The Tribune

The Bahamas Electricity Corporation's (BEC) prospective manager has dismissed as "fraud by hindsight" claims that it artificially inflated its stock price prior to a one-day wipe-out that erased $250 million in shareholder value.

Tribune Business can reveal that PowerSecure International is petitioning the eastern district court in North Carolina to dismiss a class action securities fraud claim against it on the basis that it "fails to state a claim".

Documents obtained by Tribune Business show that the case, which is thought to have played a key role in delaying the Christie administration's announcement of PowerSecure as the preferred BEC bidder, revolves around the 62 per cent "plunge" in the company's share price that occurred on May 8 last year.

Maguire Financial, the investor leading the 'class action' complaint, is alleging that PowerSecure and its top executives withheld material information that would have informed the market its financial performance was about to take a hit.

By allegedly touting strong financial results, Maguire Financial and other investors claim PowerSecure "artificially inflated" its share price starting in August 2013.

They allege that this occurred "just in time" for PowerSecure to place a stock issue with investors, raising $34 million from the sale of 2.3 million shares.

And, at the same time, the Maguire Financial class is alleging that Sidney Hinton, PowerSecure's chief executive and president, raised $3.2 million by selling 30 per cent of the shares he held in the company.

All this occurred prior to May 7, 2014, when BEC's potential manager unveiled first quarter results that led to one of the company's analysts saying they had been "blindsided". PowerSecure unveiled a net $4.3 million loss for a period in which the market had expected a profit, and reduced its revenue and net income expectations for the remainder of 2014.

"In response to this shocking material adverse information, PowerSecure's stock plunged by more than 62 per cent, erasing more than $250 million in market capitalisation, to close at just $7 on May 8, 2014, on unusually high trading volume," the Maguire Financial class action complaint alleged.

It claimed that PowerSecure had been "encountering significant operational issues and inefficiencies" from the 2013 second quarter, but these had not been disclosed to investors and the capital markets.

The allegations contained in the class action complaint drove Prime Minister Perry Christie to seek US government guarantees - from the likes of secretary of state, John Kerry, and commerce secretary, Penny Pritzker - vouching for PowerSecure's integrity.

This process is thought to have delayed the announcement of PowerSecure's selection by several months, with the company having been effectively chosen by the Government as BEC's management partner around Christmas-New Year 2015.

The Prime Minister, in particular, wants the selection of BEC's management partner to be beyond reproach, and able to withstand all scrutiny and challenge.

Yet the class action lawsuit remains an issue of concern for Bahamians. Clinton Minnis, the Bahamas Electrical Managers Union (BEMU) president, told Tribune Business last week that PowerSecure's legal battle was one concern it had raised with Deputy Prime Minister Philip Davis.

"One of the concerns that we had was whether the company had put all of its legal issues behind it,” Mr Minnis said. “We know that there was a class action suit against them." There were, in fact, three separate class action lawsuits that were eventually consolidated into the Maguire Financial complaint, as all made the same allegations.

The US is one of the most litigious societies in the world. Class-action lawsuits against publicly-traded companies by disgruntled investors are relatively commonplace when investments fail to work out and deliver the expected returns.

In PowerSecure's case, whether there is any substance to the allegations will have to be determined by the North Carolina court. The company is due to file its final response to the claims, and bid for their dismissal, by next month. It will then be up to the judge to sort out.

PowerSecure's first bid to dismiss the lawsuit effectively portrays the Maguire Financial group as just a collection of disgruntled shareholders who are unhappy with how their investment turned out.

Pointing out that share prices and markets can go down as well as up, PowerSecure said it had delivered numerous cautionary statements and guidance warnings about the factors that could negatively impact its business.

"It is only too easy - and too tempting - after a stock drop to look back with the benefit of 20/20 hindsight to allege, as plaintiff has done here, that defendants knew or should have predicted these operational challenges and disappointing financial results," PowerSecure alleged.

"Most businesses experience short-term operational challenges or disappointing financial results from time to time."

PowerSecure said "several negative factors coalesced during that quarter". These included a large utility customer ordering much less work than in the year-end 2013 quarter; work for another large utility that was more difficult and less profitable; and the pace/timing of large distribution/generation contracts slowing. One of these customers was Florida Power & Light (FPL).

"Although each of these negative factors was entirely consistent with the many descriptions and warnings that the company had frequently disclosed about the 'lumpy' and sometimes unpredictable nature of the business, when they all hit at the same time it negatively impacted the company's near-term results," PowerSecure said.

"At bottom, this is a fraud by hindsight case. The reliance on hindsight is evident from the fact that plaintiff took the exact explanation offered by company management for the disappointing results in the 2014 first quarter conference call, and then claims that these explanations were previously hidden from investors."

It added that while the Maguire Financial complaint referred to 26 separate statements it made between August 7, 2013, and May 7, 2014, there was no allegation that any of these were false.

The 'class action' group, though, claims that details provided by a PowerSecure 'whistleblower' "support a strong inference" that the company "knew or recklessly disregarded the serious problems" that were set to impact its performance.

While not identified by name, the lawsuit alleges that the whistleblower held several key executive posts with PowerSecure, including vice-president of engineering/project management in its utilities infrastructure group, plus vice-president of sales in the same division.

PowerSecure's defence was quick to dismiss the so-called whistleblower's claims, saying they had no contact with senior management and knew nothing about the problem contracts.

Describing the purported whistleblower's evidence as "vague", the prospective BEC manager added: "Finally, some of [the whistleblower's] allegations are so implausible that they cast doubt on their credibility.

"For example, [the whistleblower] claims 'the utility infrastructure group stopped growing in the third and fourth quarter of 2013', but this allegation is patently false. Utility infrastructure grew from $24.166 million in quarterly revenue in the 2013 third quarter to $37.527 million the in 2013 fourth quarter, an increase that represented 55.2 per cent quarter-over-quarter and 81.6 per cent year-over-year growth."

Maguire Financial's complaint also makes a strong personal attack on PowerSecure's chief executive, Mr Hinton, alleging that he had his own "financial motives" to push the company's share price.

It claims that he transferred 20 per cent of his equity stake to his wife just before Christmas 2013, as a means to fund his impending divorce.

PowerSecure again dismissed this accusations, arguing that the divorce was "an innocent explanation for Mr Hinton's action, and was "more plausible than fraud".

The Maguire Financial 'class' apparently remains unconvinced. In their reply to PowerSecure's arguments for dismissing the case, they reiterated: "By failing to disclose the serious problems facing the company, of which defendants were well aware, and instead consistently assuring the investing public all was well, defendants artificially inflated and maintained the trading price of PowerSecure securities.

"Defendants profited directly by selling more than $37 million of stock to the public at an artificially-inflated price."