Shares Of A123 Systems Fall On Shareholder Suit

The lawsuit alleges that A123 withheld information about defective batteries, which could cost $55M to replace, from shareholders.

Shares of A123 Systems Inc. plunged to an all-time low on Tuesday after a class-action lawsuit added to the battery maker's woes. The suit stems from A123's March 26 announcement that it must spend about $55 million to replace battery modules and packs that might be defective.

THE SPARK: The law firm Pomerantz Haudek Grossman & Gross LLP filed the federal class-action lawsuit Monday on behalf of shareholders who bought the company's stock between Feb. 28, 2011 and March 23.

Pomerantz alleges that A123 withheld information about the defective products from shareholders. After the lawsuit was filed, other law firms sent out press releases soliciting plaintiffs to join the legal action.

A123 said in a statement Tuesday that it would not comment on pending litigation as a matter of policy.

THE BIG PICTURE: Many investors were already worried that A123 might not have enough money to cover the cost of replacing the batteries. Five customers — including Fisker Automotive, the company's biggest client — received parts that could have had defective cells.

The $55 million represents as much as one quarter of this year's projected revenue, which A123 has estimated between $230 million and $300 million. A shareholder lawsuit could add still more potential costs because of litigation expenses.

The company had said that it had "sufficient liquidity" to pay for the battery replacements, and has plans to raise money to cover the expense of replacing the batteries, although it has not specified how. A123 will update shareholders on how it expects to change its fund-raising strategy during the company's next quarterly earnings call, said spokesman Andy Chu. The company hasn't announced a date for the call.

A123, which went public in September 2009, has yet to turn a profit.

Chu also said that A123 is on schedule with its battery replacement program, has fixed the manufacturing problem that caused the defects, and has hired new managers to improve its operations.

THE ANALYSIS: "You sort of look at this and think: 'Maybe I don't want to be involved in this stock because there's nothing positive to it,'" said Wunderlich Securities analyst Theodore O'Neill. "People are just looking to get out before (the stock) goes to zero," he said.

O'Neill said investors are worried that any new fundraising action would likely hurt current shareholders. That's because A123 will likely have to sell a big ownership stake in the company to draw a significant investment, O'Neill said. That action could dilute the value of shares of current shareholders.

"We have demonstrated our ability to strengthen our liquidity through strategic partnerships, so we believe we will be successful in fulfilling any necessary funding required to continue the growth of the company," A123's Chu said.

O'Neill estimated that A123 would have to raise roughly $200 million to cover costs of the battery replacement initiative and to cover its losses for the rest of the year.

SHARES: Shares plunged 15 cents, or 15 percent, to 87 cents per share. They bottomed earlier at 85 cents, the lowest level since the company went public. The stock is down 55 percent this year, and has lost more than 90 percent of its value since its initial public stock offering, which priced it at $13.50.

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