known those facts.”
The prospectus concealed GT Solar’s failure to adequately supply LDK, including “delays in shipments, which threatened GT Solar’s relationship with its most important customer,” alleges another suit filed Aug. 1 by the San Diego firm of Coughlin, Stoia and Geller.
A suit filed Aug. 12 by the New York City-based Wolf Popper LLP used GT Solar’s own assurances that the company was diversifying, and that LDK only represented 20 percent of its backlog, against it in court.
The complaint charged that the GT Solar “belatedly revealed that new orders from LDK had materially slowed or stopped.”
But all is not lost when it comes to LDK. In a conference call following LDK’s last quarterly earnings report of $149.5 million — triple that of a year ago — executives said that despite the contract with JYT, GT Solar was still “a very important supplier.”
Bob Sanders can be reached at email@example.com.