Ormat Technologies (NYSE:ORA) – Implications of the Class Action Lawsuit

Ormat (NYSE:ORA), the Reno-based geothermal power company, recently had a class action lawsuit filed against it. Lawyers began the process on behalf of shareholders after an SEC review found that management had improperly accounted for certain exploration and development costs. It’s going to be a big distraction for the company in the near term.

To examine the consequences of the lawsuit we turn to Byron W. King, Agora Financial’s editor of Outstanding Investments.

According to King’s most recent report:

“Right now, Ormat (NYSE:ORA) reminds me of something Mark Twain said. “When angry, count four; when very angry, swear.”

“In the world of geothermal power, Ormat managed to build one of the few pure-play medium-cap investment opportunities. Really, the U.S. government tax credits for geothermal are astounding — to the point of ridiculous, even. OK, truth be told, it offends my political sensibilities to see such bizarre tax policy. Then again… for as much as I don’t want government to micromanage the economy — let alone the energy economy — if there’s a great tax deal, then as an investor you need to take it.

“So Ormat is right in the sweet spot of a massive, government-subsidized energy development program for ‘clean’ electrical power. And Ormat is an example of an exploration play, a production play and a manufacturer and vendor of equipment and services. So far, so good.

“Ormat has truly frustrated me in the past month. See the Mark Twain comment, above. The stock tumbled from over $38 per share to the $28 range last week, before recovering a couple bucks to the $30 range. Ugh. What happened?

“Toward the end of February, Ormat restated its earnings from 2008. Needless to say, the numbers were worse than what was in the original statements. So all of a sudden, out came the class action lawyers to file innumerable lawsuits against Ormat, the directors, et al. for securities fraud claims. And if you were an investor in Ormat over the past two years, the attorneys want to hear from you so you can join the class action.

“Here’s a description of one proposed lawsuit, from the law firm’s press release:

The complaint alleges that defendants knew or recklessly disregarded that their public statements were false and misleading while they improperly continued capitalizing costs for individual projects, even after Ormat had decided to discontinue exploration and development of individual projects. Since those costs were not expensed in the period in which that determination was made, the financial statements during the relevant time period were overstated. The complaint also alleges that the Ormat’s financial statements failed to meet the requirements of the Generally Accepted Accounting Principles and that the company lacked adequate internal and financial controls.

“So now Ormat is getting sued big-time. Well, not as big as Toyota, maybe. But still, pretty big. If you were an Ormat shareholder, you may have ‘lost’ something because of the erroneous Ormat disclosures. How can anyone really know? Of course, the entire stock market was in a state of meltdown early last year, so it’s hard to put your finger on the exact time, place and manner of your misfortune.

“In the last couple of weeks, however, you just lost a lot more by virtue of the lawsuits. Hey, there’s nothing like a nice dose of litigation risk to carve value from the stock of a company, eh?

“What’s going to happen? I’m not prejudging anything about Ormat, or what happened or what the directors did or did not do. It’ll all come out in discovery, I suppose. Really, my big concern with Ormat over the past couple of years has been the lack of a strong succession plan for a management team that’s getting up in years.

“Ormat has a dominant position within the geothermal industry, as well as a lock on patents for an array of critical technology. It’ll be very hard for anyone to duplicate that. The big hit to the stock has already occurred. Really, it’ll be a challenge for anyone else to do what Ormat does in the geothermal field. So over time, the company ought to recover lost ground.

“Looking ahead, it might not turn out so bad. At least, that’s my informed speculation. Insurance will likely cover a lot of the attorney fees for Ormat. Still, the lawsuits will take away management time and focus. And these securities fraud lawsuits tend to resolve when the companies settle out with the plaintiff attorneys. Heck, there’s litigation risk for plaintiffs to go to court. They actually have to present a case. So a settlement is often the prudent thing to do.

“In the end, Ormat (or its insurers) will pay a settlement, most of which will go for costs and plaintiffs’ attorney fees. The shareholders will get a pittance per share. Meanwhile, Ormat will agree that whatever happened, the company didn’t do anything too bad. And it won’t do it again.”

From King’s perspective, it seems like shareholders may be doing themselves a disservice by going through with the lawsuit. You can learn more about what’s going on with Ormat and King’s other company-specific research by visiting the Agora Financial reports page here. Also, he’ll be available in to discuss these matters in person at the Agora Financial Investment Symposium taking place in Vancouver during July.


Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]