3 LIEFF ABRASER HEIMANN - Class actionsecurities.stanford.edu/filings-documents/1047/... · The Prescience report raised a number of other red flags indicating fraud at the Company,

Case 2:11-ml-02302-GW-CW Document 90 Filed 07/16/12 Page 1 of 94 Page iD #:1570 \•\// \~~ U_ U iLl

Richard M. Heimann (CA Bar No. 063607) rheimann@lchb. corn Joy A. Kruse (CA Bar No. 142799) jakruseR

ABRASERlchb. corn

LIEFF HEIMANN & BERNSTEIN, LLP 275 Battery Street, 29th Floor San Francisco, CA 94111-3339 Telephone: 415.956.1000 Facsimile: 415.956.1008

Lead Counselfor Lead PlaintiffA-Power Investor Group

ClERI, U.S. DiSTRICT COURT

CENTRAL D)STiCi OF CALIFOR N IA

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION

IN RE A-POWER ENERGY GENERATION SYSTEMS, LTD. SECURITIES LITIGATION

This Document Relates To:

ALL ACTIONS

Master Docket No.: 2:1 1-mI-2302-GW-(CWx)

CONSOLIDATED FIRST AMENDED CLASS ACTION COMPLAINT

CLASS ACTION

CONS. I ST AMENDED CLASS ACTION COMPLAINT 1043005.1 MASTER DOCKET NO.: 2:11 -ML-2302-GW- (CWX)

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Case 2 :11-ml-02302-GW-CW Document 90 Filed 07/16/12 Page 2 of 94 Page ID #:1571

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TABLE OF CONTENTS

Page I. NATURE OF THE ACTION ........................................................................... 1

II. JURISDICTION AND VENUE ....................................................................... 7

III. PARTIES .......................................................................................................... 8

A. Defendants .............................................................................................. 8

B. Relevant Non-Parties ............................................................................ 17

IV. SUBSTANTIVE ALLEGATIONS ................................................................ 18

A. Chinese Reverse Mergers ..................................................................... 18

B. Materially False And Misleading Statements Issued By Defendants During The Class Period....................................................................... 24

V. THE TRUTH BEGINS TO EMERGE ........................................................... 63

VI. ADDITIONAL SCIENTER ALLEGATIONS .............................................. 76

VII. LOSS CAUSATION ...................................................................................... 82

VIII. GAAP VIOLATIONS .................................................................................... 83

IX. CLASS ACTION ALLEGATIONS ............................................................... 84

X. FRAUD-ON-THE-MARKET PRESUMPTION ........................................... 86

XI. CLAIMS FOR RELIEF .................................................................................. 87

PRAYER FOR RELIEF ........................................................................................... 91

1043005.1 - i - CONSOL. 1ST AMEND. CLASS ACTION COMPLAINT MASTER DOCKET NO.: 2:11-ML-2302-GW- (CWX)

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Case :11-ml-02302-GW-CW Document 90 Filed 07/16/12 Page 3 of 94 Page ID #:1572

1

Lead Plaintiff A-Power Investor Group, consisting of plaintiffs Paolo

2 Bechini, William J. Rooney, Terry W. Shaw, Matthew J. Sprunger, and Robert C.

3 Treadwell, Jr. (collectively, “Plaintiffs”), individually and on behalf of all other

4 persons similarly situated, by its undersigned attorneys, for its complaint against the

5 defendants named herein (collectively, “Defendants”), allege the following based

6 upon personal knowledge as to itself and its own acts, and information and belief as

7 to all other matters, based upon, inter alia, the investigation conducted by and

8 through its attorneys, which included, among other things, a review of public filings

9 with the United States Securities and Exchange Commission (“SEC”) by A-Power

10 Energy Generation Systems, Ltd. (“A-Power” or the “Company”), information filed

11 with Administrations of Industry and Commerce (“SAIC”) in the People’s Republic

12 of China (“China” or the “PRC”) by A-Power’s subsidiaries (collectively, “A-

13 Power”), wire and press releases published by and regarding A-Power, public

14 conference calls, media and news reports concerning A-Power, securities analysts’

15 reports and advisories about the Company, and information readily obtainable on

16 the Internet. Plaintiffs believe that further substantial evidentiary support will exist

17 for the allegations set forth herein after a reasonable opportunity for discovery.

18 I. NATURE OF THE ACTION

19

1. This is a securities fraud class action brought on behalf of all persons

20 and entities who purchased or otherwise acquired the publicly traded securities of

21 A-Power between March 21, 2008 and June 27, 2011, inclusive (the “Class

22 Period”), seeking to pursue remedies under the Securities Exchange Act of 1934

23 (the “Exchange Act”). This class action is brought under Sections 10(b) and 20(a)

24 of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5

25 promulgated thereunder, 17 C.F.R. § 240.10b-5.

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2. Throughout the Class Period, Defendants made materially false and/or

27 misleading statements concerning A-Power’s operations, financial condition, and

28 business prospects. Specifically, as described in detail herein, Defendants failed to

1043005.1 - 1 - CONSOL. 1ST AMEND. CLASS ACTION COMPLAINT MASTER DOCKET NO.: 2:11-ML-2302-GW- (CWX)

Case

11-ml-02302-GW-CW Document 90 Filed 07/16/12 Page 4 of 94 Page ID #:1573

disclose, among other things, (1) that A-Power issued financial statements for the

2 years ending December 31, 2008 and 2009 that significantly overstated its actual

3 revenues and total assets, and understated total liabilities, in violation of United

4 States Generally Accepted Accounting Principles (“GAAP”), and (2) the Company

5 failed to disclose the related party nature of certain significant transactions, and

6 failed to disclose additional related parties in violation of GAAP.

7

3. The market began to learn of Defendants’ wrongful conduct on or

8 around March 28, 2011 when A-Power revealed for the first time problems

9 completing its 2010 financial statements and the audit thereof. On that day, A-

10 Power issued a press release announcing that it had postponed its 2010 earnings

11 conference call originally scheduled for the next day to “allow the Company and its

12 independent auditors to complete their work on the financial statements and audit.”

13 A-Power assured the investing public, however, that the postponement was “not

14 due to any accounting irregularities.” Following this announcement, the price of A-

15 Power common stock fell $0.31 per share, or approximately 6%, from its closing

16 price of $5.19 on the previous trading day, March 25, 2011, to close at $4.88 on

17 March 28, 2011, on unusually high trading volume.

18

4. On April 7, 2011, A-Power issued a press release announcing a delay

19 in the release of its 2010 financial results. A-Power’s Chief Financial Officer

20 (“CFO”) at the time, Defendant Kin Kwong (Peter) Mak (“Mak”), assured

21 investors, however, that the “delay was not the result of any accounting

22 irregularities or investigation of accounting errors, nor do we expect any

23 restatement of A-Power’s previously audited financial statements as a result of the

24 ongoing audit processes for 2010.”

25

5. On June 17, 2011, a research investment firm, Prescience Investment

26 Group (“Prescience”), published a report on the Seeking Alpha financial blog that

27 revealed, among other things, that A-Power had filed financial reports with

28 regulatory authorities in China that showed substantially lower revenues than what

1043005.1 - 2 - CONSOL. 1ST AMEND. CLASS ACTION COMPLAINT

MASTER DOCKET NO.: 2:11-ML-2302-GW- (CWX)


it had reported in its filings with the SEC. 1 For example, for 2009 alone, financial

statements filed by A-Power with the SAIC, which showed the Company’s true

financial condition but were not widely available to the public, revealed less than

one-tenth of the revenue A-Power had reported for the same period in its SEC

filings.

6. The Prescience report raised a number of other red flags indicating

fraud at the Company, including allegations that A-Power failed to disclose the

identity of numerous related parties and salient facts concerning related parties that

it had disclosed.

7. On the same day, A-Power issued a press release announcing that one

of its independent directors, Robert B. Leckie (“Leckie”), had resigned from the

Company’s Board of Directors (“Board”) on June 14, 2011 “as a result of concerns

that his views on process and best practices were not necessarily shared throughout

the Company.”

8. In response to these revelations, the price of A-Power stock fell $0.40

per share, or nearly 18%, to close at $1.85 on June 17, 2011, on unusually high

trading volume. On the next trading day, June 20, 2011, the stock fell another

$0.11 per share, or nearly 6%, to close at $1.74. The combined stock price decline

over these two consecutive trading sessions was $0.51 per share, or more than 23%.

9. On June 20, 2011, A-Power issued a press release stating that it was

aware of the Prescience report and that “[w]e are reviewing the issues raised in this

article and will provide answers by way of a press release as soon as possible.” To

date, A-Power has not issued a press release nor any other public statement

addressing the issues raised in the Prescience report.

1 Eiad Asbahi, Evaluating the Clouds Overshadowing A-Power Energy Generation Systems , Seeking Alpha (June 17, 2011), available at http://seekingalpha.com/ article/275457-evaluating-the-clouds-overshadowing-a-power-energy-generation-systems.

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10. On June 27, 2011, A-Power announced that its independent auditor,

2 MSCM LLP (“MSCM”), had resigned effective June 26, 2011, and that the filing of

3 A-Power’s annual report on Form 20-F for the year ending December 31, 2010

4 (“2010 Form 20-F”) would be delayed beyond its June 30, 2011 filing deadline.

5 According to A-Power, MSCM stated in its resignation letter that it had resigned

6 because “the Company had not retained a qualified independent forensic accounting

7 firm to evaluate certain business transactions that MSCM stated was necessary for

8 MSCM to complete its audit of the Company’s financial statements for the year

9 ended December 31, 2010 on a timely basis.” On the same day, the NASDAQ

10 Stock Market (“NASDAQ”) halted trading in A-Power shares at 2:55 p.m. Eastern

11 Daylight Time at a last trading price of $1.67 per share. NASDAQ indicated that

12 the shares would remain halted until A-Power satisfied its request for additional

13 information.

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11. Meanwhile, the exodus of A-Power’s top officials continued. On June

15 28, 2011, the Company revealed that another two independent directors, Defendant

16 Remo Richli (“Richli”) and Dilip R. Limaye (“Limaye”), had resigned effective

17 June 27, 2011. Richli had served as Chair of the Board’s Audit Committee and

18 Limaye had served as Chair of the Board’s Compensation Committee. According

19 to A-Power, Richli stated that his “resignation was based on his understanding of

20 events that occurred over the past few weeks, including the resignation of the

21 Company’s independent auditor. He also stated that he did not agree with the

22 course of action that the Company has proposed to take in response to recent

23 events.” Limaye’s decision to resign was “prompted by the events of the last

24 several weeks about which he communicated his concerns and views on actions that

25 should be taken,” according to A-Power.

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12. On July 1, 2011, the Company disclosed that another independent

27 director, Defendant Jianmin Wu (“Wu”), had resigned from the Company’s Board.

28 The resignations of Leckie, Richli, Limaye, and Wu left only one independent, non-



Case 11-ml-02302-GW-CW Document 90 Filed 07/16/12 Page 7 of 94 Page ID #:1576

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executive director, Zhenyu Fan, on A-Power’s seven-member Board, who also

subsequently resigned some time prior to April 26, 2012.

13. On July 5, 2011, A-Power announced that Mak would step down as

CFO when his extended service contract ended on July 15, 2011. The Company

also announced that Defendant Michael Zhang (“Zhang”), A-Power’s then-Vice

President for Strategic Planning, Internal Audit, and Internal Control, would serve

as interim CFO effective July 15, 2011.

14. On July 11, 2011, A-Power announced that Shan Lee had been

selected to serve as the Company’s interim Chief Operating Officer (“COO”),

replacing John Lin (“Lin”) who died in January 2011.

15. On August 18, 2011, the Company announced that the SEC had

launched a formal investigation into whether A-Power or its personnel violated the

federal securities laws, and served the Company with a subpoena in connection

with the investigation.

16. On September 6, 2011, the Company announced it had received a

NASDAQ de-listing letter. NASDAQ had determined that A-Power’s shares no

longer warranted listing due to the recent resignation of MSCM and the Company’s

directors, as well as the Company’s failure to file its 2010 Form 20-F.

17. On September 26, 2011, A-Power shares were suspended from being

traded on the NASDAQ and began to trade “over the counter” (“OTC”) or on the

“pink sheets.” 2 On that day, A-Power shares closed at $0.31, representing a nearly

82% decline from its last trading price of $1.67 before NASDAQ halted trading in

the shares on June 27, 2011.

2 The “pink sheets” is a daily publication compiled by the National Quotation Bureau with bid and ask price of OTC stocks, including the market makers that trade them. Unlike companies with shares listed on a stock exchange, companies quoted on the pink sheets system do not need to meet minimum requirements or file with the SEC. Pink sheets trading is a form of OTC trading.


Case 11-ml-02302-GW-CW Document 90 Filed 07/16/12 Page 8 of 94 Page ID #:1577

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18. On October 3, 2011, the Company announced that it had received an

additional determination letter from NASDAQ Staff stating that A-Power’s failure

to provide NASDAQ with “certain additional information requested in a letter to

the Company dated September 9, 2011 in connection with the Staff’s ongoing

inquiry regarding the continued listing of the Company’s securities on NASDAQ,

provides an additional basis for delisting the Company’s common stock.”

19. On October 4, 2011, only two weeks after A-Power announced that it

had engaged BDO Daejoo LLC (“BDO”) to serve as its new auditor, A-Power

revealed that BDO had rescinded its acceptance of the engagement. A-Power also

announced that it had appointed Simon & Edward, LLP, a three-partner firm that

has also been retained by other China-based reverse merger companies after their

auditors resigned, as its new auditor.

20. On November 9, 2011, a second Prescience report was published on

Seeking Alpha , in which Prescience disclosed its failed attempts to contact and

verify A-Power’s purported customers, further questioning the validity of A-

Power’s reported revenues. 3 On this news, A-Power shares closed at $0.69, over a

4% loss from the previous day’s closing price of $0.72. The stock continued to fall

over the course of the next two trading days.

21. On January 9, 2012, the Company disclosed that Zhang had resigned

from his positions as interim CFO, Director, and Vice President effective January 6,

2012.

22. Of the seven directors that served on A-Power’s Board during the

Class Period, only one remains, namely, Defendant Jinxiang Lu (“Lu”), A-Power’s

Chairman and Chief Executive Officer (“CEO”). At a hearing before the Court on

3 Eiad Asbahi, Clouds Thicken Over A-Power Generation Systems , Seeking Alpha (Nov. 9, 2011), available at http://seekingalpha.com/article/306515-clouds-thicken-over-a-power-energy-generation-systems.



Case 2

:11-ml-02302-GW-CW Document 90 Filed 07/16/12 Page 9 of 94 Page ID #:1578

April 26, 2012, A-Power, through its counsel, publicly disclosed for the first time

that Defendant Fan had left the Company.

23. On January 10, 2012, a NASDAQ Hearing Panel issued a final

determination to delist A-Power’s shares. A-Power chose not to appeal the

decision and the Hearing Panel’s determination became final on February 24, 2012.

NASDAQ filed a Notification of Removal From Listing And/or Registration on

Form 25 with the SEC on April 13, 2012.

24. The Company has not filed its 2010 Form 20-F, which it was required

to do by December 31, 2011 in order to comply with NASDAQ listing

requirements. Currently, the Company’s stock is almost worthless. It is now

trading at $0.23, which represents a 99% decline from its Class Period high trading

price of $30.82.

25. As a result of the revelations regarding Defendants’

misrepresentations and omissions, Plaintiffs and other Class members have suffered

significant losses and damages.

II. JURISDICTION AND VENUE

26. The claims asserted herein arise under Sections 10(b) and 20(a) of the

Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5 promulgated

thereunder, 17 C.F.R. § 240.10b-5.

27. This Court has jurisdiction over the subject matter of this action

pursuant to 28 U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act,

15 U.S.C. § 78aa.

28. Venue is proper in this District pursuant to Section 27 of the Exchange

Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1391(b).

29. On December 15, 2011, the Judicial Panel on Multidistrict Litigation

transferred the related cases, now consolidated into the instant action, to this

District for coordinated or consolidated pretrial proceedings.

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30. In connection with the challenged conduct, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including,

but not limited to, the United States mails, interstate telephone communications and

II the facilities of the national securities markets.

III. PARTIES

A. Defendants

31. By order dated January 9, 2012, this Court appointed the A-Power

Investor Group, consisting of Plaintiffs Paolo Bechini, Terry W. Shaw, William J.

Rooney, Matthew J. Sprunger, and Robert C. Treadwell, Jr., as Lead Plaintiff. As

set forth in their certifications, which were previously filed with this Court,

Plaintiffs purchased A-Power securities at artificially inflated prices during the

Class Period and have been damaged thereby.

32. Defendant A-Power is a holding company organized under the laws of

the British Virgin Islands and conducts most of its business and operations through

its subsidiaries in China. According to the Company’s public filings, A-Power’s

principal executive offices are located at No. 44 Jingxing Road, Tiexi District,

Shenyang, Liaoning Province, China 110021. A-Power, through its subsidiaries, is

primarily engaged in the design, construction and installation of distributed power

generation (“DG”) systems and micro power grids as stand-alone facilities and for

various customers in the steel, chemical, ethanol, cement, and food industries. The

Company designs projects, subcontracts its construction and installation to

approved third-party subcontractors under its project oversight, and conducts

testing on completed projects prior to turning them over to its customers.

According to its Form 20-F for the year ending December 31, 2009 (“2009 Form

20-F”), A-Power’s DG business accounted for 100%, 96.9 %, and 83.9% of its total

revenues in 2007, 2008 and 2009, respectively. In addition to DG systems, A-

Power also designs, installs and constructs related facilities for industrial

companies. A-Power also produces wind turbines based on technology licensed

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from strategic partners in Europe and China. In 2010, A-Power entered the solar

energy market through its acquisition of EVATECH Co., Ltd., a producer of

manufacturing equipment for thin-film silicone amorphous PV cells and solar

panels.

33. The aggregate number of shares of A-Power common stock

outstanding as of September 30, 2010 is approximately 46 million shares. During

the Class Period, A-Power’s common stock was listed on NASDAQ under the

ticker “APWR.” The following diagram depicts A-Power’s organizational structure

and its percentage ownership of each of its subsidiaries, as reported in the

Company’s 2009 Form 20-F:


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Case 2:11-ml-02302-GW-CW Document 90 Filed 07/16/12 Page 12 of 94 Page ID #:1581

1 A-Power Energy Generation Systems, Ltd.

(British Virgin Islands)

I I Head Dragon Holdings

Easy Flow Limited Limited

(Hong Kong) Kong)

------------------------------------- '::'ri:.F -icire

Liaoning GaoKe Shenyang (Jinxiang) Shenyang (Ruixiang) Energy Group Good Luck Electric Lucky Wind Power

Company Limited Power Equipment Co., Ltd. Equipments Co., 1" Gao Ke Enerv" ("Jinanff") Ltd. ("Ruianff"

1 100% Liaoning GaoKe (High- Liaoning International

Shenyang

Tech) Energy Saving

Construction and

Longxiang Wind and Thermoelectricity

Engineering Group

Power Research Institute

Limited

Technologies ("GaoKe Design")

("LICEG Ltd."

Limited 100%

- I. •i_çi•çi•• Shenyang Yixiang

WindP ower Equipment Limited

(Yixiang) 4%

Shenyang Power GE Drive train Group Ltd. ("Shenyang ' Technologies

Power Group") - I Shenyang) Co. Ltd.

("GE Drivefrain") 49%

Texas A Wind L L C TexasAWind') 1 100%

[EVATECH Co., Ltd. I (Evatech")

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c:'ffsF-ice

Shoulong Energy Co., Ltd.

(Shou1oiig")



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1

34. A-Power became a publicly-traded company through a reverse merger

2 with a shell company called Chardan South China Acquisition Corporation

3 (“Chardan”) in January 2008. 4 In connection with the reverse merger, on April 14,

4 2007, Chardan entered into a stock purchase agreement with A-Power (formerly

5 known as China Energy Technology Limited, or “CETL”) and Defendant Lu, who

6 was the sole holder of all of the issued and outstanding common shares of a holding

7 company named Head Dragon Holdings (“Head Dragon”). Head Dragon holds A-

8 Power’s DG business through the following three A-Power operating subsidiaries

9 in which it also owns a controlling interest: Liaoning GaoKe Energy Group

10 Company Limited (“GaoKe Energy”), Liaoning GaoKe (High-Tech) Energy Saving

11 and Thermoelectricity Design Research Institute (“GaoKe Design”), and Liaoning

12 International Construction and Engineering Group Limited (“LICEG”)

13 (collectively, with GaoKe Energy and GaoKe Design, “GaoKe”). Pursuant to the

14 terms of the stock purchase agreement, on January 18, 2008, A-Power acquired all

15 of the shares of Head Dragon. Chardan then merged with and into A-Power and

16 each outstanding share of Chardan common stock automatically converted into one

17 common share of A-Power. On January 22, 2008, A-Power’s common stock began

18 trading on the NASDAQ Capital Market and, on June 2, 2008, the shares began

19 trading on the NASDAQ Global Select Market.

20

35. Defendant Lu has been the Company’s Chairman of the Board and

21 CEO since January 2008. According to A-Power’s 2009 Form 20-F, Lu

22 beneficially owns approximately 24.8% of A-Power’s outstanding common shares.

23 As described above, Lu was the sole holder of the issued and outstanding common

24 shares of Head Dragon before the shares were purchased by A-Power. In exchange

25 for selling his Head Dragon shares, Lu received 13 million shares of A-Power

26 common stock and became eligible to receive additional shares each year for six

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28 4 See ¶¶ 46-57 for a general description of reverse merger transactions.



Case 2


1 years beginning in fiscal 2007 (for an aggregate of 9 million shares) if, on a

2 consolidated basis, A-Power generated pre-determined minimum net operating

3 profits each year. A-Power reportedly satisfied the minimum profit targets for

4 2007, 2008 and 2009 and issued 1,000,000 shares to Lu in July 2008 and in July

5 2009; for 2009, A-Power stated in the 2009 Form 20-F that it expected to issue

6 1,000,000 shares to Lu in the third quarter of 2010. Lu also founded A-Power

7 subsidiaries GaoKe Energy and GaoKe Design in 2003. Lu and his wife, Haixue

8 Yu, own 36% and 13%, respectively, of GaoKe Design. Lu signed A-Power’s

9 annual reports filed with the SEC on Form 20-F for the years ending December 31,

10 2007, 2008, and 2009. Lu also signed certifications pursuant to Section 302 of the

11 Sarbanes-Oxley Act of 2002 (“SOX”), which were included in A-Power’s Form 20-

12 F for 2007, 2008, and 2009, and Form 20-F/A for 2008, stating, among other

13 things, that the financial information contained in the Form 20-Fs was accurate. Lu

14 was also one of the signatories of A-Power’s registration statement, filed with the

15 SEC on Form S-8 on June 24, 2010 (“2010 Registration Statement”), that

16 incorporated by reference: (i) A-Power’s 2009 Form 20-F, (ii) A-Power’s Form 6-

17 K, filed with the SEC on April 12, 2010, which included unaudited pro forma

18 condensed combined financial statements of A-Power and EVATECH, (iii) A-

19 Power’s Form 6-K, filed with the SEC on June 10, 2010, which included A-

20 Power’s press release announcing its financial results for the first quarter of 2010,

21 and (iv) CETL’s registration statement, filed with the SEC on Form 8-A. Lu has

22 served as the “legal representative” of each of the following six A-Power

23 subsidiaries: GaoKe Design (2003 to 2011), GaoKe Energy (2003 to 2010),

24 Shenyang (Ruixiang) Lucky Wind Power Equipments Co., Ltd. (“Ruixiang”)

25 (2007 to 2008), Shenyang Power Group Ltd. (since 2009), Shenyang Longxiang

26 Wind Power Technologies Limited (“Longxiang”) (since January 2010), and

27 Shenyang (Jinxiang) Good Luck Electrical Power Equipment Co., Ltd. (“Jinxiang”)

28 (2008 to 2010). As the legal representative of the subsidiaries, Lu is responsible for



Case 2


1 affirming the accuracy of information filed with the SAIC, including financial

2 information, on their behalf.

3

36. Defendant Mak served as the Company’s CFO from May 2009 until

4 July 15, 2011, when Mak’s extended service contract with the Company ended.

5 Mak signed a certification pursuant to SOX, which was included in A-Power’s

6 2008 Form 20-F/A and 2009 Form 20-F, stating, among other things, that the

7 financial information contained in the Form 20-F was accurate. Mak also signed

8 the 2010 Registration Statement. In a letter dated December 29, 2010 to the SEC,

9 A-Power’s COO John Lin stated in part, “In preparing our financial statements for

10 2009, we had two employees with expertise in preparing financial statements in

11 accordance with U.S. GAAP” and identified Mak as one of those employees.

12

37. Defendant Edward Meng (“Meng”) served as the Company’s CFO

13 from January 2008 through October 2008, when A-Power terminated his

14 employment after receiving notification from NASDAQ that Meng was employed

15 at another company on a full-time basis while serving as A-Power’s CFO. The

16 2007 Form 20-F describes Meng as a “Certified Public Accountant” who “is

17 experienced in both PRC and U.S. GAAP accounting.” Meng signed a certification

18 pursuant to SOX, which was included in A-Power’s Form 20-F for the year ending

19 December 31, 2007 (“2007 Form 20-F”), stating, among other things, that the

20 financial information contained in the Form 20-F was accurate.

21

38. Defendant Zhang served as the Company’s Vice President for

22 Strategic Planning, Internal Audit, and Internal Control since January 2010, a

23 member of the Board since June 8, 2011, and the Company’s interim CFO since

24 July 15, 2011. In a letter dated December 29, 2010 to the SEC, Lin stated in part,

25 “During 2010, we have retained two additional employees with expertise in

26 preparing financial statements under U.S. GAAP. Mr. Michael Zhang, who we

27 retained in January 2010, as Vice President, worked as an executive director for



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1 Ernst & Young and as a director for Deloitte prior to joining us.” Zhang resigned

2 from his A-Power positions on January 6, 2012.

3

39. Defendant Fan has served as a Director since January 2008, and served

4 on the Board’s Audit and Compensation Committees since 2008. Fan signed the

5 2010 Registration Statement. Upon information and belief, Fan resigned on or

6 before April 26, 2012. At a hearing before the Court on April 26, 2012, counsel for

7 A-Power stated, “we learned last night that Mr. Fan is no longer associated with the

8 company.”

9

40. Defendant Richli served as a Director from January 2008, and as Chair

10 of the Board’s Audit Committee from 2008, until his resignation on June 27, 2011.

11 According to A-Power, Richli was qualified as an “audit committee financial

12 expert” as the term is defined in SEC rules and regulations. The expert designation

13 is an SEC disclosure requirement related to Richli’s experience and understanding

14 with respect to certain accounting and auditing matters. According to A-Power’s

15 2009 Form 20-F, the Board adopted an Audit Committee Charter setting forth the

16 following responsibilities of the Audit Committee:

17

appointing, retaining and overseeing the work of our

18

independent auditor, including resolving disagreements

19

between the management and our independent auditor

20

relating to financial reporting;

21

pre-approving all audit and non-auditing services

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permitted to be performed by our independent auditor,

23

provided that the committee may establish pre-approval

24

policies and procedures;

25

.

reviewing annually the independence and quality control

26

procedures of our independent auditor;

27

.

reviewing regularly with our independent auditor any

28

significant difficulties encountered during the course of



Case 2


1

the audit, any restrictions on the scope of work or access

2

to required information, any significant disagreement with

3

management in connection with the preparation of the

4

financial statements and any significant judgments made

5

in connection with the preparation of the financial

6

statements and their view as the appropriateness of such

7

judgments;

8

• reviewing with our independent auditor the critical

9

accounting policies and practices used by the company;

10

• discussing with management and our independent auditor

11

the annual audited financial statements and any

12

certification, report, opinion or review rendered by our

13

independent auditor;

14


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its assessment of the effectiveness and adequacy of the

16

company’s internal control structure and procedures for

17

financial reporting and consider with management and the

18

independent auditors whether any changes to such

19

internal controls are appropriate;

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material off-balance sheet transactions or structures;

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• meeting separately with our independent auditor to

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discuss critical accounting policies, management letters,

24

recommendations on internal controls, the auditor’s

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engagement letter and independence letter and other

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material written communications between the

27

independent auditors and the management;

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• reviewing and approving, if appropriate, all proposed



Case 2


1

related party transactions;

2

.

establishing procedures for the receipt, retention and

3

treatment of complaints and/or concerns received by the

4

company regarding accounting, internal accounting

5

controls or auditing matters and adopt, as necessary,

6

appropriate remedial measures or actions with respect to

7

such complaints or concerns; and

8

.

annually reviewing and reassessing the adequacy of our

9

audit committee charter.

10

According to the 2009 Form 20-F, Richli’s professional experience and

11 expertise also included serving or having served as (i) a partner of a mergers and

12 acquisitions firm, (ii) a financial expert at a venture capital firm, (iii) the CFO and

13 CEO of various companies, and (iv) a director of another NASDAQ-listed Chinese

14 reverse merger company. Richli also owned a consulting firm engaged in corporate

15 finance consultancy. In addition, Richli reportedly holds a Bachelor of Arts degree

16 and a Master of Science degree in Business and Economics, a Master of Business

17 Administration in Finance, and an Executive Master in Management. Richli’s

18 relevant business experience and expertise provided him with the requisite

19 knowledge and understanding of A-Power’s operations. He was materially

20 involved, managed, and controlled A-Power’s financial reporting and business

21 affairs since the Company’s inception. Indeed, in a prospectus filed with the SEC

22 on December 26, 2007 in connection with A-Power’s reverse merger, Richli was

23 one of several people listed under the heading “Management of CETL [or China

24 Energy Technology Limited].” Richli also signed the 2010 Registration Statement,

25 which, as described in ¶ 35, incorporated by reference A-Power’s 2009 Form 20-F.

26

41. Defendant Wu served as a Director from January 2008 and as a

27 member of the Audit Committee from 2008 until his resignation on June 30, 2011.

28 Wu signed the 2010 Registration Statement.



Case 2


42. The Defendants referenced above in ¶¶ 35-41 are collectively referred

II to herein as the “Individual Defendants.”

B. Relevant Non-Parties

43. Robert B. Leckie served as a Director from March 2008 until his

resignation on June 14, 2011. Leckie signed the 2010 Registration Statement.

44. Dilip R. Limaye served as a Director from January 2008 and as Chair

of the Board’s Compensation Committee from 2008 until his resignation on June

27, 2011. Limaye signed the 2010 Registration Statement.

45. MSCM, located in Toronto, Ontario Canada, served as the Company’s

auditor from 2008 through June 26, 2011, when it resigned. MSCM served as Head

Dragon’s external accountant during 2006 and 2007. According to MSCM’s

website, MSCM is an “independent firm associated with the North American region

of Moore Stephens International Limited.” Moore Stephens International Limited is

an accounting network consisting of independent firms. MSCM was previously

named Moore Stephens Cooper Molyneux LLP. MSCM issued Audit Reports

concerning A-Power’s financial statements for the periods ending December 31,

2007, 2008, and 2009. It also issued Audit Reports concerning A-Power’s internal

controls over financial reporting as of December 31, 2008 and December 31, 2009

in which it noted several material internal control weaknesses. Specifically, in the

report concerning A-Power’s internal controls as of December 31, 2008, MSCM

stated, among other things, that it had found “pervasive deficiencies” in both entity

level and financial closing and reporting processes which consisted of inadequate

controls with respect to “(1) oversight of financial reporting, (2) communication of

appropriate business practices and standards, (3) assessment of business risks, (4)

written policies and procedures, (5) monitoring of internal controls and, (6) the

financial reporting process and the underlying accounting processes.” In the report

concerning A-Power’s internal controls as of December 31, 2009, MSCM noted

similar pervasive deficiencies. MSCM expressly consented to the inclusion of

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1 those reports in A-Power’s annual report and amended annual report for the year

2 ending December 31 2008 (“2008 Form 20-F” and “2008 Form 20-F/A,”

3 respectively) and 2009 Form 20-F. A-Power’s 2007 Form 20-F included Audit

4 Reports issued by MSCM concerning Chardan’s and Head Dragon’s financial

5 statements as of December 31, 2007.

6 IV. SUBSTANTIVE ALLEGATIONS

7

A. Chinese Reverse Mergers

8

46. Special purpose acquisition companies (“SPACs”) enable foreign

9 corporations to access capital markets in the United States without the rigors of an

10 initial public offering (“IPO”). In this case, an IPO and its attendant regulatory

11 strictures, which would subject the Company to a thorough audit, were

12 circumvented through the mechanism of a reverse merger with a domestic listed

13 company, namely Chardan. A “reverse merger,” as the term is used in this

14 Consolidated First Amended Class Action Complaint (“Complaint”), is the

15 acquisition of a private operating company by a public shell company (the SPAC)

16 that results in the private operating company having effective control of the

17 combined company. The foreign corporation is either merged into or acquired by a

18 shell listed on a U.S. exchange, giving the foreign company immediate “back door”

19 access to the U.S. public securities market. As explained in an article published in

20 The Wall Street Journal on June 3, 2011:

21

In reverse mergers, a foreign company is “bought” by a

22

publicly traded U.S. shell company. But the foreign

23

company assumes control and gets the shell’s U.S. listing

24

without the level of scrutiny that an initial public offering

25 entails. Though companies from other countries also

26

engage in reverse mergers, such deals are especially

27 common among the Chinese. The [Public Company

28

Accounting Oversight Board] says nearly three-quarters



Case 2


1 of the 215 Chinese companies listing in the U.S. from

2007 to early 2010 did so via reverse merger. 5

47. In recent years, suspicion of reverse mergers has increased due to the

widespread use of the device as a means of avoiding SEC scrutiny. According to a

May 26, 2011 article in The New York Times , reverse mergers are “a course long

favored by shady stock promoters.” 6

48. A March 15, 2011 research note released by the Public Company

Accounting Oversight Board (“PCAOB”) expressed concern about the quality of

audits conducted on the financial statements of these reverse merger Chinese

companies. 7 In an April 26, 2011 statement before the U.S. Senate Subcommittee

on Securities, Insurance and Investment, PCAOB Chairman, James R. Doty, stated

that there are:

significant risks associated with audits of operations of

U.S. [listed] companies in China. For example, we are

finding through our oversight of U.S. firms that even

simple audit maxims, such as maintaining the auditor’s

control over bank confirmations, may not hold given the

business culture in China. [Doty concluded that] [i]n light

of these risks, the PCAOB’s inability to inspect the work

5 Michael Rapoport, SEC Probes China Auditors, The Wall Street Journal Online (June, 3, 2011), available at http://online.wsj.com/article/ SB10001424052702304563104576361422372121248.html. 6 Floyd Norris, The Audacity of Chinese Frauds , The New York Times Online (May 26, 2011), available at http://www.nytimes.com/2011/05/27/business /27norris.html?pagewanted=all. 7 PCAOB, PCAOB Issues first Research Note on Chinese Reverse Mergers , PCAOB, (March 15, 2011), http://pcaobus.org/News/Releases/Pages/ 03152011_ResearchNote.aspx.

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Case


of registered firms from China is a gaping hole in investor

2

protection. 8

49. SEC Commissioner Luis A. Aguilar has also spoken out on the

4 subject. In a speech before the Council of Institutional Investors on April 4, 2011,

Commissioner Aguilar said that using reverse mergers as a form of “backdoor

registration” was a “disturbing trend” in modern capital formation. 9 He said, “a

growing number of them are proving to have significant accounting deficiencies or

being vessels of outright fraud.” The “billions in U.S. savings and investment

dollars [that] have been entrusted with these companies” are, therefore, at risk.

10

50. The May 26, 2011 New York Times article blamed auditors and

11 inadequate audit procedures for this disturbing trend. 10 The Times revealed that

12 another China-based corporation, Longtop Financial Technologies, also recently

13 became “worthless” because of allegations of fraud, including fraud relating to

14 Longtop’s purported cash balances in Chinese banks. Deloitte Touche Tomatsu

15 resigned as Longtop’s auditor after the fraud came to light, but only after it had

16 already given “clean audit opinions to Longtop for six consecutive years,”

17 according to the article.

18

51. The May 26, 2011 New York Times article also noted that the major

19 auditing firms in China are not subject to the same type of inspections required of

20 other accounting firms that perform audits for companies whose securities are

21 traded in the U.S.:

22

23 8 Statement of James R. Doty, Chairman, Public Accounting Oversight Board 24 before the United States Senate Committee on Banking, Housing and Urban Affairs

Subcommittee on Securities, Insurance and Investment, Hearing on the Roles of Accounting Profession in Preventing Another Financial Crisis (April 6, 2011),

25 PCOAB, http://www.pcoabus.org . 9 Luis A. Aguilar, Speech by SEC Commissioner: Facilitating Real Capital 26 Formation, U.S. Securities and Exchange Commission, (April 4, 2011)

27 http://www.sec.gov/news/speech/2011/spch0404111laa.htm. 10 See supra footnote 6. 28



Case 2


1

The Chinese audit firms, while they are affiliated with

2

major international audit networks, have never been

3

inspected by the Public Company Accounting Oversight

4

Board in the United States. The Sarbanes-Oxley Act

5

requires those inspections for accounting firms that audit

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companies whose securities trade in the United States, but

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China has refused to allow inspections.

8

9

In a speech at a Baruch College conference earlier this

10

month, James R. Doty, chairman of the accounting

11

oversight board, called on the major firms to improve

12

preventative global quality controls but said that actual

13

inspections were needed. Two weeks ago, Chinese and

14

American officials meeting in Washington said they

15

would try to reach agreement on the oversight of

16

accounting firms providing audit services for public

17

companies in the two countries, so as to enhance mutual

18

trust. 11

19

20 52. The June 3, 2011 Wall Street Journal article also revealed that the SEC

21 is now examining accounting and disclosure issues regarding Chinese companies

22 that engaged in reverse mergers:

23 People familiar with the matter say the investigation also

24 includes auditors, which hadn’t previously been known.

25 As part of its inquiry, the SEC has suspended trading on

26 some Chinese companies, questioning their truthfulness

27 about their finances and operations. The Public Company

28 11 Id.



Case 2


Accounting Oversight Board, or PCAOB, the

government’s accounting regulator, said it is investigating

some audit firms over whether their audits of Chinese

clients are stringent enough.

* * *

“Right now, the auditing and regulation of U.S.-listed

Chinese companies isn’t working very well,” said Paul

Gillis, a visiting professor of accounting at Peking

University’s Guangha School of Management.

* * *

Since February, about 40 Chinese companies have either

acknowledged accounting problems or seen the SEC or

U.S. exchanges halt trading in their stocks because of

accounting questions. 12

53. Confirming the fears of Messrs. Aguilar and Doty, more than twenty-

four Chinese-based companies have filed Form 8-Ks with the SEC disclosing

auditor resignations, accounting problems, or both, since March 2011 . 13

54. On April 18, 2011, NASDAQ proposed a rule concerning companies

formed through reverse mergers. 14 Proposed Rule 2011-056 would require, among

other things, that a company formed pursuant to a reverse merger trade at least six

months after the completion of the reverse merger, and that six months’ worth of

12 See supra footnote 5. 13 Letter from SEC Chairman Mary L. Schapiro to the Honorable Patrick T. McHenry, April 27, 2011. 14 Notice of Filing of Proposed Rule Change to Adopt Additional Listing Requirements for Reverse Mergers, Exchange Act Release No. 34-64371, 76 FR 25730 (Apr. 29, 2011) available at http://www.sec.gov/rules/sro/nasdaq/2011/34- 64371.pdf.

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Case


audited financial statements following the reverse merger be timely filed prior to

2 listing the company on the NASDAQ.

55. On June 9, 2011, the SEC issued an investor bulletin warning investors

4 about the risk of fraud and other abuses involving reverse merger companies. 15

56. On November 8, 2011, the SEC approved the additional listing

requirements proposed by the New York Stock Exchange (“NYSE”), NYSE Amex,

and NASDAQ for companies going public through reverse mergers. 16 A company

will not be eligible for listing until it, among other things: (1) completes a one-year

“seasoning period” by trading in the U.S. over-the-counter market or on another

10 regulated U.S. or foreign exchange; and (2) timely files all periodic reports required

11 to be filed with the SEC, including at least one annual report containing audited

12 financials for one full fiscal year.

13

57. On June 7, 2012, The Wall Street Journal reported in an article entitled

14 “Beijing Dims the Lights On Data for Investors” that “[a] Chinese agency [SAIC]

15 that compiles extensive Chinese corporate records has begun to withhold

16 information that includes financial reports, shareholder changes and asset transfers,

17 according to lawyers, investors, and research companies.” 17

18

19

20

21

22

23 Mergers (June 9, 2011), available at http://www.investor.gov/news-alerts/investor-

15 SEC Office of Investor Education and Advocacy, Investor Bulletin: Reverse

bulletins/reverse-mergers. 24 16 Adopting Additional Listing Requirements for Reverse Mergers, Exchange Act

25 Release No. 34-65708, 76 FR 70799 (Nov. 8, 2011) available at http://www.sec.gov/rules/sro/nasdaq/2011/34-65708.pdf. 26 17 Dinny McMahon, Beijing Dims the Lights on Data for Investors , The Wall Street

27 Journal Online (June 6, 2012), available at http://online.wsj.com/articlei

SB10001424052702303506404577448113933841708.html 28


Case 2


1 B. s

58. During the Class Period, Defendants issued materially false and

misleading statements concerning: (a) A-Power’s reported revenues, net income,

assets, and liabilities, and (b) A-Power’s related party transactions.

1. A- .

59. On March 31, 2008, the Company issued a press release announcing

the financial results of its operating subsidiaries for the fiscal year ended December

31, 2007. 18 The Company reported revenue of $152.5 million and net income of

$15.2 million, as compared to revenue of $98.7 million and net income of $7.5

million for the same period the prior year. It also reported its cash balance was

approximately $97 million, up from $35.8 million at the end of 2007.

60. On April 1, 2008, A-Power conducted a conference call with analysts

and investors to discuss the 2007 financial results. During the call, A-Power’s

then-CFO, Defendant Meng, reiterated the financial results announced on March

31, 2008.

61. On June 6, 2008, the Company issued a press release announcing its

financial results for the first quarter ended March 31, 2008. The Company reported

revenue of $32.3 million and net income of $2.9 million, as compared to revenue of

$17.5 million and net income of $1.6 million, for the same period the prior year. It

also reported its cash balance was approximately $94 million, up from $36 million

at the end of 2007.

18 The reverse merger involving A-Power was completed in 2008. Accordingly, the 2007 financial results in the press release reflected the operations of Head Dragon and its Chinese operating subsidiaries only.

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62. On the same day, June 6, 2008, A-Power conducted an earnings

2 conference call with analysts and investors. During the call, Meng reiterated the

3 Company’s financial results for the first quarter of 2008 announced earlier that day.

4

63. On July 11, 2008, the Company filed its 2007 Form 20-F with the

5 SEC, which was signed by Lu, and reiterated the previously reported financial

6 results for the year ending December 31, 2007 for Head Dragon and its Chinese

7 operating subsidiaries. The 2007 Form 20-F also included the financial statements

8 of Chardan for the same period. On a combined pro forma basis, the 2007 Form

9 20-F reported total assets of $100.8 million, and total liabilities of $38.4 million. In

10 addition, pursuant to Section 302 of SOX, the 2007 Form 20-F contained signed

11 certifications by Lu and Meng, stating that the financial information contained in

12 the Form 20-F was accurate, and that they disclosed any material changes to the

13 Company’s internal control over financial reporting. The certifications stated, in

14 relevant part, as follows:

15

1. I have reviewed this Annual Report on Form 20-F of A-

16

Power Energy Generation Systems, Ltd.;

17

2. Based on my knowledge, this report does not contain any

18

untrue statement of a material fact or omit to state a

19

material fact necessary to make the statements made, in

20

light of the circumstances under which such statements

21

were made, not misleading with respect to the period

22

covered by this report;

23

3. Based on my knowledge, the financial statements, and

24

other financial information included in this report, fairly

25

present in all material respects the financial condition,

26

results of operations and cash flows of the company as of,

27

and for, the periods presented in this report;



28

Case 2


1

4. The company’s other certifying officer and I are

2

responsible for establishing and maintaining disclosure

3

controls and procedures (as defined in Exchange Act

4

Rules 13a-15(e) and 15d-15(e)) for the company and have:

5

a. Designed such disclosure controls and procedures,

6

or caused such disclosure controls and procedures to

7

be designed under our supervision, to ensure that

8

material information relating to the company,

9

including its consolidated subsidiaries, is made

10

known to us by others within those entities,

11

particularly during the period in which this report is

12

being prepared;

13

b. Evaluated the effectiveness of the company’s

14

disclosure controls and procedures and presented in

15

this report our conclusions about the effectiveness

16

of the disclosure controls and procedures, as of the

17

end of the period covered by this report based on

18

such evaluation; and

19

c. Disclosed in this report any change in the

20

company’s internal control over financial reporting

21

that occurred during the period covered by the

22

annual report that has materially affected, or is

23

reasonably likely to materially affect, the

24

company’s internal control over financial reporting;

25

and

26

5. The company’s other certifying officer and I have

27

disclosed, based on our most recent evaluation of internal

28

control over financial reporting, to the company’s auditors



Case 2


1

and the audit committee of company’s board of directors

2

(or persons performing the equivalent functions):

3

a. All significant deficiencies and material

4

weaknesses in the design or operation of internal

5

control over financial reporting which are

6

reasonably likely to adversely affect the company’s

7

ability to record, process, summarize and report

8

financial information; and

9

b. Any fraud, whether or not material, that

10

involves management or other employees who have

11

a significant role in the company’s internal control

12

over financial reporting.

13

14 64. On August 25, 2008, the Company issued a press release announcing

15 its financial results for the second quarter ended June 30, 2008. The Company

16 reported revenue of $65.7 million and net income of $6.23 million, compared to

17 revenue of $54.1 million and net income of $6.0 million for the same period the

18 prior year. It also reported a cash position of $91.2 million, total assets of

19 $176.6 million, and total liabilities of $43.9 million, compared to cash of

20 $35.8 million, total assets of $68.5 million and total liabilities of $36.9 million

21 reported as of December 31, 2007.

22 65. On the same day, August 25, 2008, A-Power hosted an earnings

23 conference call during which Meng reiterated the Company’s financial results for

24 the second quarter of 2008 announced earlier that day.

25 66. On October 15, 2008, A-Power hosted a conference call with analysts

26 and investors, in part, to explain the termination of Meng as the Company’s CFO.

27 Lu had prepared a written statement which a Company representative read aloud

28 during the call. Lu also represented that “ A-Power is also committed to providing


Case 2


as much visibility and transparency as possible ,” and, in connection therewith, the

Company appointed “a dedicated team in the finance department to work with our

auditors, Moore Stephens, to help provide the quarterly as well as the annual

financials in a more timely fashion.” (emphasis added). According to Lu, A-Power

also hired a Sarbanes-Oxley consultant “to help them become SOX compliant as

well as further improve the financial management systems.”

67. On November 19, 2008, the Company issued a press release

announcing its financial results for the third quarter ended September 30, 2008.

The Company reported revenue of $85.4 million and net income of $9.4 million,

compared to revenue of $38.9 million and net income of $4.2 million for the same

period the prior year. It also reported a cash position of $59.7 million, total assets

of $199 million, and total liabilities of $50.1 million, compared to cash of

$35.8 million, total assets of $68.5 million, and total liabilities of $36.9 million

reported as of December 31, 2007.

68. On April 9, 2009, the Company issued a press release announcing its

financial results for the fourth quarter and year ended December 31, 2008. For the

fourth quarter, the Company reported revenue of $81.4 million and net income of

$10 million or $0.30 diluted earnings per share (“EPS”), compared to revenue of

$42 million and net income of $3.4 million, or $0.26 diluted EPS for the same

period the prior year. For the year, the Company reported revenue of

$264.9 million and net income of $28.5 million, or $1.01 diluted EPS, compared to

revenue of $152.5 million and net income of $15.2 million, or $2.33 for the same

period the prior year. Its reported cash position was $43.5 million, compared with

$59.7 million at September 30, 2008. It also reported total assets of $203 million,

and total liabilities as $47.1 million, compared to total assets of $68.5 million and

total liabilities of $36.9 million reported as of December 31, 2007.

69. On the same day, April 9, 2009, A-Power conducted an earnings

conference call with analysts and investors. During the call, A-Power’s interim

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1 CFO, John Lin, reiterated A-Power’s financial results for the fourth quarter and full

2 year 2008 announced earlier that day.

3


4 financial results for the first quarter ended March 31, 2009. The Company reported

5 revenue of $31.2 million, net income of $1.5 million or $0.04 diluted EPS, gross

6 profit of $3.93 million, and operating income of $1.37 million, compared to

7 revenue of $32.3 million, net income of $2.9 million, or $0.14 diluted EPS, gross

8 profit of $3.86 million, and operating income of $2.8 million for the same period

9 the prior year. It also reported a cash position of $60.6 million, total assets of

10 $227.6 million, and total liabilities of $70.1 million, compared to cash of

11

$43.5 million, total assets of $204.3 million, and total liabilities of $48.4 million

12 reported as of December 31, 2008.

13


14 conference call with analysts and investors. During the call, A-Power’s newly

15 appointed CFO, Defendant Mak, reiterated the Company’s financial results for the

16 first quarter of 2009 announced earlier that day.

17

72. On June 30, 2009, the Company filed its 2008 Form 20-F with the

18 SEC, which was signed by Lu, and reiterated the Company’s previously reported

19 financial results for the period, except the 20-F reported slightly higher cash

20 ($44.518 million), total assets ($205.537 million), and total liabilities

21 ($49.570 million), and slightly lower diluted EPS ($0.94), than previously reported

22 in the Company’s April 9, 2009 press release. In addition, pursuant to Section 302

23 of the SOX, the 2008 Form 20-F contained signed certifications by Lu and Lin that

24 were nearly identical to the SOX certifications included in the 2007 Form 20-F,

25 except the certifications included additional statements that A-Power’s certifying

26 officers are also responsible for establishing and maintaining “internal control over

27 financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for

28 the company” and that they have



Case 2


1

Designed such internal control over financial reporting, or

2

caused such internal control over financial reporting to be

3

designed under our supervision, to provide reasonable

4

assurance regarding the reliability of financial reporting

5

and the preparation of financial statements for external

6

purposes in accordance with generally accepted

7

accounting principles[.]

8

9 73. On August 27, 2009, the Company issued a press release announcing

10 its financial results for the second quarter ended June 30, 2009. The Company

11 reported revenue of $57.5 million, net income of $6.3 million, or $0.14 diluted

12 EPS, gross profit of $7.7 million, and operating income of $4.7 million, compared

13 to revenue of $65.7 million, net income of $6.2 million, or $0.18 diluted EPS, gross

14 profit of $8 million, and operating income of $6 million for same period the prior

15 year. It also reported cash on hand of $128.7 million, compared to $60.6 million at

16 March 31, 2009. It also reported total assets of $302.1 million and total liabilities

17 of $134 million, compared to total assets of $205.5 million and total liabilities of

18 $49.6 million reported as of December 31, 2008.

19 74. On the same day, August 27, 2009, A-Power conducted an earnings

20 conference call with investors and analysts. During the call, Mak reiterated the

21 Company’s financial results for the second quarter of 2009 announced earlier that

22 day.

23 75. On December 2, 2009, A-Power filed its 2008 Form 20-F/A with the

24 SEC to incorporate comments from the SEC, to correct typographical errors, and to

correct or amend certain other information in the 2008 Form 20-F. The 2008 Form 25 26 20-F/A was otherwise substantially the same as the 2008 Form 20-F and reported

27 the same revenues, net income, total assets, total liabilities, related party loan

28 balances, and cash balances as reported in the 2008 20-F. The Form 20-F/A was



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signed by Lu and reiterated the Company’s previously reported financial results for

2008. In addition, pursuant to Section 302 of SOX, the 2008 Form 20-F/A

contained certifications signed by Lu and Mak that were nearly identical to the

II SOX certifications included in the 2008 Form 20-F.

On December 3, 2009, the Company issued a press

release announcing its financial results for the third

quarter ended September 30, 2009. The Company

reported revenue of $96.7 million and non-GAAP net

income of $9.8 million, or $0.28 diluted EPS, a GAAP net

loss of ($0.623) million, or ($0.02) diluted EPS, gross

profit of $12.6 million, and operating income of $9.4

million, compared to revenue of $85.4 million, non-

GAAP net income of $9.6 million, or $0.28 diluted EPS,

GAAP net income of $9.4 million, gross profit of $10.5

million, and operating income of $8.6 million for same

period the prior year. The Company reported cash, cash

equivalents, and restricted cash of $97.6 million, total

assets of $301 million, and total liabilities of $132

million, compared to cash, cash equivalents, and restricted

cash of $47.1 million, total assets of $205.5 million and

total liabilities of $49.6 million reported as of December

31, 2008

76. On March 31, 2010, the Company issued a press release announcing

its financial results for the fourth quarter and year ended December 31, 2009. For

the fourth quarter, the Company reported revenue of $125.9 million, non-GAAP net

income of $20.6 million or $0.61 diluted EPS, a GAAP net loss of ($23.9) million,

or ($0.69) diluted EPS, gross profit of $26.9 million, and operating income of

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1 $22.8 million, compared to revenue of $81.4 million, net income of $10 million, or

2 $0.30 diluted EPS, gross profit of $14.5 million, and operating income of

3 $10.8 million for the same period the prior year. For the year, the Company

4 reported revenue of $311.3 million, non-GAAP net income of $36.1 million, or

5 $1.05 diluted EPS, a GAAP net loss of ($16.5) million, or ($0.49) diluted EPS,

6 gross profit of $51.1 million, and operating income of $38.2 million, compared to

7 revenue of $264.9 million, net income of $28.9 million, or $0.94 diluted EPS, gross

8 profit of $36.9 million, and operating income of $28.2 million for the same period

9 the prior year. The Company reported cash, cash equivalents, and restricted cash of

10 $179.8 million, total assets of $355 million, and total liabilities of $102.7 million,

11 compared to cash, cash equivalents, and restricted cash of $47.1 million, total assets

12 of $205.5 million and total liabilities of $49.6 million reported as of December 31,

13 2008.

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77. On March 31, 2010, the Company filed its 2009 Form 20-F with the

15 SEC, which was signed by Lu, and reiterated the Company’s reported financial

16 results for the period. In addition, pursuant to Section 302 of SOX, the 2009

17 Form 20-F contained signed certifications by Lu and Mak that were nearly identical

18 to the SOX certifications included in the 2008 Form 20-F.

19


20 financial results for the first quarter ended March 31, 2010. The Company reported

21 revenue of $67.3 million, GAAP net income of $29.3 million or $0.64 diluted EPS,

22 gross profit of $9.8 million, and operating income of $0.9 million, compared to

23 revenue of $31.2 million, GAAP net income of $1.6 million or $0.04 diluted EPS,

24 gross profit of $3.9 million, and operating income of $1.4 million for the same

25 period the prior year. It also reported cash, cash equivalents, and restricted cash of

26 $220.4 million, total assets of $532 million, and total liabilities of $192.5 million,

27 compared to cash, cash equivalents, and restricted cash of $179.8 million, total

28 assets of $355 million, and total liabilities of $102.7 million at December 31, 2009.


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conference call with analysts and investors. During the call, Mak reiterated the

Company’s financial results for the first quarter of 2010 announced earlier that day.

80. On August 26, 2010, the Company issued a press release announcing

its financial results for the second quarter ended June 30, 2010. The Company

reported revenue of $74.8 million, GAAP net income of $11.6 million, or $0.25

diluted EPS, gross profit of $11.6 million, and operating income of $2.9 million,

compared to revenue of $57.5 million, GAAP net income of $6.3 million, or $0.14

diluted EPS, gross profit of $7.7 million, and operating income of $4.7 million for

the same period the prior year. It also reported cash, cash equivalents, and

restricted cash of $182.7 million, total assets of $526.1 million, and total liabilities

of $168.8 million, compared to cash, cash equivalents, and restricted cash of

$179.8 million, total assets of $355 million, and total liabilities of $102.7 million at

December 31, 2009.

81. On the same day, August 26, 2010, A-Power conducted an earnings

conference call with analysts and investors. During the call, Mak reiterated the

Company’s financial results for the second quarter of 2010 announced earlier that

day.

82. On December 1, 2010, the Company issued a press release announcing

its financial results for the third quarter ended September 30, 2010. The Company

reported revenue of $57.3 million, non-GAAP net income of $2.4 million, GAAP

net loss of ($1.0) million, or ($0.02) diluted EPS, gross profit of $12.3 million, and

operating income of $3.4 million, compared to revenue of $96.7 million, non-

GAAP net income of $9.9 million, GAAP net loss of $0.623 million, or ($0.02)

diluted EPS, gross profit of $12.6 million, and operating income of $9.4 million for

the same period the prior year. It also reported its cash, cash equivalents, and

restricted cash of $221.9 million, total assets of $552 million, and total liabilities of

$189.8 million, compared to cash, cash equivalents, and restricted cash of

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1

$179.8 million, total assets of $355 million, and total liabilities of $102.7 million at

2 December 31, 2009. As a result, the Company lowered its forecast for 2010 sales

3 to $310 million versus its original forecast of $500 million. The Company

4 attributed this to lower-than-expected wind turbine sales.

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83. On the same day, December 1, 2010, A-Power conducted an earnings

6 conference call with analysts and investors. During the call, Mak reiterated the

7 Company’s financial results for the third quarter of 2010 announced earlier that

8 day.

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84. As described below, the foregoing statements were materially false

10 and/or misleading because, among other things:

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(a) A-Power grossly misstated its revenue, income, total assets and total

12

liabilities, as demonstrated by the significant discrepancies between the

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financial results it reported to the SAIC and to the SEC;

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(b) A-Power experienced significant contract delays and cancelations in

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2008 and, therefore, there was no reasonable basis for its reported revenues

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and net income;

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(c) A-Power’s prepayments to suppliers far exceeded customer deposits it

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received and, therefore, its reported assets (in the form of customer deposits)

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were misstated or being misappropriated;

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(d) A-Power’s commitments to suppliers and subcontractors far exceeded

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expected contract revenues and indicated a risk of contract losses and/or

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commitments being made for improper purposes;

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(e) A-Power made loans to its subsidiary, Ruixiang, despite reporting

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substantial reported cash reserves, thus indicating A-Power misrepresented

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its true liquidity; and

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(f) A-Power extended the repayment date and discounted the balance

27

owed on loans it made to customers, which indicated a risk of loss on

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contracts with the customers arising from their potential inability to pay.



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1 a.

85. The SAIC has two main functions: (1) to administer the establishment

and closing of companies, as well as to record corporate changes, such as a change

in shareholders, capital amount and directors; and (2) to monitor compliance by

companies with China’s company laws and regulations. Under this regulatory

power, the SAIC conducts an annual examination of companies in connection with

the annual renewal of company business licenses. The annual review usually

occurs each year between March and June. Companies are required to file financial

statements with the relevant SAIC office as part of the annual examination. Unlike

financial reports filed with the SEC, financial reporting to the SAIC is not readily

available to persons outside the filing company. In fact, SAIC filings are only

accessible by licensed attorneys in China, persons authorized by the filing

company, or high-level employees of the company.

86. As part of the annual business license renewal process, all Chinese

companies, including domestic companies and foreign-invested enterprises (“FIE”),

are required to file a “Company Annual Inspection Report” with the SAIC. As

described below, the said report generally includes financial data but the required

financial information is different between domestic companies and FIEs.

87. Each of A-Power’s eight subsidiaries in mainland China is an FIE or a

subsidiary of an FIE. Each of the subsidiaries is required to file their Company

Annual Inspection Report with the Shenyang SAIC. Shenyang is the capital city of

Liaoning Province in Northeast China.

88. According to the Shenyang SAIC’s website, as part of the annual

business license renewal process in 2008 and 2009, FIEs and subsidiaries of FIEs

registered with the Shenyang SAIC were required to first log onto the website of

Liaoning Province’s SAIC (www.lngs.gov.cn ) and file their Company Annual

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A-Power Subsidiary SAIC Office

GaoKe Energy Shenyang Municipal Administration for

Industry and Commerce

GaoKe Design Shenyang Municipal Administration for

Industry and Commerce

LICEG Shenyang Municipal Administration for

Industry and Commerce, the Bureau of

Financial and Commercial Development

Zone

Ruixiang Shenyang Dongling District (Hunan New

District) Industry and Commerce

Administration Bureau

Jinxiang Shenyang Administration for Industry and

Commerce Shenyang Yixiang Wind Shenyang High-Tech Industrial

Power Equipment Ltd. Development Zone Industry and

Inspection Report, including audited financial statements, online. 19 The enterprises

were next required to print their Company Annual Inspection Report filed online,

stamp it with their official enterprise seal, and submit the report together with other

required materials at the relevant SAIC office.

89. As part of the Plaintiffs’ investigation, counsel for Plaintiffs retained

firms based in China to obtain SAIC filings for A-Power’s subsidiaries.

90. In January 2012 , an investigative firm retained by Plaintiffs’ counsel

obtained financial information filed with the SAIC for the following six A-Power

subsidiaries at the following SAIC offices in Shenyang:

19 The website for the Shenyang AIC is located at http://www.sygsj.gov.cn


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(“Yixiang”)

Commerce Administration Bureau

2

The investigative firm provided Plaintiffs’ counsel with printouts of

computer data maintained by those SAIC offices. The financial information in ¶¶

91 and 92 of the Complaint is based upon the computer printouts obtained from the

SAIC offices by the investigative firm.

91. A comparison of the SAIC financial information and A-Power’s SEC

filings reveals markedly inconsistent financial results for 2008 and 2009, as detailed

in the charts below. For example, for 2008, A-Power reported ten times more

revenue to the SEC than it did to the SAIC. Similarly, the Company reported

negative net income to the SAIC, while claiming significant positive net income in

its SEC filings:

2008 Consolidated

(in USD) SAIC Financial 2008 Form 20-F 21

Information 20

Revenue $25,476,193 $264,866,000

Net Income ($3,192,970) $28,516,000

20 The 2008 Consolidated SAIC Financial Information consists of the sum of the 2008 SAIC financial results (converted from Renminbi to U.S. dollars) of the following A-Power subsidiaries: (1) GaoKe Energy, (2) GaoKe Design, (3) LICEG, (4) Jinxiang, and (5) Ruixiang. Plaintiffs used the same Renminbi-to-U.S. dollar exchange rate that A-Power said it used to present its consolidated financial statements in its 2008 Form 20-F ( i.e. , 6.95). Upon information and belief, A-Power’s remaining subsidiaries do not contribute significantly to the Company’s financial results. As described in ¶ 32, a vast majority of A-Power’s revenues are derived from its DG business which is conducted through GaoKe Energy, GaoKe Design, and LICEG. The financial results of those three subsidiaries, as reported to the SAIC, are included in the consolidated SAIC results above. The consolidated results are therefore representative of A-Power’s financial results. 21 The 2008 Form 20-F financial information is based on consolidated financial results of A-Power and its subsidiaries, including the subsidiaries listed in footnote 20. Accordingly, the financial data underlying the 2008 Consolidated SAIC Financial Information and the 2008 Form 20-F are substantially the same.

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Total Assets $132,054,857 $205,537,000 2

Total Liabilities $65,478,384 $49,570,000

Shareholder Equity $66,576,473 $155,967,000 4

92. Similarly, for 2009, the Company reported revenues of over $311

million in its 2009 Form 20-F, while reporting less than one-tenth of that amount –

$25.67 million – to the SAIC. In addition, A-Power reported $166.5 million in cash

in its 2009 Form 20-F, which is approximately 18 times more than the $8.8 million

in cash it reported to the SAIC. The SAIC financial information shows other

10 drastic differences between A-Power’s reported amounts for total assets, total

11 liabilities and shareholder equity:

12

2009 Consolidated

13

(in USD) SAIC Financial 2009 Form 20-F 23

14

Information 22

15

Revenue $25,667,000 $311,252,000

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Gross Profit $1,675,000 $51,085,000

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Operating Income ($2,677,000) $38,240,000

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Net Income ($4,145,000) ($16,523,000)

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Cash24 $8,803,000 $166,476,000

20

21 22 The 2009 SAIC Consolidated SAIC Financial Information consists of the sum of 22 the 2009 SAIC financial results (converted from Renminbi to U.S. dollars) of the

same subsidiaries as listed in footnote 20, with the addition of Yixiang. Plaintiffs used the same Renminbi-to-U.S. dollar exchange rate that A-Power said it used to 23 present its consolidated financial statements in its 2009 Form 20-F ( i.e. , 6.83).

24 Upon information and belief, the 2009 consolidated results are also representative of A-Power’s financial results. 25 23 The 2009 Form 20-F financial information is based on consolidated financial

26 results of A-Power and its subsidiaries, including the subsidiaries referenced in footnote 22. Accordingly, the financial data underlying the 2009 Consolidated

27 SAIC Financial Information and the 2008 Form 20-F are substantially the same. 24 “Cash” here includes “cash and cash equivalents.” 28


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1 Total Assets $335,992,000 $355,360,000

Total Liabilities $233,043,000 $102,720,000

Shareholder Equity $102,948,000 $252,640,000

93. The June 17, 2011 Prescience report noted similar vast discrepancies

between A-Power’s 2009 SAIC and SEC filings. 25

94. As detailed below, the discrepancies between A-Power’s revenues and

assets reported in its SEC filings versus those reported to the SAIC cannot be

explained by differences between U.S. and Chinese accounting standards.

95. The financial information contained in SAIC filings is required to be

presented in conformity with PRC GAAP. As part of the annual business license

renewal process, domestic companies are required to submit balance sheets and

income statements, but not audited financial statements. The SAIC takes a more

stringent approach towards FIEs and subsidiaries of FIEs. As described above,

those enterprises are required to submit audited financial statements that comply

with PRC GAAP as part of their Company Annual Inspection Report.

96. Each of the six A-Power subsidiaries described in ¶ 90 is an FIE or a

subsidiary of an FIE. A review of the SAIC filings obtained by Plaintiffs’ counsel

for each of those subsidiaries shows the following auditing firms as having audited

the subsidiaries’ financial statements that were filed with the SAIC:

A-Power Subsidiary Auditor GaoKe Energy Liao Ning Lixinda Certified Public

Accountants Co., Ltd. and Liaoning

Zhonglixing Certified Public Accountants

25 Plaintiffs obtained 2009 SAIC financial information of Ruixiang, which was not included in the analysis of SAIC filings set forth in the June 17, 2011 Prescience report.

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1 Co., Ltd.

GaoKe Design Liao Ning Lixinda Certified Public

Accountants Co., Ltd.

LICEG Liao Ning Lixinda Certified Public

Accountants Co., Ltd.

Ruixiang Liaoning Yinjian Certified Public

Accountants Co., Ltd., and Liaoning


Co., Ltd.

Jinxiang Liaoning Yinjian Certified Public

Accountants Co., Ltd., Liaoning


Co., Ltd., and Shenyang Guanghe

Certified Public Accountants Co., Ltd.

Yixiang Shenyang Guanghe Certified Public

Accountants

97. There are no significant differences between the U.S. and PRC GAAP

in accounting for revenues. According to a report published by the Committee of

European Securities Regulators (“CESR”), an authoritative body established

directly by the European Union, 26 entitled, “CESR’s advice on the equivalence of

Chinese, Japanese, and US GAAPs ,” there are no significant differences between

U.S. GAAP and International Financial Reporting Standards (“IFRS”). 27 The

report, published in accordance with a mandate from the European Commission,

26 CESR members were senior officials from the authorities responsible for securities activities in the European Union’s member states. CESR was succeeded by the European Securities and Market Authority in 2011. 27 CESR, CESR’s advice on the equivalence of Chinese, Japanese, and US GAAPs (March 2008), available at http://www.iasplus.com/suripe/0803cesequivalence.pdf.

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also concluded that there are no significant differences between PRC GAAP and

2 IFRS on revenue recognition. Thus, since there are no significant differences

between U.S. GAAP and IFRS, and no significant differences between IFRS and

4 PRC GAAP on revenue recognition, there are no significant differences between

U.S. GAAP and PRC GAAP on revenue recognition.

98. A comparison of the relevant provisions of U.S. GAAP and PRC

GAAP with respect to construction revenues, general revenues, and assets further

shows that the discrepancies between A-Power’s SEC filings and SAIC financial

information cannot be explained by any differences in accounting standards.

10

99. The majority of A-Power’s revenues was earned from its Construction

11 Segment, which consists of GaoKe Energy and LICEG. That type of revenue was

12 based on specific contracts where performance extended over long time periods.

13 According to the 2009 Form 20-F, the duration of contracts varied from several

14 months to 18 months or more.

15

100. For purposes of its SEC filings, A-Power recognized revenue on those

16 construction contracts using the percentage of completion (“POC”) method of

17 accounting, in accordance with the American Institute of Certified Public

18 Accountants Statement of Position (“AICPA SOP”) 81-1. 28 The POC method is

19 permitted when a company can make “reasonably dependable estimates” of “the

20 extent of progress toward completion, contract revenues, and contract costs.” See

21 AICPA SOP 81-1 ¶ 23. Under U.S. GAAP, progress towards completion may be

22 measured by either: (1) the efforts expended on the contracts (AICPA SOP 81-1

23 28 Different accounting standards apply to the recognition of revenue from wind 24 turbine production. Pursuant to Accounting Standards Update (“ASU”) 2009-13 25 regarding Multiple-Deliverable Revenue Arrangement, the manufacture of wind

turbines comprises three stages: (a) manufacture; (b) installation; and (c) quality assurance and warranty. Separate units of accounting apply to each stage if certain

26 criteria are met. A-Power’s wind turbine production business generated only a small portion of its total revenues during the Class Period. The vast majority of A-

27 Power’s revenues were derived from its DG business involving projects mostly located in China. 28



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¶¶ 48, 50); or (2) the results achieved (AICPA SOP 81-1 ¶ 46). According to its

SEC filings, A-Power measured progress towards completion based on the first

method – specifically, the actual costs incurred to date as a percentage of the

expected total direct contracts costs.

101. Likewise, PRC GAAP permits the use of POC if the outcome of a

construction contract can be estimated in a “reliable way,” including reliable

measurements of the stage of contract completion, contract revenue, and actual

contract costs. See PRC Accounting Standards for Business Enterprises (“PRC

ASBE”) No. 15, arts. 18-19. The stage of completion may be determined by: (1) the

proportion of actual costs incurred to estimated total costs (which covers the

method used by A-Power), (2) the proportion of completed contract work to the

estimated total work, or (3) surveys of the work performed. See id. , art. 21.

102. Accordingly, the application of U.S. GAAP or PRC GAAP does not

yield materially different results for A-Power’s construction revenue.

103. For general revenues (unrelated to construction contracts), revenue

recognition standards under U.S. GAAP are stricter than the parallel PRC GAAP

standards. Under U.S. GAAP, revenue can only be recognized when

(i) collectability is reasonably assured, (ii) delivery has occurred or services have

been rendered, (iii) persuasive evidence of an arrangement exists, and (iv) the

seller’s price to the buyer is fixed or determinable. SEC Staff Accounting Bulletin

No. 101, Revenue Recognition in Financial Statements. Chinese rules apply the

more lenient standard that revenue may be recognized when (i) risks and rewards

have been transferred, (ii) the issuer “ceases control” on the goods sold, (iii) the

revenue (and associated costs) can be measured reliably, and (iv) the economic

benefits may flow into the enterprise. PRC ASBE No. 14, art. 4.

104. Given that U.S. accounting standards for the accounting of revenues in

connection with long-term construction contracts are virtually the same as PRC

GAAP and are more stringent than Chinese accounting standards for general

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revenues, the fact that A-Power’s reported revenues in its SEC filings are ten times

more than those reported to the SAIC indicates that the revenues reported to the

SEC are materially overstated.

105. Further undercutting the legitimacy of A-Power’s reported revenues is

the fact that many of A-Power’s purported customers appear to be non-existent. As

detailed further herein ( see ¶¶ 188-189), in its November 9, 2011 report on A-

Power, Prescience was not able to contact and/or verify the existence of dozens of

A-Power’s purported customers.

106. The inconsistencies in the asset totals that A-Power reported to the

SEC and to the SAIC also cannot be explained by any differences in accounting

standards. Although there is no specific provision in U.S. GAAP concerning the

accounting for total assets, comparable accounting principles apply in the United

States and China with respect to many of A-Power’s largest asset line items. Cash,

for example, was one of A-Power’s largest asset line items in its 2008 and 2009

Form 20-Fs. No comparative analysis of U.S and Chinese accounting principles is

necessary, since cash is counted at face value. As illustrated by the chart in ¶ 92

above, the Company’s reported drastically different amounts of cash for 2009 to the

SEC and to the SAIC: A-Power reported only $8.8 million to the SAIC, but

reported more than eighteen times that amount ($166 million) in its 2009 Form

20-F.

107. Other Chinese reverse merger companies have similarly reported

vastly divergent cash balances to the SAIC and to the SEC, as well as the

resignation of their auditors for reasons including their inability to verify company

transactions and cash balances and to obtain bank confirmations therefor. SEC

Chairman, Mary Schapiro, commented after the SEC issued an investor alert about

reverse merger companies in June 2011 that “[w]e are on high alert. . . .We have

found companies that have inflated their sales and earnings, that have misstated

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their cash to deceive investors, and that have had their auditors resign because they

didn’t feel that the financial statements could be relied upon.” 29

b. Additional

Demonstrating A-Power’s

ere

(i) DG Contracts Were Significantly Delayed or Canceled

108. A-Power experienced significant delays and cancelations of DG

contracts in 2008, which reduced its backlog by $499 million , or 63% , to $290

million as of the end of the fourth quarter ending December 31, 2008, from $789

million as of the end of the third quarter ending September 30, 2008. The contract

delays and cancelations are strong indications that A-Power materially overstated

its 2008 revenues and net income in its SEC filings.

109. According to A-Power’s 2009 Form 20-F, “[b]acklog represents the

dollar amount of revenue we expect to realize in the future as a result of performing

work under multi-period contracts that we have entered into.” As described in ¶

100, A-Power recognized revenue on the contracts based on the POC accounting

method.

110. As described in further detail below, one of A-Power’s largest DG

contracts during the Class Period was a $280 million contract with Inner Mongolia

Wulahot Hengwang Heat & Electricity Generation Co., Ltd. (“Urad Hengwang”).

A-Power announced the contract on March 21, 2008.

111. On October 15, 2008, Roth Capital Partners (“Roth”) issued an analyst

report stating, in relevant part, that “[o]ver the last three weeks, we have conducted

multiple meetings with APWR management in Shenyang, visited three of APWR’s

distributed generation (DG) construction sites,” including “Inner Mongolia [Urad

29 Kevin McCoy and Kathy Chu, Merger of U.S., Chinese Firms is Cautionary Tale, USATODAY.com (Dec. 26, 2011), available at http://www.usatoday.com/ money/markets/story/2011-12-26/china-us-merger-cautionary-tale/52233828/1

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Hengwang],” and “observed that APWR’s largest projects (Inner Mongolia

Wulahot Hengwang and Jilin Glad) are very early stages of construction and both

are likely to curtail work during the winter season.” 30 The report concluded that it

was unlikely that the three projects, which, collectively, accounted for

approximately $625 million, or more than 75%, of A-Power’s $789 million in total

backlog at the time, would contribute substantial revenues in the second half of

2008.

112. Over the next several months, A-Power failed to make any meaningful

progress on the Urad Hengwang project. On April 2, 2009, Roth issued a report by

the same analyst that stated, in relevant part, “[t]his week, we conducted a visit to

the construction site of APWR’s largest DG project – Inner Mongolia Wulahot

Hengwang.” The analyst observed that “minimal work” had been done, and

“almost no progress” was made since his last visit in October 2008. The analyst

estimated that “nearly the entire amount of this contract remains within APWR’s

reported $800mm DG backlog (35% of backlog).”

113. On April 9, 2009, A-Power confirmed the contract delays and

cancelations, and that its backlog had been reduced to $290 million. On that day,

during a conference call with analysts and investors to discuss A-Power’s fourth

quarter and full-year 2008 financial results announced earlier that day, A-Power’s

COO, John Lin, responded to the following questions from analysts about the

Company’s backlog:

Joe Maxa: Can you tell us what your backlog was at the

year end, and what it consists of?

John S. Lin, Chief Operating Officer: $290 million. We

30 Mark Tobin, Roth Capital Partners, A-Power Energy Generation Systems, Ltd., Company Update, Conf Call a Non-Event; Channel Checks Raise Caution; Downgrade to HOLD , Oct. 15, 2008.

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1 prefer not to disclose details at each project level now.

Joe Maxa: I will jump back in the queue, but can you

elaborate on what the previous backlog, I imagine, that

you had, it was significantly higher at the end of

September. Can we assume that was primarily canceled?

John S. Lin, Chief Operating Officer: $290 million. Yes,

the total backlog is $290 million.

* * *

Mark Tobin: Just – I’m still wrestling with the backlog

answer. The total backlog within the DG segment is $290

million versus $789 million at the end of last quarter?

John S. Lin, Chief Operating Officer: $290 million is

confirmed, and other projects will be delayed, and we’re

not accounting for that backlog now.

On the same day, April 9, 2009, the Roth analyst issued a

report stating, in relevant part, “[w]e estimate that the

current backlog is comprised almost entirely of the

Wulahot [Urad] Hengwang project.” 31

114. Remarkably, despite the contract cancelations and delays, A-Power

reported strong fourth quarter and full year 2008 results based almost entirely on its

DG segment. 32 For the quarter, A-Power reported $81.4 million in revenues and

31 Mark Tobin, Roth Capital Partners, A-Power Energy Generation Systems, Ltd. , Backlog Down 63% Q/Q; 2009 Guidance Lowered; Outlook Remains Cautious , April 9, 2009. 32 In the 2009 Form 20-F, A-Power reported that, of the Company’s total $264.866 million in revenues in 2008, $256.760 million, or 96.9%, was derived from its DG

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$10 million in net income. For the year, A-Power reported $264.9 million in

2 revenues, and $28.5 million in net income. Put differently, A-Power claimed that

during the same quarter in which its backlog shrunk nearly one-half billion dollars

4 (or $499 million), it purportedly generated 30.7% of its total 2008 revenues ($81.4

million divided by $264.9 million) and 35% of its total 2008 net income ($10

million divided by $28.5 million). The contract cancelations and delays make A-

Power’s reported fourth quarter and full year 2008 results implausible.

115. Those results are further undermined by the fact that A-Power

recognizes revenue on DG contracts based on the POC accounting method.

10 Because the Urad Hengwang project was in the preliminary stage and almost the

11 entire contract amount remained in backlog by the end of 2008, A-Power could not

12 have properly recognized the significant revenues thereon in 2008 under the POC

13 accounting method.

14

15

(ii) Prepayments to Suppliers Outstripped Advance Payments from Customers

116. During the Class Period, the balance of A-Power’s prepayments to 16

suppliers exceeded the balance of customer deposits it received. That was at odds 17

with A-Power’s POC accounting method pursuant to which customer deposits and 18

vendor prepayment balances should decline proportionately , and customer deposits 19

should not exceed vendor prepayments at any point in time of a contract. 33 During 20

21 segment.

22 33 To illustrate this point, assume on January 1, A-Power entered into a $1 million DG contract requiring $600,000 in vendor costs. A-Power required a customer

23 deposit of 10% of the contract price ( i.e. , $100,000), and vendors required A-Power to prepay 10% of contract costs ( i.e. , $60,000). Accordingly, under this scenario, as 24 of January 1, customer deposits exceed vendor prepayments. Assume further that

25 as of April 1 (three months later), 25 % of contract and vendor costs are incurred. Under its POC revenue recognition policy, A-Power is then allowed to recognize

26 25% of contract revenues. In addition, because customer deposits decrease based on recognized revenue, customer deposits would also decrease by 25%.

27 Accordingly, as of April 1, customer deposits would decrease by $25,000 (25% x $100,000) to $75,000, and the vendor prepayment balance would decrease by 28


Case 2


1 the Class Period, however, the opposite was true, which indicates that A-Power’s

2 assets (in the form of customer deposits) were not properly reported in accordance

3 with GAAP and/or were being misappropriated.

4

117. The Company explained in its 2009 Form 20-F that it typically makes

5 vendor prepayments equal to 10% to 15% of contract costs:

6

[t]he Company typically makes down payments of 10% to

7

15% of total contract price due to a vendor upon or

8

immediately following the execution of a contract. This

9

down payment is recorded as an asset as deposits or

10

prepayments. The remaining balance of the contract price

11

is paid over the term of the contract as work is completed

12

by the vendor.

13

118. Likewise, the Company noted its practice of receiving advance

14 payments and “deposits” from its customers equal to 10% to 15% of the contract

15

price:

16

For distributed generation business, customers typically

17

make down payments of 10% to 15% of a total contract

18

price upon or immediately following the execution of a

19

contract. For wind turbine business, the down payment of

20

approximately 30% of a total contract price is paid upon

21

or immediately following the execution of a contract for

22

wind turbine manufacturing business. This down payment

23

is recorded as a liability in customer deposits. The

24

remaining balance of the contract price is paid over the

25

term of the contract as work is completed by the

26

Company.

27 $15,000 (25% x $60,000) to $45,000. As of April 1, customer deposits would still 28 exceed the vendor prepayment balance.


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1

119. During the years ended December 31, 2008 and December 31, 2009,

2 the Company’s reported gross margins were 13.9% and 16.4%, respectively.

3

120. In light of the above, deposits from customers would be expected to

4 exceed prepayments to vendors, given that the amount of customer deposits and

5 prepayments to suppliers were based upon the same relative percentages of contract

6 revenue (for customers) and of contract costs (for suppliers), that is, 10% to 15%,

7 and considering that revenues exceeded costs ( i.e. , positive profit margins).

8

121. Yet the Company’s financial statement statements reflected the

9 opposite: prepayments to vendors were more than double the deposits from

10 customers. A-Power’s purported prepayments to its suppliers totaled $69.2 million

11 and $40.5 million by December 31, 2008 and December 31, 2009, respectively,

12 while customer deposits, deferred revenue, and billings exceeded cost liabilities by

13 only $17.4 million and $16.3 million for those years.

14

122. In fact, as of June 30, 2008 and each quarter thereafter through

15 September 30, 2010, it appears vendor prepayments and deposit amounts were

16 consistently higher than customer deposits and deferred revenues and billings in

17 excess of cost and estimated earnings on uncompleted projects, combined.

18 Specifically, for A-Power reported the following for each quarter in press releases

19 and Form 6-K filings with the SEC:

20

21 Quarter Assets Liabilities

End Date 22

Prepayments, Customer Deferred Revenue

23 Deposits, Other Deposits and Billings in

Receivables Excess of Cost & 24 Estimated Earnings

25

6/30/08 $21.21 million $186,510 N/A

26

9/30/08 $67.07 million $1.93 million N/A

27 12/31/08 $79.85 million $13.35 million $4.02 million




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9/30/09 $67.06 million $18.24 million $10.098 million





123. These inconsistencies seriously undermine the veracity of A-Power

reported customer deposits and raise serious concerns that the customer deposit

amounts were: (1) misclassified based upon their actual purpose and underlying

nature; (2) in fact true assets under GAAP, reflective of probable future economic

benefits to the Company; (3) overvalued considering that such deposits materially

exceeded A-Power’s anticipated revenue streams represented by its deferred

revenue and disclosed customer deposit balances, or (4) outright misappropriated.

(iii) Money Committed to Suppliers Puts A-Power at a Loss in 2009

124. During the Class Period, A-Power reported commitments to suppliers

that far exceeded expected revenues from existing contracts. That was materially

inconsistent with the Company’s reported gross profit margins of 13.9% and 16.4%

during 2008 and 2009 and seriously undermines the veracity of both A-Power’s

reported future purchase commitments and operating results. 34

125. In particular, the Company disclosed the following commitments

within its 2009 financial statements:

The Company is committed to purchasing subcontracting

services and project supplies related to the fulfillment of

its distributed power generation contracts. The total

34 AU § 230.02; AU § 326.25; AU § 333.04.

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commitment to subcontractors and suppliers remaining as

2

of December 31, 2009 was approximately $205,631[,000]

. . . and $19,215[,000] . . . respectively. Included in

4

prepayments, deposits and other receivables are payments

of $40,345[,000] . . . to be applied against these

commitments.

In other words, as of December 31, 2009, the Company committed $224.8 million

in future payments to subcontractors and suppliers ($205.6 million plus

$19.2 million).

10

126. As described above in ¶ 117, vendor prepayments and customer

11 deposits were recognized into costs and revenues, and, therefore, they should be

12 recognized (and reduced) proportionately under the Company’s POC revenue

13 recognition policy. Given these proportional decreases, the amount of 1) customer

14 deposits ($16.3 million, i.e. , 10% of upfront future billings due on existing

15 contracts (as disclosed)), as a percentage of future billings, should be the same as

16 2) remaining vendor deposits ($40.345 million) as a percentage of total future

17 vendor commitments ($224.8 million), or 18% (i.e. , $40.345 million divided by

18 $224.8 million). 35 Applying this formula, $16.3 million in customer deposits would

19 represent 18% of future billings, or only $90.7 million (i.e. , $16.3 million divided

20

21 35 To illustrate this point using the same example above at footnote 33, assume at

22 billings under the contract. Similarly, $60,000 represents 10% of future vendor the outset of the contract, customer deposits of $100,000 represent 10% of future

commitments under the contract. After incurring 25% of both the vendor and 23 customer deposits ($25,000 of customer deposits and $15,000 of vendor deposits),

remaining customer and vendor deposits totaled $75,000 and $45,000, respectively. 24 Assuming the future remaining commitments to the vendors total $540,000,

25 excluding the $45,000 deposit ( i.e. $600,000 less the $60,000 in vendor prepayments), we can compute total future billings on the contract as follows:

26 $45,000 in vendor deposits divided by $540,000 in remaining commitments to vendors = 8.33%. Accordingly $75,000 in remaining customer deposits should

27 represent 8.33% of total future contract billings. As calculated, total future billings is $900,000 ($75.000 divided by 8.33%). 28


Case 2


1 by 18%), which is still materially less than A-Power’s supplier related

2 commitments of $224.8 million.

3

127. Thus, the Company appears to have committed much more in cash

4 payments to suppliers and subcontractors ($224.8 million) than it could ever expect

5 to receive from outstanding customer contracts ($163 million). The imbalance in

6 commitments to suppliers and expected revenues from existing contracts indicates

7 (1) losses on existing contracts were not being properly disclosed, (2) the true

8 nature of business commitments and operations were not being accurately

9 disclosed, and (3) the committed monies were being diverted out of the

10 organization for undisclosed purposes that were unrelated to the customer contracts.

11

(iv) Ruixiang’s Unnecessary Loans

12

128. During 2009, Ruixiang, a wholly-owned indirect subsidiary of A-

13 Power (see ¶ 33), borrowed $19.9 million at interest rates between 2.2% and

14 5.841% in connection with foreign currency forward contracts. The loans appear

15 wholly unnecessary given the substantial cash the Company claimed it had on hand

16 as of December 31, 2008 ($47.1 million) and December 31, 2009 ($179.9 million).

17

129. The fact that an A-Power subsidiary was borrowing money and paying

18 interest on amounts outstanding despite reporting substantial cash reserves indicates

19 that the Company was misrepresenting its true liquidity. In fact, as the SAIC

20 financial information shows, in 2009, A-Power reported a fraction of the cash that it

21 reported to the SEC. It also suggests that monies were being allocated out of A-

22 Power through interest payments for undisclosed purposes.

23

(v) Loans To Customers

24

130. The Company advanced funds to customers for undisclosed purposes.

25 One such customer was Heilongjiang Hailun Biomass Power Generation Ltd.

26 (“Hailun Biomass”). According to the Company’s website, A-Power entered into a

27



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1 contract with Hailun Biomass for RMB 200,000,000, or approximately

2 $26.3 million in June 2007 : 36

3

Name of Project and Owner

4

Power Plant Project of Hailun Biomass Power Generation

5

Co., Ltd.

6

Location: Hailun City

7

Contract Signing Date: June, 2007

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Capacity: 2*75t/h+2*C12

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Fuel: Corn stalk

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Contract Price: 200,000,000.00

11

Expected Completion Date: July, 2009

12

Type of Operation: Interconnected grid and Micro-grid

13

131. In May 2008, the Company made an interest-free loan to Hailun

14 Biomass for $8.8 million. The Company inexplicably extended the repayment date

15 from May 2009 to May 2010, and the balance was subsequently discounted to

16 present value at a rate of 5.4% for 2009.

17

132. The $8.8 million loan to Hailun Biomass calls into question the

18 Company’s ability to collect $26.3 million in revenues relating to this particular

19 customer, as Hailun Biomass may not have been able to pay A-Power for its

20 contract.

21

2. Misrepresentations Concerning Related Party Transactions

22

133. During the Class Period, Defendants failed to disclose the related party

23 nature of significant transactions that accounted for hundreds of millions of dollars

24 of A-Power’s reported revenues and failed to disclose the existence all related

25 parties.

26

27 36 http://www.lngkny.com/english/gnly- 28 how.asp?column_cat_id=8&column_id=44530



Case 2


134. The June 17, 2011 Prescience report brought to light the following

companies owned or operated by Lu that A-Power failed to disclose in its SEC

filings or on its website: (1) Urad Hengwang Thermal Power Energy Co., Ltd.,

(2) Urad Jihe Oriental Wind Power Energy Co., Ltd., (3) Shenyang Xiangfeng

Energy Equipment Co., Ltd., (4) Beijing Century Yisheng International Investment

Co., Ltd., (5) Shenyang Power System Integration Co., Ltd, a member of Liaoning

Hi-Tech Energy Group, and (6) Liaoning Hi-Tech Advertising and Media Co. Ltd.

The Prescience report also reported that four companies owned or operated by Lu

“have been trading cash with APWR.”

135. Plaintiffs’ investigation into these newly-discovered related companies

revealed that A-Power engaged in significant transactions with two of these

companies, including contracts with A-Power purportedly totaling hundreds of

millions of dollars. Thus, a substantial amount of A-Power’s revenues were

actually derived from contracts with undisclosed related parties.

136. Both related companies have names that are substantially similar to

two of A-Power’s purported customers:

Related Party Name of Purported

Discovered by Prescience 37 A-Power Customer

Urad Hengwang Thermal Power Hengwang Thermal Power Energy Co.,

Energy Co., Ltd. Ltd38

Urad Jihe Oriental Wind Power Jihe Orient Wind Power Energy Co.,

Energy Co., Ltd. Ltd. 39

37 June 17, 2011 Prescience report. 38 Liaoning Hi-Tech Energy Group, http://www.lngkny.com/english/gnly-show.asp?column_cat_id=8&column_id=44530 . “Liaoning Hi-Tech Energy Group” is an alternative translation of Liaoning GaoKe Energy Group Limited (“GaoKe Energy”). GaoKe Energy is one of A-Power’s major subsidiaries. 39 A-Power Form 6-K, filed Sept. 16, 2009; and 2009 Form 20-F, at 37.

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1

137. The only difference between the names of the related parties and the

2 purported customers is the addition of the word “Urad” in the related parties’

3 names. Significantly, both purported customers are located in “Urad Banner,”

4 which is a county in Inner Mongolia.

5

138. Counsel for Plaintiffs retained an investigative firm to obtain the SAIC

6 filings of Urad Hengwang Thermal Power Energy Co., Ltd. (“Urad Hengwang”),

7 Urad Jihe Oriental Wind Power Energy Co., Ltd. (“Urad Jihe”), as well as Urad

8 Jihe’s parent company, Liaoning Beidian (North Electric) Piping Construction Co.,

9 Ltd. (“Liaoning Beidian”) at the relevant SAIC offices in Inner Mongolia and in

10 Shenyang. The investigative firm provided Plaintiffs’ counsel with printouts of

11 computer information maintained by those SAIC offices in February 2012. As

12 described below in ¶¶ 142 and 149, the SAIC information for the aforementioned

13 three companies, as well as for LICEG and GaoKe Energy, shows previously

14 undisclosed relationships between A-Power, including its subsidiaries, Defendant

15 Lu, and each of Urad Hengwang and Urad Jihe.

16

139. The contract with Urad Hengwang was valued at approximately $280

17 million. A-Power listed the details of this contract on the website of an A-Power

18 subsidiary as follows: 40

19

Name of Project and Owner

20

Power Plant Project of Hengwang Thermal Power Energy

21

Co., Ltd. Urad, Inner Mongolia

22

Location: Bayan Nur

23

Contract Signing Date: March, 2008

24

Capacity: *200MW (200MW for each phase)

25

Fuel: Coal

26

Contract Price: 2,000,000,000.00

27

28 40 See supra footnote 38.



Case 2


1 Expected Completion Date: January, 2010

140. Consistent with the above website description, A-Power issued a press

release on its website on March 21, 2008, announcing a $280 million contract with

“Inner Mongolia Wulahot Hengwang Heat & Electricity Generation Co., Ltd.” for a

400MW distributed generation facility, estimated to be completed in January

2010 . 41

141. A-Power , however, failed to disclose that the Company, including its

subsidiaries, and Defendant Lu had multiple ties with Urad Hengwang that

rendered it a related party:

a. A-Power, through its 100% owned subsidiary, GaoKe Energy,

acquired a majority (70%) stake in the equity of Urad Hengwang in March 2008;

b. Defendant Lu became a director of Urad Hengwang in March

2008;

c. Qiang Wang, a director of GaoKe Energy since 2006, became a

director of Urad Hengwang in March 2008; and

d. Hui Li, then a supervisor of an A-Power subsidiary, LICEG,

became a supervisor of Urad Hengwang in March 2008.

142. A-Power also failed to disclose that for 2008, Urad Hengwang

reported to the SAIC no annual revenue and only approximately $719,424 (or 5

million Renminbi) in assets. For 2009, Urad Hengwang also reported no revenue

and only approximately $730,600 (or 4.99 million Renminbi) in assets. 42 In short,

neither Urad Hengwang’s assets nor revenue showed adequate means to pay a $280

million contract. This raises serious doubts as to A-Power’s ability to collect

contract payments from Urad Hengwang and to recognize revenue on the $280

million contract.

41 Inner Mongolia Wulahot is an alternative translation of Urad, Mongolia. 42 The amount of assets for 2008 and 2009 was calculated based on the Renminbi-to-U.S. dollars exchange rate of 6.95 for 2008 and 6.83 for 2009.

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143. The $280 million Urad Hengwang project was the Company’s largest

2 DG project at the time. When the contract was signed, it constituted approximately

3 50% of A-Power’s reported $566 million backlog of revenue the Company

4 expected to recognize on existing contracts. By the end of 2008, the Urad

5 Hengwang project had even more significance, as A-Power’s backlog was

6 decimated because of cancellation and delays, dropping from $789 million as of the

7 end of the third quarter of 2008 to $290 million as of the end of the fourth quarter

8 of 2008. As describe d above, nearly the entire $290 million in backlog consisted

9 of the Urad Hengwang contract, according to Roth Capital Partners.

10

144. Also, as described above, the project showed little progress, if it

11 indeed was ever completed. According to the October 15, 2008 report by Roth, an

12 analyst at Roth who met with A-Power’s management and visited the Urad

13 Hengwang construction site observed that the project was in the “very early stages

14 of construction” and was unlikely to contribute substantial revenues in the second

15 half of 2008. According to the April 2, 2009 report issued by Roth, the same

16 analyst visited the Urad Hengwang construct site again and observed that “minimal

17 work” had been done, and “almost no progress” was made since the analyst’s last

18 visit in October 2008. This state of affairs made the analyst doubt his prior estimate

19 that the Urad Hengwang project would contribute approximately $150 million in

20 revenue in 2009. A-Power’s “lack of transparency” led to Roth’s decision to

21 suspend its coverage of the Company on June 16, 2009.

22

145. Despite the lack of progress on the Urad Hengwang project and

23 significant contract cancelations and delays, A-Power reported revenues of $264.9

24 million for 2008 and $311 million for 2009 in its 2008 and 2009 Form 20-Fs,

25 respectively.

26

146. Additionally, according to a September 15, 2009 press release issued

27 by A-Power, the Company entered into a $90.5 million contract with a second



28

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1 related party and purported customer, Jihe Orient Wind Power Energy Co., Ltd.

2 (“Urad Jihe”):

3

[A-Power] today announced the Company has won a

4

“full-responsibility” contract to develop a 49.5MW wind

5

farm in the township of Saiwusu, Guba County, Inner

6

Mongolia (“the Saiwusu Wind Farm”), for the Urat Rear

7

Banner-based Jihe Orient Wind Energy Co., Ltd. (“Jihe

8

Orient”). The total value of the contract is $90.5 million.

9 * * *

10

The project is due to commence early October this year

11

and the estimated completion time is June 2010.

12

[Emphasis added.]

13

147. The Urad Jihe project also represented an important addition to the

14 Company’s pipeline. The Urad Jihe contract added more than 23% to the

15 Company’s reported backlog of $290 million as of December 31, 2008.

16

148. Just as with Urad Hengwang, A-Power failed to disclose that the

17 Company, including its subsidiaries, and Lu had multiple ties with Urad Jihe that

18 rendered it a related party:

19

a. Defendant Lu had been a director of Urad Jihe;

20

b. Qiang Wang, a director of GaoKe Energy since 2006, was also a

21 director of Urad Jihe;

22

c. Haixue Yu, Defendant Lu’s wife, was the legal representative

23 and 60% owner of Urad Jihe’s parent company, Liaoning Beidian, from 2005

24 through 2010; and

25

d. Haiwang Lu, a director of LICEG since 2007, was also a 5%

26 owner of Urad Jihe’s parent company since 2005.

27

149. A-Power also failed to disclose that for both 2008 and 2009, Urad Jihe

28 reported to the SAIC no annual revenue and only approximately $2.9 million (or



Case 2


19.8431 million Renminbi) in assets. 43 Neither Urad Jihe’s assets nor revenue

showed adequate means to pay a $90.5 million contract. This raises serious doubts

as to A-Power’s ability to collect contract payments from Urad Jihe and to

recognize revenue on the $90.5 million contract.

150. Together, the contracts with Urad Hengwang and Urad Jihe constituted

$371 million in expected revenues claimed by A-Power, beginning in 2008. Thus,

while A-Power was touting its lucrative contracts with these two customers, it

failed to disclose that the contracts were actually deals with undisclosed related

parties.

151. A-Power’s failure to disclose the related party nature of its contracts

with Urad Hengwang and Urad Jihe violated the Financial Accounting Standards

Board (“FASB”) standard on related party disclosures, FAS 57 and applicable SEC

Rules. FAS 57 defines “related parties” as follows:

Affiliates of the enterprise 44 ; entities for which

investments in their equity securities would, absent the

election of the fair value option under FASB Statement

No. 159, The Fair Value Option for Financial Assets and

Financial Liabilities, be required to be accounted for by

the equity method by the enterprise; trusts for the benefit

of the employees, such as pension and profit-sharing trust

that are managed by or under the trusteeship of

management; members of the immediate families of

principal owners of the enterprise or management ; and

other parties with which the enterprise may deal if one

43 The amount of alleged assets for 2008 and 2009 was calculated based on the Renminbi-to-U.S. dollar exchange rate of 6.95 for 2008 and 6.83 for 2009. 44 An affiliate is any “party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the reporting company.”

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party controls or can significantly influence the

management or operating policies of the other to an

extent that one of the transacting parties might be

prevented from fully pursuing its own separate interests.

Another party also is a related party if it can significantly

influence the other to an extent that one or more of the

transacting parties might be prevented from fully pursuing

its own separate interests. [Emphasis added.]

152. FAS 57 requires that companies such as A-Power disclose material

transactions with related parties. 45 The requisite disclosures include:

-The nature of the relationship;

-A description of the transaction and other information

necessary to understand the effect of the transactions on

the financial statements;

-The dollar amounts of the transactions for each of the

periods for which income statements are presented; and

-Amounts due from or to related parties as of the date of

each balance sheet presented. 46

153. As a foreign private issuer within the meaning of the rules

promulgated under the Exchange Act, A-Power was also subject to SEC Rules and

related reporting obligations. These rules required A-Power to include the

following related party transactions disclosures within its annual report on Form

20-F filed with the SEC for the three financial years up to the date reported on:

1. The nature and extent of any transactions or

45 FAS 57, paragraphs 2 and 24(f). 46 FAS 57, paragraph 2. Furthermore, FAS 57 dictates that disclosures regarding related party transactions shall not imply that the transactions were consummated on terms equivalent to those that prevail at arm’s-length, unless such claims can be substantiated.

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presently proposed transactions which are material to the

company or the related party, or any transactions that are

unusual in their nature or conditions, involving goods,

services, or tangible or intangible assets, to which the

company or any of its parent or subsidiaries was a party.

2. The amount of outstanding loans (including

guarantees of any kind) made by the company, its parent

or any of its subsidiaries to or for the benefit of any of the

persons listed above. The information given should

include the largest amount outstanding during the period

covered, the amount outstanding as of the latest

practicable date, the nature of the loan and the transaction

in which it was incurred, and the interest rate on the loan.

In addition, if the company, its parent or any of its

subsidiaries is a foreign bank (as defined in 17 CFR §

240.13k-1) that has made a loan to which Instruction 2 of

this Item does not apply, identify the director, senior

management member, or other related party required to be

described by this Item who received the loan, and

describe the nature of the loan recipient's relationship to

the foreign bank. 47

154. Both Urad Hengwang and Urad Jihe meet the definition of “related

parties” under FAS 57 and A-Power’s failure to fully disclose details of its

relationship and transactions with them violated U.S. GAAP and SEC Rules.

47 SEC Official Text; SEC Form 20-F, Item 7, Major Shareholders and Related Party Transactions, Subsection B, Related party transactions, Item 7.B. of Form 20–F (17 CFR § 249.220f).



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1

155. Specifically, with respect to Urad Hengwang, the following factors

2 evidence A-Power’s ability to exercise control over the entity or significant

3 influence over its financial and operating policy decisions: (i) A-Power, through its

4 wholly owned subsidiary, GaoKe Energy, acquired a majority (70%) stake in the

5 equity of Urad Hengwang, and (ii) both Lu and Qing Wang (a director of GaoKe

6 Energy), served as directors of Urad Hengwang since March 2008.

7

156. In light of the above, A-Power was required to make the necessary

8 related party disclosures under GAAP and SEC Rules in connection with its

9 transactions with Urad Hengwang. A-Power, however, made no such disclosures

10 and failed to specifically mention Urad Hengwang or identify it as a related party in

11 its 2008 and 2009 Form 20-Fs.

12

157. Similarly, A-Power was required to make the necessary related party

13 disclosures under FAS 57 and SEC Rules in connection with its transactions with

14 Urad Jihe based on the following factors that demonstrated its ability to exercise

15 control or significant influence over Urad Jihe: (i) Haixue Yu, Lu’s wife, was the

16 legal representative and 60% owner of Urad Jihe’s parent company, Liaoning

17 Beidian Piping Construction Co., Ltd. (“Liaoning Beidian”), from 2005 through

18 2010. As Liaoning Beidian maintained a 100% interest in Urad Jihe, Lu’s family,

19 through Haixue Yu’s ownership interest in Liaoning Beidian, effectively held a

20 60% interest in Urad Jihe. Further, Haiwang Lu, a director of A-Power’s wholly-

21 owned subsidiary, LICEG, held an additional 5% interest in Liaoning Beidian since

22 2005. In total, certain officers and directors of A-Power and one of its subsidiaries

23 held a 65% aggregated interest in Urad Jihe; and (ii) various members of A-Power’s

24 management, including Lu, also appeared to have served as directors of Urad Jihe,

25 further evidencing A-Power’s ability to significantly influence management and

26 operating policies.

27

158. In light of the above, A-Power was again required to make the

28 necessary related party disclosures under GAAP and SEC Rules in connection with



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1 its transactions with Urad Jihe. Although A-Power mentioned Urad Jihe was a key

2 customer in its 2008 and 2009 Form 20-Fs, citing certain material contracts in place

3 between the parties, A-Power failed to disclose that Urad Jihe was a related party or

4 the related party nature of the transactions.

5 V. THE TRUTH BEGINS TO EMERGE

6

159. On March 28, 2011, the market began to learn of Defendants’

7 wrongful conduct when A-Power revealed for the first time problems completing its

8 2010 financial statements and audit thereof. On that day, A-Power issued a press

9 release announcing that it had postponed its 2010 earnings conference call

10 scheduled for the next day to “allow the Company and its independent auditors to

11 complete their work on the financial statements and audit.” A-Power, however,

12 assured that the postponement was “not due to any accounting irregularities.”

13 Following this announcement, the price of A-Power common stock fell $0.31 per

14 share, or approximately 6%, from its closing price of $5.19 on the previous trading

15 day, March 25, 2011, to close at $4.88 on March 28, 2011, on unusually high

16 trading volume.

17

160. On April 7, 2011, the Company issued a press release announcing a

18 delay in the reporting of its 2010 financial results. However, the Company, again,

19 affirmatively denied that the delay was due to any accounting irregularities or other

20 improprieties. In the release, Mak stated, in relevant part, as follows:

21

The scope of the audit field work that is necessary to

22

bring the audit of our 2010 financial statements to a

23

conclusion was not immediately recognized when the

24

conference call was initially scheduled to discuss our

25 results. After learning from both our internal team and

26

from our outside professional advisers that the work on

27

the financial statements and conclusion of the audit could

28

not be completed prior to the date we had previously



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1

scheduled for release, we, of necessity, postponed the

2

conference call and the release of the financial results for

3

2010.

4 * * *

5

I again confirm that the delay was not the result of any

6

accounting irregularities or investigation of accounting

7

errors, nor do we expect any restatement of A-Power’s

8

previously audited financial statements as a result of the

9

ongoing audit processes for 2010.

10

11 161. On June 17, 2011, the Company disclosed that an independent

12 director, Leckie, had suddenly resigned from the Company’s Board. Leckie’s

13 stated reasons for his resignation were because his “concerns that his views on

14 process and best practices were not necessarily shared throughout the Company.”

15 162. On the same day, Prescience published a report on the Seeking Alpha

16 financial blog entitled Evaluating the Clouds Overshadowing A-Power Energy

17 Generation Systems . The report cautioned that “the company’s revenue and profit

18 may be overstated in its SEC filings. Furthermore, a large number of related parties

19 that have not been properly disclosed have been identified throughout our research

20 process.” The article revealed the following key concerns about A-Power:

21

. A-Power has a history of internal weaknesses over

22 financial controls, which has resulted in an adverse opinion from

23 A-Power’s independent auditor. A-Power’s auditor issued an

24 adverse opinion in the 2009 audit and A-Power has yet to

25 publish its 2010 audited financial statements.

26 .

Management’s compensation structure is egregious,

27 offering enormous bonuses on an all-or-none basis for achieving

28 lofty performance goals.



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• SAIC filings show that A-Power is reporting significantly

lower revenue and profit to the authorities in China. For 2009,

SAIC filings showed approximately $25 million of revenue,

compared to $311 million in SEC filings.

. A-Power discloses a number of “Related Party Balances”

in which A-Power is both lending money to and borrowing

money from related individuals and businesses. However,

management makes no mention of the actual transactions

occurring between A-Power and these related businesses. Our

investigators have uncovered numerous additional undisclosed

companies owned and/or operated by A-Power’s CEO. 48

163. With respect to A-Power’s SAIC filings, Prescience found that the

financial results reported therein for 2009, on a consolidated basis, significantly

differed from the 2009 financial results A-Power reported in its SEC filings, as

follows: 49 2009 AIC Filings (CHY '000) In USD SEC Filings

GdoKe Energy aoKe Deslqri UCEG Ltd. RiIxIanq GE Drivetrain Ylxiang Consolidated ($ millions) ($ influlonc) Revenue 94,015 1,558 7,731 — — 175,304 $ 25.66 $ 311.25 Cross Profit 2,673 730 SeD35 11,436 5 1.67 Operating Income (17560) (2) (725) — — (16,267} $ (2.6e) $ 36.24

Cash 10,657 1219 4,569 3982 7701 60,II8 $ SSO $ 166.48 Total Assets l e 05%749 3,558 64,963 8,12 27,363 I23865 $ I6I.35 3 Shareholder Equity 21 z 948 3,092 53 z 477 58,500 20z mo 167,017 $ 24.45 $ 252.64

164. The Prescience report concluded that the “magnitude of the

discrepancy between the consolidated SAIC filings and the SEC filings is an

indication that management may be lying to regulatory authorities.” In addition,

48 See ¶ 135 for some of the companies owned or operated by Lu, including those that have been “trading cash” with A-Power. 49 The Prescience report indicated that the consolidated AIC numbers were based on the SAIC filings of GaoKe Energy, GaoKe Design, and LICEG, “APWR’s three primary subsidiaries and those most likely to make a contribution to revenue and earnings.” As demonstrated in ¶¶ 91-92, Plaintiffs’ independent investigation yielded results consistent with the Prescience report.

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1 the report stated that the “conclusions cautious investors can draw from this is that

2 the business is materially much smaller than what is reported in SEC filings.”

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165. With respect to related party transactions, Prescience found that

4 “[s]ince inception, the company has been making and repaying loans to company

5 insiders and businesses owned by those insiders. Surprisingly, despite disclosing

6 the loan balances, management fails to make note of any business related

7 transactions to and from these companies.” The report identified related party

8 balances and transactions between 2005 and 2009 involving a number of related

9 parties, including: (i) Defendant Lu, (ii) John Lin, (iii) Liaoning High Tech Energy

10 Group Electrical Supplies Ltd., (iv) Head Dragon Ground Heating Pump Company,

11 and (v) Liaoning High-Tech Furnace Insulation and Anti-Corrosion Engineering

12 Ltd.

13

166. Prescience found that the lack of disclosures regarding the business

14 transactions between the related parties raised the following concerns: “Are

15 investors to believe APWR isn’t contracting services from these companies, or

16 trading goods with these companies? Why is management associating with these

17 businesses if they’re not working with APWR? This is an oversight worthy of an

18 SEC investigation .” (emphasis added)

19

167. Prescience went on to state in the report that “[m]otivated by evidence

20 that APWR is not fully disclosing related party transactions, we became suspicious

21 that additional related parties may exist which have not received loans from

22 APWR.” According to the report, Prescience instructed the local organization that

23 had obtained AIC filings for Prescience to search for additional companies owned

24 or operated by Lu. The local organization reportedly found “four related parties

25 that have been trading cash with APWR, as well as 7 additional previously

26 undisclosed related parties .” (emphasis added).

27

168. With respect to A-Power’s internal controls, Prescience noted that the

28 first time the Company disclosed material weaknesses in “entity-level controls” and



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1 in its “financial closing and reporting process” was in its 2008 Form 20-F.

2 Although A-Power reportedly took steps to remediate the problem, it disclosed a

3 lack of internal controls again in its 2009 Form 20-F.

4

169. The Prescience report also highlighted the fact that A-Power’s auditor,

5 MSCM, issued a report dated March 30, 2010 expressing an adverse opinion

6 concerning A-Power’s internal controls over financial reporting as of December 31,

7 2009 . 50 Prescience concluded that the real reason for A-Power’s announcement on

8

9 50 MSCM’s report, which was included in A-Power’s 2009 Form 20-F, stated, in relevant part,

10 As stated in management’s report, the pervasive

11 deficiencies identified include both entity level and

12 financial closing and reporting processes and consisted of

13 inadequate controls with respect to (1) communication of

14 appropriate business practices and standards,

15 (2) assessment of business risk and risks related to

16 financial reporting, (3) written policies and procedures,

17 (4) monitoring of internal controls and, (5) the financial

18 reporting process and the underlying accounting

19 processes. These material weaknesses were considered in

20 determining the nature, timing and extent of audit tests

21 applied in our audit of the 2009 financial statements, and

22 this report does not affect our report dated March 31,

23 2010 on those financial statements.

24

25

In our opinion, because of the effect of the material

26 weaknesses described above on the achievement of the

27 objectives of the control criteria, A-Power Energy

28

Generation Systems, Ltd. has not maintained effective



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April 7, 2011 that it would be delaying the release of its 2010 financial statements

is that “APWR and its auditors have hit sticking points in the audit itself.”

170. With respect to the compensation structure of A-Power’s management,

Prescience focused on Lu’s incentive compensation scheme. Prescience described

the scheme, which reportedly provided Lu with “perverted incentives,” as follows:

At the IPO price of $8 per share, a 1-million share bonus

is valued at $8,000,000. Lu would receive this bonus for

2008 and 2009 as well, and then $16,000,000 in 2010,

2011, and 2012 for a total package value of $72 million

assuming no share price appreciation. Growing the share

price could obviously greatly increase the value of this

bonus over time. Before the share price collapsed in 2008,

Lu could have expected a $30m 2008 bonus. At the end of

2009, with shares trading at $20, Lu could have expected

a $20m bonus.

Additionally, because of the all-or-none nature of this

compensation scheme, not only does Jinxiang Lu have

this year’s bonus on the line, but all future years as well.

If management reported only $25 million in 2009,

internal control over financial reporting as of

December 31, 2009 . . .

MSCM issued a similar adverse report that was included in A-Power’s 2008 Form 20-F. In addition, MSCM issued unqualified audit opinions concerning A-Power’s financial statements for the periods ending December 31, 2008 and 2009, in which it stated that it conducted its audits in accordance with Public Company Accounting Oversight Board standards and that the financial statements “present fairly, in all material respects, the financial position of the Company.”

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Jinxiang Lu would be jeopardizing not only that $8

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million, but the next three payments of $16 million as

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well. Hitting the 2009 target could effectively be worth

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$112 million.

5

171. Following the news of Leckie’s resignation and the revelations

6 contained in the Prescience report, A-Power stock fell $0.40 per share, or

7 approximately 18%, to close at $1.85 on June 17, 2011, on unusually high trading

8 volume.

9

172. On June 20, 2011, A-Power issued a press release that claimed the

10 Company was reviewing the issues raised by the Prescience report and would

11 provide answers by way of a press release as soon as possible. To date, A-Power

12 has not issued a press release or any other public statement addressing the issues

13 raised in the Prescience report. It also has not released its SAIC filings to the

14 public. On June 20, 2011, A-Power shares closed down another $0.11, or nearly

15 6%, to $1.74. The total decline in the stock price on June 17 and June 20, 2011 was

16 $0.51 per share, or more than 22%.

17

173. On June 27, 2011, A-Power disclosed yet another resignation, that of

18 its auditor, MSCM. MSCM blamed its resignation on the Company’s failure to

19 “retain a qualified independent forensic accounting firm to evaluate certain business

20 transactions that MSCM stated was necessary for MSCM to complete its audit of

21 the Company’s financial statements for the year ended December 31, 2010 on a

22 timely basis.” MSCM’s resignation made it apparent that the filing of the

23 Company’s 2010 annual report on Form 20-F would be delayed indefinitely beyond

24 its June 30, 2011 filing deadline.

25

174. Upon this news, NASDAQ halted trading of A-Power stock on

26 June 27, 2011 at 2:55 p.m. Eastern Daylight Time at its last trading price of $1.67

27 per share. NASDAQ stated that the stock would remain halted until A-Power

28 satisfied its request for additional information.



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1

175. On June 28, 2011, the Company disclosed in a press release that two

2 more independent directors had resigned from the Company’s Board. The release

3 stated in relevant part as follows:

4

Mr. Remo Richli has resigned as a director of A-Power

5

and as chair of the board’s audit committee. Mr. Richli

6

stated that his resignation was based on his understanding

7

of events that occurred over the past few weeks, including

8

the resignation of the Company’s independent auditor. He

9

also stated that he did not agree with the course of action

10

that the Company has proposed to take in response to

11

recent events.

12

13

Mr. Dilip R. Limaye has regretfully resigned as a director

14

of A-Power and as chair of the board’s compensation

15

committee. He stated that his decision to resign was

16

prompted by the events of the last several weeks about

17

which he communicated his concerns and views on

18

actions that should be taken.

19

20 176. On July 1, 2011, the Company disclosed in a press release the

21 resignation of yet another independent director from the Company’s Board. The

22 release stated in relevant part as follows:

23 Mr. Jianmin Wu has regretfully resigned as a director of

A-Power and as a member of the board’s audit committee. 24

25 Mr. Wu stated that, considering the recent changes

26 occurring at the Company, he believed he would not be

27 able to continue to work effectively as an independent

director and contribute as a member of the board of



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1

directors.

2

3 177. On July 5, 2011, the Company announced in a press release that Mak’s

4 extended service contract as the Company’s CFO was ending on July 15, 2011, and

5 that Zhang, the Company’s Vice President for Strategic Planning, Internal Audit,

6 and Internal Control, and a member of the Company’s Board, would serve as A-

Power’s interim CFO. 7

8 178. On July 11, 2011, A-Power announced that Shan Lee had been

9 selected to serve as the Company’s interim COO, replacing Lin who died in

10 January 2011.

11 179. On August 18, 2011, the Company announced in a press release that

12 the SEC had launched a formal investigation into the Company. The release stated,

13 in relevant part, as follows:

14 [A-Power] was notified recently by the staff of the U.S.

15 Securities and Exchange Commission (“SEC”) that the

16 SEC has initiated a formal, nonpublic investigation into

17 whether the Company or any of its personnel violated the

federal securities laws. 18

19

20 On August 17, 2011, the SEC served the Company with a

21 subpoena for documents in connection with its

22 investigation. The Company is committed to cooperating

23 with the SEC. The Company cannot predict the timing or

24 outcome of the investigation. The SEC has informed the

25 Company that the investigation should not be construed as

26 an indication that any violations of law have occurred.

27 180. On September 6, 2011, the Company announced it had received a

28 NASDAQ determination letter stating that the continued listing of A-Power shares



Case 2


on NASDAQ was no longer warranted. Specifically, the release stated, in relevant

part, as follows:

The Nasdaq Staff indicated in its letter that the continued

listing of the Company’s securities on Nasdaq is no

longer warranted based on certain circumstances

surrounding the resignation of the Company’s

independent auditor, MSCM LLP (“MSCM”), on June 26,

2011, as well as the circumstances surrounding the

Company’s recent director resignations. The Staff’s

determination is based on the authority granted to Nasdaq

under Listing Rule 5101.

In addition, the Staff determined that Company’s failure

to timely file with the SEC the Form 20-F for the year

ended December 31, 2010 (the “Form 20-F”), as required

by Listing Rule 5250(c), constitutes a separate basis for

delisting.

181. On September 20, 2011, A-Power announced that it had retained the

services of a new independent auditor, BDO, effective September 15, 2011, to audit

the Company’s financial statements for 2010.

182. On September 26, 2011, the Company announced that A-Power shares

were suspended from being traded on NASDAQ and that it had been relegated to

trading on the pink sheets. 51 The press release stated in relevant part as follows:

[A-Power] announced that it has been advised by The

Nasdaq Stock Market LLC that the current trading halt for

its common shares will be converted to a suspension

51 See supra footnote 2 for a description of the “pink sheets.”

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today, Monday, September 26, 2011.

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As a result, the Company expects that its common shares

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will become eligible today for quotes and trading in the

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OTC Pink Limited Information tier of OTC Markets

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Group Inc. . . .

6 * * *

7

The Company has appealed the Staff’s determination to a

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Nasdaq Listing Qualifications Panel (the “Panel”). The

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Company had requested that its shares remain halted

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pending the conclusion of the hearing with the Panel,

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however, Nasdaq elected not to grant the Company’s

12

request.

13

14 183. Following this announcement, A-Power shares closed at $0.31,

15 representing a nearly 82% decline from its last trading price of $1.67 before

16 NASDAQ halted trading in the shares on June 27, 2011.

17 184. On October 3, 2011, the Company disclosed that it had received a

18 determination letter from NASDAQ as to its stock. The press release stated in

19 relevant part as follows:

20 The Nasdaq Staff indicated in its letter that the

21 Company’s failure, within a reasonable period of time, to

22 provide the Staff with certain additional information

23 requested in a letter to the Company dated September 9,

24 2011 in connection with the Staff’s ongoing inquiry

25 regarding the continued listing of the Company’s

26 securities on Nasdaq, provides an additional basis for

27 delisting the Company’s common stock. The Staff’s

28 additional determination is based upon the authority



Case 2


1

granted to Nasdaq under Listing Rule 5250(a).

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3 185. On this news, the Company’s stock price fell another $0.05, or 16%, at

the close of October 3, 2011. 4

5 186. On October 4, 2011, only two weeks after BDO reportedly accepted its

6 engagement to serve as A-Power’s auditor, A-Power revealed that BDO had

7 rescinded its acceptance. A-Power also announced that it had appointed Simon &

8 Edward, LLP, a three-partner firm that has also been retained by other China-based

9 reverse merger companies after their auditors resigned, as its new auditor. To date,

10 Simon & Edward has not issued any public statements about its audit of A-Power.

11 187. On November 9, 2011, a second Prescience report was published on

12 Seeking Alpha . The second report revealed that Prescience had conducted further

13 investigation into A-Power, including attempting to verify dozens of A-Power’s

14 purported customers. Prescience revealed that it was unable to contact and/or

15 verify many of these purported customers, throwing into further doubt the validity

16 of A-Power’s revenues. The report stated, in relevant part as follows:

17 Our attempts to locate and/or contact distributed

18 generation facilities mentioned on A-Power’s website and

19 in recent press releases have failed. Our investigation

20 team in China has prepared a report for us in which 39

21 companies out of 39 companies on our list have either not

22 been locatable, or refused to answer even a preliminary

23 set of questions. Our spreadsheet includes addresses,

24 phone numbers, Chinese and English names, websites,

25 and some other information we have put together. We

26 also searched for evidence of distributed generation

27 facilities on Google Maps and found many vacant lots

28 (although data is sometimes outdated).



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* * *

We suspect that in the best-case scenario, press releases

were issued prematurely and proposed projects never

made it to the development stage. In the worst-case

scenario, management wholly fabricated these projects.

With help from our investigators in China, we were able

to put together a list of A-Power’s recent distributed

generation clients in China. Part of this list came directly

from APWR’s website . . . To supplement it, we also

looked back at the press releases announcing project wins

since January 2010. Our final list contains 40 entries. . .

With this list in hand, we hired a reputable and

independent third-party due-diligence investigation team

in China to contact as many of these organizations as

possible. This team is staffed with both American and

Chinese citizens, and has been working in China for over

a decade. A spreadsheet of our investigator’s findings can

be found here. To summarize, only a handful of these

customers were reachable, or even locatable in any way.

The few we were able to locate were unwilling to speak.

Some of these companies had websites which appeared

“fake” to our investigators. Many had a locatable address

with no signs of construction or distributed generation

facilities at the expected locations, and many companies

had no locatable address using common internet mapping

188. Prescience explained its investigation and findings in further detail as

follows:



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1 software.

189. On this news, A-Power shares closed at $0.69 on November 9, 2011,

more than a 4% decline from the previous day’s close of $0.72. The share price

continued to fall over the next two trading days, closing at $0.61 on November 10,

2011 (over an 11% decline) and $0.54 on November 11, 2011 (another 11%

decline).

190. On January 9, 2012, the Company disclosed that Zhang had resigned

from his positions as interim CFO, Director, and Vice President effective January 6,

2012.

191. Of the seven directors that served on A-Power’s Board during the

Class Period, only one remains, namely, Lu. At a hearing before the Court on April

26, 2012, A-Power, through its counsel, publicly disclosed for the first time that

Defendant Fan “is no longer associated with the Company.”

192. On April 13, 2012, NASDAQ filed a Notification of Removal From

Listing And/Or Registration on Form 25 with the SEC. The Form 25 stated that a

NASDAQ hearing panel issue d a final determination on January 10, 2012 to delist

A-Power’s shares. A-Power chose not to appeal the decision and the Hearing

Panel’s decision became final on February 24, 2012.

VI. ADDITIONAL SCIENTER ALLEGATIONS

193. The Individual Defendants, as directors and/or senior officers of A-

Power during the Class Period, including Defendant Richli as Chair of A-Power’s

Audit Committee and an “audit committee financial expert” according to SEC rules

and regulations, are liable as direct participants in all of the wrongs complained of

herein. Through their positions of control and authority, as well as their stock

ownership, the Individual Defendants were in a position to, and did, control all of

the Company’s false and misleading statements and omissions, including the

contents of the Form 20-Fs, Form 6-Ks, and press releases, as set forth above.

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194. The Individual Defendants also possessed the power and authority to,

2 and did, control the contents of A-Power’s reports to the SEC, press releases and

3 presentations to securities analysts, money and portfolio managers and institutional

4 investors, i.e. , the market. The Individual Defendants were provided with copies of

5 the Company’s reports and press releases alleged herein to be materially false and

6 misleading prior to, or shortly after, their issuance and had the ability and

7 opportunity to prevent their issuance or cause them to be corrected.

8

195. As already detailed herein at ¶¶ 63, 72, 75, and 77, Defendants Lu,

9 Meng, and Mak signed annual SOX certifications during the Class Period attesting

10 to their responsibility for and knowledge of disclosure controls and procedures, as

11 defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as well as A-Power’s

12 internal control over financial reporting. Specifically, Lu signed the certifications

13 included in the 2007, 2008, and 2009 Form 20-Fs; Meng signed the certification

14 included in the 2007 Form 20-F; and Mak signed the certifications included in the

15 2008 Form 20-F/A and the 2009 Form 20-F.

16

196. As alleged in ¶ 35, Defendant Lu was the legal representative of six A-

17 Power subsidiaries: GaoKe Energy, GaoKe Design, Ruixiang, Shenyang Power

18 Group, Longxiang, and Jinxiang. The SAIC mandates that the legal representative

19 of the submitting enterprise certify the truth of the contents of the SAIC filing,

20 including financial statements. As the legal representative, Lu was responsible for

21 affirming the accuracy of filings made on behalf of these subsidiaries with the

22 SAIC during the Class Period.

23

197. The Individual Defendants knew and/or recklessly disregarded that the

24 Company’s public statements concerning its financial results were false and

25 misleading when made.

26

198. Specifically, the Company’s revenue, gross profits, operating income,

27 net income, cash, total assets and total liabilities – each of which was falsely

28 portrayed – were key performance metrics for the Company, and knowledge of



Case


these key facts may rightfully be attributed to the Company and its key officers,

2 including the Individual Defendants, particularly Richli, Wu, and Fan who were

members of A-Power’s Audit Committee during the Class Period. According to A-

4 Power, Richli, Wu, and Fan “can read and understand fundamental financial

statements, including a balance sheet, income statement, and cash flow statement.”

As members of the Audit Committee, their principal responsibility was to oversee

A-Power’s accounting and financial reporting processes and the audits of its

financial statements of our company.

199. As already detailed herein at ¶¶ 85-93, the Company was reporting

10 drastically divergent financial results in its SEC filings, as compared to what it

11 reported to the SAIC. The SEC filings were false and/or misleading. The

12 Individual Defendants controlled the information the Company filed with the SAIC,

13 and were aware of the contradictory financial results reported by A-Power in China.

14

200. Defendants also received and/or had access to monthly construction

15 progress reports concerning A-Power’s DG contracts. In a letter dated

16 December 29, 2010 from John Lin to the SEC concerning A-Power’s 2009

17 Form 20-F, Lin stated that A-Power’s primary obligations as a contractor on DG

18 construction projects include “check[ing] (on a monthly basis) the construction

19 progress reports generated by the subcontractors and verify[ing] the progress

20 reports.” Lin also stated in the letter that “[t]he progress on a construction project is

21 an important factor in determining when to recognize revenue under the percentage

22 of completion method of accounting and it is also a way to measure the status or

23 volume of distributed power contracts. Therefore, payment to subcontractors is

24 correlated to the status and volume of our distributed power contracts.” The

25 monthly reports alerted Defendants to the fact that several DG projects were

26 significantly delayed and that the revenues reported in A-Power’s SEC filings were

27 grossly overstated. In the same correspondence, Lin identifies defendants Mak

28 and Zhang as part of a small group of A-Power employees knowledgeable in U.S.


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GAAP and responsible for A-Power’s financial reporting. Therefore, given the

2 given the importance of the monthly construction progress reports to determining

revenue recognition under the POC method of accounting one can reasonably infer

4 that Mak, Zhang, and other A-Power officers and employees monitored and

reviewed these reports in preparing financial reports and thus were aware that the

SEC financial statements contained false revenue amounts.

201. Defendant Lu was aware of the status of A-Power’s DG contracts and

therefore knew of, or recklessly disregarded, the significant contract delays and

cancelations during the Class Period and that there was therefore no reasonable

10 basis in fact for A-Power’s reported revenues and income during the Class Period.

11 For example, in the December 3, 2009 press release announcing A-Power’s results

12 for the third quarter of 2009, Lu stated “Our DG business progressed well during

13 the third quarter. 14 out of our total 17 projects were under construction according

14 to their respective schedules. . . . We also started our DG project in Thailand in

15 December.” In the August 26, 2010 press release announcing A-Power’s results

16 for the second quarter of 2010, Lu similarly indicated his awareness of the status of

17 the contracts, stating that the quarter’s results were “primarily driven by growth in

18 our DG business, both domestically and internationally.” On December 1, 2010,

19 when A-Power announced its results for the third quarter of 2010, Lu also again

20 demonstrated his awareness of the status of A-Power’s DG business, commenting,

21 “A-Power’s results in the third quarter were less than we hoped we would achieve.

22 The shortfall was due mainly to lower revenues in our Distributed power generation

23 segment because of the timing of work under contracts, and to less-than-planned

24 sales in our Wind power segment.”

25

202. With respect to the related party transactions involving customers Urad

26 Hengwang and Urad Jihe, Lu had actual knowledge of their related party nature

27 because he served as a director of these companies, and his wife had an ownership

28 interest in and was the legal representative of Urad Jihe’s parent company.


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203. Furthermore, the magnitude of the transactions between A-Power and

these companies raises the strong inference that the other Individual Defendants

also knew, or recklessly disregarded, their related party nature. For instance, the

$280 million Urad Hengwang contract was significant to the Company’s fiscal

bottom line, constituting 50% of A-Power’s backlog when the contract was

executed. Similarly, the $90.5 million Urad Jihe contract, signed in September

2009, added more than 23% to the Company’s reported backlog of $290 million as

of December 31, 2008.

204. In addition, A-Power acquired a 70% ownership stake in Urad

Hengwang, and Lu and other high-ranking employees of the Company served as

directors and supervisors of Urad Hengwang and had ownership interests in Urad

Jihe.

205. Lu was motivated to engage in the fraud alleged herein. As detailed in

¶ 35, Lu beneficially owned approximately 24.8% of A-Power’s outstanding

common shares and was eligible to receive additional shares each year for six years

beginning in fiscal 2007 (for a total of 9,000,000 shares) if A-Power generated pre-

determined minimum net operating profits each year. According to A-Power’s

2009 20-F, the Company achieved those minimum net operating profit targets in

2007, 2008, and 2009, and, therefore, issued 1,000,000 shares to Lu for each of

those years. Accordingly, Lu had a significant financial incentive to cause A-

Power to materially overstate its reported profits and other financial results during

the Class Period. As described in the June 17, 2011 Prescience report, Lu’s

incentive compensation scheme provided Lu with “perverted incentives.”

206. Lu had significant control over A-Power’s operations, business, and

dissemination of information to the public. Indeed, A-Power’s 2009 Form 20-F

cautioned that because Lu’s percentage of beneficial ownership of A-Power’s

shares is so significant, he “may exercise significant influence over all matters

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requiring shareholder approval, including the election of a majority of the directors

and the determination of significant corporate actions.”

207. Defendant Mak, the Company’s CFO from May 2009 to July 15, 2011,

was intimately involved with A-Power’s financial reporting and reportedly had the

requisite experience and expertise to understand and prepare A-Power’s financial

statements. For example, in a letter dated December 29, 2010 from John Lin to the

SEC, Mak was identified as one of A-Power’s employees who prepared A-Power’s

2009 financial statements and who had “expertise in preparing financial statements

in accordance with U.S. GAAP . . . . Mr. Mak has years of experience in preparing

U.S. GAAP financial statements.” In addition, Mak assured investors in an April 7,

2011 press release that the Company’s delay in releasing its 2010 financial results

“was not the result of any accounting irregularities or investigation of accounting

errors, nor do we expect any restatement of A-Power’s previously audited financial

statements as a result of the ongoing audit processes for 2010.” Yet only a few

months later, the Company’s outside auditor resigned, due to accounting concerns

that it had about certain transactions. Mak’s experience and expertise with financial

reporting is based, in part, on his former roles as a partner of Arthur Andersen

Worldwide and as the managing partner of Arthur Andersen Southern China.

208. Defendant Zhang, A-Power’s Vice President for Strategic Planning,

Internal Audit, and Internal Control, and interim CFO during the Class Period, was

also intimately involved with A-Power’s financial reporting and reportedly had the

requisite experience and expertise to understand and prepare A-Power’s financial

statements. In the December 29, 2010 letter to the SEC, Zhang was identified as an

employee retained in 2010 “with expertise in preparing financial statements under

U.S. GAAP.” Zhang’s experience and expertise with financial reporting is based,

in part, on his former roles as Executive Director of Business Risk Services with

Ernest & Young (China) Advisory Limited and as Director of Enterprise Risk

Services at Deloitte Touche Tohmatsu CPA Ltd. Zhang was also intimately

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1 familiar with A-Power’s internal controls. According to A-Power, Zhang “joined

2 A-Power in January 2010 as Vice President, initially for the design,

3 implementation, and management of A-Power’s internal and disclosure controls

4 systems.”

5

209. Defendant Meng also had the requisite experience and expertise to

6 understand and prepare A-Power’s financial statements. According to A-Power’s

7 2007 Form 20-F, Meng is a “Certified Public Accountant” and “is experienced in

8 both PRC and U.S. GAAP accounting.” As described herein, the financial

9 statements in A-Power’s SAIC filings were required to conform with PRC GAAP

10 and the financial statements in its SEC filings were required to confirm with U.S.

11 GAAP. In addition, there are no significant differences between relevant provisions

12 of PRC and U.S. GAAP. Accordingly, Meng was aware that the discrepancies

13 between the financial information A-Power filed with the SAIC and the SEC were

14 not due to any differences in accounting standards.

15 VII. LOSS CAUSATION

16

210. Defendants’ unlawful conduct alleged herein directly caused the losses

17 incurred by Plaintiffs and the Class. Throughout the Class Period, the price of A-

18 Power’s securities was artificially inflated as a direct result of Defendants’

19 materially false and misleading statements and omissions.

20

211. The true facts became known by investors and the market through a

21 series of partial corrective disclosures, some by third parties, and some by

22 Defendants, beginning on or around March 28, 2011. By making contemporaneous

23 additional misstatements in the form of denials in response to partial disclosures by

24 third parties, or by failing to reveal the falsity of all statements at one time, artificial

25 inflation remained in the price of A-Power securities throughout the entirety of the

26 Class Period.

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212. As the true facts become known and/or the materialization of the risks

28 that had been concealed by Defendants occurred, the price of A-Power securities



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1 declined as the artificial inflation was removed from the market price of the

2 securities, causing substantial damage to Plaintiffs and the members of the Class.

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213. The declines in the price of A-Power’s securities and the resulting

4 losses are directly attributable to the disclosure of information and/or

5 materialization of risks that were previously misrepresented or concealed by

6 Defendants. Had Plaintiffs and other members of the Class known of the material

7 adverse information not disclosed by Defendants or been aware of the truth behind

8 their material misstatements, they would not have purchased A-Power securities at

9 artificially inflated prices.

10

214. From the time that the truth about Defendants’ wrongful conduct first

11 emerged, until the time the market learned of A-Power’s true financial condition,

12 the price of A-Power common stock declined in a series of material steps from

13 $5.19 per share (the closing price on March 25, 2011, one trading day immediately

14 preceding March 28, 2011), to $1.67 per share when trading in the shares was

15 halted on June 27, 2011—a total decline of over 67%—as the market processed

16 each set of previously undisclosed facts. A-Power shares would decline another

17 $1.36 per share, or nearly 82%, to close at $0.31 on September 26, 2011, when the

18 shares began to trade on the pink sheets after being suspended from trading on

19 NASDAQ. Each disclosure and/or materialization of previously concealed risks

20 removed a portion of the artificial inflation from the price of A-Power’s common

21 stock caused by Defendants’ prior material misrepresentations and omissions, and

22 directly caused Plaintiffs to suffer damages.

23 VIII. GAAP VIOLATIONS

24

215. The representations and certifications by Defendants Lu, Meng, Mak,

25 and John Lin that A-Power’s financial results were prepared and reported

26 accurately and in accordance with U.S. GAAP were materially false and

27 misleading.



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216. GAAP requires: (i) that financial reporting should provide information

that is useful to present and potential investors and creditors and other users in

making rational investment, credit, and similar decisions, set forth in FASB

Statement of Concepts No. 1, ¶ 34; (ii) that financial reporting should provide

information about the economic resources of an enterprise, the claims to those

resources, and effects of transactions, events, and circumstances that change

resources and claims to those resources, set forth in FASB Statement of Concepts

No. 1, ¶ 40; (iii) that financial reporting should provide information about an

enterprise's financial performance during a period set forth in FASB Statement of

Concepts No. 1, ¶ 42; (iv) that financial reporting should be reliable in that it

represents what it purports to represent, set forth in FASB Statement of Concepts

No. 2, ¶¶ 58-59; and (v) completeness, meaning that nothing material is left out of

the information that may be necessary to ensure that it validly represents underlying

events and conditions, set forth in FASB Statement of Concepts No. 2, ¶ 79.

217. Furthermore, as described in ¶¶ 152 - 159, FAS 57 concerning

“Related Party Disclosures” and applicable SEC Rules mandate disclosure of

material related-party transactions. Specifically, financial statements shall include

disclosures of material related-party transactions, other than compensation

arrangements, expense allowances, and other similar items in the ordinary course of

business.

218. Because A-Power’s Class Period financial statements violated GAAP,

they are presumptively misleading and inaccurate under SEC Regulation S-X, 17

C.F.R. § 210.4-01(a)(1).

IX. CLASS ACTION ALLEGATIONS

219. Plaintiffs bring this action as a class action pursuant to Federal Rule of

Civil Procedure 23(a) and (b)(3) on behalf a Class of all persons and entities who

purchased or acquired A-Power’s publicly traded securities during the Class Period

(the “Class”). Excluded from the Class are Defendants herein, the officers and

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1 directors of the Company, at all relevant times, members of their immediate

2 families and their legal representatives, heirs, successors or assigns, and any entity

3 in which Defendants have or had a controlling interest.

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220. The members of the Class are so numerous that joinder of all members

5 is impracticable. Throughout the Class Period, A-Power securities were actively

6 traded on NASDAQ. While the exact number of Class members is unknown to

7 Plaintiffs at this time and can be ascertained only through appropriate discovery,

8 Plaintiffs believe that there are hundreds or thousands of members in the proposed

9 Class. Record owners and other members of the Class may be identified from

10 records maintained by A-Power or its transfer agent and may be notified of the

11 pendency of this action by mail, using the form of notice similar to that customarily

12 used in securities class actions.

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221. Plaintiffs’ claims are typical of the claims of the members of the Class

14 as all members of the Class are similarly affected by Defendants’ wrongful conduct

15 in violation of federal law that is complained of herein.

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222. Plaintiffs will fairly and adequately protect the interests of the

17 members of the Class and have retained counsel competent and experienced in class

18 and securities litigation. Plaintiffs have no interests antagonistic to or in conflict

19 with those of the Class.

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223. Common questions of law and fact exist as to all members of the Class

21 and predominate over any questions solely affecting individual members of the

22 Class. Among the questions of law and fact common to the Class are:

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. whether the federal securities laws were violated by

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Defendants’ acts as alleged herein;

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. whether statements made by Defendants to the investing

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public during the Class Period misrepresented material

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facts about the business, operations and management of

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A-Power;



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• whether the Individual Defendants caused A-Power to

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issue false and misleading financial statements during the

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Class Period;

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• whether Defendants acted knowingly or recklessly in

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issuing false and misleading financial statements;

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• whether the prices of A-Power securities during the Class

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Period were artificially inflated because of Defendants’

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conduct complained of herein; and

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• whether the members of the Class have sustained

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damages and, if so, what is the proper measure of

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damages.

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224. A class action is superior to all other available methods for the fair and

13 efficient adjudication of this controversy since joinder of all members is

14 impracticable. Furthermore, as the damages suffered by individual Class members

15 may be relatively small, the expense and burden of individual litigation make it

16 impossible for members of the Class to individually redress the wrongs done to

17 them. There will be no difficulty in the management of this action as a class action.

18 X. FRAUD-ON-THE-MARKET PRESUMPTION

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225. Plaintiffs will rely, in part, upon the presumption of reliance

20 established by the fraud-on-the-market doctrine in that:

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a. Defendants made public misrepresentations or failed to disclose

22 material facts during the Class Period;

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b. the omissions and misrepresentations were material;

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c. A-Power common stock was traded in an efficient market during

25 the Class Period;

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d. the Company’s shares were liquid and traded with moderate to

27 heavy volume during the Class Period;



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e. the Company traded on the NASDAQ, and was covered by

multiple analysts;

f. the misrepresentations and omissions alleged would tend to

induce a reasonable investor to misjudge the value of the Company’s securities; and

g. Plaintiffs and members of the Class purchased and/or sold A-

Power securities between the time the Defendants failed to disclose or

misrepresented material facts and the time the true facts were disclosed, without

knowledge of the omitted or misrepresented facts.

226. Based upon the foregoing, Plaintiffs and the members of the Class are

entitled to a presumption of reliance upon the integrity of the market.

XI. CLAIMS FOR RELIEF

COUNT I (Against All Defendants for Violations of Section 10(b)

and Rule 10b-5 Promulgated Thereunder)

227. Plaintiffs repeat and reallege each and every allegation contained

above as if fully set forth herein.

228. This Count is asserted against all Defendants and is based upon

Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5

promulgated thereunder by the SEC.

229. During the Class Period, Defendants engaged in a plan, scheme,

conspiracy and course of conduct, pursuant to which they knowingly or recklessly

engaged in acts, transactions, practices and courses of business which operated as a

fraud and deceit upon Plaintiffs and the other members of the Class; made various

untrue statements of material facts and omitted to state material facts necessary in

order to make the statements made, in light of the circumstances under which they

were made, not misleading; and employed devices, schemes and artifices to defraud

in connection with the purchase and sale of securities. Such scheme was intended

to, and, throughout the Class Period, did: (i) deceive the investing public, including

Plaintiffs and other Class members, as alleged herein; (ii) artificially inflate and

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maintain the market price of A-Power securities; and (iii) cause Plaintiffs and other

2 members of the Class to purchase A-Power securities at artificially inflated prices.

In furtherance of this unlawful scheme, plan and course of conduct, Defendants,

4 and each of them, took the actions set forth herein.

230. Pursuant to the above plan, scheme, conspiracy and course of conduct,

each of the Individual Defendants participated directly or indirectly in the

preparation and/or issuance of the quarterly and annual reports, SEC filings, press

releases and other statements and documents described above, including statements

made to securities analysts and the media that were designed to influence the

10 market for A-Power securities. Such reports, filings, releases and statements were

11 materially false and misleading in that they failed to disclose material adverse

12 information and misrepresented the truth about A-Power’s finances and business

13 prospects.

14

231. By virtue of their positions at A-Power, the Individual Defendants

15 were privy to confidential, proprietary, and material adverse non-public information

16 concerning A-Power and therefore knew of or recklessly disregarded the materially

17 false and misleading statements and material omissions alleged herein and intended

18 thereby to deceive Plaintiffs and the other members of the Class, or, in the

19 alternative, the Individual Defendants acted with reckless disregard for the truth in

20 that they failed or refused to ascertain and disclose such facts as would reveal the

21 materially false and misleading nature of the statements made, although such facts

22 were readily available to the Individual Defendants. Said acts and omissions of

23 Defendants were committed willfully or with reckless disregard for the truth. In

24 addition, each Individual Defendant knew or recklessly disregarded that material

25 facts were being misrepresented or omitted as described above.

26

232. Information showing that the Individual Defendants acted knowingly

27 or with reckless disregard for the truth is peculiarly within Defendants’ knowledge


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and control. As the senior managers and/or directors of A-Power, the Individual

Defendants had knowledge of the details of A-Power’s internal affairs.

233. The Individual Defendants are liable both directly and indirectly for

the wrongs complained of herein. Because of their positions of control and

authority, the Individual Defendants were able to and did, directly or indirectly,

control the content of the statements of A-Power. As officers and/or directors of a

publicly-held company, the Individual Defendants had a duty to disseminate timely,

accurate, and truthful information with respect to A-Power’s businesses, operations,

future financial condition and future prospects. As a result of the dissemination of

the aforementioned false and misleading reports, releases and public statements, the

market price of A-Power securities was artificially inflated throughout the Class

Period. In ignorance of the adverse facts concerning A-Power’s business and

financial condition which were concealed by Defendants, Plaintiffs and the other

members of the Class purchased A-Power securities at artificially inflated prices

and relied upon the price of the securities, the integrity of the market for the

securities, and/or upon statements disseminated by Defendants and were damaged

thereby.

234. During the Class Period, A-Power securities were traded on an active

and efficient market. Plaintiffs and the other members of the Class, relying on the

materially false and misleading statements described herein, which the Defendants

made, issued or caused to be disseminated, or relying upon the integrity of the

market, purchased shares of A-Power securities at prices artificially inflated by

Defendants’ wrongful conduct. Had Plaintiffs and the other members of the Class

known the truth, they would not have purchased said shares, or would not have

purchased them at the inflated prices that were paid. At the time of the purchases

by Plaintiffs and the Class, the true value of A-Power securities was substantially

lower than the prices paid by Plaintiffs and the other members of the Class. The

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market price of A-Power securities declined sharply upon public disclosure of the

2 facts alleged herein to the injury of Plaintiffs and Class members.

235. By reason of the conduct alleged herein, the Individual Defendants

4 knowingly or recklessly, directly or indirectly, have violated Section 10(b) of the

Exchange Act and Rule 10b-5 promulgated thereunder.

236. As a direct and proximate result of Defendants’ wrongful conduct,

Plaintiffs and the other members of the Class suffered damages in connection with

their respective purchases and sales of the Company’s securities during the Class

Period.

10

COUNT II

11 (Violations of Section 20(a) of the Exchange Act

against the Individual Defendants)

237. Plaintiffs repeat and reallege each and every allegation contained in the 12

foregoing paragraphs as if fully set forth herein. 13

238. During the Class Period, the Individual Defendants participated in the 14

operation and management of A-Power, and conducted and participated, directly 15

and indirectly, in the conduct of A-Power’s business affairs. Because of their 16

senior positions, the Individual Defendants were privy to confidential, proprietary, 17

and material adverse non-public information concerning A-Power’s misstatements 18

of its reported financial results. 19

239. As officers, directors, and/or controlling shareholders of a publicly 20

traded company, the Individual Defendants had a duty to disseminate accurate and 21

truthful information with respect to A-Power’s financial condition and results of 22

operations, and to promptly correct any public statements issued by A-Power which 23

24 had become materially false or misleading.

25

240. Because of their positions of control and authority as senior officers,

directors, and/or controlling shareholders, the Individual Defendants were able to, 26

and did, control the contents of the various reports, press releases and public filings 27

which A-Power disseminated in the marketplace during the Class Period



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concerning A-Power’s results of operations. Throughout the Class Period, the

Individual Defendants exercised their power and authority to cause A-Power to

engage in the wrongful acts complained of herein. The Individual Defendants

therefore, were “controlling persons” of A-Power within the meaning of

Section 20(a) of the Exchange Act.

241. Each of the Individual Defendants, therefore, acted as a controlling

person of A-Power. By reason of their senior management positions, being

directors of A-Power and/or controlling shareholders of A-Power, each of the

Individual Defendants had the power to direct the actions of, and exercised the

same to cause A-Power to engage in the unlawful acts and conduct complained of

herein. Each of the Individual Defendants exercised control over the general

operations of A-Power and possessed the power to control the specific activities

which comprise the primary violations about which Plaintiffs and the other

members of the Class complain.

242. By reason of the above conduct, the Individual Defendants are liable

pursuant to Section 20(a) of the Exchange Act for the violations committed by A-

Power.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs demand judgment against Defendants as follows:

A. Determining that the instant action may be maintained as a class action

under Rule 23 of the Federal Rules of Civil Procedure, and certifying Plaintiffs as

the Class representatives;

B. Awarding compensatory damages in favor of Plaintiffs and the other

class members against all Defendants, jointly and severally, for all damages

sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial,

including interest thereon;

C. Awarding Plaintiffs and the other members of the Class prejudgment

and post-judgment interest, as well as their reasonable attorneys’ fees, expert fees

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and other costs; and

D. Awarding such equitable, injunctive or other relief as this Court may

deem just and proper.

DEMAND FOR TRIAL BY JURY

Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiffs

hereby demand trial by jury of all issues that may be so tried.

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Dated: July 16, 2012 Respectfully submitted,

LIEFF CABRASER HEIMANN & BERNSTEIN, LLP

By: GV - a /1 .A.KR E

Richrd M. Heimann (State Bar No. 063607) J A. Kruse (State Bar No. 142799) MFF CABRASER HEIMANN & BERNSTEIN, LLP 275 Battery Street, 29th Floor San Francisco, CA 94111-3339 Telephone: (415) 956-1000 Facsimile: (415) 956-1008

Lead Counsel for Lead PlaintiffA -Power Investor Group

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043005.1 CONSOL. I ST AMEND. CLASS ACTION COMPLAINT -

- MASTER DOCKET NO.: 2:11 -ML-2302-GW- (CWX)

3 LIEFF ABRASER HEIMANN - Class actionsecurities.stanford.edu/filings-documents/1047/... · The Prescience report raised a number of other red flags indicating fraud at the Company,

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