1 amended complaint 01/21/2014

Case 1:13-cv-00797-SS Document 26 Filed 01/21/14 of 47

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF TEXAS

DON LEE, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, Civil Action No.: 13-cv-797-SS

Plaintiff, AMENDED COMPLAINT

vs. JURY TRIAL DEMANDED

ACTIVE POWER, INC., STEVEN R. FIFE, DOUG MILNER, and HUAN WANG,

Defendants .


Table of Contents I. NATURE OF THE ACTION ........................................................................................... 1

a. Huan Wang and Active Power’s liability: ..........................................................................2

b. Fife and Milner’s liability. .................................................................................................. 3

II. JURISDICTION AND VENUE ....................................................................................... 5

III. PARTIES AND IMPORTANT NON-PARTIES ........................................................... 5

a. Plaintiffs. ............................................................................................................................. 5

b. Defendants. ......................................................................................................................... 6

c. Important non-parties. ...................................................................................................... 6

IV. DEFENDANTS’ MISCONDUCT ................................................................................... 7

a. Background. ....................................................................................................................... 7

b. Huan Wang’s becomes Active Power’s China Country Manager, and speaks to mediafor the firm. ............................................................................................................. 7

c. Active Power sets high goals for its Beijing office, which the office can’t meet. ........ 11

d. Applicable accounting rules. ........................................................................................... 13

e. Active Power’s relationship with its distributors and revenue recognition policies. 16

f. Qiyuan is a small, recently-established company; Digital China is a large company owned by a China Fortune 100 Company. .................................................................... 16

g. Defendants’ actionable statements. ................................................................................ 18

h. Active Power reveals that its agreement had been with Qiyuan, and that Qiyuan had no relationship with Digital China Information. .......................................................... 27

i. Wang and Active Power’s statements were made with scienter. ................................ 30

j. Fife and Milner made false statements recklessly. ....................................................... 30


k. Respondeat superior. ....................................................................................................... 32

V. CLASS ACTION ALLEGATIONS .............................................................................. 33

VI. APPLICATION OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET......................................................................................................................... 35

VII. COUNT I Against All Defendants For Violations of §10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder .................................................................... 37

VIII. COUNT II Violations of §20(a) of the Exchange Act Against the Individual Defendants....................................................................................................................... 40

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Court-appointed Lead Plaintiff Bahadir Onalan and Named Plaintiff Colin Vestrand

(“Plaintiffs”), individually and on behalf of all other persons similarly situated, by their undersigned

attorneys, for their complaint against defendants Active Power, Inc., Steven R. Fife, Doug Milner,

and Huan Wang (the “Defendants”), allege the following based upon personal knowledge as to

themselves and their own acts, and upon information and belief as to all other matters.

I. NATURE OF THE ACTION 1. This is a securities class action on behalf of a class consisting of all persons other

than defendants who purchased the common stock of Active Power, Inc. between February 19, 2013

and September 5, 2013, both dates inclusive, (the “Class Period”), seeking to pursue remedies under

the Securities Exchange Act of 1934 (the “Exchange Act”).

2. Active Power develops, builds, and sells Uninterruptible Power Supply (“UPS”)

products. Active Power sells both off-the-rack and customized products.

Active Power has been selling its products in China since at least 2005, and in 2010

established a regional sales office in Beijing. The Beijing office was the Active Power regional sales

office responsible for all Southeast Asia.

4. Active Power’s regional sales offices – of which it only had four – were integral to its

international sales. They control Active Power’s operations within their regions from product testing

to marketing to integration in local clients’ systems to customer support. Hence, they are a major

investment for Active Power.

To manage the Beijing office and oversee its China operations, Active Power hired

Huan Wang, an industry veteran. Active Power announced Wang’s hiring in a press release. It then

let him speak on Active Power’s in an interview with a leading Chinese media (alongside its Chief

Financial Officer) about the new office. Later, Active Power quoted him in press releases that


concerned its operations in China.

6. Huan Wang was Active Power’s China Country Manager, and oversaw its sales,

marketing, technical, and service teams in China.

7. The Beijing office proved to be a disappointment, however, with Active Power’s

sales increasing in 2011, but losing about a third of the gain in 2012. And because of lower prices in

China and increased shipping costs, Active Power’s profit margins in China also turned out to be

lower than in other regions.

a. Huan Wang and Active Power’s liability: 8. On February 19, 2013, however, Active Power reported that it was close to inking a

deal with a China partner, which promised to restore its fading fortunes there. And on April 30,

2013, Active Power announced in two separate press releases that the partner was Digital China

Information Technology Systems, Inc. (“Digital China Information”), one of China’s leading IT

solutions providers, and a subsidiary of a $9.1 billion Chinese public company listed in Fortune’s

China 100. One of the press releases, issued by Active Power but purporting to be from both

companies, included a quote from a purported Digital China Information Vice President, touting the

partnership. Active Power also issued a 10-Q that reflected purported sales to Digital China

Information. And on a conference call held that day, Active Power also repeatedly touted its

partnership with Digital China Information, and added that the two companies were already

collaborating on specific key initiatives, and expected to deploy the products created in 2013. Doug

Milner, Active Power’s CEO, also boasted that with Digital China distributing its products, Active

Power could compensate somewhat for higher shipping costs and lower prices by having much

lower distribution costs.

9. But Active Power never had an agreement with Digital China Information. Rather, its

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contract was with Qiyuan Network System Limited (“Qiyuan”), a tiny Hong Kong firm. As it

announced in September 2013, a China-based employee had intentionally lied to it, claiming that

Qiyuan was a subsidiary of Digital China Information, though the two companies had no affiliation.

Upon discovering the lie, Active Power immediately terminated the employee.

10. Huan Wang, Active Power’s China Country Manager, was abruptly terminated in

September 2013. He remained unemployed in December 2013.

11. Ni Jun, Huan Wang’s spouse, was a Qiyuan director, and held 20% of its shares.

Three other individuals, and one investment fund, each held 20%, and a directorship.

12. Huan Wang, Active Power’s China Country Manager, would have reviewed the

contract with Qiyuan, would certainly have heard the claim that Qiyuan was a subsidiary of Digital

China, and would have wondered why Active Power made the claim, as his spouse held 20% of

Qiyuan’s shares.

13. Thus, Huan Wang was the employee who, according to Active Power, “intentionally

misled” it by claiming Qiyuan was a subsidiary of Digital China Information.

14. According to Active Power, Huan Wang is responsible for providing the false

information to Active Power that Active Power repeated in its press releases, financial statements,

and conference calls.

15. Both because of his role in providing false information to Active Power and because

of his high level at the company, Huan Wang’s scienter is imputed to Active Power.

b. Fife and Milner’s liability. 16. During the Class Period, Active Power through defendants Fife and Milner

represented that it and Digital China:

. Held joint sales calls;

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. Held formal training sessions;

~ Engaged in several large projects together

~ Quoted a purported Digital China executive;

~ Had cooperated in reselling Active Power’s products in Taiwan and Thailand using

Digital China’s extensive reseller network;

17. And Active Power represented it had:

. Hired an Asia region manager who was working through the details of the

partnership with Digital China; and

. Sold $4.186 million of product to Digital China.

18. Active Power booked revenues for sales with Qiyuan amounting to $4.186 million in

the first quarter of 2013; by June 30, 2013, Active Power had not been paid a single Renminbi by

Qiyuan, and had made no further sales to Qiyuan.

19. At all times, Defendants Fife and Milner actually knew that Active Power’s contract

was with Qiyuan. All Huan Wang told them was that Qiyuan was a subsidiary of Digital China

Information.

20. Indeed, they even recklessly embellished on Huan Wang’s story, telling Active

Power’s investors that, instead of a partnership with its subsidiary, Active Power had a partnership

with Digital China Information itself.

21. When it announced its results for the second quarter of 2013, Active Power reported

disappointing revenues, blaming sales in China; Active Power had poor sales in China because it had

made no sales to Qiyuan. Active Power’s share price fell from a close of $3.95 on July 29 to $3.70

on July 31, 2013, on heavy volume, damaging investors.

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22. Then, on September 6, 2013, Active Power announced that it had had no relationship

with Digital China Information. Its stock price fell from $3.50 on September 5 to $3.02 on

September 6, on heavy volume, damaging investors.

II. JURISDICTION AND VENUE 23. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange Act

(15 U.S.C. §§78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17 C.F.R. §

240.10b-5).

24. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§1331 and Section 27 of the Exchange Act (15 U.S.C. §78aa).

25. Venue is proper in this Judicial District pursuant to 28 U.S.C. §1391(b) and Section

27 of the Exchange Act (15 U.S.C. §78aa(c)). The Company’s headquarters are located in this

district.

26. In connection with the acts, transactions, and conduct alleged herein, Defendants

directly and indirectly used the means and instrumentalities of interstate commerce, including the

United States mail, interstate telephone communications, and the facilities of a national securities

exchange.

III. PARTIES AND IMPORTANT NON-PARTIES

a. Plaintiffs .

27. Plaintiff Bahadir Onalan, as set forth in his Certification, which was previously filed

on the Court’s docket, purchased Active Power common stock during the Class Period at artificially

inflated prices during the Class Period and has been damaged thereby.

28. Plaintiff Colin Vestrand, as set forth in his Certification, which is attached as Exhibit

1 to this Complaint and incorporated by reference, purchased Active Power common stock during

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the Class Period at artificially inflated prices during the Class Period and has been damaged thereby.

b. Defendants. 29. Defendant Active Power, together with its subsidiaries, designs, manufactures, and

services uninterruptible power supply (“UPS”) and modular infrastructure solution (“MIS”) products

that provide electrical power continuity and integrated infrastructure platforms for data centers and

other applications that require continuous power. One of the MIS products Active Power sells, called

PowerHouse, is a containerized purpose-built enclosure whose size and features depending on the

customer’s power load requirements.

30. Defendant Doug Milner (“Milner”) was Active Power’s CEO between March 1,

2012, and July 29, 2013, when he resigned all positions with Active Power.

31. Defendant Steven R. Fife (“Fife”) was Active Powers’s CFO beginning October 9,

2012, until the end of the Class Period. He has since left Active Power.

32. Defendant Huan Wang (“Wang”) headed Active Power’s China operations – and ran

its Beijing regional office – between August 2010 and September 2013, when he was abruptly

terminated. Huan Wang resided in Beijing at all relevant times.

33. Collectively, Wang, Fife, and Milner are the “Individual Defendants”.

c. Important non-parties.

34. Digital China Information is an operating subsidiary of Digital China Holdings, Inc.

Active Power never had a partnership with Digital China Information or its subsidiaries.

35. Qiyuan Network System Limited is a small Hong Kong company. It has five

shareholders, all of whom are directors, including Wang’s wife Ni Jun. Four of Qiyuan’s five

shareholders, including Ni Jun, reside in Beijing, where Wang also resides.

36. Martin Olsen was Active Power’s Vice President of Global Sales and Marketing from

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December 2010 to November 5, 2013. Olsen was responsible for Active Power’s global sales

activity; in particular, Olsen was responsible for sales through IT partners. Olsen was the third

highest paid employee of Active Power.

IV. DEFENDANTS’ MISCONDUCT

a. Background. 37. Active Power sells its products both in the U.S. and internationally.

38. Active Power has had significant operations in China since at least September 2005.

And in March, 2007 Active Power expanded its China operations by opening a regional office in

Japan to “anchor the company’s operations for the Asia Pacific markets focusing on Japan, Korea,

China, Taiwan, and Southeast Asia.” 1

39. Active Power focuses its sales on nine global markets, one of which is Asia. To

support its customer acquisition and marketing, Active Power has established regional offices. The

regional offices make local sales and service local customers, provide product testing, test products

under local conditions, and help integrate Active Power’s products into the client’s systems. Thus,

the regional offices play a central role in Active Power’s international sales.

40. According to Active Power, prior to August 2010, when it opened its Beijing, China

office, Active Power had three regional sales offices, one of which was in Japan.

b. Huan Wang’s becomes Active Power’s China Country Manager, 2 and speaks

to media for the firm.

41. The Active Power press release announcing the Beijing office’s creation also told

1 Press Release issued March 7, 2007. 2 In communications addressed to Chinese media and public, Active Power referred to Wang as its Greater China Head; Greater China includes Mainland China, Hong Kong, Macau, and Taiwan.

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investors that Defendant Huan Wang would head the office as its sales director:

Active Power (Nasdaq: ACPW) has created a formal legal entity in China and opened an office in Beijing. Huan Wang, a seasoned technology veteran, will serve as Active Power’s sales director in China.

The Asia market for UPS (uninterruptible power supplies) systems was worth approximately $2 billion in 2009 with China alone generating over $500 million, according to IMS Research. The China UPS market is projected to grow at a 12 percent compound annual growth rate between 2009-2014, second only to India. [footnote omitted].]

This increase is due to the fact many China based companies and government organizations will continue to build out local information technology infrastructure as the country’s technology market grows stronger. This rapid expansion will place an even greater demand on China’s power grid. As a result, this will create power quality problems due to the strain on the country’s grid infrastructure which will in turn increase the need for highly efficient and reliable UPS technology. [footnote omitted].

“It makes excellent business sense to establish an office in China to support our strategy of expanding distribution and building brand worldwide,” said Dietmar Papenfort, vice president, Sales for Europe, Middle East and Africa and Asia Pacific at Active Power. “This decision follows encouraging sales of our UPS and containerized solutions in China; the China Ministry of Information Industry product certification we received in 2008; and also complements our existing sales and service organization in other parts of Asia.”

Active Power continues to generate market traction in China, particularly with utility subsidiaries part of the China National Power Grid. 12 containerized power systems have been deployed in China since 2008, with two systems most recently delivered to Shanghai Municipal Electric Power Company for their mobile continuous power solutions fleet. In June 2008, Active Power announced an order for eight PowerHouse systems from another utility subsidiary. These systems are currently being used for mobile backup power in emergency situations.

[Emphasis added].

42. Wang was also quoted in an August 13, 2010 article issued by China Business News,

a leading Chinese newspaper, alongside Active Power’s then-CFO:

Cashing in on the 0.1 percent failure rate in China’s power supply reliability may not seem to be a huge business, but Active Power, a backup power supplier, is eyeing the

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niche market in China and believes it is likely to grow with the country’s increasing demand for a stable electricity supply.

China State Grid, the country’s largest power distributor has vowed to keep electricity reliability at 99.9 percent, meaning there is still a 0.1 percent possibility of failure.

Even with the minor chance of failure in the country’s power system, Active Power is eyeing huge potential.

The power supplier recently launched its Beijing office providing uninterruptible power systems (UPS) to entities with mission-critical operations, including data centers, airlines, broadcasters, healthcare facilities, financial institutions and industry.

The firm said it so far has deployed 12 of its containerized power systems in China and is in partnership with 20 clients.

“China’s burgeoning online and data sectors have higher standards for supply stability,” said Wang Huan, Active Power’s China head, adding that a blackout may mean losses in the millions for an online business.

Wang said the company’s major clients will be search engine operators, e-commerce websites and data centers.

The transaction value of China’s e-commerce industry in the first half of 2010 was 2.25 trillion yuan ($332.6 billion).

“The China market will account for 20 percent to 25 percent of our global business within five years,” said John Penver, the company’s chief financial officer.

Emerson, which also makes uninterruptible power systems, is set to make “major investments” in China, according to Chief Executive Officer David Farr.

The Asia market in UPS systems was worth approximately $2 billion in 2009, with China alone generating over $500 million, according to IMS Research.

The UPS market in China is projected to grow at 12 percent compound annual growth between 2009-2014, second only to India.

This increase is due to many China-based companies continuing to expand their local information technology infrastructure, such as data centers, as the country’s technology market gets stronger.

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In the meantime, this rapid expansion will place even greater demand on China’s power grid. As a result, this will create power quality problems due to the strain on the country’s grid infrastructure that will in turn increase the need for highly efficient and reliable UPS technology.

[Emphasis added]. 43. Wang was also quoted by Active Power in a press release it issued on March 21,

2013, alongside Martin Olsen, Active Power’s Global Sales Head:

(NASDAQ: ACPW), manufacturer of uninterruptible power supply (UPS) systems and modular infrastructure solutions, has deployed a CleanSource® 1000 kVA UPS system to 21Vianet (NASDAQ: VNET), one of the largest data center services provider in China. The system was installed in late February 2013 at the provider’s colocation data center in Beijing, the largest such facility in the city. The facility hosts mission critical data for a variety of customers, including Internet firms, government entities, blue-chip enterprises, and small to medium sized businesses. “This deployment is representative of how China’s leading innovators in data center design seek solutions that deliver on the most challenging demands of their IT environment,” said Huan Wang, sales director, Active Power China. “These organizations want solutions that are energy and space efficient, but that also deliver superior reliability.” “CleanSource UPS offers low and predictable maintenance and eliminates battery replacements which improves system availability as compared to a legacy UPS,” continued Wang. “All of this translates into a product that delivers on a combination of power density, reliability, and total cost of ownership unmatched in the industry today.” For Active Power, this deployment follows a number of UPS projects for some of the largest, state-of-the-art data centers in China. In the third quarter of 2012, the company deployed a CleanSource 1000 kVA UPS system at one of the largest modular colocation facilities in China, a new facility located on the country’s east coast. Prior to that, Active Power installed a similar system to a large cloud based data center in the Shanxi province in western China. The China data center market shows no signs of slowing down with an estimated 20 percent compounded annual growth rate over the next five years. Nearly $6 billion has been invested in the market over the last 12 months and is forecasted to grow to $7.5 billion from 2012-2013. Beijing in particular continues to experience growth in its data center business as end user white space grew 45 percent from 2011 to 2012.1 “The growth of the data center market in China coupled with the increasing demand for our product in the region makes this market a significant opportunity for Active Power,” said Martin Olsen, vice president, Global Sales, at Active Power. “As we have indicated before, we will continue to make smart investments in China that enables our on-the-ground personnel and key distributors to better capture this

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growth opportunity.”

[Emphasis added].

44. Wang was Active Power’s China Country Manager. He established Active Power’s

China operations, managed its entire sales, marketing, technical and service teams, and oversaw

Active Power’s business in other Asian countries.

45. Active Power relied on Huan Wang as the source for information about its operations

in China that it disclosed to its shareholders. Indeed, Active Power stated that it had communicated

false information to its shareholders about a partnership with Digital China Information because

Huan Wang falsely told it Qiyuan was a subsidiary of Digital China Information.

c. Active Power sets high goals for its Beijing office, which the office can’t meet.

46. For years, Active Power has been touting the importance of growth in the China

market for its products:

China represents the second largest UPS market in the world and has the potential to become a substantial market for our products. Over time we anticipate increasing sales of our UPS systems as well as our CPS solutions in China. We have historically experienced a lag between adding sales and service capabilities and generating meaningful revenue from a new territory. As a result, we would expect that the investments that we have made during the last few years in Europe and Asia will generate higher revenues from these regions in 2012. We continue to invest in sales, service and marketing capabilities in each of these regions as well as building brand awareness for our company and products globally. We expect that a significant portion of our total revenue will continue to be derived from international sales. 3

47. And:

And as I mentioned earlier, we received the first purchase order for our new UPS platform in China. We view China as a strategic part of our growth going forward and we will continue to invest in our on the ground personnel and key distribution

3 Active Power, 2011 10-K, filed on 2012-03-01,at 34 (available at <http://www.sec.gov/Archives/edgar/data/1044435/000114036112012224/form10k.htm >.)

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partnerships in that region.4

48. Indeed, Active Power’s annual report to its shareholders for 2012 stated in its

introduction that Active Power “will target and invest in geographies where a growing demand

exists for [its] products and in particular China.” 5

49. When it opened, Active Power specifically touted the Beijing office’s prospects,

inviting investors to believe the office would lead to higher sales in 2011 or soon thereafter:

In August we opened our first sales office in China as part of our effort to add sales and service capabilities to this market. China represents the second largest UPS market in the world and has the potential to become a substantial market for our products. There is usually a gap between adding sales and service capability and generating meaningful revenue from a new territory. As a result, we would expect that the investments that we have made during 2009 and 2010 in Europe and Asia will generate higher revenues from these regions in 2011. We continue to invest in sales, service and marketing capabilities in each of these regions as well as building brand awareness for our company and products globally. 6 50. The Asia effort led by the Beijing office initially met with some success, as Asia

revenues grew by $3.4 million, to $7.9 million, or 76%.

51. But its success retrenched, and revenues in Asia fell 20% in 2012 to $6.2 million.

Revenues in Asia were falling again in 2013. In Q1 2013, Active Power announced that it had made

sales to Asia of $3.96 million. But the vast majority7 of Active Power’s sales were to Qiyuan, which

4 Doug Milner, Prepared Remarks to Active Power’s Q4 2012 Results, transcript available at <http://seekingalpha.com/article/1204821-active-powers-ceo-discusses-q4-2012-results-earnings-call-transcript>. 5 Active Power, 2012 Annual Report, third page (unpaginated) (available at <http://www.sec.gov/Archives/edgar/vprr/13/9999999997-13-009157 >). 6 Active Power, 2010 10-K, filed on 2011-03-02, at 34 (available at <http://www.sec.gov/Archives/edgar/data/1044435/000114036111013125/form10k.htm >.) 7 Indeed, somewhat more than all of them. Active Power initially announced that its Q1 2013 sales to all of Asia amounted to $3.96 million. Active Power, Press Release issued April 30, 2013, available at <http://www.sec.gov/Archives/edgar/data/1044435/000114036113017919/ex99_1.htm >. Yet

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had the ability neither to pay for the goods nor to resell them. Thus, Active Power’s Q1 2013 sales to

China were continuing to dwindle rapidly. 8

d. Applicable accounting rules.

52. During the Class Period, Defendants represented that Active Power’s financial

statements were prepared in conformity with Generally Accepted Accounting Principles (“GAAP”),

which are recognized by the accounting profession and the SEC as the uniform rules, conventions

and procedures necessary to define accepted accounting practice at a particular time.

53. Financial Accounting Standards Board (“FASB”) Statements of Concepts (“Concepts

Statement”) No. 1 provides that a fundamental objective of financial reporting is providing accurate

and reliable information concerning an entity’s financial performance during the period being

presented. Concepts Statement No. 1, paragraph 42, states:

Financial reporting should provide information about an enterprise’s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors’ and creditors’ expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance.

54. SEC Rule 4-01(a) of SEC Regulation S-X provides that: “Financial statements filed

with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be

misleading or inaccurate.” 17 C.F.R. § 210.4-01(a)(1). Management is responsible for preparing

when it restated its Q1 2013 financial statements, Active Power announced that it was reversing $4.186 million in sales to Qiyuan in Q1 2013. Active Power, 8-K, filed on 2013-11-07available at <http://www.sec.gov/Archives/edgar/data/1044435/000114036113041130/form8k.htm >. Thus, Active Power appears to have booked more sales to Qiyuan than it booked to all of Asia, suggesting that Defendants’ fraud had other aspects. 8 As of September 30, 2013, Active Power had recorded $3.193 million of revenue in Asia. Active Power, available at

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financial statements that conform to GAAP. As stated in the professional standards adopted by the

American Institute of CPAs:

[F]inancial statements are management’s responsibility . . . . [M]anagement is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with management’s assertions embodied in the financial statements. The entity’s transactions and the related assets, liabilities and equity are within the direct knowledge and control of management . . . . Thus, the fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management’s responsibility.

55. GAAP permits the recognition of revenue only if the following criteria are met: (i)

persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the vendor’s fee is

fixed or determinable; and (iv) collectability is probable. SEC Staff Accounting Bulletin (“SAB”)

No. 104. Moreover, in order for revenue to be recognized, it must be earned and realized or

realizable. Concepts Statement No. 5, Recognition and Measurement in Financial Statements of

Business Enterprises, ¶ 83, ASC § 605-10-25-1(a) 9 Revenues are earned when the reporting entity

has substantially accomplished what it must do to be entitled to the benefits represented by the

revenues. Id. Revenues are realizable when related assets received or held are readily convertible to

known amounts of cash or claims to cash. Id. If collectability is not reasonably assured, revenues

should be recognized on the basis of cash received . Concepts Statement No. 5, ¶ 84g; see also

Accounting Research Bulletin No. 43 (“ARB 43”), Ch. 1A, ¶ 1 (June 1943); ASC § 605-10-25-1;

<http://www.sec.gov/Archives/edgar/data/1044435/000114036113043340/ex99_1.htm >. 9 With the issuance of FASB Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles , the FASB approved the Codification (“ASC”) as the source of authoritative US GAAP for non-governmental entities for interim and annual periods ending after September 15, 2009. The FASB Accounting Standards Codification , hereinafter cited as “ASC __.”

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Accounting Principles Board Opinion No. 10 (“APB 10”) Omnibus Opinion-1966 ¶ 12 (Dec. 1966).

If payment is subject to a significant contingency, revenue recognition is improper. Statement of

Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies (Mar. 1975); ASC §

450-30-25-1. Active Power states that its policy is to only recognize revenues from sales to

distributors when, among other things, collectability from the distributor is reasonably assured. 10

56. When a sale is made, and only when a sale is made, the revenues generated are either

paid for in cash or credit is extended. Until the full sale price is paid, a company records the amount

owed as accounts receivable. Revenue may only be recognized if collectability is reasonably

assured, and accounts receivables may only be created if revenue is recognized; thus, accounts

receivable may only be created if collectability is reasonably assured. Indeed, Accounting Research

Bulletin (“ARB”) No. 43, Chapter 3, Section 9 provides that companies should provide reserves

against receivables to assure that “[a]ccounts receivable net of allowances for uncollectible accounts

. . . are effectively stated as the amount of cash estimated as realizable.”

57. According to GAAP, a retroactive restatement of financial statements is reserved for

material accounting errors “resulting from mathematical mistakes, mistakes in the application of

GAAP, or oversight or misuse of facts that existed at the time the financial statements were

prepared.” SFAS No. 154, Accounting Changes and Error Corrections, ¶ 2h (May 2005); ASC §

250.

58. Since GAAP allows only restatements to correct “material” errors resulting from

“mistakes in the application of GAAP [...] that existed at the time,” by restating Active Power’s

financial statements, Defendants have admitted that they contained false statements.

10 Active Power 2012 10-K, filed on 2013-03-04 at 38 (available at

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e. Active Power’s relationship with its distributors and revenue recognition

policies.

59. Particularly outside the U.S., Active Power derives much of its revenue from sales

through distributors. Active Power sells the distributor Active Power products, and the distributor

then resells them, often integrating Active Power’s products into larger systems.

60. When Active Power sells products to a distributor, title and risk of loss pass to the

distributor; the distributor does not have the right to return Active Power’s products.

61. Active Power has yet to have a profitable year, and finances its operations in part by a

$15.625 million loan facility from Silicon Valley Bank. The amount available under the loan facility

depends on the amount of Active Power’s accounts receivable – the higher Active Power’s accounts

receivable, the more cash it has available to it in the loan facility. But only $1.5 million in accounts

receivable aged 91 days or more may be counted, and loans based on these receivables carry a

higher interest rate.

62. Indeed, it is a business commonplace that as accounts receivable age, they become

less likely to be paid.

f. Qiyuan is a small, recently-established company; Digital China is a large

company owned by a China Fortune 100 Company.

63. Qiyuan’s public records show that Qiyuan is a small Hong Kong company, with

registered capital of about $1.2 thousand, or the minimum for a Hong Kong company, and that it was

established in November 2012.

64. These same public records show that Qiyuan has five shareholders, each of whom

<http://www.sec.gov/Archives/edgar/data/1044435/000114036113010418/form10k.htm >.)

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owns 20% of the company, and all of whom are also directors.

65. These public records show that one of the shareholders is Ni Jun

66. PRC law requires household registration through records called “hukou”. Each hukou

includes only immediate family – siblings, spouses, parents, and grandparents, but not more distant

kinship. Huan Wang and Ni Jun’s public records show that they share a hukou, and are thus

immediate relatives.

67. Like Wang, Ni Jun resides in Beijing. She was born in 1974, and Wang in 1971. She

cannot be Wang’s sister, since she does not share his name – in China, a wife does not adopt her

husband’s family name. She cannot be his daughter or granddaughter. Thus, she is his spouse.

68. Qiyuan’s public records show that four of Qiyuan’s five shareholders are based in

Beijing. Its registered address – a single shared office – is at Unit A10, 9/F Silvercorp International

Tower, 707-713 Nathan Road, Kowloon, Hong Kong. When Plaintiffs visited Qiyuan’s Hong Kong

headquarters in December 2013, no Qiyuan employees were present, and the office was instead

occupied by another company, operating a mail drop. Qiyuan’s headquarters consisted of a young

woman at a desk in a tiny one-room office whose job consisted of receiving mail addressed to

dozens of companies, including Qiyuan, that had its mail delivered to that one small room.

69. Active Power entered into a partnership agreement with Qiyuan in or around the first

quarter of 2013.

70. Active Power reported that it sold $4.186 million of products to Qiyuan in Q1 2013.

However, because Qiyuan is a small company with whom Active Power had not previously done

business, collectability of this $4.186 million was not reasonably assured. See ¶52-62, above.

Indeed, Active Power later restated its financial statements to acknowledge that its revenues from

17


sales to Qiyuan were not reasonably certain to be collected.

71. Active Power’s financial statements claimed that it held $4.186 million in accounts

receivable as of March 31 and June 30, 2013. Accounts receivables are an asset permitted to be

reported on the balance sheet only if they are a legally collectible claim whose collections is

reasonably assured. Because accounts receivable can only be created if collectability is reasonably

assured, Active Power was not permitted under U.S. generally accepted accounting principles to

book amounts due from Qiyuan as accounts receivable, as it recognized when it restated its accounts

receivables balance for Q1 and Q2, 2013.

72. Digital China Information is a large subsidiary of Digital China Holdings, Inc., a $9.1

billion Fortune China 100 company.

73. Active Power claimed it had entered into a partnership agreement with Digital China

Information, whereby Digital China Information would sell two of Active Power’s high-end UPS

products, as well as its PowerHouse products, which are customized and built out of shipping

containers.

74. Active Power never entered into a partnership agreement with Digital China

Information, or its subsidiaries.

g. Defendants’ actionable statements.

75. The Class Period begins on February 19, 2013, when Active Power held its earnings

conference call for the quarter ended December 31, 2012. There, Defendant Milner noted that Active

Power had been working towards an agreement with a large distributor in China, and that this

distributor would be adequate to distribute Active Power’s products in China and Asia.

Doug, maybe talk to the go-to market strategy. Obviously, moving beyond, US and traditional Europe and particularly China, are going to be selling and using a direct

18


presence or using a channel partners. Can you talk about that and maybe some other non-traditional geographies that you are targeting beyond China? Doug Milner - President & CEO Sure our intent and we have been working for some time now really setting up an intelligent distribution system in China. We will use a distribution partner, we intend to use a distribution partner that will be our primary fulfillment channel for not just China but I would say Asia generally. And then that partner will work with our direct technical sales support people to develop opportunities and close them and they have been doing that for the past several months that in part is one of the reasons we have been successful finding or landing our first order for our new CSHD system in China. So it will be a distribution of fulfillment partner in China that we are having a network of resellers as resellers will be supported by our technical people on the ground. And I believe it’s going to prove out to be a very efficient system. [emphasis added].

76. The statement was false and misleading because, for reasons more fully explained in

¶¶ 63-74 above, Active Power had been working to set up a distribution system in China with

Qiyuan . Qiyuan, as a small company with virtually no capital, and no expertise, was not a suitable

partner for Active Power, could not be used as Active Power’s primary fulfillment channel for either

China or Asia.

77. On April 30, 2013, Active Power (a) issued an earnings press release touting its

results and also touting by name its partnership with Digital China, (b) specially issued a press

release touting its partnership with Digital China, and (c) held a conference call.

78. The April 30 earnings press release contained false statements:

(a) It falsely stated that Active Power had a “[n]ew strategic distribution partnership

agreement with Digital China Information Service Company Limited, the largest IT

solutions provider in China.” The statement was false because, for reasons more fully

set out in ¶¶ 63-74 above, Active Power had a distribution partnership agreement

with Qiyuan, not Digital China.

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(b) It falsely stated that revenues in 2013 Q1 were $18.6 million. The statement was

false because Active Power recognized $4.186 million in sales to Qiyuan. For

reasons more fully set out in ¶¶ 52-74 above, Active Power could not recognize

revenues from sales to Qiyuan, because collectability was not reasonably assured.

Thus, Active Power’s revenues for Q1 2013 were actually $14.4 million.

(c) It falsely states “[r]evenue in the first quarter of 2013 was $18.6 million compared to

$15.2 million in the previous quarter and $19.8 million in the first quarter of 2012.

The sequential increase was due to the increase in UPS sales, while the decrease

from the year-ago quarter was attributed to a decline in modular IT infrastructure

revenues partially offset by the increase in UPS sales. The improvement in UPS sales

was driven by a large order in the fourth quarter of 2012 for which revenue was

recognized in the first quarter of 2013 as well as an increase in sales to China.” This

statement was false because (i) revenues were $14.4 million, not $18.6 million, (ii)

which is a decrease, not an increase, and (iii) UPS sales did not increase.

(d) It falsely states that Active Power had made sales to Asia of $3.96 million. For

reasons more fully set out in ¶¶ 52-74, sales to Qiyuan of $4.186 million were not

reasonably certain to be collectable, and could not be recorded as revenues.

(e) Defendant Milner was quoted as falsely saying “[w]e also broadened our market

reach in Asia with the addition of Digital China [Information] as one of our strategic

distribution partners. We have already engaged with Digital China [Information] on

large data center projects for which we anticipate field product deployments later this

year.” The statement was false because Digital China Information neither engaged

20


with Active Power on large data center projects nor entered into a partnership

agreement with it, as more fully set out in ¶¶ 63-74, above.

79. The press release announcing the partnership with Active Power contained false

statements:

Active Power and Digital China Information Service Company Limited Enter Into Partnership Agreement AUSTIN, TX--(Marketwired - Apr 30, 2013) - As a strategic part of its growth moving forward and to expand its distribution of products into the China market, Active Power [] manufacturer of uninterruptible power supply (UPS) systems and modular infrastructure solutions, has entered into a partnership agreement with Digital China Information Service Company Limited (DCITS), China’s No. 1 IT solutions distribution and system integration firm. DCITS is a subsidiary of Digital China Holdings Limited (HK00861), a Fortune China 100 company. Under the new agreement, DCITS will market and sell Active Power’s CleanSource® UPS and CleanSource® High Density UPS products and PowerHouseTM products through its field sales offices in 19 of 22 mainland provinces in China as well as key geographies in the greater Asian market. The partnership also provides for joint sales and marketing and technical support. “We continue to see significant growth occurring in the China data center market which is driving an increased investment in physical infrastructure sales,” said Eddie Yan, vice president, Solutions Group, DCITS. “With this growth, we see tremendous opportunity for Active Power’s highly differentiated product line and believe these offerings will be compelling for our IT customer base. We are excited to take part in extending Active Power to customers as part of our portfolio of data center solutions.” “ We are excited and proud to have the largest IT solutions provider in China partner with us to further extend our reach in the region and build upon the success we’ve had with some of China’s leading innovators in data center design,” said Doug Milner, president and CEO, at Active Power. “Having a leading firm like DCITS, with its extensive IT experience and strong business relationships, join us as one of our China based partners further validates our product offerings and value proposition of unmatched power density, reliability, and total cost of ownership.”

80. All emphasized statements were false because Active Power did not have a

partnership agreement, or any sort of sales agreement, with Digital China Information, as more fully

set out in ¶¶ 63-74.

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81. The false statements were repeated on Active Power’s conference call, a true and

correct transcript of which is attached as Exhibit 2 to this Complaint, with false statements italicized,

and incorporated by reference. First, every statement which provided Active Power’s revenues for

Q1 2013 is false, because Active Power had recognized $4.186 million in sales to Qiyuan which

Active Power could not recognize under U.S. generally accepted accounting principles. And

statements about revenue growth were false because revenues fell and did not grow. Both are more

fully set out in ¶¶ 52-74. For the same reasons, statements about revenue growth in China were false

because revenues in China fell. And statements concerning Active Power’s partnership with Digital

China were false because Active Power did not have a partnership with Digital China, as more fully

set out in ¶¶ 63-74.

82. In addition, in the earnings conference call, Defendant J. Douglas Milner said Active

Power was already seeing the results of collaboration with Digital China:

Carter W. Driscoll – Ascendiant Capital Markets LLC (outside analyst) Just two questions on agreement [with Digital China] itself, maybe I can see is, I think you mentioned that there is some opportunity for them [Digital China] to sell outside of the Chinese markets within other countries in APAC and maybe you can discuss where they had success in some of those countries, and then is just an exclusive agreement or could they potentially be a distributor for one of the competitors. J. Douglas Milner (CEO) I think it’s not exclusive to us, they were well established IT system integrator and distributor and they do have access to and they have relationships with other UPS manufactures. So I think the difference is that we\re unique in our value propositions stands on its own. The answer to the question of do they have reached outside of China? Yeah, they’ve got very well established presence outside of China and, yes, we have seen early succession in Taiwan and in Thailand, and so we have seen the influence that their reseller network and their boots on-the-ground have on projects outside of China and we’ve already gotten some early traction within there .

[Emphasis added.]

22


83. The highlighted statement was false because Active Power had not worked with

Digital China Information’s reseller network.

84. And Defendant Milner emphasized that Active Power would be at a competitive

disadvantage in China without such a large partner:

Carter W. Driscoll – Ascendiant Capital Markets LLC Okay with that. Maybe talk about the deal size that you’re initially finding in China versus other geographies, is it larger and I’m assuming it is and then if so, what impact that has your margins there? Obviously you already have a bit of a margin impact of manufacturing in Austin, but you kind of trend to help us as we build our expectations in for growth in China, what that may or may not do your gross margins? J. Douglas Milner Yeah, the deal size really depends on the type of customer and we’ve encountered all types of customers. So we’ve sold just a couple of systems doing enterprise datacenter for one example and then the co-location data center deals tend to be about the same size as they are here and maybe a little bit bigger than they are in Europe. And so, the customers have similar scale. We are going to, since we are going through multi-tier distribution. In China, our margins are going to be somewhat lower, because there we’ve got basically provide margin for that channel. But we also are much more efficient on the back end of selling and support because we have such a large partner in China. [Emphasis added].

85. That day, Active Power also gave revenue guidance for Q2 2013 of between $19

million and $22 million, and also filed with the SEC a registration statement on Form S-3. Active

Power thereby sought to register $50 million of common stock, warrants, units, depositary shares,

and debt securities, to be sold by Active Power in a future offering.

86. On May 3, 2013, Active Power filed its Q1 2013 results with the SEC on Form 10-Q.

The 2013 Q1 10-Q contained false statements for the same reason set out in ¶¶ 52-74 above: it

overstated revenues, and though it claimed Active Power had increased revenues and increased

revenues in China, both had in fact fallen. The 10-Q also provided that “[UPS p]roduct sales to

customers in Asia were $3.9 million, or 25% of our total product revenue, in the three-month period

23


ended March 31, 2013 [] primarily driven by one large distributor order” 11 – that is, the order from

Qiyuan. Milner and Fife both signed the 10-Q.

87. On July 8, Defendant Milner resigned from his positions at Active Power, effective

July 29, 2013.

88. On July 30, 2013, Active Power issued a press release disclosing its results for Q2

2013. In that press release, Defendants admitted that Active Power’s revenues were $20.2 million, or

about $1.5 million less than the same quarter in 2012, and its net income down to $0.2 million, from

$0.3 million for the same quarter in 2012.

89. On July 30, 2013, Active Power held a conference call to tout its results for the

quarter ended June 30, 2013. Active Power gave revenue guidance for Q3 2013 of between $15

million and $18 million. In the conference call, Defendant Fife admitted that Active Power’s

revenues and guidance were disappointing and that one major reason was that Active Power’s sales

in China were disappointing:

Carter Driscoll - Ascendiant Capital Markets Thank you. Good afternoon. Yeah I was hoping we could drill little deeper into the guidance you just provided and kind of par some of the factors and it’s been outside of the push out in the fourth quarter last year this is one of the weakest quarters you guys given the revenue lines for couple of years now. And trying to figure out how much of this is potentially customers waiting on that next generation platform whether its specific customer deployments that maybe you could shed a little color on for those weakness in an particular region maybe this is relatively weak number as I said the last couple of years, any guidance or color if you can provide would be helpful. Steve Fife Yeah Carter this is Steve. So, I think the first thing is to know that we had a, we’re really pleased with the second quarter MIS revenue numbers and that came in very strong because of demand both for our IT product and for our PowerHouse product. And as you know and as we’ve stated both our business is lumpy and where we get

11 Active Power, Q1 2013 10-Q, filed on 2013-05-03 at 15, available at <http://www.sec.gov/Archives/edgar/data/1044435/000114036113018708/form10q.htm >.

24


and are subject to some relatively big orders that can cause this kind of fluctuation on a quarter-to-quarter basis. We’re – we fully expect our UPS revenue to come back in Q3 we’re not seeing right now , we don’t have visibility to, and really strengthen our service business as well in Q3. But right now we don’t have the visibility on the MIS segment of our business in the quarter. I’d say geographically we continue to see a lot of strong interest in from all of the regions if anything – I think our China business is maybe a little bit slower than we anticipated it at this point in time but we still remain very optimistic about the market size and the opportunities throughout in that market. And we expect that the 750 we will be shipping that during the quarter, it’s going to come out a little bit later than we had anticipated and so that’s also having a little bit of an impact in the quarter from what we had previously anticipated. But are encouraged by all indications of where we’ll end up by for the year in total. [Emphasis added].

90. Active Power’s revenues, and its revenues in China, were lower than expected

because Active Power had not made any sales to Qiyuan in Q2 2013. Nor had Active Power received

any payment from Qiyuan in all of Q2 2013. As Active Power would admit when it restated its

financial statements, all of Active Power’s purported sales to Qiyuan were booked as revenues in the

first quarter of 2013, and remained on Active Power’s books as accounts receivable as of June 30,

2013 (i.e., Active Power had not received a payment). In Q2 2013, Qiyuan neither bought more

products from Active Power nor paid a Renminbi for the products it had already bought.

91. It is because Active Power’s distributor was Qiyuan rather than Digital China that it

was not able to make any Q2 sales to the distributor – a realization of the risk of having a lower

quality distributor.

92. Active Power’s stock price fell from $3.95 on July 29 to close at $3.70 on July 31, on

heavy volume.

93. In the July 30 conference call, Defendant Fife falsely stated that Digital China, to

support its distribution of Active Power products, had established “dedicated peoples”, and had set

up “formal trainings” and held “joint [sales] calls” with Active Power:

25


Jeff Osborne Stifel, Nicolaus & Co Okay. And then last question, any comments with the new China partner and how the training there and synergies are ramping in terms of joint sales pitches and what that? Steve Fife Yes. Well, I guess first of all as Ake said we hired a new General Manager for our Asia business and he’s been in place for a few weeks now and I think it’s going to add tremendously to our over side and frankly closing opportunities that we’ve identified in China in particular but he’s met with a number of our key customers end customers as well as with our distributor partner that we entered into an – Digital China as we entered into an agreement with back in the end of Q1 and he’s working through those details but yet we do have Digital China has dedicated peoples we’re starting to set up formal trainings with them and with our team and there are joint calls that are taking place right now. [Emphasis added].

94. The statements were false and misleading because Active Power did not have a

partnership with Digital China, Digital China did not have employees dedicated to servicing the

Active Power account, and Active Power had not set up formal trainings or joint calls with Digital

China, for the reasons more fully set out in ¶¶ 52-74 above.

95. On July 31, 2013, Active Power filed its Form 10-Q for the quarter ended June 30,

2013. The 10-Q contained false statements because Active Power’s accounts receivable included

$4.186 million in receivables from Qiyuan. Hence, since accounting rules prevented Active Power

from recognizing revenues from sales to Qiyuan, they also prevented Active Power from counting

those sales as accounts receivable, as Active Power would admit when it restated its 10-Q for the

quarter ended June 30, 2013. Defendant Fife signed the 10-Q.

96. On August 1, 2013, Digital China Holdings, Inc., Digital China Information’s parent,

announced that it was spinning off Digital China Information, to be absorbed by Shenzen Techo

Telecom Co. Active Power made no disclosure concerning this existential corporate change in its

purportedly key distributor.

26


h. Active Power reveals that its agreement had been with Qiyuan, and that

Qiyuan had no relationship with Digital China Information.

97. On September 5, 2013, Active Power retracted its guidance for Q3 and full year 2013.

For the lowered guidance, Active Power blamed the fact that it had actually signed its distributor

agreement with Qiyuan, not Digital China Information, as it had previously announced:

AUSTIN, Texas (Sept. 5, 2013) – Active Power (NASDAQ: ACPW), manufacturer of uninterruptible power supply (UPS) systems and modular infrastructure solutions, will not achieve its revenue or earnings per share guidance for the third quarter ending Sept. 30, 2013, due primarily to lower than expected sales in China. The company expects lower sales in China through the end of 2013 and as a result does not expect to achieve its previously targeted year-over-year revenue growth, positive adjusted EBITDA, or breakeven to positive net income for full year 2013.

The lower than expected sales in China are due to disappointing results from the company’s distribution relationship in China. The company previously announced in error that a partnership agreement with Digital China Information Service Company Limited was entered into on April 30, 2013. However, the company’s previously announced agreement in China is with Qiyuan Network System Limited, which the company’s management discovered is neither an affiliate nor a subsidiary of Digital China Information Service Company Limited.

“While we remain optimistic about our long-term market opportunity in China, our experience this year in China has been very disappointing and for now is unpredictable,” said Steve Fife, CFO, and vice president of Finance, for Active Power.

[Emphasis added].

98. Active Power’s stock price fell from a close of $3.50 on September 5 to close at $3.50

$3.02 on September 6, on heavy volume.

99. In September 2013, Active Power terminated Huan Wang. Wang had no other job

lined up and, as this Complaint is filed, appears still to be unemployed.

100. Then, Active Power terminated its Global Sales Head Martin Olsen, effective

27


November 5, 2013. Olsen’s separation agreement contained a non-disparagement clause and a

release of all his claims against Active Power.

101. On November 7, 2013, Active Power announced that it would restate its financial

statements for the quarters ended March 31 and June 30, 2013, announced an SEC investigation into

Active Power’s statements, and claimed that a Chinese employee (i.e., Huan Wang) had misled it

and was no longer with Active Power:

On November 4, 2013, the Audit Committee of the Board of Directors (the “Audit Committee”) of Active Power, Inc. (the “Company”) concluded , in consultation with management and after discussion with the Company’s independent registered public accounting firm (Grant Thornton LLP), that the Company will restate its quarterly interim financial statements for the periods ending March 31, 2013 and June 30, 2013. Accordingly, these previously-filed financial statements for the periods ending March 31, 2013 and June 30, 2013 should no longer be relied upon.

As previously disclosed in its September 5, 2013 press release and Form 8-K, the Company announced in error in April 2013 that it had entered into a strategic distribution agreement with [Digital China Information]. The actual party to this agreement is [Qiyuan]. A Company employee in China represented to management that Qiyuan was a subsidiary of Digital China [Information]. Management subsequently discovered that the Company employee in China intentionally misrepresented the relationship between Qiyuan and Digital China [Information]. Qiyuan has no affiliation with Digital China [Information]. The employee is no longer with the Company .

The Securities and Exchange Commission’s (“SEC”) Division of Enforcement has notified the Company that it is conducting an investigation regarding Active Power, including matters relating to the Company’s public statements regarding Digital China and the Company’s distribution relationships in China. The Company has been and intends to cooperate fully with the SEC. The Audit Committee of the Board of Directors, with the assistance of independent counsel, is also conducting an investigation into the facts and circumstances surrounding the Company’s agreements and transactions with Qiyuan, including the statements made regarding Qiyuan’s affiliation with Digital China. This investigation is ongoing.

Management of the Company has concluded that the revenue recognized in the quarter ending March 31, 2013 from Qiyuan was not reasonably assured to be collectable at the date of shipment and at March 31, 2013. Therefore, the Company

28


currently expects to reverse revenue of $4.1 [sic -- $4.186] million and cost of goods sold of $3.0 million in the quarter ending March 31, 2013, and the Company subsequently expects to record revenue in the third quarter of 2013 of $1.6 million and cost of goods sold of $1.2 million based on cash payments received from Qiyuan in the third quarter. For the nine months ended September 30, 2013, the combined impact of the restatement described above is a loss of $0.7 million or $0.04 per share. In addition, subsequent to September 30, 2013, the Company received additional payments of $0.2 million and has accepted a return of $1.6 million of inventory previously shipped to Qiyuan.

102. But the press release also disclosed that Fife and Milner had recklessly embellished

the facts Wang had purportedly told them; Wang purportedly told Active Power that Qiyuan was a

subsidiary of Digital China Information, but Fife and Milner had said that Active Power had a

partnership with Digital China Information.

103. On November 14, 2013, Defendant Fife resigned as Active Power’s CFO, effective

December 4, 2013. Fife’s separation agreement included a non-disparagement covenant, and

required him to release Active Power for all claims.

104. On November 18, 2013, Active Power restated its financial statements for the

quarters ended March 31 and June 30, 2013. Active Power reduced Q1 revenues by $4.186 million,

and Q1 and Q2 accounts receivable by $4.186 million.

105. On November 18, Active Power also held a conference call to discuss its Q3 2013

results. There, Active Power announced that it had either received payment for or had returned to it

all of the products it had shipped to Qiyuan.

106. Active Power also revealed that it had convened an investigation into the facts and

circumstances of its transactions with Qiyuan. Active Power also revealed that the SEC investigation

swept more broadly than it had previously disclosed, as it merely “included” the Qiyuan matter.

29


i. Wang and Active Power’s statements were made with scienter.

107. According to Active Power, one of its employees had “intentionally” misled it by

telling it that Qiyuan was a subsidiary of Digital China Information.

108. Active Power had only 20 employees in administration, information technology,

human resources and finance.

109. Ni Jun, Wang’s wife, owned 20% of Qiyuan, and was one of its directors. Wang was

Active Power’s China Country Manager. He reviewed the Qiyuan contract, and told Active Power’s

executives that it Qiyuan was a subsidiary of Digital China Information. Since Qiyuan is a small

company 20% owned by his wife, it is obvious that Wang knew Qiyuan was not a subsidiary of

Digital China, but rather was owned by his wife and four others. Hence, Wang is the Active Power

officer who, it claims, “intentionally” misled it.

110. As a high-level Active Power employee and the source of Active Power’s information

on Qiyuan and China, Wang’s scienter may be imputed to Active Power.

j. Fife and Milner made false statements recklessly.

111. During the Class Period, Fife and Milner made statements concerning a variety of

activities Active Power purportedly with Digital China, all of which statements were false because

Active Power had a relationship with Qiyuan, not Digital China:

Statement Date and source Speaker Active Power had been setting up partnership with February 19, 2013, Milner single distributor that would carry Active Power’s earnings conference call products throughout Asia Active Power had a distribution agreement with April 30, 2013 press Milner Digital China releases and earnings

conference call Digital China’s efficient distribution network April 30 earnings Milner would improve Active Power’s margins in China conference call

30


Active Power’s revenues were $18.6 million, which April 30, 2013, 10-Q and Fife and included $4.2 million to Qiyuan earnings conference call Milner Active Power had engaged in several large projects April 30, 2013 earnings Milner which were expected to be deployed by the end of conference call 2013 Eddie Yan, Vice President at Digital China, was April 30, 2013 press Falsely excited about cooperation with Active China release attributed to

Eddie Yan Active Power has “seen early success in Taiwan April 30, 2013 conference Milner and Thailand” because of the cooperation, and call have personally witnessed influence of Digital China’s reseller network and obtained “early traction” there

Sales in China had been lower than expected July 30 conference call Fife Active Power remained optimistic about China July 30 conference call Fife market Active Power’s China manager was “working July 30 conference call Fife through details” of agreement with Digital China Digital China had “dedicated peoples” July 30, 2013 conference Fife

call Active Power and Digital China had set up joint July 30, 2013 conference Fife formal training call Active Power and Digital China were holding joint July 30, 2013 conference Fife sales calls call Active Power had accounts receivable of $4.2 July 30, 2013 conference Fife and non- million from Digital China call, and 10-Q party Ake

Almgren, the chair of Active Power’s board and its interim CEO

112. Thus, Defendants’ false statements about Active Power’s partnership with Digital

China Information were neither sparse nor vague.

113. The purported agreement with Digital China was a milestone for Active Power.

Before making so many positive statements about the positive effects the agreement would provide

to Active Power, Milner and Fife were required to read and understand fully the agreement with

31


Qiyuan to ensure that the statements they were making concerning the agreement were accurate.

Further, Fife and Milner knew the agreement was not with China Digital Information, but rather with

Qiyuan.

114. Active Power recognized $4.186 million in revenue in Q1 2013 from Qiyuan, but

neither collected any of this revenue from nor sold more product to Qiyuan in Q2 2013. Thus, by the

end of June 30, 2013, all of Active Power’s receivables from Qiyuan were at least 91 days old.

115. Active Power’s loan facility bases the amounts available to Active Power on a

formula based on Active Power’s accounts receivable. But that formula only counts up to $1.5

million of accounts receivable aged 91-120 days. Further, finance charges on accounts receivable

aged are 2.00%, against 1.75% for accounts receivable aged less than 91 days. 12

116. Hence, Fife and Milner were reckless in stating that Active Power had a partnership

with Digital Information China, both in recklessly failing to determine that Qiyuan was not a

subsidiary of Digital China Information, and then for recklessly stating that Active Power had a

partnership with Digital China Information despite having been told that Active Power had a

relationship with Qiyuan , a subsidiary of Digital China Information.

k. Respondeat superior. 117. Active Power is liable for the acts of the Individual Defendants and its employees

under the doctrine of respondeat superior and common law principles of agency as all of the

wrongful acts complained of herein were carried out within the scope of their employment with

authorization.

118. The scienter of the Individual Defendants and other employees and agents of the

12 Active Power, 2012 10-K, filed on 2013-3-04 at 40. Available at: <http://www.sec.gov/Archives/edgar/data/1044435/000114036113010418/form10k.htm >

32


Company is similarly imputed to Active Power under respondeat superior and agency principles.

119. Active Power and Wang’s interests in overstating Active Power’s China operations

and relationship with Digital China Information were aligned.

120. Active Power’s annual report for the year ended 2012 stated that Active Power would

pursue growth through sales in China. By recognizing revenues from sales to Qiyuan, Active Power

was able to overstate its China revenues by $4.1 million, or enough to show substantial growth in its

China operations. In reality, its revenues from Asia were $0.199 million in Q1 and Q2 2013

combined. 13 Similarly, Active Power was able to claim that though its production margin was lower

in China because of lower product prices, its distributing agreement with Digital China would

increase Active Power’s distribution margin, allowing it to reap reasonable returns.

121. Indeed, the day it announced a partnership with Digital China, Active Power also

filed a registration statement to sell $50 million of its securities.

122. Thus, Wang did not secretly act adversely to Active Power and entirely for his own or

another’s purposes.

V. CLASS ACTION ALLEGATIONS

123. Plaintiff brings this action as a class action on behalf of himself and on behalf of all

purchasers of common stock of Active Power during the Class period, (the “Class”), pursuant to

Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of the class. Excluded from the Class are

Defendants herein, members of the immediate family of each of the Defendants, any person, firm,

trust, corporation, officer, director or other individual or entity in which any Defendant has a

13 Active Power had revenues from Asia of $2.914 million in Q3 2013, and revenues from Asia $3.193 million in the first three quarters of 2013. Active Power, 8-K, available at <http://www.sec.gov/Archives/edgar/data/1044435/000114036113043340/ex99_1.htm >. Thus,

33


controlling interest or which is related to or affiliated with any of the Defendants, and the legal

representatives, agents, affiliates, heirs, successors-in-interest or assigns of any such excluded party.

124. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Active Power securities were actively traded on the

NASDAQ exchange. While the exact number of Class members is unknown to Plaintiff at this time

and can only be ascertained through appropriate discovery, Plaintiff believes that there are at least

hundreds of members in the proposed Class. Members of the Class may be identified from records

maintained by Active Power or its transfer agent and may be notified of the pendency of this action

by mail, using a form of notice customarily used in securities class actions.

125. Plaintiff’s claims are typical of the claims of the members of the Class, as all

members of the Class are similarly affected by defendants’ wrongful conduct in violation of federal

law that is complained of herein.

126. Plaintiff will fairly and adequately protect the interests of the members of the Class

and has retained counsel competent and experienced in class action and securities litigation.

127. The prosecution of separate actions by individual members of the Class would create

a risk of inconsistent or varying adjudication with respect to individual members of the Class that

would establish incompatible standards of conduct for the party opposing the Class.

128. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy. Since the damages suffered by individual Class members may be

relatively small, the expense and burden of individual litigation make it virtually impossible for the

Class members to seek redress for the wrongful conduct alleged. Plaintiff knows of no difficulty that

Active Power’s revenues from Asia for the first two quarters of 2013 were $0.199 million.

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will be encountered in the management of this litigation that would preclude its maintenance as a

class action.

129. Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

(b) whether the April 30, 2013 Press Release and April 30, 2013 8-K filing issued

by Defendants to the investing public misrepresented material facts concerning Active Power and its

business; and

(c) the extent of injuries sustained by members of the Class and the appropriate

measure of damages.

VI. APPLICATION OF PRESUMPTION OF RELIANCE:

FRAUD ON THE MARKET

130. Plaintiff will rely upon the presumption of reliance established by the fraud on the

market doctrine in that, among other things:

(a) Defendants made public misrepresentations or failed to disclose material facts

during the Class Period;

(b) The omissions and misrepresentations were material;

(c) The Company’s stock traded in an efficient market;

(d) The misrepresentations alleged would tend to induce a reasonable investor to

misjudge the value of the Company’s stock; and

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(e) Plaintiff and other members of the Class purchased Active Power common

stock between the time defendants misrepresented or failed to disclose material facts and the time

the true facts were disclosed, without knowledge of the misrepresented or omitted facts.

131. At all relevant times, the market for Active Power common stock was efficient for

the following reasons, among others:

(a) As a regulated issuer, Active Power filed periodic public reports with the

SEC. Active Power met the requirements for listing, and was actively traded on the NASDAQ, under

ticker ACPW;

(b) As of December 31, 2013, there were 14,270,000 shares in Active Power’s

public float, and 19,360,000 Active Power shares were outstanding;

(c) During the Class Period, an average of 304,000 Active Power shares were

traded weekly, or about 2.1% of Active Power’s publicly traded float and 1.6% of Active Power’s

total shares outstanding;

(d) Active Power regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases on

the major news wire services and through other wide-ranging public disclosures, such as

communications with the financial press, securities analysts, and other similar reporting services.

(e) Active Power was eligible and did file short-form registration statements with

the SEC on Form S-3;

(f) Active Power was followed by numerous analysts that issued reports about it,

including Stifel Nicolaus, Capstone Investments, Dominick & Dominick, Ascendiant Capital

Markets, LLC, and Ardour Capital Investments.

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(g) New company specific information was rapidly reflected in the Company’s

stock price.

(h) At least twenty firms made a market in the Company’s stock.

VII. COUNT I

Against All Defendants For Violations of §10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder

132. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

133. This Count is asserted against defendants and is based upon Section 10(b) of the

Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.

134. During the Class Period, defendants engaged in a plan, scheme, conspiracy and

course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions,

practices and courses of business which operated as a fraud and deceit upon Plaintiff and the other

members of the Class; made various untrue statements of material facts and omitted to state material

facts necessary in order to make the statements made, in light of the circumstances under which they

were made, not misleading; and employed devices, schemes and artifices to defraud in connection

with the purchase and sale of securities. Such scheme was intended to, and, throughout the Class

Period, did: (i) deceive the investing public, including Plaintiff and other Class members, as alleged

herein; (ii) artificially inflate and maintain the market price of Active Power securities; and (iii)

cause Plaintiff and other members of the Class to purchase Active Power securities and options at

artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct,

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defendants, and each of them, took the actions set forth herein.

135. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the

defendants participated directly or indirectly in the preparation and/or issuance of the quarterly and

annual reports, SEC filings, press releases and other statements and documents described above,

including statements made to securities analysts and the media that were designed to influence the

market for Active Power securities. Such reports, filings, releases and statements were materially

false and misleading in that they failed to disclose material adverse information and misrepresented

the truth about Active Power’s finances and business prospects.

136. By virtue of their positions at Active Power, defendants had actual knowledge of the

materially false and misleading statements and material omissions alleged herein and intended

thereby to deceive Plaintiff and the other members of the Class, or, in the alternative, defendants

acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose such

facts as would reveal the materially false and misleading nature of the statements made, although

such facts were readily available to defendants. Said acts and omissions of defendants were

committed willfully or with reckless disregard for the truth. In addition, each defendant knew or

recklessly disregarded that material facts were being misrepresented or omitted as described above.

137. Information showing that defendants acted knowingly or with reckless disregard for

the truth is peculiarly within defendants’ knowledge and control. As the senior managers and/or

directors of Active Power, the Individual Defendants had knowledge of the details of Active Power

internal affairs.

138. The Individual Defendants are liable both directly and indirectly for the wrongs

complained of herein. Because of their positions of control and authority, the Individual Defendants

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were able to and did, directly or indirectly, control the content of the statements of Active Power. As

officers and/or directors of a publicly-held company, the Individual Defendants had a duty to

disseminate timely, accurate, and truthful information with respect to Active Power’s businesses,

operations, future financial condition and future prospects. As a result of the dissemination of the

aforementioned false and misleading reports, releases and public statements, the market price of

Active Power securities was artificially inflated throughout the Class Period. In ignorance of the

adverse facts concerning Active Power’ s practices which were concealed by defendants, Plaintiff

and the other members of the Class purchased Active Power securities at artificially inflated prices

and relied upon the price of the securities, the integrity of the market for the securities and/or upon

statements disseminated by defendants, and were damaged thereby.

139. During the Class Period, Active Power securities were traded on an active and

efficient market. Plaintiff and the other members of the Class, relying on the materially false and

misleading statements described herein, which the defendants made, issued or caused to be

disseminated, or relying upon the integrity of the market, purchased shares of Active Power

securities at prices artificially inflated by defendants’ wrongful conduct. Had Plaintiff and the other

members of the Class known the truth, they would not have purchased said securities, or would not

have purchased them at the inflated prices that were paid. At the time of the purchases by Plaintiff

and the Class, the true value of Active Power securities was substantially lower than the prices paid

by Plaintiff and the other members of the Class. The market price of Active Power securities

declined sharply upon public disclosure of the facts alleged herein to the injury of Plaintiff and Class

members.

140. By reason of the conduct alleged herein, defendants knowingly or recklessly, directly

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or indirectly, have violated Section l0(b) of the Exchange Act and Rule l0b-5 promulgated

thereunder.

141. As a direct and proximate result of defendants’ wrongful conduct, Plaintiff and the

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company’s securities during the Class Period, upon the disclosure that the Company had been

disseminating misrepresented financial statements to the investing public.

VIII. COUNT II

Violations of §20(a) of the Exchange Act Against the Individual Defendants

142. Plaintiff repeats and realleges each and every allegation contained in the foregoing

paragraphs as if fully set forth herein.

143. During the Class Period, the Individual Defendants participated in the operation and

management of Active Power, and conducted and participated, directly and indirectly, in the conduct

of Active Power’s business affairs. Because of their senior positions, they knew the adverse non-

public information about Active Power’s corporate governance violations and false financial

statements.

144. As officers and/or directors of a publicly owned company, the Individual Defendants

had a duty to disseminate accurate and truthful information with respect to Active Power’ s financial

condition and results of operations, and to correct promptly any public statements issued by Active

Power which had become materially false or misleading.

145. Because of their positions of control and authority as senior officers, the Individual

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Defendants were able to, and did, control the contents of the various reports, press releases and

public filings which Active Power disseminated in the marketplace during the Class Period

concerning Active Power’s results of operations. Throughout the Class Period, the Individual

Defendants exercised their power and authority to cause Active Power to engage in the wrongful

acts complained of herein. The Individual Defendants therefore, were “controlling persons” of

Active Power within the meaning of Section 20(a) of the Exchange Act. In this capacity, they

participated in the unlawful conduct alleged which artificially inflated the market price of Petro

china securities.

146. Each of the Individual Defendants, therefore, acted as a controlling person of Active

Power. By reason of their senior management positions and/or being directors of Active Power, each

of the Individual Defendants had the power to direct the actions of, and exercised the same to cause,

Active Power to engage in the unlawful acts and conduct complained of herein. Each of the

Individual Defendants exercised control over the general operations of Active Power and possessed

the power to control the specific activities which comprise the primary violations about which

Plaintiff and the other members of the Class complain.

147. By reason of the above conduct, the Individual Defendants are liable pursuant to

§20(a) of the Exchange Act.

PRAYER FOR RELIEF

WHEREFORE , Plaintiff, on behalf of themselves and the Class, pray for judgment and

relief as follows:

(a) declaring this action to be a proper class action, designating Plaintiff as Lead

Plaintiff and certifying Plaintiff as a class representative under Rule 23 of the

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Federal Rules of Civil Procedure and designating plaintiff’s counsel as Lead

Counsel;

(b) awarding damages in favor of Plaintiff and the other Class members against all

defendants, jointly and severally, together with interest thereon;

(c) awarding Plaintiff and the Class reasonable costs and expenses incurred in this

action, including counsel fees and expert fees; and

(d) awarding Plaintiff and other members of the Class such other and further relief as

the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

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Dated: January 21, 2014 THE ROSEN LAW FIRM, P.A.

/s/ Jonathan Horne Laurence Rosen, Esq. (pro hac vice) Phillip Kim, Esq. (pro hac vice) Jonathan Horne, Esq. (pro hac vice 275 Madison Avenue, 34th Floor New York, NY 10016 Phone: (212) 686-1060 Fax: (212) 202-3827 [email protected] [email protected] [email protected]

Lead Counsel for Plaintiffs

-and-

THE PAYNE MITCHELL LAW GROUP R. Dean Gresham, Esq. (State Bar No. 24027215) 2911 Turtle Creek Blvd., Suite 1400 Dallas, TX 75219 Tel: (214) 252-1888 Fax: (214) 252-1889 Email: [email protected]

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Certificate of Service

I hereby certify that on January 21, 2013, I electronically filed the foregoing document, which sent notification of such filing to all counsel of record.

/s/ Jonathan Horne

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1 amended complaint 01/21/2014

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