Pomerantz Achieves Two Multi-Million Dollar Class Action Settlements
POMERANTZ MONITOR | NOVEMBER DECEMBER 2020
In significant victories for investors, Pomerantz recently achieved multi-million dollar settlements in two separate securities fraud class actions: (1) a $3.75 million settlement with Ormat Technologies, Inc. (“Ormat”); and (2) a $13.25 million settlement with Blue Apron Holdings, Inc. (“Blue Apron”). Both proposed settlements are pending court approval.
On September 3, 2020, Judge Robert C. Jones, in the U.S. District Court of the District of Nevada, granted preliminary approval of the $3.75 million settlement that Pomerantz, as sole lead counsel, achieved in a securities fraud class action against Ormat and certain of its officers. The final approval hearing is scheduled for January 11, 2021.
Ormat is a vertically integrated geothermal energy company. Its common shares are dual-listed on the New York Stock Exchange (“NYSE”) and the Tel Aviv Stock Exchange (“TASE”). The complaint generally alleged that, during the class period (August 8, 2017 – May 15, 2018, inclusive), the defendants unlawfully inflated Ormat’s stock price and violated the U.S. federal and Israeli securities laws by issuing materially false and misleading financial statements that improperly recorded millions of dollars of deferred tax assets and by making materially false and misleading statements regarding the adequacy of Ormat’s internal controls.
More specifically, our complaint alleged that Ormat improperly recorded millions of dollars of deferred tax assets on its financial statements, thus materially misrepresenting the company’s financial condition to investors and artificially inflating the prices of the company’s publicly traded securities. A deferred tax asset is an asset carried on a company’s balance sheet that may be used to offset taxable income in future years. For a company to realize the benefit of a deferred tax asset, however, it must actually have future income to offset. When a company is unlikely to earn that future income, it cannot carry its deferred tax assets at full value on its financial statements. Specifically, Generally Accepted Accounting Principles (“GAAP”) require that a company offsets the value of its deferred tax assets by recording a “valuation allowance” if it is “more likely than not” that some or all of its deferred tax assets will not be realized. As Ormat told investors, once a valuation allowance is recorded, it can only be released on the basis of “sufficient evidence that we will be able to generate sufficient future taxable income in the U.S.” Moreover, GAAP prohibits companies from “offset[ting] deferred tax liabilities and assets attributable to … different tax jurisdictions.” The complaint alleged that, instead of abiding by these rules during the class period, Ormat improperly released $62 million of its valuation allowance when it had a reasonable basis to release no more than $35.6 million. Thus, during the Class Period, Ormat continued to record and carry deferred tax assets at falsely inflated values. Defendants allegedly had a motive to misstate the company’s financials, in violation of Ormat’s accounting policies and internal controls, because, after Ormat had to book a large deferred tax liability in connection with its plan to repatriate foreign earnings, defendants wanted to offset this bad news, mitigate its impact on the company’s financial statements, and assure investors that the net impact on the company’s tax position would be positive.
The truth concerning Ormat’s financial condition and internal controls was revealed through disclosures on May 11 and May 16, 2018. On May 11, 2018, Ormat disclosed that it had to delay filing its quarterly report for the first quarter of 2018 because the company’s management had identified an error in the company’s financial statement presentation of deferred income tax assets and liabilities affecting the company’s balance sheets in prior reporting periods. Among other things, the company also noted that it was in the process of evaluating the control implications of this error given that it relates to previous material weakness disclosures. On this news, Ormat’s stock price plummeted $3.58 per share, or over 6%, over two consecutive trading days. Then, on May 16, 2018, Ormat announced that the internal control problems were actually so serious that it was forced to restate numerous prior financial statements, including its second, third and fourth quarter 2017 financial statements and its full-year 2017 financial statements. As a result, the company’s stock price fell further, by $0.67 per share.
The settlement was achieved after approximately two years of litigation. Ormat moved to dismiss the action, primarily on the basis that the complaint failed to plead scienter. The Court denied defendants’ motion in its entirety on December 6, 2019. The Court’s opinion was particularly significant because it rejected Ormat’s argument that the complexity of the underlying GAAP rules foreclose a finding of scienter. Moreover, the Court accepted Pomerantz’s argument that the relevant accounting provisions set forth bright-line rules, and a reasonable person could find that Ormat’s alleged impermissible netting of deferred assets across jurisdictions was done to offset the damaging news of repatriation taxes.
In another meaningful victory for investors, Pomerantz, as co-lead counsel, achieved a $13.25 million settlement with Blue Apron, as well as certain of its current and former officers and directors. On November 6, 2020, lead plaintiffs filed a motion in the U.S. District Court of the Eastern District of New York seeking the Court’s preliminary approval of the settlement. Blue Apron is a subscription-based meal-kit delivery service. The action arose from allegations that the company made material misrepresentations and omissions in connection with its June 2017 initial public offering (“IPO”) in violation of Sections 11 and 15 of the Securities Act. More specifically, the complaint alleged, among other things, that the company’s IPO prospectus misleadingly attempted to assure investors that its ambitious growth plans and ability to compete in the increasingly competitive meal-kit delivery service segment, which were tied to its highly-touted new production facility in Linden, New Jersey, remained on track. However, the defendants allegedly failed to disclose that significant delays had already materialized in opening and in ramping up production at the Linden facility, which was hindering the company’s customer retention, product expansion plans, and strategic approach for the remainder of 2017. Less than two months after the IPO, on August 10, 2017, Blue Apron revealed the significant delays it had encountered at its new factory in Linden and their negative impact on the company’s performance and outlook. Following this news, Blue Apron’s share price fell $1.10, to close at almost 50% below the IPO price. Blue Apron’s stock price continued to slide well into November, as the market learned the full extent of Blue Apron’s ongoing production struggles.
The defendants moved to dismiss the complaint, which the Court denied on April 22, 2020. In its opinion, the Court agreed with plaintiffs’ argument that the allegations regarding material, existing delays at the Linden facility rendered portions of Blue Apron’s IPO prospectus misleading and actionable.
The settlement was achieved following the Court’s denial of the defendants’ dismissal motion, while the parties were engaged in early stages of discovery. The proposed settlement resulted in a recovery provided the putative class of investors with as much as 53% of the maximum potential recoverable damages. This is an exceptional result when compared to historical statistics in class action settlements.