United States District Court, C.D. California
KEVIN T. KNOX; NOE BAROCIO; SALVADOR BAROCIO; CINDY CONYBEAR, each individually and on behalf of all others similarly situated, Plaintiffs,
YINGLI GREEN ENERGY HOLDING COMPANY LIMITED; LIANSHENG MIAO; YIYU WANG; and ZONGWEI “BRIAN” LI, Defendants.
ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANT'S MOTION TO DISMISS 
D. WRIGHT, II UNITED STATES DISTRICT JUDGE
a putative class action for securities fraud under sections
10(b) and 20(a) of the Securities Exchange Act of 1934.
Plaintiffs Noe Barocio, Salvador Barocio, and Cindy Conybear
allege that Defendant Yingli Green Energy Holding Company
Limited (“Yingli”), a company that sells solar
energy products, defrauded its investors by making false and
misleading public statements about (1) the company's
involvement in a government subsidy program, and (2) the
collectability of debts owed by is customers. Yingli now
moves to dismiss Plaintiffs' Consolidated Amended
Complaint, which the Court GRANTS IN PART and DENIES IN PART.
(ECF No. 93.)
is a publicly traded corporation that manufactures and sells
solar energy products. (Consol. Am. Compl.
(“CAC”) ¶ 2, ECF No. 92.) Prior to 2010,
Yingli sold its products mainly to European companies.
(Id. ¶¶ 3-4, 30-31.) Beginning in 2010,
however, Yingli's sales gradually shifted from Europe to
China. This shift was due in part to a solar energy subsidy
program offered by the Chinese government called
“Golden Sun.” (Id. ¶¶ 5-9,
Golden Sun Program
the Golden Sun Program, the Chinese government subsidized up
to 70% of the cost of approved solar power projects in China.
(Id. ¶ 42.) Yingli benefitted from the program
in two ways. First, the developers for one-quarter of all
Golden Sun projects purchased photovoltaic panels from
Yingli. (Id. ¶¶ 9, 48, 49.) Second, Yingli
received subsidies for its own solar power projects.
(Id. ¶ 49.)
The Allegedly Misleading Statements
December 2, 2010, and March 4, 2013, Yingli touted its
involvement in-and attributed its success in the Chinese
market to-the Golden Sun Program. (Id. ¶¶
51-67.) For example, Yingli expressed “a firm
commitment to the Golden Sun Program” and claimed to
“have established a solid market position”
through its involvement in the program. (Id.
¶¶ 52, 55.) Yingli attributed its “strong
performance” in 2010 to “the steady growth in the
rooftop segment under the Golden Sun Program.”
(Id. ¶ 56.) During its Q3 2012 Earnings Call,
Yingli announced that it expected “[t]he Golden Sun
volume for next year [to] be much larger than this year,
” and that “there will be no any [sic]
cut.” (Id. ¶ 62.) And during its Q4 2012
Earnings Call, Yingli stated that “in the future, our
profitability points are really coming from [the] Golden Sun
Program.” (Id. ¶ 67.)
Why These Statements Were Misleading
to Plaintiffs, these statements were misleading because
Yingli failed to disclose two significant risks to its
involvement in and reliance on the Golden Sun Program: (1)
the inevitable termination of the program due to widespread
fraud in obtaining subsidies; and (2) the government's
right to claw back subsidy awards from developers that did
not meet project deadlines.
Plaintiffs allege that at least 29% of Golden Sun subsidies
were procured through “outright fraud, ” making
it all but inevitable that the government would terminate the
program once the fraud came to light. (Id.
¶¶ 68, 77.) Such fraud included overstating project
costs in subsidy applications, agreeing to use expensive
high-quality materials but instead using inexpensive
low-quality materials, and otherwise “submit[ting]
false applications using fraudulent paperwork.”
(Id. ¶ 77.) Yingli allegedly knew about the
fraud because it procured subsidies for both itself and its
customers through similar types of fraud. (Id.
¶ 109.) First, Yingli purposely overstated costs in both
its own subsidy applications and the applications of its
customers. For example, while Yingli sold solar panels at a
“typical” rate of RMB 6 per watt, Yingli reported
on its applications a “typical” rate of RMB 10
per watt. (Id. ¶ 110.) Second, Yingli
deliberately delayed construction of its approved Golden Sun
projects. (Id. ¶ 111.) The Chinese government
would pay out subsidies immediately upon project approval,
yet Yingli and its customers would delay construction until
the market price for various project materials had decreased.
(Id.) For example, the government approved one
particular Yingli project in 2012 based on a cost estimate of
RMB 13 per watt, but by the time construction on the project
began, the cost had fallen to RMB 7-8 per watt.
(Id.) This resulted in Yingli and its customers
receiving an “interest free
loan.” (Id.) Finally, while Yingli was
required to use certain high-quality materials, it instead
used cheaper low-quality materials during actual
construction. (Id. ¶ 112.) For example, Yingli
represented that it would use 240-watt solar panels, but it
instead used 235-watt panels for its projects. (Id.)
to a former Yingli employee (FE2), the Chinese government
discovered several instances of fraud in the program in 2009
and 2010. (Id. ¶ 113.) This prompted the
government to require inspections of all projects approved
after September 2010. (Id.) Yingli managed to avoid
detection by showing government inspection teams only its
compliant projects and convincing them that they need not
inspect its non-compliant projects. (Id.)
Plaintiffs also allege that there was a high risk that the
government would claw back subsidies paid to both Yingli and
its customers. The government notice announcing the Golden
Sun Program stated that projects approved between 2009 and
2011 must be completed by February 15, 2012, and that the
failure to meet this deadline would require the award
recipient to repay the subsidy for that project.
(Id. ¶¶ 9, 46.) Plaintiffs also allege that
the widespread fraud in the Golden Sun Program exposed the
subsidies to clawbacks, although it is unclear what types of
misconduct would result in clawbacks. (See Id.
¶¶ 82, 114.)
Clawbacks and Cancellation of the Golden Sun Program
March 18 and March 22, 2013, a series of news articles and
several industry experts predicted that the Chinese
government would discontinue the Golden Sun Program.
(Id. ¶¶ 69-79.) At least one article noted
that the program provided developers with “an
overgenerous capital expenditure-based subsidy before
installation, ” thereby reducing their incentive to
build high-quality solar energy systems. (Id. ¶
69.) However, the article did not explicitly cite this as the
reason why the government might discontinue the program.
These articles and predictions allegedly caused Yingli's
stock price to fall 22.2% on March 25, 2013. (Id.
April 2013, the Chinese Ministry of Finance issued clawback
notices to developers that received subsidy awards between
2009 and 2011 but that had failed to complete their projects
on time. (Id. ¶ 74.) On May 20, 2013, Sina.com,
an aggregator of Chinese-language news, reported that the
Ministry of Finance issued clawback notices to 109 Golden Sun
projects, demanding a total repayment of between RMB 7 and 10
billion. (Id. ¶ 75.) Citing a Yingli
“sales head, ” the article further indicated that
51 of the 55 Golden Sun developers that had purchased solar
energy products from Yingli received clawback notices, thus
endangering “nearly 100 million” RMB in its
accounts receivable. (Id. ¶ 87.) The article
noted that the Golden Sun Program had been plagued by
“continuous rumors” about project irregularities,
such as “receiving subsidies by swindling,
procrastinating on work schedules and passing substandard
products as good products.” The article further noted
that “problems have repeatedly occurred in terms of
project examination and approval, subsidy disbursements and
8, 2013, the China Economic Weekly reported that the Ministry
of Finance demanded the repayment of 80% of the subsidies
that it awarded between 2009 and 2011. (Id. ¶
76.) On June 20, 2013, the Chinese National Audit Office
issued an Audit Report estimating that 29% of Golden Sun
subsidies awarded between 2009 and 2011 were “procured
through intentional fraud.” (Id. ¶¶
77, 78.) Five days later, an industry magazine cited the
Audit Report as an indication that the Golden Sun Program was
“nearing its end, ” and that a new subsidy
program “based on real power production” would
take its place. (Id. ¶ 79.) Sure enough, the
Chinese government cancelled the Golden Sun Program in
December 2013. (Id. ¶¶ 81-82.)
Yingli's Doubtful Accounts
also allege that Yingli committed accounting fraud by
delaying the recognition of doubtful accounts (i.e., accounts
on which collectability is no longer reasonably assured) in
the wake of Golden Sun's collapse.
The Allegedly Misleading Statements
prepared its 2013 20-F Report in accordance with U.S.
Generally Accepted Accounting Principles (GAAP).
(Id. ¶ 85.) In this report, Yingli stated that
it “establish[es] an allowance for doubtful accounts
for the estimated loss on receivables when collection may no
longer be reasonably assured.” (Id. ¶
83.) Yingli then recognizes doubtful accounts as bad debt
once “all means of collection have been exhausted and
the potential for recovery is considered remote.”
(Id. ¶ 84.)
Why These Statements Were Misleading
to a former Yingli employee (FE1), Yingli would delay making
an allowance for doubtful accounts until long after
collection was no longer reasonably assured. That is, Yingli
would not make such an allowance until (1) “Yingli
ha[d] lost virtually all hope of collecting” the debt,
and (2) Yingli had “obtain[ed] permission from the tax
office to write off income from the debts from Yingli's
taxes.” (Id. ¶ 88.) Thus, Yingli delayed
recognizing as doubtful the outstanding accounts of its
Golden Sun customers until 2014, even though the clawbacks
rendered those accounts obviously uncollectible in 2013.
(Id. ¶¶ 94, 101.) Yingli's 2013 20-F
Report therefore misrepresented the company's true
point to the account of Shanghai Chaori Solar Energy Science
& Technology Co. Ltd. (“Chaori”) as an
example of Yingli delaying the recognition of an obviously
doubtful account. Chaori had received subsidies from the
Golden Sun Program, and its “existence was imperiled by
the Golden Sun clawbacks.” (Id. ¶ 89.)
Chaori owed a Yingli subsidiary RMB 75.3 million as of May
2013. (Id. ¶ 91.) In March 2013,
Chaori sent a letter to Yingli stating that it did not have
the cash to pay the debt on time, and requested a payment
extension until the end of 2013. (Id.) In April
2013, Yingli sued Chaori for the outstanding amount.
(Id.) By July 2013, Chaori's other creditors had
sued Chaori for a total of RMB 1.906 billion. (Id.
¶ 90.) In September 2013, a Chinese court awarded Yingli
the full RMB 75.3 million in outstanding debt. (Id.
¶ 91.) In March 2014, Chaori defaulted on its
government-issued notes. (Id. ¶ 93.) In July
2014, Chaori's creditors successfully petitioned a court
to place Chaori into bankruptcy. (Id.) Chaori
subsequently advised Yingli to pursue creditor's rights
with the bankruptcy court. (Id.)
Yingli recognized this debt as a doubtful account in its 2014
report, Plaintiffs allege that Yingli should have done so in
its 2013 report. (Id. ¶¶ 94, 95.)
Moreover, because Yingli made only a RMB 20 million allowance
for doubtful accounts in 2013, and because Yingli's
outstanding accounts relating to the Golden Sun Program
allegedly amounted to hundreds of millions of RMB, Plaintiffs
infer that Yingli did not make any doubtful account
allowance that year for outstanding debt owed by customers
that were subject to Golden Sun clawbacks. (Id.
¶¶ 95, 96.) Plaintiffs infer that Yingli delayed
making such an allowance until 2014, when it recorded RMB
228.8 million in doubtful accounts. (Id. ¶ 96.)
March 25, 2014, in response to this large disclosure of
doubtful accounts, Yingli's stock price fell 15%.
(Id. ¶ 99.) On May 15, 2015, Yingli reported
that it was writing off USD $33.2 million (approximately RMB
230 million) in doubtful accounts. (Id. ¶¶
100-01.) Plaintiffs contend that these accounts all became
uncollectible because of clawbacks from the Golden Sun
Program. (Id. ¶ 101.) The next trading day,
Yingli's stock price fell 12.4%. (Id. ¶
102.) The following day, Yingli's stock price fell an
additional 37%. (Id.)
28, 2015, Kevin Knox filed this action. (ECF No. 1.) Three
weeks later, Bhimsain Mangla filed a near-identical action.
(See Compl., Mangla v. Yingli Green Energy
Holding Co. Ltd., et al., No. 2:15-cv-04600-ODW (MRWx)
(C.D. Cal. June 17, 2015).) The Court consolidated the two
actions, appointed Noe Barocio and Salvador Barocio as lead
plaintiffs, and The Rosen Law Firm as lead counsel. See
Knox v. Yingli Green Energy Holding Co. Ltd., 136
F.Supp.3d 1159 (C.D. Cal. 2015). Plaintiffs subsequently
filed a Consolidated Complaint, which Yingli moved to
dismiss. (ECF Nos. 63, 65, 74.) The Court granted in part and
denied in part Yingli's Motion. See Knox v. Yingli
Green Energy Holding Co. Ltd., No. 215CV04003ODWMRWX,
2016 WL 6609210, at *1 (C.D. Cal. May 10, 2016). Plaintiffs
thereafter filed a Consolidated Amended Complaint. (ECF No.
92.) Yingli has again moved to dismiss the complaint. (ECF
No. 93.) That Motion is now before the Court for
court may dismiss a complaint for failure to plead sufficient
facts to support a claim for relief. Fed.R.Civ.P. 12(b)(6);
Balistreri v. Pacifica Police Dep't, 901 F.2d
696, 699 (9th Cir. 1990). In a typical section 10(b) action,
a plaintiff must plead and prove, among other things, (1) a
material misrepresentation or omission by the defendant and
(2) scienter. Stoneridge Inv. Partners, LLC v.
Sci.-Atlanta, 552 U.S. 148, 157 (2008); 17 C.F.R. §
240.10b-5. The plaintiff must plead these elements in
accordance with Federal Rule of Civil Procedure 9(b) and the
Private Securities Litigation Reform Act of 1995
(“PSLRA”), In re VeriFone Holdings, Inc. Sec.
Litig., 704 F.3d 694, 701 (9th Cir. 2012), although the
Rule 9(b) analysis is “effectively subsumed”
under the stricter PSLRA analysis, Miss. Pub. Emps. Ret.
Sys. v. Boston Sci. Corp., 523 F.3d 75, 85 n.5 (1st Cir.
establish the first element, “a plaintiff must show
that the defendant made a statement that was
misleading as to a material fact.”
Matrixx Initiatives, Inc. v. Siracusano, 563 U.S.
27, 38 (2011) (emphasis in original) (footnote and some
internal quotation marks omitted). A statement containing an
express falsehood is sufficient, but not necessary, to
satisfy this element, for a statement may still be false or
misleading if it omits a critical fact. Brody v.
Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir.
2002). But to show fraud by omission, the company's
affirmative statement must be more than simply incomplete; it
must “create an impression of a state of affairs that
differs in a material way from the one that actually
exists.” Id.; see also In re Cutera Sec.
Litig., 610 F.3d 1103, 1109 (9th Cir. 2010). Moreover,
there must be “a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the
‘total mix' of information made available.”
Matrixx Initiatives, 563 U.S. at 38 (quoting
Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988)).
“Pursuant to the PSLRA, a complaint must ‘specify
each statement alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if an
allegation regarding the statement or omission is made on
information and belief, the complaint shall state with
particularity all facts on which that belief is
formed.'” Ronconi v. Larkin, 253 F.3d 423,
429 (9th Cir. 2001) (quoting 15 U.S.C. § 78u-4(b)(1)).
complaint must also ‘state with particularity facts
giving rise to a strong inference that the defendant acted
with the required state of mind'-that is, that he acted
with intentionality or deliberate recklessness or, where the
challenged act is a forward looking statement, with
‘actual knowledge . . . that the statement was false or
misleading.'” Ronconi, 253 F.3d at 429
(quoting 15 U.S.C. §§ 78u-4(b)(2)(A),
78u-5(c)(1)(B)(i)) (footnotes and some citations omitted). To
determine whether the plaintiff has shown a “strong
inference” of scienter, the court “must engage in
a comparative evaluation; it must consider, not only
inferences urged by the plaintiff . . . but also competing
inferences rationally drawn from the facts alleged.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 314 (2007). “An inference of fraudulent
intent may be plausible, yet less cogent than other,
nonculpable explanations for the defendant's conduct. To
qualify as ‘strong' . . . an inference of scienter
must be more than merely plausible or reasonable-it must be
cogent and at least as compelling as any opposing inference
of nonfraudulent intent.” Id. This analysis
requires the court to “assess all the allegations
holistically” rather than “scrutiniz[ing] each
allegation in isolation.” Id. at 326.