VeraSun Fraud Case Dismissed
A judge has ruled the ethanol company adequately warned investors of possible risks.
September 9, 2010
A federal judge has dismissed a lawsuit that had accused former VeraSun Energy Corp. executives of fraud.
U.S. District Court Southern District of New York Judge Shira A. Scheindlin dismissed the lawsuit Aug. 31 against former VeraSun Energy Corp. executives CEO Donald L. Endres, CFO Danny C. Herron, and Chief Accounting Officer Bryan D. Meie.
The class action suit filed by stockholders in the former ethanol company alleged the executives were untruthful about the financial state of the company and the risks involved in the business when it offered 20 million shares of its common stock for sale on Sept. 16, 2008. That was one month before the company filed for Chapter 11 bankruptcy protection.
The judge ruled that VeraSun adequately warned investors.
"Contrary to plaintiffs' assertion that any 'risk factors cited by defendants are unspecified and uninformative,' even a cursory look at the record reveals that defendants directly acknowledged the very risks plaintiffs fault for their losses," the judge wrote.
The company filed bankruptcy as a result of getting caught on the wrong side of volatile corn prices in the summer of 2008, according to reports VeraSun previously filed with the U.S. Securities and Exchange Commission. Big financial losses came as a result of the company using accumulator contracts for corn.
VeraSun's strategy allowed the company to buy a specified volume of corn below the then-prevailing market price, but also committed the company to buying larger volumes at a set price if the futures prices declined.
In an SEC report from September 2008, the company said its strategy resulted in incurring average corn prices between $6.75 and $7 a bushel in the third quarter, contributing to third-quarter losses of $100 million.
"Simply put, VeraSun attempted to realize its expansion plans in a declining and volatile market, and then exacerbated its imprudence by locking itself into accumulator contracts on a faulty presumption that corn prices would remain high," the court said in its ruling.
As a result of the bankruptcy, farmers who had contracts for future delivery at the 24 plants VeraSun owned at the time, were considered to be unsecured creditors. Many farmers lost money on unfulfilled contracts.
The suit alleged that the company made false and misleading statements and had material omissions from financial reports.
The plaintiffs focused on a particular earnings conference call. During that call, the suit alleged, the company led investors to believe the company's current financial situation was in good shape.
Those statements included "our current expectation of cash flows ..." and "the company's liquidity was strong."
The judge stated in the ruling that the company also issued warnings about its "high level of debt" and elaborated on the "significant consequences" that the debt could pose for shareholders. The judge also stated shareholders didn't prove that VeraSun had the motive and opportunity to commit the alleged fraud.
The lawsuit said it is unclear how many stockholders lost money as a result, only saying that it could be "hundreds" or "thousands."