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In Re Ormat Technologies

August 29, 2011

IN RE ORMAT TECHNOLOGIES, INC. DERIVATIVE LITIGATION


Order

This Document Relates To: ALL ACTIONS

This case arises from a derivative lawsuit filed by Ormat Technology, Inc.'s ("Ormat") shareholders. Now pending is Ormat's Second Motion to Dismiss or Stay Pending First Filed State Court Derivative Action and Related Federal Securities Class Action (#27).

The motion is ripe, and we now rule on it.

I. Background

A. Securities Class Action

On March 9, 2010, Wayne Szymborski filed a complaint for violations of federal securities law against Ormat and certain individual defendants in the U.S. District Court of Nevada. Two other related securities class action suits were also brought against Ormat. On June 3, 2010, this Court consolidated the three related securities class action suits. On July 9, 2010, lead plaintiffs Jianxun Dong, George Umino, and A.R.D. Investment Club, L.P. filed a consolidated class action complaint for violations of federal securities law in the U.S. District Court of Nevada ("Securities Class Action"). (Sec. Class Action Compl. at 1, 79 (#28-4).)*fn1

Lead plaintiffs sued Yehudit Bronicki and Joseph Tenne and alleged two causes of action. (Id. at 4, 74, 77.) In the first cause of action, lead plaintiffs alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 because defendants employed schemes to defraud, made untrue statements of material fact, and engaged in practices which operated as fraud and deceit upon purchasers in an effort to maintain artificially high market prices for Ormat's securities. (Id. at 74.) In the second cause of action, lead plaintiffs alleged violations of Section 20A of the Exchange Act. (Id. at 77.) Lead plaintiffs sought the following relief: (a) class action certification, (b) compensatory damages, and (c) costs and fees for bringing the action. (Id. at 78.)

B. State Derivative Action

On September 7, 2010, Thomas Hebel and J.L.B. Stolz filed a consolidated derivative complaint in the Second Judicial District Court in Washoe County ("State Derivative Action"). (State Compl. at 2, 73 (#28-12).)*fn2 The state plaintiffs sued all of the same defendants listed in the federal derivative action with the exception of Joseph Tenne. (See id. at 6-7.) State plaintiffs alleged that defendants had made false and/or misleading statements and had failed to disclose that the company improperly capitalized costs for individual projects it had abandoned instead of expensing the costs. (Id. at 4.) As a result, the company's financial results were overstated, not prepared in accordance with the Generally Accepted Accounting Principles ("GAAP"), and were materially false and misleading. (Id.) State plaintiffs alleged that Ormat misrepresented and failed to disclose material adverse facts regarding severe operational issues plaguing its North Brawley, California, geothermal projects. (Id.)

State plaintiffs alleged six causes of action against all defendants. (Id. at 67-69.) In the first cause of action, state plaintiffs alleged a breach of fiduciary duty because defendants improperly misrepresented the business prospects of the company and failed to correct the company's public announcements. (Id. at 67). In the second cause of action, state plaintiffs alleged abuse of control. (Id.) In the third cause of action, state plaintiffs alleged gross mismanagement. (Id. at 68.) In the fourth cause of action, state plaintiffs alleged waste of corporate assets. (Id.) In the fifth cause of action, state plaintiffs alleged unjust enrichment. (Id. at 69.) In the sixth cause of action, state plaintiffs alleged contribution and indemnification. (Id.) State plaintiffs sought the following relief: (a) constructive trust; (b) restitution; and (c) costs and fees for bringing this action. (Id. at 70.)

C. Federal Derivative Action

On March 29, 2010, Travis Branam, on behalf of Ormat,*fn3 filed a derivative complaint in this District against certain members of Ormat's board of directors and executive officers. (Complaint at 1-2 (#1).) On August 31, 2010, the Court granted an order consolidating Branam v. Bronicki with Pipefitters Local 537 Annuity Fund v. Bronicki, et al., no. 3:10-cv-336-LRH-VPC, filed on June 6, 2010. (Order at 6 (#16).) The consolidated case is known as In re Ormat Technologies, Inc., Derivative Litigation, 3:10-cv-177-ECRRAM. (Id. at 7.) The Court granted Plaintiffs leave to file a consolidated complaint which would be the operative complaint. (Id. at 10.) On October 28, 2010, Plaintiffs filed a Verified Consolidated Shareholder Derivative Complaint. (Consolidated Compl. (#21).) That same day Travis Branam filed a motion to withdraw as plaintiff and substitute Don B. Dale as plaintiff. (Mot. to Substitute Pl. at 1 (#20).) Judge McQuaid granted that motion. (Minute Order (#26).)

In the consolidated derivative complaint, Plaintiffs sued current and/or former members of Ormat's board of directors and executive officers*fn4 for actions taken between March 2008 and the present. (Consolidated Compl. at 2 (#21).) According to the complaint, Ormat was engaged in the geothermal and recovered energy power business in the United States and abroad. (Id.) The complaint alleged the following. (Id.) Defendants "engaged in a false and misleading accounting scheme designed to artificially inflate [Ormat's] net income, and in turn, artificially inflate the dividends paid on [Ormat's] stock." (Id.) Instead of using the "successful efforts" method to expense costs, Defendants used the "full cost" method. (Id. at 3.) Defendants "improperly capitalized costs with [Ormat's] abandoned projects, instead of expensing those costs" in violation of GAAP. (Id. at 2-3.) Defendants continued to use this accounting scheme after the Securities and Exchange Commission ("SEC") informed Defendants about serious issues involving their accounting practices. (Id. at 3.) Defendants continued to use this scheme until February 24, 2010, when the SEC forced Defendants to disclose to the public that the company's financial statement for year end December 31, 2008, and the first three quarters of 2009, could not be relied upon and had to be restated. (Id.) During the relevant time period, Defendants issued a series of false or misleading statements and failed to disclose material adverse facts about the company's business, operations, and prospects. (Id. at 4.) Defendants wanted to artificially inflate the company's net income, profits, share price, and dividends. (Id.) Defendants wanted to artificially inflate dividends in order to protect the Bronicki family's ownership interest. (Id. at 5.) The Bronicki family owned 35% of Ormat Industries Ltd., which owned 56% of Ormat. (Id.) The Bronicki family used their ownership interest as collateral for a loan they took out in response to a takeover attempt in December 2007. (Id.) A decline in stock price would have caused the Bronicki family to lose half of their ownership interest in Ormat. (Id.) The artificially inflated dividends provided the Bronicki family with income to pay down the loan without selling collateral shares or risk losing their controlling interest in the company. (Id.)

The complaint alleged the following causes of action against all Defendants. (Id. at 62.) In the first count, Plaintiffs alleged a breach of fiduciary duty for disseminating false and misleading information. (Id.) In the second count, Plaintiffs alleged a breach of fiduciary duty for failing to maintain internal controls to ensure that Ormat's financial statements were prepared in accordance with GAAP. (Id. at 63.) In the third count, Plaintiffs alleged a breach of the fiduciary duties of loyalty and good faith for failing to properly apply the proper accounting treatment to Ormat's abandoned geothermal projects. (Id.) In the fourth count, Plaintiffs alleged unjust enrichment at the expense and detriment of Ormat. (Id. at 64.) In the fifth count, Plaintiffs alleged abuse of control by allowing Ormat to misrepresent material facts regarding its financial position and business prospects. (Id. at 64-65.) In the sixth count, Plaintiffs alleged gross mismanagement. (Id. at 65.) In the seventh count, Plaintiffs alleged a waste of corporate assets for causing Ormat to incur significant legal liability and/or legal costs to defend itself as a result of Defendants' unlawful actions. (Id. at 66.) Plaintiffs sought: (a) the ...


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