Shareholders sue cellulosic company for ‘false and misleading’ statements

Source: Amanda Peterka, E&E reporter • Posted: Thursday, August 22, 2013

Shareholders filed a class-action lawsuit yesterday against cellulosic biofuel maker KiOR Inc. for failing to deliver on its promises.

The lawsuit in U.S. District Court for the Southern District of Texas accuses the company and its executives of deceiving investors by reporting optimistic production targets and deadlines, spurring stock purchases at prices that were artificially high.

“Plaintiff and the other members of the class, relying on materially false and misleading statements described herein … purchased shares of KiOR securities at prices artificially inflated by defendants’ wrongful conduct,” the lawsuit says. “Had plaintiff and the other members of the class known the truth, they would not have purchased said securities, or would not have purchased them at the inflated prices that were paid.”

KiOR has been at the forefront of the U.S. cellulosic biofuels industry, which is seeking to make fuels from farm residues, grasses and other vegetation. In 2011, KiOR raised $150 million in an initial public offering and last year completed construction on a facility in Columbus, Miss., that is capable of producing 13 million gallons of cellulosic gasoline and diesel a year from woody biomass (Greenwire, Nov. 9, 2012). The product is identical to petroleum-based fuel and can be used in existing infrastructure.

The lawsuit alleges that KiOR executives made claims last year in several earnings calls, presentations and press releases that misrepresented the actual progress at the facility.

Though KiOR originally expected to begin shipping commercial quantities of its fuel last fall and reiterated that goal several times last year, the first shipment of diesel didn’t occur until March of this year; the first shipment of cellulosic gasoline occurred later on June 28. According to U.S. EPA, the company struggled during the commissioning of the facility because of interruptions in electricity supply.

After the initial startup difficulties, CEO Fred Cannon in May projected the company would ship between 300,000 and 500,000 gallons of cellulosic fuel during the second quarter this year. The company fell short of that goal and announced two weeks ago it shipped 75,000 gallons of fuel in that period. KiOR also reported a net loss of $38.5 million in the second quarter of this year, compared to a loss of $31.3 million in the first quarter.

After the earnings call, KiOR shares fell more than 44 percent, from $4.76 on Aug. 7 to $2.62 on Aug. 15, according to the lawsuit.

The suit alleges that the company’s executives knew they were issuing misleading statements. New York City-based firm Pomerantz Grossman Hufford Dahlstrom & Gross LLP filed the class-action suit on behalf of Michael Berry and other shareholders against the company, Cannon and Chief Financial Officer John Karnes.

“By virtue of their positions at KiOR, defendants had actual knowledge of the materially false and misleading statements and material omissions alleged herein and intended thereby to deceive,” the lawsuit says, “or, in the alternative, defendants acted with reckless disregard for the truth.”

The court filing predicts there could be hundreds or even thousands of members included in the class-action suit who purchased securities in the company between August 2012 and August 2013. The plaintiffs have requested a jury trial.

KiOR didn’t respond to a request for comment on the lawsuit.

Despite the difficulties, biofuels advocates have touted the company as on the leading edge of the nascent next-generation fuels industry. EPA is relying on the company to meet nearly all of this year’s 6-million-gallon mandate for cellulosic biofuels and earlier this year determined that the cellulosic gasoline produced by KiOR could count for credit under the renewable fuel standard (Greenwire, Feb. 25).

Company executives have continued to issue optimistic projections.

In the most recent earnings call two weeks ago, Cannon said the facility has made “significant operational progress.” KiOR is looking at building an additional facility in Columbus and also has plans to begin construction soon on a larger, 40-million-gallon-a-year $350 million plant in Natchez, Miss.

“Did we encounter unexpected startup issues unrelated to our technology? Yes, we did,” Cannon told investors during the fourth-quarter 2012 earnings call in March. “However, we have overcome these normal startup issues and we have proven that KiOR’s proprietary biomass-to-fuels technology works at commercial scale at Columbus.”