Suit alleges GTAT ‘chaos’

Shareholders say firm tried the ‘impossible’

It was a technology “light years” away from where it needed to be.

It had a timeline “completely out of line with reality.”

“No reasonable person” would think that the endeavor was going to be profitable.

These are just some of the opinions expressed by former employees about Merrimack-based GT Advanced Technologies’ effort to manufacture sapphire for Apple’s mobile devices. They are recorded in a shareholder complaint filed in late July in a class-action suit.

According to the suit, even while several employees told executives that the Apple deal was failing, executives told investors it was succeeding, and since Apple effectively controlled GTAT, it was in on the fraud as well.  

The complaint – consolidated from some 13 other shareholder suits issued after GTAT filed for bankruptcy in October –  quotes public filings and private interviews and charges executives with “an audacious securities fraud” by “touting a supposedly transformative business venture with Apple Inc. that they secretly knew was doomed to fail.”  

In the process, the executives reaped nearly $20 million in “illicit profits,” while GTAT collapsed, wiping out $1.4 billion in shareholder value and precipitating an investigation by the Securities and Exchange Commission, according to the complaint.

NH Business Review also contacted some employees familiar with the GTAT/Apple operation, and they confirmed the gist of what is charged in the suit. But they asked not to be identified.

The bankrupt GTAT isn’t named as a defendant, but former CEO Thomas Gutierrez, who announced his retirement on Aug. 10, was named, as were former and current chief financial officers Richard Gaynor and Raja Bal, the entire board of directors and several underwriters.

Apple was added to the suit in July, along with Hoil Kim, GTAT’s chief administrative officer and general counsel, and Daniel W. Squiller, GTAT’s chief operating officer, who ran the Arizona operation and whose declaration blaming Apple for its failure was widely quoted in the complaint.  Kim, Bal and current CEO David Keck (not named in the suit) now are the members of the company’s newly formed Office of the Chairman.  

“Every complaint, in every case, presents a one-sided version of the facts,” Jordan D. Hershman — leader of securities litigation at Morgan Lewis, the firm representing the executives — told NH Business Review in an email. Hershman said he would ask the court to dismiss the case because of its “many deficiencies,” but “out of respect for the court” declined further comment.

Calls to Apple and its attorneys were not returned by deadline.

‘Bait-and-switch’ tactics

GTAT was struggling before it got involved with Apple, but, in hindsight, there is little doubt that its fate was sealed when it abandoned its business model – making equipment to produce materials for such uses as solar cells and in LED equipment – to pursue a deal to manufacture sapphire for Apple’s mobile devices.

Apple lent GTAT $439 million to build and run a factory in Arizona on land owned by a subsidiary and stock it with more than 2,000 furnaces for the manufacturing operation. But that deal was only reached after “bait-and-switch” tactics, according to the aforementioned Squiller declaration.

GTAT had originally just wanted to sell Apple the furnaces, but “after it allocated virtually all of its resources to the Apple agreement and abandoned other business opportunities,” it felt it had no choice but to accept the agreement, the complaint says.  

“Apple simply dictated the terms and conditions of the deal,” and its negotiators allegedly told GTAT, “put on your big boy pants and accept the agreement,” according to Squiller’s statement.

The problem was that the company’s technology was “light years” away from being able to meet Apple’s specifications, which were withheld from investors because of Apples confidentiality requirements, claims the suit in quoting GTAT’s former sapphire product manager from 2010 through January 2014. 

Those specifications required that GTAT produce 262-kilogram boules, more than twice the size ever produced, in less than a year. It took nearly three years (from March 2010 to early 2013) for the company to figure out how to increase boule size from 85 kg to 115 kg, says the suit.

That product manager, according to the complaint, repeatedly ran “models that proved that we could not do it” and sent that information to Gutierrez and Squiller, advising them to walk away from the deal. When they didn’t, the product manager quit in December 2013.

The “timeline [for the production of the 262 kg boules] was completely out of line with reality,” said a former GTAT sapphire engineer who worked at the plant from February through October 2014, according to the complaint. 

The senior director of quality from October 2013 through October 2014 at the plant, allegedly called the deal a “leap of faith,” adding, “no reasonable person could think that was going to be profitable given what was going on,” once production commenced.

‘No organization’

Perhaps GTAT could have managed it, if everything went right, but a lot went wrong, as documented in the Squiller declaration and a November 2014 article in The Wall Street Journal, which also cited unnamed sources.

Some of the problem was Apple’s fault, according to Squiller. For instance, the Arizona plant had an unreliable power supply, the agreement required GTAT to use Apple-approved vendors, and there was constant interference from Apple managers.  

But the result was that yield rates reached only 30 percent, rather than the 90 to 97 percent required to manufacture sapphire at a reasonable cost, according to GTAT’s director of operations for the sapphire fabrication business unit, in the complaint.

“There was no organization to the process,” the global logistics manager at the plant from March to December 2014 says in the complaint. The “amount of confusion” surrounding the project was “unreal,” the executive added, and the company was “throwing everything at the wall they could trying to figure out how to get larger boules.”

The logistics manger allegedly uses the word “chaos” to describe the situation, adding, “there was no way they were going to be able to manufacture the volumes they had committed to.”

According to the complaint, a former growth support supervisor of sapphire equipment and materials says what GTAT was trying to do the “impossible” and the company was “setting ourselves up to fail.”

A different picture

Yet GTAT presented a different picture to investors.

For instance, Gutierrez said in a February 2014 press release that “our arrangement to supply sapphire materials to Apple is progressing well.”

In an early May 2014 release, GTAT declared it had “developed more advanced [advanced sapphire furnace] technology capable of producing boules significantly greater than 165 kg.”  

The complaint, quoting The Wall Street Journal article, says that Gutierrez told Apple that he was there to “fall on his sword,” and by July, according to an unnamed production technician,“ GTAT shut down all of its furnaces and only started a few furnaces back up to experiment with various recipes from July to October,” the complaint charges. 

Yet in August 2014, according to the complaint, Gutierrez and Bal “actively lied to investors” when they said that GTAT was “commencing the transition to volume production” and that GTAT would receive a final payment from Apple because it expected to meet certain “operational targets.”

“These statements were outrageously false,” the complaint claims.

When the company filed for bankruptcy, its stock price dropped by 93 percent, to 80 cents a share, costing shareholders $1.4 billion. The company’s stock also was delisted by the Nasdaq exchange, and the company continues to lose money. Its over-the-counter stock price has sunk to below 10 cents a share.

Some 18 shareholders, who are not a part of the suit, have backed up a motion in bankruptcy court for an official equity committee. In their motion, many have detailed their plight.

“I have lost over $100,000 in market value on my pre-bankruptcy holdings, a substantial portion (over 15 percent) of my retirement accounts and my biggest market loss ever, by far, after 35 years as a public servant in California,” wrote Douglas Southard, a retired superior court judge.

‘Not a chance’

But while shareholders were buying up stock, executives were selling, claims the complaint.

In the 11-month period ending with the bankruptcy filing on Oct. 6, 2014, executives sold nearly $20 million in stock, whereas in the previous 11 months, starting on Dec. 5, 2013, they didn’t sell anything, according to the complaint.

Gutierrez, the complaint charges, received half of those proceeds by selling half of his personal holdings available for sale.  

The sales “were extremely large, highly unusual, and wildly inconsistent with their prior trading history,” charges the suit.

Gutierrez and the other executives named in the suit are covered under  GTAT’s insurance policy, and on Aug. 27, the bankruptcy court approved a motion allowing the attorneys to use that policy to pay for their defense, as well as “other matters.”

The class action attorneys filed a motion in bankruptcy court asking that that policy, and the coverage amount, and the amount drawn down, be made public, as well as to disclose what other legal matters the defendants were preparing for. But the bankruptcy judge ruled against the plaintiffs, telling them, “That isn’t going to happen.” 

Bankruptcy law shields GTAT from the class action suit, besides, it would be unlikely that there will be much money left after the firm emerges from bankruptcy. Indeed, attorneys told the bankruptcy court in August that there was “not a chance” that equity owners would be able to recover any of their losses.

Apple, with a market capitalization of more than $600 billion, is another matter, and the complaint argues that the technology giant shares responsibility for the fiasco.

Citing the Squiller declaration, as well various confidentiality agreements, the complaint claims that Apple was in “de facto control of GTAT,” both of its sapphire operations and “the content and dissemination of statements” that the plaintiffs allege were “materially false and misleading.” 

Bob Sanders can be reached at bsanders@nhbr.com