Named in the federal suit are Stanley Charren, former board chairman, current chairman Gerald Alderson, former chief financial man Maury Miller and executive vice president Joel Canino. The plaintiff, investor Michael Lilley, along with other investors, is seeking a jury trial and damages of an undetermined amount, says George Trevor, the plaintiffs' lawyer.
The defendants deny the charges, says Kenetech spokesman Bud Grebey. Kenetech also states the suit is "predictable given the precipitous drop in the market price of Kenetech's stock." Although securities fraud lawsuits are indeed common when stock plummets, the plaintiffs' lawyers are law firm Gold, Bennett & Cera of San Francisco, known for its involvement several years ago in tracking the stock manipulations of financier Ivan Boesky and the Pacific Lumber class action lawsuit linked to the fall of Drexel, Burhnam & Lambert and Michael Milken in the high-profile financial fraud scandal of the late 1980s.
The Kenetech suit is filed on behalf of all people who bought stock during a period of almost two years -- from Kenetech's initial public offering on September 21, 1993 until August 8, 1995, when Kenetech reported a loss of two cents per share because of "continuing difficulties" implementing its backlog of projects efficiently and cost effectively. Its poor earnings statement prompted its stock to plummet $3 the next day on extremely heavy volume of 2.3 million shares (Windpower Monthly, September 1995).
Shares had initially been sold at $16.50 in 1993, but dropped to about 25% of that initial value, at $4.25, on October 20 of this year. In class action cases, the plaintiffs must be certified as a class within six months.
Specifically, the 38 page suit alleges that Kenetech used securities analysts -- at firms including Smith Barney, Morgan Stanley and Merrill Lynch -- to unwittingly feed false information to the securities markets through conference calls, meetings and analysts' briefings. As well as its false statements, Kenetech also intentionally or recklessly misled investors by feeding untrue or misleadingly incomplete information to analysts. The price of Kenetech securities information was thus manipulated by an illegal scheme and investors were defrauded, the suit alleges.
The suit tracks Kenetech's business claims through the case period, starting with its Initial Public Offering prospectus statement that, based on output and operating data, the Model 33M-VS could produce power for five cents or less a kilowatt hour under average wind conditions. (The Model 33M-VS was later renamed the KVS-33.) The complaint alleges that the financial results Kenetech announced in February 1995 for the fourth quarter and the fiscal year of 1994 -- net income of $6.5 million and $12 million respectively -- were false and misleading and the result of abnormal accounting.
The lawsuit recalls that on April 3 the company revised its statements, saying revenues for fiscal 1994 and the fourth quarter were overstated by at least $40 million and net income by at least $13.2 million because of improper revenue recognition practices. It also quotes Kenetech spokesman "Clarance Greeby" in February -- after a sharp drop in the company's stock price following a ruling by the Federal Energy Regulatory Commission that pending wind contracts were illegal under California's Biennial Resource Plan Update -- as saying the stock price did not reflect the strength of Kenetech's operations and that its generating costs had dropped to three to five cents per kWh.
The suit alleges that Kenetech was in fact having increasing difficulty building and operating wind plants with the KVS-33 cost effectively; that it could not efficiently manufacture and install wind plants and that the margins on wind plant sales were sharply lowered; that the electricity cost of five cents had never been achieved when all costs of design, manufacture, installation, warranty, operation and maintenance were included; and that the KVS-33 was never competitive with conventional forms of generation.
In conclusion, the suit refers to Kenetech's Form 10-Q for the second quarter of 1995 as finally revealing the truth -- construction, manufacturing and engineering costs were higher than expected; delays in financing projects have increased holdings costs; and warranty costs may be increased based on operating experience; and that the company believes it will continue to experience reduced margins.