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Knox v. Yingli Green Energy Holding Company Limited

United States District Court, C.D. California

March 15, 2017

KEVIN T. KNOX; NOE BAROCIO; SALVADOR BAROCIO; CINDY CONYBEAR, each individually and on behalf of all others similarly situated, Plaintiffs,




         This is 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.)[1]


         Yingli 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, 30-41.)

         A. Golden Sun Program

         Under 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.)

         1. The Allegedly Misleading Statements

         Between 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.)

         2. Why These Statements Were Misleading

         According 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.

         Fraud. 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[].”[2] (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.)

         According 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.)

         Clawbacks. 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.)[3] 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.)

         3. Clawbacks and Cancellation of the Golden Sun Program

         Between 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. ¶ 73.)

         In 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.)[4] On May 20, 2013,, 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.”[5] The article further noted that “problems have repeatedly occurred in terms of project examination and approval, subsidy disbursements and subsequent supervision.”[6]

         On June 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.)

         B. Yingli's Doubtful Accounts

         Plaintiffs 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.

         1. The Allegedly Misleading Statements

         Yingli 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.)

         2. Why These Statements Were Misleading

         According 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 financial condition.

         Plaintiffs 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.[7] (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.)

         Although 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.)

         On 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.)

         C. Procedural History

         On May 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 consideration.


         The 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. 2008).

         A. Material Misrepresentation

         To 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)).

         B. Scienter

         “The 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.

         C. ...

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