The US District Court for the Southern District of New York recently dismissed a securities class action against a battery manufacturer, finding that the plaintiffs failed to plead a causal connection between the alleged revenue misstatements and a drop in the company’s stock price. 

New Energy Systems Group manufactures and distributes lithium battery shells and related products through a subsidiary based in China. Plaintiffs alleged that New Energy’s financial reports filed with the Securities and Exchange Commission for 2008 and 2009 showed substantially more revenue and net income than New Energy’s comparable filings submitted to China’s State Administration for Industry and Commerce. In essence, plaintiffs alleged that New Energy kept “two sets of books.” 

New Energy subsequently amended its Chinese filings to comport with the SEC filings in December 2011 and publicized the amendments on its website in March 2011. New Energy’s stock price did not react to the amendments. Nearly eight months later, New Energy issued a press release announcing a 42 percent decline in year-over-year revenues. Following this announcement, New Energy’s stock price fell by nearly 50 percent. Plaintiffs then filed a putative class action under Section 10(b) of the Securities Exchange Act of 1934. Defendants moved to dismiss, arguing that the plaintiffs failed to adequately plead loss causation. 

The District Court found that the complaint failed to allege that plaintiffs suffered losses either when New Energy amended its Chinese filings or when it publicized information about those amendments. Instead, plaintiffs tied the losses to the press release issued eight months later on a theory that New Energy never had revenue or income previously reported, and it merely “ratcheted down” its revenue in an effort to conceal fraud. The District Court found plaintiffs’ theory unavailing, because elements of the alleged fraud would have been exposed to the market through the amendments to the Chinese filings, and the complaint alleged no market reaction whatsoever to the amendments. Consequentially, the District Court dismissed the complaint.   

In re. New Energy Sys. Sec. Litig., No. 12-c-01041 (S.D.N.Y. Sept. 30, 2014).