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Note: American Superconductor Corporation (Seller) contracted with a Chinese company, Sinovel Wind Group (Buyer), to supply wind turbine parts for USD 470,000,000. The contract required Buyer to provide an LC prior to each shipment providing that, "two [] weeks before each shipment date, an irrevocable letter of credit in the amount of 95% of each shipment value shall be issued by a first class Chinese bank. If the [LC] is delayed, the delivery time will be postponed accordingly". Despite not having an LC in place, Seller issued a revenue projection based on receipt of the proceeds of the sale.

Shareholders of Seller (Shareholders) sued Seller for securities violations under the US Securities Exchange Act of 1934 (Exchange Act). Shareholders claimed that projecting LC proceeds as revenue, when no LC was issued, was a violation of the Exchange Act. Seller moved to dismiss. The US District Court of Massachusetts, Young, J., granted Sellers's motion to dismiss Exchange Act claims on counts one and two.

In its publicly disclosed revenue recognition policy, Seller stated that it recognized revenue "upon customer acceptance" provided "collectability" was "reasonably assured". Seller also claimed that the filings with the US Securities and Exchange Commission conformed to Generally Accepted Accounting Principles standards. The Shareholders' action was based in part on the allegation that the contract was not "reasonably assured" because letters of credit were not issued for each shipment, calling into question the creditworthiness of Buyer. The Shareholders claimed the Seller continued to allow these shipments simply to prematurely record millions of dollars in sales.

The court held that the Shareholders did not show that Seller knew or had reason to know that Buyer was not providing LCs with its shipments. The Shareholders also failed to show that when Buyer did not provide LCs it automatically precluded the shipments from being reasonably assured as per the contract between Buyer and Seller.

[JEB/sls]

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