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A.O. Smith Corp.

Case Details

Class Period: February 17, 2017 - May 28, 2019
Date Filed: May 28, 2019
Case Number: 2:19-cv-01198-LA
Jurisdiction: Eastern District of Wisconsin

Case Summary

The Complaint brings forth claims for violations of the Securities Exchange Act of 1934 against A.O. Smith Corporation (“A.O. Smith” or the “Company”), and certain of its senior executives. The Complaint alleges that Defendants made false and misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects on behalf of all persons or entities that purchased or otherwise acquired A.O. Smith common stock between February 17, 2017 and May 28, 2019 (the “Class Period”).

A.O. Smith manufactures and sells water heaters, tanks, boilers, and water treatment products. In recent years, the Company has increasingly turned to China to generate growth. The Complaint alleges that during the Class Period, Defendants failed to disclose that A.O. Smith used a distribution partner, Jiangsu UTP Supply Chain (“UTP”), to artificially inflate the Company’s sales and gross margins in the important Chinese market. Defendants used UTP to perpetrate a classic sales channel stuffing scheme by forcing unwanted inventory on A.O. Smith’s customers so that the Company could report inflated sales. Furthermore, A.O. Smith failed to disclose the existence of secret inventory repurchase agreements under UTP’s asset-backed financing arrangements that backstopped hundreds of millions of dollars of Chinese loans in violation of Generally Accepted Accounting Practices (“GAAP”).

The scheme began to unravel in early 2019. By April 30, 2019, the Company was forced to release disastrous financial results, as the China sales channel stuffing had proved to be unsustainable. Then, on May 16, 2019, analyst firm J Capital Research USA LLC (“J Capital”) published a report exposing the channel-stuffing scheme. J Capital’s revelations sent the Company’s stock price plummeting. The next day, Defendants issued a press release that, for the first time, admitted that UTP was a material customer for the Company’s China operations. On May 29, 2019, J Capital released a second report that provided further evidence detailing the scheme. In total, disclosures related to UTP and A. O. Smith’s channel stuffing scheme have wiped out over $1.4 billion in shareholder value, as A. O. Smith’s stock price plummeted from its Class Period high of $68.39 per share, to a low of $41.19 per share, representing a decline of 40%.

On September 16, 2019, the Court appointed the City of Birmingham Retirement and Relief System as Lead Plaintiff and Saxena White P.A. as Lead Counsel. Lead Plaintiff filed an Amended Complaint on November 22, 2019.

On June 24, 2020, the Court granted Defendants’ Motion to Dismiss.  The Court issued a deadline of July 31, 2020 for Lead Plaintiff to file a Motion for Leave to Amend the Consolidated Complaint.