Taxpayers’ Green ‘Investment’ in Battery Company Withers

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A123 logoA123 Systems – the taxpayer-funded electric vehicle battery manufacturer that famously shipped duds to Fisker Automotive, which caused one of its luxurious Karma EVs to shut down just before a Consumer Reports test – is now the defendant in an investor class action lawsuit and its stock has tanked to below $1.

Massachusetts-based A123 received more than $279 million in grants from the Department of Energy, most of it used to refurbish two plants in Livonia and Romulus, Mich., for the production of EV batteries. The company laid off 125 factory workers in November, lost $257.7 million in 2011 (including an $11.6 million write-down of its stake in Fisker), and announced it would spend $55 million to fix the defective batteries it delivered to Fisker and other customers. Meanwhile A123’s top executives received big raises and inflated parachutes should the company change ownership.

The lawsuit, filed in a Massachusetts U.S. District Court by New York-based firm Pomerantz, Haudek, Grossman and Gross (which is also suing First Solar), appears to be primarily tied to inadequate disclosures related to the defective batteries. The complaint cites the costs that A123 will incur to fix its batteries over the next several quarters, which “represents approximately one quarter of the company’s projected annual revenue for 2012.” The lawyers also noted the decline in stock price (AONE) by more than 12 percent (21 cents per share) on the news, closing at $1.49 on March 26 and $1.22 on March 28 after a Deutsche Bank analyst issued a bleak forecast.

Since then it’s only gotten worse, closing at 87 cents yesterday. It stood at $2.28 when the executives got their pay boost on February 8. At one time it had traded at over $20 and was near $10 a year ago, but the company has never made money, suffering net losses of $85.8 million in 2009 and $152.6 million in 2010.

The class action complaint accuses A123 executives, including President David Vieau, of a failure to disclose “severe manufacturing deficiencies” that led to the delivery of the faulty batteries, which will require it to “incur substantial costs,” causing investors to suffer significant losses and damages. A123 is charged with:

·      Deceiving the investing public

·      Artificially inflating and maintaining its market price

·      Causing the plaintiff and others in the class action suit to purchase A123 stock at artificially inflated prices 

“The company’s statements were materially false and misleading at all relevant times,” the complaint said.

The failure that was consummated by the Consumer Reports public relations debacle was actually the second such incident between A123 and Fisker. In December Fisker recalled 239 Karmas – a taxpayer-subsidized EV toy for rich people, priced at a minimum of $102,000 – due to faulty hose clamps associated with the batteries.

Many, including myself, thought the problems of Fisker were perhaps the biggest contributor to A123’s woes. Now it looks increasingly like each is showing equal capacity for mistakes, crony socialism and cash burn.

NLPC has documented extensively the relationships, campaign contributions and lobbying efforts of both companies with the Obama administration. A123 executives gave more than $19,000 to key Democrats ahead of their stimulus-funded DOE grant, and Vieau was also featured in a 30-second spot in late 2009 to endorse energy and climate legislation promoted by President Obama and his fellow Democrats. And major Fisker investor Kleiner Perkins Caufield Byers, a Silicon Valley venture capital firm, has donated $2.6 million to candidates and political action committees, favoring Democrats over Republicans by a very wide margin. KPCB spent $50,000 per quarter throughout 2009 and 2010 lobbying Congress on legislation that was heavy-laden with renewable energy government incentives, and Fisker lobbied Congress, the White House and the Departments of Energy and Defense – spending $190,000 in 2009, $480,000 overall – to seek funds through DOE’s loan program, among other things.

Now it looks like even taxpayers can’t bail out the crony socialists. Besides Deutsche Bank, Motley Fool analyst Travis Hoium wrote in February, “The common theme from A123 Systems over the last two years has been disappointment, a trend that may continue.” And Theodore O’Neill of Wunderlich Securities wrote in a February research article that A123 faced “a doomsday” scenario. 

On Monday Motley Fool’s Navjot Kaur explained “Why I’m Staying Away from A123,” writing, “some analysts believe the company may have to raise funds as early as the third quarter of this year to meet working capital requirements. Furthermore, the company's huge $54 million inventory may include batteries that possess defective cells.” And O’Neill told Associated Press yesterday, “People are just looking to get out before (the stock) goes to zero.”

Anyone who looks at A123, Fisker or any of the DOE’s stimulus grant or loan recipients and wants to debate whether they were a worthwhile “bet” of government funding, is missing the point. Even if they were a smashing success, private investors should have enjoyed the benefits, not bureaucrats. Would taxpayers have received a windfall if all the “green” energy companies were home runs? Of course they wouldn’t.

The process of picking winners and losers only invites appearance of cronyism at best and outright corruption at worst. Let private investors who can best afford to take the risks decide which corporate management and technological innovation holds the most promise. Government bureaucrats will never be able to exercise sound judgment in such matters. The many failures of "green" stimulus recipients is just further proof.

Paul Chesser is an associate fellow for the National Legal and Policy Center.