The suit, filed in a US federal court in mid-March, alleges that Vestas deliberately misled American investors about its earnings and accuses it of securities fraud. The case comes after the world's leading turbine manufacturer admitted in October, that it had failed to make changes to its accounting practices as legally required under EU law by the start of 2010.
The suit has been filed in the US on behalf of a small municipal pension fund based near Detroit, the City of Sterling Heights General Employees' Retirement System. It claims Vestas knew the accounting change was required. During the delay in making the change, Vestas and four of its top officers committed fraud, it says, by improperly accounting revenue, which resulted in the release of misleading information about the company's 2009 and 2010 earnings.
The suit was filed in US District Court in Colorado - the centre of Vestas' American manufacturing base - by several law firms including Robbins Geller Rudman & Dowd LLP of San Diego, lead counsel for investors in the Enron fraud case. A class-action suit allows plaintiffs with a shared interest to sue as a group. Named in the suit are: Wind Systems, Vestas Americas, board chairman Bent Erik Carlsen, chief executive Ditlev Engel, CFO Henrik Norremark and Martha Wyrsch, the president of Vestas Americas.
The defendants are accused of overstating Vestas' financial performance and outlook, thereby artificially inflating the price of its stock in the US. Specifically, the defendants are accused of causing Vestas to improperly account for its revenue in violation of international accounting standards by not adopting the International Financial Reporting Interpretations Committee's Interpretation 15, Agreements for the Construction of Real Estate. As a result, the company's financial guidance for the 2010 financial year was exaggerated.
"As a result of the defendants' false statements, Vestas' American depository receipts and ordinary shares traded at artificially inflated prices" during the "class period", which runs from October 27, 2009 to October 25, 2010, say the plaintiff's lawyers. They reached a high of $26.00 and $78.05 per share, respectively, on November 9, 2009. "However, after the truth was revealed and absorbed by the market, investors sold their Vestas securities en masse, reducing the price of (the) securities by 57% from their class period high."
The defendants' motivation, it is alleged, is that Engel and Norremark were trying to maximise their 2009 and 2010 incomes. In 2009, they each received performance-based bonuses of EUR1 million in shares and EUR350,000 in cash. They received no bonuses in 2010 because of the company's "disappointing" performance, however.
The suit notes that on February 15, 2010, Norremark sold 93% of his Vestas ordinary shares. At the time, shares in Vestas were priced at $51.30, 36.5% higher than after the company publicly admitted its failure to update its accounting methods. The firm's successful completion of its EUR600 million Eurobond offering, at a favourable coupon rate of 4.625%, in March 2010, is also cited as motivation for the alleged fraud.
On August 18, 2010, Vestas downwardly revised its 2010 financial outlook for revenue and earnings, admitting sales contracts it had expected to be recognised in 2010 - particularly in the US - would have to be deferred. In line with that, the company decreased its 2010 revenue guidance from EUR7 billion to EUR6 billion. Two months later, on October 26, 2010, Vestas admitted it had failed to adopt the legally required accounting standards when due.
Vestas refutes the allegations. "The complaint is without merit," it says in a statement. "The company and the individual defendants intend to defend themselves vigorously."
The prospects for the suit are mixed. Whether a company should adopt the new accounting is not clear-cut, says analyst Gerard Reid of investment firm Jefferies. He says that no other major wind company has applied it, although Nordex recently said it would.
He argues that the new standard applies to property developers - and partly at issue is whether a wind developer is a property developer.
"I can understand that there's a class-action suit, but I don't think they have a chance of winning," concludes Reid.