Hyatt v. Vivint Solar, Inc. et al
Filing
81
OPINION & ORDER re: (38 in 1:14-cv-09709-KBF) MOTION to Dismiss the Second Consolidated Amended Complaint. filed by Blackstone Advisory Partners L.P., Morgan Stanley & Co. LLC, Barclays Capital Inc., Goldman, Sachs & Co., Deuts che Bank Securities Inc., Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., (67 in 1:14-cv-09283-KBF) MOTION to Dismiss the Second Consolidated Amended Complaint. f iled by Blackstone Advisory Partners L.P., Morgan Stanley & Co. LLC, Barclays Capital Inc., Goldman, Sachs & Co., Deutsche Bank Securities Inc., Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, C itigroup Global Markets Inc., (35 in 1:14-cv-09709-KBF) MOTION to Dismiss The Second Consolidated Amended Complaint. filed by David F. D'Alessandro, The Blackstone Group L.P., Peter F. Wallace, Todd R. Pedersen, Joseph F. Trustey, Bruce McEvoy, Vivint Solar, Inc., Alex J. Dunn, Joseph S. Tibbetts, Dana C. Russell, Gregory S. Butterfield, (64 in 1:14-cv-09283-KBF) MOTION to Dismiss The Second Consolidated Amended Complaint. filed by David F. D'Alessandro, The Blackstone Group L.P., Peter F. Wallace, Todd R. Pedersen, Joseph F. Trustey, Bruce McEvoy, Vivint Solar, Inc., Alex J. Dunn, Joseph S. Tibbetts, Dana C. Russell, Gregory S. Butterfield. For the reasons set forth above, defendants' motion to dismiss is GRANTED. The action is dismissed with prejudice. Plaintiff was previously provided with the opportunity to amend its pleading, and has done so. Plaintiff has not suggested any facts it might include in a further amendment that woul d resolve the deficiencies in the SAC. The Clerk of Court is directed to amend the captions in this matter to match the caption above, terminate the motions at ECF Nos. 64 and 67, and terminate these actions. (As further set forth in this Order) (Signed by Judge Katherine B. Forrest on 12/10/2015) Filed In Associated Cases: 1:14-cv-09283-KBF, 1:14-cv-09709-KBF(lmb)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
ROBBY SHAWN STADNICK, individually and :
on behalf of all others similarly situated,
:
:
Plaintiff,
:
:
-v:
:
VIVINT SOLAR, INC., et al.,
:
:
:
Defendants.
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: December 10, 2015
14-cv-9283 (KBF)
14-cv-9709 (KBF)
OPINION & ORDER
KATHERINE B. FORREST, District Judge:
Plaintiff Robby Shawn Stadnick, on behalf of himself and as representative of
a purported class, brings this action against Vivint Solar, Inc. (“Vivint Solar” or “the
Company”), its largest stockholder, Blackstone Group, L.P., a number of individual
officers and directors (the “Individual Defendants”1), and a syndicate of
underwriters (the “Underwriter Defendants”2), for securities law violations in
connection with the Company’s initial public offering (“IPO”) on October 1, 2014.
(SAC3 ¶ 1.) Pursuant to the IPO, the Company sold 20,600,000 shares of its
common stock at $16 per share, raising net proceeds of $300.8 million. (Id. ¶ 29.)
1
The Individual Defendants include Gregory S. Butterfield who at the time of the IPO was the Chief Executive
Officer, President, and a director, Dana C. Russell, who at the time of the IPO was the Chief Financial Officer, and
David F. D’Alessandro, Alex J. Dunn, Bruce McEvoy, Todd R. Pedersen, Joseph F. Trustey, Peter F. Wallace, and
Joseph S. Tibbetts, who at the time of the IPO were directors. (SAC ¶¶ 19-22.)
2
The Underwriter Defendants include Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Inc., Credit
Suisse Securities (USA) LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Morgan Stanley & Co.
LLC, Barclays Capital Inc., and Blackstone Advisory Partners L.P. (SAC ¶ 23.) The Underwriter Defendants both
joined in the arguments submitted by Vivant Solar and the Individual Defendants, and submitted their own
memoranda in support of this motion. (ECF Nos. 68.)
3
The notation “SAC” refers to plaintiff’s Second Consolidated Amended Complaint for Violation of the Federal
Security Laws, available at ECF No. 58.
Plaintiff asserts that Vivint Solar issued a misleading Registration
Statement in connection with its IPO. (Id. ¶ 1.) The core of plaintiff’s claim is that
the Registration Statement inaccurately portrayed the Company as a good
investment with consistently positive net income and earnings-per-share and a
strong qualitative description of operations by omitting three material pieces of
information: a “massive negative swing in earnings” in the third fiscal quarter that
ended the day before the IPO; increasing regulatory constraint on the Company’s
operations in Hawaii, its second biggest market; and changes in consumer
preferences within the residential solar energy market. Plaintiff alleges that these
omissions violated §§ 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C §§ 77k(a),
77l(a), and 77o(a) (2012). (Id. ¶¶ 109-40.)
Now before the Court are defendants’ motions to dismiss plaintiff’s Second
Consolidated Amended Complaint (SAC) for failure to state a claim upon which
relief can be granted. (ECF Nos. 64 & 67.) For the reasons set forth below, those
motions are GRANTED.
2
I.
FACTUAL BACKGROUND4
A.
Vivint Solar’s Business Model
Vivint Solar is a residential solar energy unit installer that leases solar
energy systems to homeowners. (SAC ¶ 2.) It operates in a number of states
including California, Hawaii, Arizona, Massachusetts, New Jersey and New York.
(Id. ¶ 16.) As of June 30, 2014, over 50% of its total installations were in California,
and 15% were in Hawaii. (Id.) The majority of its offices – 21 of 37 – were located
in these two states alone. (Id.)
The Company’s business model is premised on its ownership of solar energy
equipment installed on residential homes, with homeowners entering into long-term
– typically 20 year – leases for power. (Id. ¶¶ 25, 26.) Vivint Solar’s customers pay
little to no money upfront and pay 15-30% less for their power than they would for
utility-generated electricity. (Id. ¶ 25.) The fundamental revenue stream for the
Company is homeowners’ monthly payments for power over the lives of the leases.
(Id. ¶ 26.) Because Vivint Solar retains ownership of the systems, it qualifies for
various tax credits and other local, state, and federal incentives. (Id.)
4
In evaluating whether plaintiff has stated a claim, this Court considers the allegations of the SAC, as well as
document incorporated by reference therein. See, e.g., Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d
Cir. 2002). The SAC identifies and incorporates a number of such materials, including Vivint Solar’s filings with
the Securities and Exchange Commission (“SEC”), regulatory filings and reports, securities analyst reports, press
releases and other public statements issued by the Company, and other media reports about the Company. (SAC p.
1.) The incorporated materials include most notably the Company’s Registration Statement (ECF No. 66, Exh. A),
Form 10-K for the year ended December 31, 2014 (Id., Exh. B), Form 10-Q for the quarter ended September 30,
2014 (Id., Exh. J), and analyst reports issued in October and November (Id., Exhs. F, K). The SAC also references a
report by GTM Research, issued in June 2014, entitled “U.S. Residential Solar Financing,” and another by the
National Renewable Energy Laboratory, issued in November 2014, entitled “The Solar Market Report”. (Id., Exhs.
C, D.)
3
Because Vivint Solar’s customers pay little to no money upfront, the
Company needs access to capital to purchase, install, and maintain the systems.
Prior to the IPO, Vivint Solar had raised cash through at least 10 Investment
Funds. (Id. ¶ 27.) In return for substantial cash commitments, these Funds have
interests in the long-term payment stream generated by homeowner payments. (Id.
¶ 28.) The contracts between the Company and the Investment Funds provide that
after the systems a Fund finances are installed, the bulk of the homeowner
payment revenues go to the Fund until, depending on the contract’s structure,
either the Fund achieves a targeted rate of return or the recapture period associated
with certain investment tax credits expires, at which point the percentages “flip”
and the Company began to receive most of the revenues. (Id. ¶ 37; RS5 89.)
Vivint Solar calculates its net income available or loss attributable to
common stockholders by first calculating its overall net income or loss and then
subtracting the net loss attributable to non-controlling interests and redeemable
non-controlling interests (together referred to as “NCIs”). (SAC ¶ 50; RS 99.) Loss
attributable to NCIs are allocable to Fund investors, as opposed to the Company
itself. (SAC ¶ 36.) Vivint Solar calculates the net loss attributable to NCIs using
an accounting method known as Hypothetical Liquidation at Book Value (“HLBV”).
(SAC ¶ 36.) Under HLBV, the net loss attributable to NCIs for a period is the
change in the amount the Funds’ investors would hypothetically receive under the
5
The notation “RS” refers to Vivint Solar’s Registration Statement, available as ECF No. 66, Exh. A.
4
liquidation provisions of the Funds’ contractual agreements, after taking into
account any capital transactions between the Funds and the investors. (RS 88-89.)
The Company’s combined use of Investment Funds and the HLBV accounting
method makes timing important to the Company’s balance sheets. At times a
Fund’s investors contribute cash to pay for the installation of solar energy systems
prior to the actual installation of the systems. (SAC ¶ 43; RS 90.) When this
occurs, the Company assigns the uninstalled system an asset value of zero and the
Fund reflects a receivable, representing its eventual right to receive solar panels.
(RS 90.) In order to account for this receivable, the Fund’s member’s equity is
reduced; that is, the Fund investor has a loss. (SAC ¶ 43; RS 90.) When the
purchased solar energy system is eventually installed the receivable is eliminated
and the Fund’s member’s equity is increased, reversing the earlier loss. (SAC ¶ 43;
RS 90.)
The Blackstone Group L.P. (Blackstone) is an investment firm that owns a
majority interest in Vivint Solar. (SAC ¶¶ 17-18.) Blackstone controlled 97% of the
Company’s common stock prior to the IPO and 78% after the IPO. (Id. ¶ 18.)
B.
The Registration Statement
Vivint Solar sought capital on the public equity markets starting in 2014.
(Id. ¶ 29.) In connection with its IPO it submitted and revised a Registration
Statement, which the Securities and Exchange Commission (“SEC”) declared
effective on September 30, 2014, the day before the Company’s October 1, 2014 IPO.
5
(Id.) Plaintiff’s claims turn on the whether this Registration Statement contained
material misstatements or omissions.
The Registration Statement provides extensive information about the risks of
investing in Vivint Solar. On page 8, within the Prospectus Summary, the
Statement summarizes risks including, inter alia, the Company’s “need to enter into
substantial additional financing arrangement,” “electric utility industry policies and
regulations,” the Company’s reliance on “net metering6 and related policies to offer
competitive pricing,” a “material weakness in [the Company’s] internal control over
financial reporting,” and the challenges of “attracting, training and retaining sales
personnel and solar energy system installers.” (RS 8.)
The Risk Factors section of the Registration Statement begins on page 19 and
runs for 39 pages. (Id. 19-58.) The first risk listed, to which the Statement returns
a number of times, relates to the Company’s financing arrangements with its
Investment Funds. (SAC ¶ 28; RS 19.) The Company disclosed that its “future
success depends on [its] ability to raise capital from third-party investors on
competitive terms to help finance the deployment of [its] solar energy systems.” (RS
19.)
The Registration Statement also addressed the possibility that regulations
governing the electric utility industry and that industry’s policies “could result in a
significant reduction in the potential demand for electricity from [the Company’s]
6
“Net metering allows a homeowner to pay his or her local electric utility only for their power usage net of
production from the solar energy system . . . . Homeowners receive credit for the energy that the solar installation
generates to offset energy usage at times when the solar installation is not generating energy.” (RS 23.)
6
solar energy systems and could deter customers from entering into contracts with
[the Company].” (Id. 21.) One regulatory issue the Registration Statement
highlighted was the Company’s reliance on favorable net metering policies, the
absence of which “would significantly limit customer demand for [the Company’s]
solar energy systems.” (Id. 23.) The Statement noted that, under California
regulations, systems installed before the earlier of July 2017 or the fulfillment of a
“statutory net metering cap” would be grandfathered in to the current favorable net
metering rules for 20 years, but later-installed systems would not. (Id.)
The Risk Factors section also highlighted the specific risk of regulatory
limitations in “certain key markets.” (Id. 24.) Regarding Hawaii, the Registration
Statement explained that
Hawaiian electric utilities have adopted certain policies that limit
distributed electricity generation in certain geographic areas. While
these limits have constrained [the Company’s] growth in Hawaii,
legislative and regulatory developments in Hawaii have generally
allowed distributed electricity generation penetration beyond the
electric utility imposed limitations. Future revisions, however, could
result in limitations on deployment of solar energy systems in Hawaii,
which accounted for approximately 15% of [the Company’s] total
installations as of June 30, 2014 and would negatively impact [the
Company’s] business.
(Id.) A few pages later, the importance of the Hawaii and California markets was
re-emphasized and quantified: “As of June 30, 2014, approximately 53% and 15% of
[the Company’s] total installations were in California and Hawaii, respectively, and
21 of [its] 37 offices were located in those states. In addition, [the Company]
expect[s] much of [its] near-term future growth to occur in California, further
concentrating [its] customer base and operational infrastructure.” (Id. 28.)
7
Outside of the Risk Factors section, however, the Statement was more
positive about the California and Hawaii markets. One of the factors the Company
predicted would affect its performance was its ability to expand into new markets
beyond the seven states in which it already operated.7 (Id. 83.) However, the
Company did note its belief that those seven states, including California and
Hawaii, “remain[ed] significantly underpenetrated,” (id.) and noted that utility
rates in Hawaii increased 55% from 2007 to 2012 and that “in the past 20 years, the
combined average residential utility rate in our top markets of California and
Hawaii ha[d] doubled.” (Id. 126.)
Another disclosed risk stemmed from Vivint Solar’s “limited operating
history,” which, “combined with the rapidly evolving and competitive nature of [its]
industry, may not provide an adequate basis for [a potential purchaser of stock] to
evaluate [the Company’s] operating and financial results and business prospects.”
(Id. 28.) The Company warned that it had “limited insight into emerging trends
that may adversely impact [its] business, prospects and operating results.” (Id.)
Vivint Solar also disclosed that it had “incurred operating losses since [its]
inception,” including “net losses of $56.5 million and $76.2 million for the year
ended December 31, 2013 and the six months ended June 30, 2014, respectively.”
(Id. 30.) The Registration Statement also noted that the Company “expect[ed] to
continue to incur net losses from operations as [it] increase[d] [its] spending to
finance the expansion of [its] operations, expand [its] installation, engineering,
7
Arizona, California, Hawaii, Maryland, Massachusetts, New Jersey, and New York. (RS 83.)
8
administrative, sales and marketing staffs, and implement internal systems and
infrastructure to support [its] growth.” (Id.)
Another set of risks the Registration Statement disclosed concerned Vivint
Solar’s “need to hire, train, deploy, manage and retain a substantial number of
skilled installers and electricians.” (Id. 32.) These staffing requirements, the
Company explained, could prevent it from “complet[ing] [its] customers’ projects on
time, in an acceptable manner or at all.” (Id. 33.)
The Risk Factor section of the Statement also warned that Vivint Solar’s
“operating results may fluctuate from quarter to quarter, which could make [its]
future performance difficult to predict and could cause [its] operating results for a
particular period to fall below expectations, resulting in a severe decline in the price
of [the Company’s] common stock.” (Id. 36.) The Company had “experienced
seasonal and quarterly fluctuations in the past,” and “the true extent of these
fluctuations may have been masked by [the Company’s] recent growth rates and
thus may not be readily apparent from [its] historical operating results and may be
difficult to predict.” (Id.) The Registration Statement listed a number of factors
which, “[i]n addition to the other risks described in this ‘Risk Factors’ section …
could cause [the Company’s] results to fluctuate.” Those factors included
“significant fluctuations in customer demand for our offerings” and the Company’s
“ability to complete installations in a timely manner.” (Id.) “For these or other
reasons,” the Statement continued,
the results of any prior quarterly or annual periods should not be
relied upon as indications of [Vivint Solar’s] future performance. In
9
addition, [the Company’s] actual revenue, key operating metrics and
other operating results in future quarters may fall short of the
expectations of investors and financial analysts, which could have an
adverse effect on the trading price of [its] common stock.
(Id. 37.)
Another section of the Statement presented selected consolidated financial
data. (Id. 67-70.) The table below presents selections of this data.
Jan 1 –
Nov. 16,
2012
Total revenue
Total operating expenses
Net loss
Net loss attributable to
NCIs
Net income available (loss
attributable) to
stockholder
Net income per share
available (loss
attributable) to common
stockholder
Nov. 17 –
Dec. 31,
2012
340
12,657
(13,445)
(1,771)
109
4,346
(3,303)
(699)
Year
ended
Dec. 31,
2013
6,170
57,508
(56,470)
(62,108)
6 months
ended
June 30,
2013
1,925
23,108
(22,741)
(2,307)
6 months
ended
June 30,
2014
10,065
74,044
(76,154)
(88,688)
(11,674)
(2,604)
5,638
(20,434)
12,534
(0.42)
(0.03)
0.08
(0.27)
0.17
(Id. 67-68.) (All figures in thousands of dollars, except per share figures.)
10
Elsewhere, the Registration Statement provided the same data on a
quarterly basis for the 18 month period that ended on June 30, 2014.
Total revenue
Total operating
expenses
Net loss
Net loss
attributable to
NCIs
Net income
available (loss
attributable) to
stockholder
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30,
2013
2013
2013
2013
2014
2014
592
1,333
2,274
1,971
3,507
6,558
10,294
12,814
15,732
18,668
33,367
40,677
(10,780)
(2,121)
(11,961)
(186)
(14,993)
(37,848)
(18,736)
(21,953)
(36,543)
(43,584)
(39,611)
(45,104)
(8,659)
(11,775)
22,855
3,217
7,041
5,493
(Id. 99.) (All figures in thousands of dollars.)
The Registration Statement included “a chronology of some of [Vivint Solar’s]
key corporate milestones,” which included the number of solar energy systems
installed (2,669 in 2012, 10,521 in 2013, and 8,624 for the first six months of 2014),
the rate of installation (51 systems per week in 2012, 202 systems per week in 2013,
and 332 systems per week in the first six months of 2014), and aggregate capacity of
all installed systems (14.8 megawatts at the end of 2012, 72.8 megawatts at the end
of 2013, and 129.7 megawatts at the end of the first six months of 2014). (Id. 71.)
These “milestones” largely overlapped with the four “key operating metrics” the
Company identified elsewhere in the Registration Statement: “solar energy system
installations;” “megawatts installed and cumulative megawatts installed;”
11
“estimated nominal contracted payments remaining;”8 and “estimated retained
value.”9 (Id. 77-79.)
The Statement also disclosed and explained the role of the 10 Investment
Funds, through which investors had “committed to invest approximately $543
million,” which would “enable [the Company] to install solar energy systems [worth]
approximately $1.3 billion, of which approximately $913 million ha[d] been
installed.” (Id. 72.) The Statement went on to explain the role of the funds in
greater detail:
[Vivint Solar] contribute[s] or sell[s] the solar energy systems,
customer contracts, and associated rights to the investment funds and
receive[s] cash and an equity interest in the fund. … The cash
contributed by the fund investor is used by the investment fund to
purchase the solar energy systems developed by [the Company]. The
investment funds own the solar energy systems, customer contracts
and associated rights, and the monthly payments from customers are
made directly to the investment funds. … [The Company] use[s] the
cash received from the investment funds to cover [its] variable and
fixed costs associated with installing the related solar energy systems.
(Id. 73-74.)
The Registration Statement also provided information about how the Funds
impacted the Company’s accounting. Vivint Solar, it explained, “consolidate[s] the
assets and liabilities and operating results of these partnerships in [its]
consolidated financial statements,” and “recognize[s] the fund investors’ share of the
8
“[T]he sum of remaining cash payments that our customers are expected to pay over the term of the agreements
with us for systems installed as of the measurement date.” (RS 78.)
9
“[T]he net cash flows we expect to receive from customers pursuant to long-term customer contracts … but which
are not yet recognized on our financial statements.” (RS 79.)
12
net assets of the investment funds as [NCIs] in [the Company’s] consolidated
balance sheets.” (Id. 76.)
Although the investment funds’ results were consolidated on the Company’s
balance sheets, the Company’s financial statements divided net gain or loss into a
portion available/attributable to NCIs and a portion available/attributable to
common stockholders. (Id. 88-91.) It did so by calculating the loss attributable to
NCIs and subtracting it from the Company’s net loss. (Id. 88.) The loss attributable
to NCIs was calculated using the HLBV method and “reflect[ed] changes in the
amount the fund investors would hypothetically receive at each balance sheet date
under the liquidation provisions of the contractual agreements of these funds.” (Id.
88-89.) During every time period reported in the Statement, the Company had
posted a net loss and subtracting the loss attributable to NCIs had either reduced
the loss attributable to common stockholders or turned the Company’s recorded net
loss into income available to common stockholders. (Id. 67-68, 99.)
The Registration Statement also warned that, under the HLBV method, “the
impact on [NCIs] may vary significantly period-to-period depending on,” among
other things, “the timing of an investor’s cash contribution to the investment fund
relative to the timing of the contribution or sale by [the Company] of the solar
energy system to the applicable investment fund.” (Id. 90-91.) The Statement
explained:
A portion of the solar energy systems purchased by, or contributed to,
an investment fund [using investors’ cash contributions] are not
installed at the time of purchase or contribution and therefore do not
have any carryover basis allocated to them. [The Company’s] wholly
13
owned subsidiary has an obligation to purchase, install, and provide
the solar energy system equipment to an investment fund for any inprogress projects that were previously purchased by such fund. …
[T]he portion of the cash purchase price paid by an investment fund
that relates to in-progress projects [is] recorded as a receivable by the
investment fund (i.e., representing the investment fund’s right to
receive solar panels and related equipment for solar energy systems
that are installed after the project is purchased by the investment
fund). Given that [Vivint Solar’s] subsidiary controls the investment
fund, we have accounted for the receivable balance (i.e., the entire cash
balance paid to our subsidiary for the purchased, uninstalled solar
energy systems) as a reduction in the investment fund’s members’
equity in accordance with GAAP. Initially, this results in the
allocation of losses amongst the partners, primarily to the fund
investor, because the GAAP equity balance is less than the tax capital
account. When such solar energy systems are subsequently installed,
the systems are recorded at their carryover basis as a common control
transaction and the receivable balance is eliminated. With the
elimination of the receivable, the investment fund’s member’s equity is
increased to the extent of the carrying amount of the assets
contributed which results in the reversal of a portion of the prior
allocation of losses.
(Id. 90.)
In the Notes to Consolidated Financial Statements section of the Registration
Statement, the Company provided a breakdown of the aggregate value of the
Investment Funds’ assets and liabilities. (Id. F-44.) The following table provides a
selection of the data:
Dec. 31, 2012
Assets
Total current
assets
Solar energy
stems, net
Total assets
Liabilities
Total liabilities
Dec. 31, 2013
June 30, 2014
995
3,636
8,091
33,437
152,565
308,130
34,432
156,201
316,221
171
2,916
5,899
(Id.) (All figures in thousands of dollars.)
14
C.
Third Quarter Results
The third quarter of 2014 ended on September 30, 2014, the day before Vivint
Solar’s IPO. (SAC ¶ 31.) During that quarter the Company installed 6,935 solar
energy systems with a capacity of 49 megawatts, bringing the total cumulative
capacity of its systems to 178 megawatts. (Nov. 10, 2014 Form 8-K,10 at 5, 12.) The
Company’s estimated nominal contracted payments remaining and estimated
retained value both also increased, by $195 million and $89 million respectively.
(Id.) However, the net loss attributable to stockholders per diluted share was
($0.45). (Id. 6). The table below presents some of the Company’s third quarter
financial results.
Total revenue
Total operating expenses
Net loss
Net loss attributable to NCIs
Net income available (loss
attributable) to stockholder
Net income per share
available (loss attributable)
to common stockholder
3 Months
ending Sept.
30, 2014
8,333
66,690
(51,693)
(16,415)
(35,278)
(0.45)
(Id. 10.) (All figures in thousands of dollars, except per share figures.)
10
The notation “Nov. 10, 2014 Form 8-K” refers to Vivint Solar’s Nov. 10, 2014 Form 8-K filing with the SEC and
its attached exhibits. The form and exhibits are available as ECF No. 66, Exh. E.
15
The Investment Funds’ balance of assets and liabilities also shifted. The
table below presents some of the balance sheet information as of the end of the third
quarter.
Sept. 30, 2014
Assets
Total current assets
Solar energy stems, net
Total assets
Liabilities
Total liabilities
10,674
408,035
418,709
6,461
(SAC ¶ 40.) (All figures in thousands of dollars.)
The third quarter results were not included in the Registration Statement
that preceded Vivint Solar’s IPO or otherwise disclosed prior to the IPO.
D.
Other Developments
1.
Installation Delays
Plaintiff alleges that, prior to the IPO, Vivint Solar was facing significant
delays in its installation of solar energy systems. (SAC ¶ 43.) He has rounded up a
group of former Vivint Solar employees to “confirm that the Company was not
installing its solar energy systems on a timely basis.” (Id. ¶ 44.) The five former
employees had all been based in California. (Id. ¶ 44-45.) Four worked for Vivint
Solar both before and after the IPO and recounted delays due to, inter alia,
insufficient training time for new hires, permitting delays, technician inexperience,
and a mid-2014 change in the mounting systems the Company used. (Id. ¶ 44.) The
fifth, who left the Company before the IPO, asserted that “Vivint Solar and its
executive management were aware of the installation delays” and recounted reports
16
of the delays that management received and internal systems and tools that the
Company used to track installations and other account statuses. (Id. ¶¶ 45-47.)
2.
Hawaii
Plaintiff alleges that prior to Vivint Solar’s IPO Hawaii had already begun
“instituting regulations aimed at slowing and/or decreasing solar energy
generation.” (SAC ¶ 82.) In particular, plaintiff notes that because oversaturation
of residential rooftop solar energy systems posed a threat to the operations and
safety of the electric grid, the local utilities had already proposed major regulatory
changes to net metering and maintenance charges “approximately one month before
the Registration Statement went effective.” (Id. ¶ 84.) Plaintiff asserts that “[t]he
effects of Hawaii’s tightening regulations,” including a decrease in the number of
people employed in the state’s solar energy sector and the number of permits issued
for new rooftop solar energy systems, “have been noticed, and well-documented.”
(Id. ¶ 86.) Plaintiff also alleges that “[t]he true state of the Hawaiian solar energy
market did not become evident until the Company released its quarterly financials
for the third quarter of fiscal 2014 in a press release issued after the market closed
on November 10, 2014 and the Company’s quarterly report on Form 10-Q after the
market closed on November 12, 2014.” (Id. ¶ 92.)
3.
Consumer Preferences
Plaintiff alleges that, at the time of Vivint Solar’s IPO, the solar energy
market was experiencing a “shifting preference for outright purchasing and/or
financing of solar energy systems (as opposed to long-term leases and power
17
purchase agreements).” (SAC ¶ 66.) This changing preference, plaintiff argues, was
“evident.” (Id. ¶ 67.) For example, a June 2014 report by GTM Research noted that
“[t]hird-party ownership (TPO) is still the dominant model for financing a
residential solar installation, but direct ownership via loans and other mechanisms
is gaining traction as a result of lower system costs, changing consumer preferences,
and improved options offered by the industry’s leading players.” (GTM11 5.) The
report noted that “the trend over the past several years ha[d] clearly been a rapid
rise in the deployment of TPO solar,” but that “this share has leveled off or even
decreased in most … states in the past year.” (Id. 18.) The report forecasted that
“the share of TPO solar in the residential market … is expected to grow slightly this
year [2014] and then begin declining.” (Id. 31.)
Plaintiff also cited a November 2014 report by the U.S. Department of
Energy’s National Renewable Energy Laboratory (SAC ¶¶ 68-70) that predicted
that “solar loans will increasingly capture market share relative to the TPO model
in the coming years.” (NREL12 vi.) This report explained that, although third-party
systems were dominant in the distributed solar energy market, “comprising
approximately 60% to 80% of residential systems installed in California, Arizona,
and Massachusetts – three of the top U.S. residential markets,” “in the last two
11
The notation “GTM” refers to GTM Research’s June 2014 report entitled ‘U.S. Residential Solar Financing 20142018.’ The report is available as ECF No. 66, Exh. C.
12
The notation “NREL” refers to the National Renewable Energy Laboratory’s November 2014 report entitled
‘Banking on Solar: An Analysis of Banking Opportunities in the U.S. Distributed Photovoltaic Market.’ The report
is available as ECF No. 66, Exh. D.
18
years, another solar financing option [had become] commensurately competitive and
ha[d] begun to capture market shares: loans.” (Id. 15, 11.)
Plaintiff also recounted that two former employees of the Company, both of
whom worked for the Company before and after the IPO, reported “losing a
considerable amount of customers” because “Vivint Solar was unable to offer a
direct purchasing option for the solar energy systems.” (SAC ¶ 71.) These former
employees respectively estimated the loss at 15-20% and 5-10% of potential
customers. (Id.)
Plaintiff further alleges that “Vivint Solar’s largest competitor, SolarCity,
was aware of the shift in the marketplace” and responded by offering a loan option
starting in October 2014. (Id. ¶ 72.) Finally, plaintiff alleges that the changes in
customer preference “did not become evident until the Company released its
quarterly financials for the third quarter of fiscal 2014 in a press release issued
after the market closed on November 10, 2014.” (Id. ¶ 73.)
E.
The IPO and Subsequent Trading
Vivint Solar held its IPO on October 1, 2014. (SAC ¶ 29.) The Company sold
20.6 million shares of its common stock at $16.00 per share, resulting in net
proceeds of $300.8 million after deducting underwriting discounts and commissions
and $8.6 million in offering expenses. (Id.)
On October 1, 2014, plaintiff purchased a number of shares of Vivint Solar’s
common stock. (ECF No. 24, Exh. A.) He purchased these shares at prices ranging
from $16.40 to $16.80. (Id.)
19
On November 10, 2014, Vivint Solar issued a press release disclosing its
third-quarter financial results and fourth-quarter guidance. (SAC ¶ 92.) The
Company disclosed the financial results discussed above and predicted that the
fourth quarter would see fewer installations (45-47 megawatts, compared with 49
megawatts) and lower total revenue ($5.5-6.5 million, compared with $8.3 million)
than the third quarter. (Id. ¶ 93-94; Nov. 10, 2014 Form 8-K 6-7.) The Company
also predicted a decline in total operating expenses, from $66.7 million in the third
quarter to $47-51 million in the fourth. (Nov. 10, 2014 Form 8-K 6-7.)
Vivint Solar stock, which had been trading at $14.74 per share on November
10, 2014, declined to $11.42 per share on November 11, 2014. (SAC ¶ 97.) This
$3.32 per share decline was approximately 22.5% of the stock’s value.
On November 12, 2014, Vivint Solar issued its quarterly report on Form 10Q. (Id. ¶ 92.) Among other facts, the report disclosed that at the close of the third
quarter of 2014, “approximately 12% of … Vivint Solar’s cumulative installations
were in Hawaii, down from 15% as of June 30, 2014.” (Id. ¶ 95.)
The Company’s stock, which had been trading at $12.33 per share on
November 12, 2014, declined to $11.70 per share on November 13, 2014. (Id. ¶ 99.)
This $0.63 per share decline was approximately 5% of the stock’s value.
II.
LEGAL PRINCIPLES
A.
The Standard on a Motion to Dismiss
Under Rule 12(b)(6), a defendant may move to dismiss a complaint for
“failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6).
20
To survive a Rule 12(b)(6) motion, a plaintiff must provide grounds upon which his
claim rests through “factual allegations sufficient ‘to raise a right to relief above the
speculative level.’” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d
Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). In other
words, the complaint must allege “enough facts to state a claim to relief that is
plausible on its face.” Starr v. Sony BMG Music Entm't, 592 F.3d 314, 321 (2d Cir.
2010) (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009).
In applying this standard, the Court accepts as true all well-pled factual
allegations, but does not credit “mere conclusory statements” or “[t]hreadbare
recitals of the elements of a cause of action.” Id. The Court will give “no effect to
legal conclusions couched as factual allegations.” Port Dock & Stone Corp. v.
Oldcastle Ne., Inc., 507 F.3d 117, 121 (2d Cir. 2007) (citing Twomblv, 550 U.S. at
555). Knowledge and other conditions of a person’s mind may be alleged generally.
Fed. R. Civ. P. 9(b). A plaintiff may plead facts alleged upon information and belief
“where the facts are peculiarly within the possession and control of the defendant.”
Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010). But, if the Court
can infer no more than the mere possibility of misconduct from the factual
averments—in other words, if the well-pled allegations of the complaint have not
“nudged [plaintiff's] claims across the line from conceivable to plausible”—dismissal
21
is appropriate. Twombly, 550 U.S. at 570; Starr, 592 F.3d at 321 (quoting Iqbal,
556 U.S. at 679). Where necessary, the Court may supplement the allegations in
the complaint with facts from documents either referenced therein or relied upon in
framing the complaint. See DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d
Cir. 2010).
For purposes of ruling on this motion to dismiss a Securities Act claim, also
considers the Securities and Exchange Commission filings that plaintiff references
in the operative complaint. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 322 (2007); ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d
Cir. 2007).
B.
Liability Under §§ 11, 12(a(2), and 15 of the Securities Act
“Sections 11 and 12(a)(2) of the Securities Act impose liability on certain
participants in a registered securities offering when the registration statement or
prospectus contains material misstatements or omissions.” Panther Partners Inc. v.
Ikanos Commc’ns, Inc., 681 F.3d 114, 119 (2d Cir. 2012) (citing 15 U.S.C. §§ 77k,
77l(a)(2)). “Section 11 imposes strict liability on issuers and signatories, and
negligence liability on underwriters, in case any part of the registration statement,
when such part became effective, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Section 12(a)(2) imposes liability
under similar circumstances for misstatements or omissions in a prospectus. And §
15 imposes liability on individuals or entities that control any person liable under
22
§§ 11 or 12.” Id. at 120 (alterations, citations, and internal quotation marks
omitted). Sections 11 and 12 are “Securities Act siblings with roughly parallel
elements.” In re Morgan Stanley Info. Fund Secs. Litig., 592 F.3d 347, 359 (2d Cir.
2011). Neither scienter, reliance, nor loss causation is an element of a claim under
§§ 11 or 12(a)(2). Panther Partners, 681 F.3d at 120. Thus, unless the allegations
in the complaint are premised on fraud,13 a Securities Act plaintiff faces only “a
relatively minimal burden” and need not satisfy the heightened particularity
requirements of Rule 9(b) of the Federal Rules of Civil Procedure. Id. (quoting
Litwin v. Blackstone, 634 F.3d 706, 716 (2d Cir. 2011)).
Under both §§ 11 and 12(a)(2) a plaintiff need only establish one of three
bases for liability: “(1) a material misrepresentations; (2) a material omission in
contravention of an affirmative legal disclosure obligation; or (3) a material
omission of information that is necessary to prevent existing disclosures from being
misleading.” Litwin, 634 F.3d at 715-716. Plaintiff alleges each of these bases for
liability. (See ECF No. 71 at 17; SAC ¶¶ 110, 126.)
“Materiality is an inherently fact-specific finding that is satisfied when a
plaintiff alleges “a statement or omission that a reasonable investor would have
considered significant in making investment decisions.” Litwin, 634 F.3d at 716-17
(internal quotation marks and citations omitted). An omitted fact is material if
13
The parties disagree as to whether plaintiff’s allegations are premised on fraud. Because plaintiff’s complaint
must be dismissed even under the “‘short and plain statement’ requirements of Federal Rule of Civil Procedure
8(a),” Morgan Stanley Info. Fund, 592 F.3d at 360, the Court does not need to resolve this question.
23
there is a substantial likelihood that the reasonable investor would view its
inclusion as significantly altering the total mix of available information. Id. at 717.
In considering whether alleged misrepresentations and/or omissions
constitute violations of the securities laws, a court must read the offering
documents as a whole. Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 5 (2d
Cir. 1996); see also Morgan Stanley Info. Fund, 592 F.3d at 366 (“When analyzing
offering materials for compliance with the securities laws, we review the documents
holistically and in their entirety.”); I. Meyer Pincus & Assocs. v. Oppenheimer &
Co., 936 F.2d 759, 761 (2d Cir. 1991). The “central issue” a court considers in
assessing sibling Securities Act claims “is not whether the particular statements,
taken separately, were literally true, but whether defendants’ representations,
taken together and in context, would have misled a reasonable investor about the
nature of the securities.” Olkey, 98 F.3d at 5 (quotation marks and alterations
omitted). Where “the risks of which plaintiffs complained were disclosed in the
prospectus” – i.e., where a “reasonable investor” was informed “about the nature of
the securities” – dismissal of the claims under Rule 12(b)(6) is appropriate.
Steinberg v. PRT Grp., Inc., 88 F. Supp. 2d 294, 300 (S.D.N.Y. 2000) (citing Olkey,
98 F.3d at 9).
As discussed above, “[o]ne of the potential bases for liability under §§ 11 and
12(a)(2) is an omission in contravention of an affirmative legal disclosure
obligation.” Panther Partners, 681 F.3d at 120. Here, plaintiff alleges that the
Company failed to meet a disclosure requirement imposed by Item 303 of SEC
24
Regulation S–K. This Regulation obliges securities registrants to disclose, among
other things, “any known trends or uncertainties that have had or that the
registrant reasonably expects will have a material favorable or unfavorable impact
on net sales or revenues or income from continuing operations.” 17 C.F.R. §
229.303(a)(3)(ii). Instruction 3 to the Item’s paragraph 303(a) explains that “[t]he
discussion and analysis shall focus specifically on material events and uncertainties
known to management that would cause reported financial information not to be
necessarily indicative of future operating results or of future financial condition.”
Item 303’s disclosure duty exists “where a trend, demand, commitment, event or
uncertainty is both [1] presently known to management and [2] reasonably likely to
have material effects on the registrant's financial condition or results of operations.”
Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 716 (2d Cir. 2011) (alterations in
original) (quoting Management’s Discussion and Analysis of Financial Condition
and Results of Operations; Certain Investment Company Disclosures, Securities Act
Release No. 6835, Exchange Act Release No. 26831, Investment Company Act
Release No. 16,961, 43 S.E.C. Docket 1330 (May 18, 1989)).
III.
DISCUSSION
Plaintiff’s basic contention is that the Company misled the market when it
failed to disclose its true financial picture in its Registration Statement and instead
waited until the post-IPO release of its third-quarter earnings to adequately clarify
its position. This premise is fundamentally flawed.
25
A.
Earnings Swing
Vivint Solar’s third quarter ended September 30, 2014, the day before the
IPO took place. (SAC ¶ 1.) Plaintiff alleges that, because the Company’s net
income per share in that quarter differed significantly from its net income per share
in the previous four quarters, failing to include third quarter financial information
was a material omission in violation of the Securities Act. As discussed above, to be
actionable plaintiff must adequately allege that the omission either contravened an
affirmative legal disclosure obligation or made existing disclosures misleading.
Vivint Solar argues that it had no duty to report the third quarter results in
the Registration Statement because the most recent financial information it
reported, from the second quarter of 2014, was less than 135 days old, as required
by SEC Regulation S-X. See 17 C.F.R. § 210.3-12(a), (g)(1)(ii). Plaintiff responds by
citing cases in which compliance with the 135-Day Rule was not sufficient to meet a
registrar’s disclosure commitments. Most notably, in Shaw v. Digital Equipment
Corp, 82 F.3d 1194 (1st Cir. 1996), the First Circuit held that an issuer would be
required to disclose “nonpublic information indicating that the quarter in progress
at the time of the public offering will be an extreme departure from the range of
results which could be anticipated based on currently available information.” Id. at
1210. The question for the Court on this motion to dismiss, then, is whether, as a
matter of law, the Company’s third quarter results can be described as this type of
extreme departure from anticipated range.
26
Careful examination of the Registration Statement and the third quarter
results indicates that the latter were not an actionable “extreme departure.”
Although plaintiff focuses on the earning per share figure, it does not tell the whole
story, and evaluating the broader financial data indicates that the volatility in net
income available to stockholders and earnings per share derived not from a
disastrous and unexpected shift in the Company’s business but instead largely from
the accounting methods that were fully disclosed in the Registration Statement.
In each of the six quarters for which specific financial information was
provided in the Registration Statement, the Company operated at a net loss. (RS
99.) That quarterly net loss grew every quarter. (Id.) The Registration Statement
disclosed these operating losses “since [the Company’s] inception” and explicitly
warned that the Company “expect[ed] to continue to incur net losses from
operations.” (Id. 30.)
The same pattern held into the third quarter 2014 results: total revenue
grew, but not as quickly as total operating expenses, and once again the Company
experienced a record net operating loss. (Nov. 10, 2014 Form 8-K, at 10.) The third
quarter net operating loss of $51.7 million compared with losses of $39.6 million,
$36.5 million, $18.7 million, $15.0 million, $12.0 million, and $10.8 million in the
previous six quarters. (Id.; RS 99.)
Under the Company’s disclosed accounting practices, translating net losses to
net income available (loss attributable) to stockholders requires attributing some
portion of the loss to the NCIs. The Registration Statement explained that this
27
figure was calculated using the HLBV method and might “vary significantly periodto-period depending on,” among other things, “the timing of an investor’s cash
contribution to the investment fund relative to the timing of the contribution or sale
by [the Company] of the solar energy system to the applicable investment fund.”
(RS 90-91.) The financial data disclosed in the Statement also indicated that the
quarterly loss attributable to the NCIs was volatile: in the six quarters before the
IPO, the amount had been $45.1 million, $43.6 million, $22.0 million, $37.8 million,
$0.2 million, and $2.1 million. (Id. 99.) In the third quarter of 2014, the figure was
$16.4 million. (Nov. 10, 2014 Form 8-K, at 10.)
As described above, the net income available (or loss attributable) to
stockholders was found by subtracting the net loss attributable to NCIs from the
net operating loss. In the four quarters prior to the IPO this amount was positive
each quarter, although it reflected the variance in loss attributable to NCIs by not
following a set pattern: the amounts were $5.5 million, $7.0 million, $3.2 million,
and $22.9 million. (RS 99.) The two quarters before those had both seen negative
results for stockholders, with attributable losses of $11.8 million and $8.7 million.
(Id.) The third quarter of 2014 ended with a net loss attributable to stockholder of
$35.3 million. (Nov. 10, 2014 Form 8-K, at 10.)
In the appropriate context, therefore, the third quarter earnings were not the
kind of “extreme departures” that impose a reporting requirement more stringent
than the 135-Day Rule in SEC Regulation S-X. Plaintiff is correct that the net
income/loss attributable to stockholder varied dramatically between the second and
28
third quarters of 2014, but this variance reflected a known and disclosed volatility
in the calculation of Vivint Solar’s financial data. It did not reflect a departure from
the normal pattern of operations on the scale of the events that courts have
determined create a specific duty to disclose new data. See, e.g. Shaw v. Digital
Equip. Corp., 82 F.3d 1194, 1210 (1st Cir. 1996) (reversing dismissal of claim where
undisclosed quarterly loss was largest in over a year, “far greater than analysts had
been expecting,” and “bucked the positive trend of reduced losses under the
company’s new management,” id. at 1200).
This legal conclusion is further supported by the Company’s broader third
quarter results. As discussed above, the Registration Statement identifies four
“Key Operating Metrics”: solar energy system installations; megawatts installed
and cumulative megawatts installed; estimated nominal contracted payments
remaining; and estimated retained value. (RS 77-79.) For the third quarter of
2014, each of these metrics had increased significantly since the second quarter of
2014 and was more than double the results of the third quarter of 2013. (Nov. 10,
2014 Form 8-K at 12.) The third quarter of 2014 was thus not an extreme
departure for Vivint Solar, but instead one in which trends in the Company’s
fundamental metrics continued apace while the net loss attributable to NCIs, an
accounting figure whose volatility was fully disclosed, experienced a sharp drop.
The same appraisal of the Company’s Registration Statement and third
quarter financial results demonstrates that the SAC fails to state a claim under
Item 303 of Regulation S-K regarding the Company’s earnings. Item 303 is
29
explicitly concerned with “known trends or uncertainties … that the registrant
reasonably expects will have a material ... unfavorable impact on ... revenues or
income from continuing operations.” Litwin v. Blackstone Grp., L.P., 634 F.3d 706,
716 (2d Cir. 2011) (omissions in original) (quoting 17 C.F.R. § 229.303(a)(3)(ii)).
Plaintiff has not alleged that the decrease in net loss attributable to NCIs between
the second and third quarters of 2014 is a persistent trend that will materially
impact the Company’s revenues or income, much less that Vivint Solar reasonably
expected it to be such a trend when it issued the Registration Statement. See
Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1191 (11th Cir. 2002) (“The
first element of the Item 303 disclosure test … require[s] an assessment of whether
an observed pattern accurately reflects persistent conditions of the particular
registrant’s business environment.”). The fact that the Company’s net loss
attributable to NCIs increased back to $31.9 million in the fourth quarter of 2014 is
further evidence that fluctuations in this accounting figure did not amount to a
trend under Item 303. (Mar. 3, 2015 Form 8-K14 at 12.)
Plaintiff also argues that Item 303’s requirement that registrar’s “[d]escribe
any unusual or infrequent events or transactions or any significant economic
changes that materially affected the amount of reported income from continuing
operations” required specific disclosure of the third quarter changes in the
Investment Funds’ assets and liabilities. 17 C.F.R. § 229.303(a)(3)(i). He further
14
The notation “Mar. 3, 2015 Form 8-K” refers to Vivint Solar’s Mar. 3, 2015 Form 8-K filing with the SEC and its
attached exhibits. The form and exhibits are available as ECF No. 66, Exh. G.
30
alleges that failure to make this specific disclosure violated the standards of the
Financial Accounting Standards Board (“FASB”), particularly the requirement to
disclose subsequent events when the absence of such disclosure would render
financial statements misleading.
Even accepting plaintiff’s description of the relationship between the Funds’
assets and the Company’s earnings,15 an increase in the Investment Funds’ assets
was not an unusual or infrequent event but instead the crux of how the Company
had been funding itself and planned to continue to access capital. The role of the
Funds, including the fact that they would receive solar energy systems as assets
upon their installation, was fully disclosed in the Registration Statement. The fact
that the specific amount by which the Funds’ assets had grown in the quarter that
ended the day before the IPO did not appear in the Statement did not make it
materially incomplete or misleading. Plaintiff’s distaste for the Company’s
disclosed business model is not actionable.
B.
Installation Delays
At certain points in the SAC, plaintiff appears to conflate the issue of
installation delays and third quarter earnings. (See, e.g., SAC ¶ 43 (“[B]y October
1, 2014, Vivint Solar was also aware of its ongoing solar energy system installation
delays and the impact that these delays would have on the Company’s net loss and
15
The Company strenuously disputes plaintiff’s description of the relationship between these assets and NCI loss,
but for the purposes of this motion to dismiss the Court accepts plaintiff’s assertion that they are linked. The
Company also argues that plaintiff’s arguments specifically related to the change in Investment Fund assets was not
present in the SAC and appeared for the first time in plaintiff’s opposition to the motion to dismiss; because
plaintiff’s argument is in all events unavailing, the Court need not determine whether it amounts to an improper
attempt to amend.
31
earnings-per-share. As explained by Vivint Solar in the Registration Statement,
the HLBV calculation and, in turn, the Company’s NCI loss, was affected by Vivint
Solar’s ability to timely install the solar energy systems it sold or contributed to the
Investment Funds.”).) The SAC does not detail how a delay in installations would
affect the financial statements the Company released before the IPO in a way that
made them misleading. Both the SAC and the Registration Statement explain that
purchased but un-installed systems are reflected as a decrease in equity for the
Funds’ investors, and that the loss is reversed to the Company when installation is
successful. (Id. ¶¶ 43, 48; RS 90.) Under this disclosed accounting treatment, any
delay in installation would also delay any losses to the Company. Thus, while an
increased pace of installations in one period could conceivably increase the rate of
losses in that period, the SAC contains no allegations of such a change in the delay
rate. Instead it alleges a consistent installation delay issue without explaining,
even cursorily, how that alleged issue could affect the validity of the Company’s
financial statements. In any event, as discussed above, the failure to disclose the
third quarter earnings statement is not actionable, and thus, without more, neither
is the failure to disclose the alleged reasons for those earnings.
The alleged installation delays might, however, be actionable as an
undisclosed trend under Item 303. The SAC cites former employees’ accounts of
losing customers based on frustration with installation delays. (SAC ¶ 44.) If these
accounts disclosed a trend toward losing customers that was not otherwise
32
discernable from the information the Company published in the Registration
Statement plaintiff they could conceivably provide a basis for liability under § 11.
In this case, the details of the alleged installation delays are not actionable.
First, as discussed above, the Registration Statement identified the Company’s
“ability to complete installations in a timely manner” as a factor that “could cause
[its] operating results to fluctuate.” (RS 36.) Moreover, only one of the former
employees plaintiff references in the SAC recounted losing customers, and that
employee did not directly state what percentage, if any, of those lost customers were
due to installation delays. (See SAC ¶ 44 (“FE 1 estimated that he lost
approximately 40% of FE 1’s customers throughout his employ with the
Company.”).) The other employees recount lag times and the need for repairs but do
not connect these events to any lost business, nor does plaintiff explain how this
“trend” materially affected the Company’s revenues or income. This may be
because the third quarter results that form the basis of plaintiff’s claim related to
earnings indicate that the Company installed both more systems and more
megawatts in that quarter than any prior quarter, (Nov. 10, 2014 Form 8-K at 5, 12)
an outcome inconsistent with the supposition that the Company faced a materially
adverse installation trend of which it was aware and which it was obliged to
disclose.
C.
Hawaii
Plaintiff’s allegations that the Registration Statement failed to disclose
material information about the Hawaii market ignores the Statement’s specific
33
warnings about the risks of changing regulations. As discussed above, the
Registration Statement disclosed not only that “[t]echnical and regulatory
limitations [might] significantly reduce [the Company’s] ability to sell electricity
from our solar energy systems in certain markets,” but specifically discussed the
existence of such limits in Hawaii, where limits had already “constrained [the
Company’s] growth” and further regulation “could result in limitations on
deployment of solar energy systems in Hawaii, which accounted for approximately
15% of [the Company’s] total installations as of June 30, 2014 and would negatively
impact [the Company’s] business.” (RS 24.) Plaintiff argues that the apparent
limitation of the existing regulations to “certain geographic areas” (Id.) rendered
this disclosure incomplete, but a reasonable investor would have understood the
Registration Statement to disclose exactly the risk that plaintiff highlights.
Additionally, plaintiff fails to adequately allege that any regulatory
developments in Hawaii were material to Vivint Solar’s revenues or income.
Although plaintiff points out that the percentage of the Company’s cumulative
installations that were in Hawaii fell from 15% at the end of the second quarter of
2014 to 12% at the end of the third quarter and 10% at the end of the fourth, (SAC
¶¶ 98-101) he does not allege that the absolute number of installations in Hawaii
dropped or even increased at a slower pace than before. The SAC does not provide
any explanation for the supposition that the Company growing faster in the rest of
the country than in Hawaii was an adverse development.
34
D.
Consumer Preferences
Plaintiff’s allegations regarding shifting consumer preference for solar
financing (which Vivint Solar does not offer) rather than third party ownership of
residential solar energy systems (Vivint Solar’s business model) relies on two
publicly available reports and the accounts of two former employees of the
Company. (SAC ¶¶ 66-71.) At no point does the SAC allege that any of the
statutory defendants of the claims under §§ 11 and 12(a)(2) were aware of the
purported trend, much less that they “reasonably expect[ed]” such a trend to “have
a material favorable or unfavorable impact on net sales or revenues or income from
continuing operations,” the basis for liability under Item 303. 17 C.F.R. §
229.303(a)(3)(ii). “Knowledge of a trend is an essential element … under Item 303.”
In re Noah Educ. Holdings, Ltd. Sec. Litig., No. 08 Civ. 9203(RJS), 2010 WL
1372709, at *6 (S.D.N.Y. Mar. 31, 2010) (citing Blackmoss Invs. Inc. v. ACA Capital
Holdings, Inc., No. 07 Civ. 10528(RWS), 2010 WL 148617, at *9 (S.D.N.Y. Jan. 14,
2010)).
The fact that one of the two reports plaintiff cites to document the trend in
consumer preferences was published and available at the time of Vivint Solar’s IPO
cuts against his allegations of a material omission. Although “in appropriate
circumstances [the SEC’s disclosure] requirement may extend to certain trends that
are not firm-specific or are publicly available,” Kapps v. Torch Offshore, Inc., 379
F.3d 207, 215 (5th Cir. 2004), “as a general matter, the ‘total mix of information
may include information already in the public domain and facts known or
35
reasonably available to potential investors.’” Litwin v. Blackstone Grp., L.P., 634
F.3d 706, 718 (2d Cir. 2011) (internal quotation marks, omission, and alteration
omitted) (quoting United Paperworkers Int’l Union v. Int’l Paper Co., 985 F.2d
1190, 1199 (2d Cir. 1993)). This publicly available report, moreover, did not predict
doom for the Company’s business model; instead, it predicted that the total number
of solar systems installed per year would increase until at least 2016, that the total
number of third-party owned solar systems installed per year would increase until
at least 2016, and even that the percentage of solar system installations per year
that were third-party owned would continue to increase until at least 2014. (GTM
32.) The report was thorough and put into context its evaluation that “direct
ownership via loans and other mechanisms [was] gaining traction.” (Id. 5.) That
context undercuts efforts to paint consumer preferences as a trend that could be
reasonably expected to materially impact the Company’s revenues or income.
Therefore, even if the SAC had adequately alleged knowledge of this trend on the
part of defendants, this trend would still not be actionable under §§ 11 and 12(a)(2).
E.
Additional Reasons for Dismissal
As discussed above, the Company’s Registration Statement did not contain
an untrue statement of a material fact or omit a material fact or otherwise required
disclosure. Plaintiff has therefore failed to state a claim for relief under § 11 of the
Securities Act. It follows that he has failed to state a claim for liability under §§
12(a)(2) and 15. See In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359
(2d Cir. 2010) (“Claims under sections 11 and 12(a)(2) are … Securities Act siblings
36
with roughly parallel elements.”); id. at 358 (“[T]he success of a claim under section
15 relies, in part, on a plaintiff's ability to demonstrate primary liability under
sections 11 and 12.”); New Jersey Carpenters Vacation Fund v. Royal Bank of
Scotland Grp., PLC, 720 F. Supp. 2d 254, 268 (S.D.N.Y. 2010) (“The analysis of
claims made pursuant to section 11 and section 12(a)(2) is essentially the same.”).
Some of plaintiff’s claims, however, would be properly dismissed even if the
SAC stated a claim upon which relief can be granted under § 11. The Court
discusses two of these alternative bases below.
1.
Blackstone
The only claim against Blackstone in the SAC is Count I, the claim for a
violation of § 11 of the Securities Act.16 (SAC ¶¶ 109-20.) The other two counts, for
violations of §§ 12(a)(2) and 15, are directed at the “Underwriter Defendants” and
the “Individual Defendants,” respectively. (Id. pp. 42, 44.) The portion of the SAC
that introduces the parties defines the “Individual Defendants” and “Underwriter
Defendants” not to include The Blackstone Group L.P. (Id. ¶¶ 22-23.)
Although plaintiff’s only allegation against Blackstone is for a violation of §
11, Blackstone is not a statutory defendant under that section. The statute creates
a cause of action against persons who signed the offending registration statement;
persons who were then, or were about to become, directors of or partners in the
16
Even this count is debatable: the heading mentions “The Defendants” without limitation, while the count’s
specific allegations conclude that “Vivint Solar, the Individual Defendants, and the Underwriter Defendants have
violated Section 11 of the Securities Act.” (Id. at p.41 & ¶ 120.) As discussed further below, the SAC distinguishes
between Vivint Solar and Blackstone (id. ¶¶ 16-17) and defines the “Individual Defendants” and “Underwriter
Defendants” not to include The Blackstone Group L.P. (Id. ¶¶ 22-23.)
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issuer; professionals who consented to be named as having prepared or certified the
offending registration statement or a report used in connection with it; and
underwriters. 15 U.S.C. § 77k(a). The SAC does not and could not allege that
Blackstone fits any of these categories. Blackstone would therefore have to be
dismissed as a defendant even if plaintiff stated a claim under any of the three
counts in the SAC.
2.
12(a)(2) Standing
Section 12(a)(2) only provides a cause of action against a plaintiff’s “statutory
seller,” the person who either “passed title, or other interest in the security, to the
buyer for value,” or “successfully solicited the purchase of a security, motivated at
least in part by a desire to serve his own financial interests or those of the
securities’ owner.” Morgan Stanley Info. Fund, 592 F.3d at 359 (alterations
omitted) (quoting Pinter v. Dahl, 486 U.S. 622, 642, 647 (1988)). Section 12’s
liability reaches “only the buyer’s immediate seller; … a buyer cannot recover
against his seller’s seller.” Pinter, 486 U.S. at 644 n.21. Robby Shawn Stadnick,
the lead plaintiff in this case, is not alleged to have purchased his shares of Vivint
Solar’s common stock directly from the Underwriter Defendants he alleges violated
Section 12(a)(2). (See SAC ¶ 15.) Indeed, he represents that he bought his shares
at prices above the $16.00 offering price in the IPO, which necessarily means that
he did not buy through the initial public offering itself. (ECF No. 24, Exh. A.) He
therefore lacks standing to bring a claim under Section 12(a)(2) against the
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Underwriter Defendants.17 See, e.g. In re Fuwei Films Sec. Litig., 634 F. Supp. 2d
419, 445 (S.D.N.Y. 2009) (“[L]iability pursuant to section 12(a)(2) only attaches to
plaintiffs who purchased their shares directly in the initial public offering, and not
the so-called ‘aftermarket.’”).
Plaintiff argues that he is nonetheless entitled to maintain the Section
12(a)(2) claims on behalf of unnamed class members. The basis for plaintiff’s
argument is the Second Circuit’s decision in NECA-IBEW Health & Welfare Fund
v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012). Plaintiff interprets NECAIBEW to stand for the proposition that because he shares the “same set of concerns”
as those who purchased directly in the offering, he is entitled to represent them.
The Court has found that NECA-IBEW is frequently misread, usually, as
here, in an attempt to create standing where standing does not exist. It does not
stand for the sweeping proposition that an individual may represent absent class
members with regard to claims as to which he or she has no individual standing,
although that is how it is now sometimes cited. Instead, NECA-IBEW invoked
principles of standing to help determine whether the claims of a present class
member with standing were sufficiently close to the claims of absent class members’
claims to maintain the action on a representative basis.
In NECA-IBEW, the Second Circuit partially vacated a district court’s
dismissal of certain claims brought pursuant to §§ 11, 12(a)(2), and 15 of the
17
Nor is this lack of standing a defect that is unique to Mr. Stadnick. Neither of the other two potential lead
plaintiffs allege that they purchased their shares directly from the Underwriter Defendants, (ECF Nos. 21, Exhs. 2,3;
27, Exhs. B,C), nor did either of the individuals who filed the initial complaints that have been consolidated in this
action. (ECF No. 1 in case 14-cv-9283; ECF No. 1 in case 14-cv-9709.)
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Securities Act. 693 F.3d at 167-68. Defendants had issued and underwritten
mortgage-backed certificates in 17 separate offerings, all of which relied on the
same Shelf Registration Statement but each of which had been associated with a
separate Prospectus Supplement. Id. at 148-49. Plaintiff had purchased
certificates in two of the offerings but sought to assert class claims on purchasers of
all 17. Id. at 149. Although all purchasers were subject to the alleged
misrepresentations in the sole Shelf Registration Statement, the district court only
allowed plaintiff to represent persons or entities that purchased certificates in the
two offerings from which plaintiff had purchased its shares. Id. at 154-55.
The Second Circuit noted that plaintiff had both “Article III standing to sue
defendants in its own right” and “statutory standing [under §§ 11 and 12(a)(2) of the
Securities Act] in its own right.” Id. at 158. Whether plaintiff had “class standing,”
however, turned on further considerations. The Second Circuit surveyed the
Supreme Court’s pronouncements on the subject, which it concluded “stand
collectively for the proposition that, in a putative class action, a plaintiff has class
standing if he plausibly alleges (1) that he personally has suffered some actual ...
injury as a result of the putatively illegal conduct of the defendant, and (2) that
such conduct implicates the same set of concerns as the conduct alleged to have
caused injury to other members of the putative class by the same defendants.” Id.
at 162 (omission in original) (internal quotation marks and citation omitted). The
Second Circuit therefore focused on the similarities and differences between the
harm the plaintiff claimed to have suffered and the claims other putative class
40
members would claim. The certificates plaintiff purchased were based on loans
originating with two lenders, and the Second Circuit concluded that plaintiff could
stand as class representative for all purchasers of certificates containing loans from
those lenders, but not for purchasers of certificates containing loans originating
with other lenders. Id. at 163-64. Thus, plaintiff could represent a class of
purchasers from seven of the offerings, but not from all 17.
In the instant case, plaintiff’s position is significantly different from that of
the plaintiff in NECA-IBEW. As discussed above, plaintiff here does not have
statutory standing on his own right to pursue a claim under § 12(a)(2). Rather than
expanding from his own statutory standing to represent a class of people with the
same set of concerns, plaintiff instead asserts merely that the similarity between
claims under § 11 and claims under § 12(a)(2) is enough. It is not, and plaintiff’s
lack of statutory standing for a § 12(a)(2) claim is dispositive. See Police & Fire Ret.
Sys. of the City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 112 (“[T]here must be
a named plaintiff sufficient to establish jurisdiction over each claim advanced.”).
IV.
CONCLUSION
For the reasons set forth above, defendants’ motion to dismiss is GRANTED.
The action is dismissed with prejudice. Plaintiff was previously provided with the
opportunity to amend its pleading, and has done so. Plaintiff has not suggested any
facts it might include in a further amendment that would resolve the deficiencies in
the SAC.
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The Clerk of Court is directed to amend the captions in this matter to match
the caption above, terminate the motions at ECF Nos. 64 and 67, and terminate
these actions.
SO ORDERED.
Dated:
New York, New York
December 10, 2015
______________________________________
KATHERINE B. FORREST
United States District Judge
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