Lawsuits say GT Solar misled over disclosures

GT Solar International, less than three weeks after going public, is being swamped by class action lawsuits claiming that it misled investors by failing to disclose it was in danger of losing its primary customer before launching a half-billion-dollar initial public offering.

The Merrimack-based manufacturer of the furnaces that create the materials to make solar energy cells, 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 day after the July 24 initial public offering – launched with much fanfare with the ring of the Nasdaq bell in New York’s Times Square – LDK Solar Co., a Chinese firm that represented 62 percent of the company’s sales in fiscal 2008, announced that it had signed a major contract with the China-based JYT Corp., a GT Solar competitor.

The contract, which expanded LDK’s solar production capacity, caused LDK stock price to soar and 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.

GT Solar hastily put out a press release that tried to reassure investors that LDK only represented 20 percent of the company’s vaunted $1.3 billion backlog, and only 8 percent of that backlog was LDK furnaces that were being contracted out to somebody else. That helped the stock bounce back somewhat but also added fuel to law suits, one of which used that fact as further evidence that GT Solar already knew it was losing its major customer and withheld that fact from investors.The first four lawsuits so far 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 the action, but none of those firms have 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 law suits. “In the meantime, management continues to remain focused on executing its business strategy.”

Lewis declined further comment, citing the 40-day “quiet period” required by federal regulations which forbids companies from talking up or down a newborn security.

GT Solar started in 1994 in the basement of Kedar Gupta and John Talbott (whose last name initials explain the company’s name), 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.

In a two-year period, the company saw revenue growth of 419 percent, from about $47 million to more than $244 million. And in fiscal year 2008, the company first posted a profit, a net income of $36 million, almost making up for the net loss it suffered in the two previous years.

After several aborted attempts to take the company public, GT Solar finally filed with the Securities and Exchange Commission in June a rough draft of the prospective, finalized in July, to give the financial background of the company so that would-be investors could make up their minds as to whether they wanted to invest in the company.

The prospective explained that not the whole company would go public. The original stockholders, including the private equity firms, would retain control of 78 percent of the stock, and the money raised would go to 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 $65 million and $21 million cash payments out of the deal, 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 the heart of the class action litigation.

It isn’t that the prospective 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 around 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 that “we had a $1.3 billion order backlog, of which $769 million was attributable to three customers (without naming those customers). . . . There is a risk that existing customers will elect not to do business with us in the future.”

But the plaintiffs said the company knew and should have made clear that the risk was eminent. 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 read. “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 prospective 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 by the San Diego firm of Coughlin, Stoia and Geller on Aug. 1. The latest 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.”

GT Solar closed Thursday at $11.78, up 30 cents a share, from the previous day’s close of $11.48.