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A.O. Smith Corp.

Case Details

Class Period: July 26, 2016 - May 16, 2019
Date Filed: May 28, 2019
Case Number: 2:19-cv-00786
Jurisdiction: Wisconsin Eastern District Court

Case Summary

The Complaint brings forth claims for violations of the Securities 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/or 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 during 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.  By 2015 and throughout 2016, over 90% of the Company’s revenue growth was derived from China.

Specifically, the Complaint alleges that during the Class Period,  the Defendants: (1) 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; (2) in reality, UTP was essentially insolvent and 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;  (3) the scheme led to an immense overstocking of A.O. Smith products; (4) while Defendants told investors that customer demand was strong and driving the Company’s impressive reported sales in China, in truth, demand was declining through much of the Class Period; and (5) 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 when A.O. Smith’s customers became so overloaded with inventory that they canceled their contracts with the Company.  By April 30, 2019, the Company was forced to release disastrous financial results, as the China sales channel stuffing had proved to be unsustainable.  In response, the price of A.O. Smith common stock fell nearly 6% or $3.24 per share, erasing over $459 million in market capitalization on the highest trading volume of the year.  Then, on May 16, 2019, analyst firm J Capital Research USA LLC (“J Capital”) published a report alleging that A.O. Smith used several manipulative practices to show higher sales and earnings in its China operations, exposing the scheme to investors.  J Capital’s revelations sent the Company’s stock price plummeting and forced Defendants to respond.  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.  Defendants also did not deny a single fact stated in the J Capital report.  A.O. Smith’s stock prices continued to decline after the press release, eventually falling over 10% and erasing nearly $700 million in market capitalization.  On May 29, 2019, J Capital released a second report that provided further evidence detailing the scheme.  In response to the second J Capital report, A.O. Smith’s stock price declined further, falling by over 4%.  Finally, on June 3, 2019, Defendants filed a Form 8-K with the SEC admitting that A.O. Smith had for years been backstopping UTP’s loans to A.O. Smith’s customers.  The fallout from the fraud continues to this day, as A.O. Smith has recently announced significant layoffs and store closures in China due to the continued excess inventories.

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

On January 24, 2020, Defendants filed their Motion to Dismiss the Amended Complaint.  Lead Plaintiff will file their Opposition on March 25, 2020, and Defendants will file their Reply on April 24, 2020.