Co-authored by Jessica M. Garrett

Judge John Koeltl in the U.S. District Court for the Southern District of New York recently denied a motion to dismiss a securities class action arising, in part, from the Lehman Brothers bankruptcy filing.

On July 9, 2008, JA Solar Holdings Co., Ltd., a China-based manufacturer of high-performance solar cells, purchased a $100 million note issued by Lehman Brothers Treasury Co. B.V. (Lehman Treasury), a subsidiary of Lehman Brothers Holdings, Inc. (Lehman Brothers). According to the complaint, the note was supposed to have 100% principal protection and was guaranteed by Lehman Brothers.

Lehman Brothers filed for bankruptcy on September 15, 2008, prior to the note’s maturity date, and Lehman Treasury subsequently failed to pay the note when it came due on October 9, 2008. On November 12, 2008, JA Solar announced that it had recorded a $100 million impairment charge on the value of the note. That day, JA Solar’s stock price declined by 28%.

The second amended complaint alleged that JA Solar and three senior officers violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 by making materially misleading statements concerning JA Solar’s relationship with Lehman Brothers and the impact of Lehman Brothers’ bankruptcy filing on the value of the note.

First, plaintiffs alleged that in August 2008, JA Solar disclosed that it had retained Lehman Brothers and other banks to help manage its cash without disclosing the fact that JA Solar had purchased the note from Lehman Treasury. Second, plaintiffs alleged that in a September 2008 press release and conference call, JA Solar materially understated the risk that the Lehman Brothers bankruptcy filing would have on the value of the note by (a) emphasizing that JA Solar had purchased the note from Lehman Treasury, which was not “the subject of insolvency proceedings”, and (b) suggesting that the note was “principal protected” notwithstanding the bankruptcy filing.

The court found that plaintiffs adequately pleaded the elements of a Section 10(b) claim under Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). With regard to the August 2008 disclosure, the court found that once JA Solar decided to disclose its relationship with Lehman, it had a duty to be accurate and complete. With regard to the September 2008 statements, the court determined that, notwithstanding the fact that it purchased the note from Lehman Treasury, JA Solar knew that Lehman Brothers was the only guarantor of the note and that Lehman Brothers was in fact in bankruptcy. (Ellenburg v. JA Solar Holdings Co., Ltd., 2010 WL 1983375 (S.D.N.Y. May 17, 2010))