Case 1:13cv068834TS Document 41 Filed 03/27/14 Page 1 of 113

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK x RICHARD A. DEMPSEY, Individually and on Civil Action No. L: 13-cv-06883-LTS Behalf of All Others Similarly Situated, CLASS ACTION Plaintiff. AMENDED COMPLAINT FOR vs. : VIOLATIONS OF THE FEDERAL SECURITIES LAWS DAVID P. VIEAU and DAVID J. PRY STASH. DEMAND FOR JURY TRIAL Defendants. x Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 2 of 113

TABLE OF CONTENTS

Page

NATUREOF THE ACTION ...... 1

JURISDICTIONAND VENUE ...... 4

PARTIES...... 5

CLASS ACTION ALLEGATIONS ...... IL

CONFIDENTIAL SOURCES ...... 12

SUBSTANTIVE ALLEGATIONS ...... 13

The Proliferation of the Electric Vehicle Industry in the United States ...... 13

The DOE Loan Program Is Established to Support the Electric Vehicle Industry ...... 14

TheCompany and Its Business...... 16

A 123 and Fisker Had Strong Business and Financial Ties ...... 17

Fisker Made Questionable Representations to the DOE in Order to Obtain Its ATVM ProgramLoan...... 20

Defendants Knew the Consequences if Fisker Defaulted on the Terms of Its Loans from theDOE ...... 24

Defendants Knew that Fisker Defaulted on the DOE Loan and Would Lose Its DOE Funding ...... 27

Defendants Knew that A 123's Batteries Were Flawed and Defectively Manufactured ...... 33

Materially False and Misleading Statements Issued During the Class Period...... 42

A 123 Reduces Its Revenue Guidance but Defendants Misleadingly Assert that the Reduction Is "Unexpected" and Will Be "Temporary ......

Fisker's Impaired Financial Condition Is Revealed and the Company Takes an Impairment Charge on Its Investment in Fisker as Defendants Continue to Claim that A123 Will Receive Significant Future Revenues from Battery Sales to Fisker and Attempt to Downplay Defects with the Company's Batteries ...... 64

A123 Voluntarily Replaces Its Flawed and Defective Batteries While Defendants Continue to Tout the Company's Relationship with Fisker ...... 70

A123Files for Bankruptcy...... 79 Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 3 of 113

Page

PostClass Period Events ...... 81

Defendants Were Required to Disclose Not Only that Fisker Was Unable to Purchase A123's Batteries and that the Company's Batteries Were Flawed, but Also the Impact of These Issues on the Company's Business ...... 85

A 123's False and Misleading Financial Statements ...... 89

ADDITIONAL SCIENTER ALLEGATIONS ...... 94

NOSAFE HARBOR ...... 100

APPLICATION OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET ...... 101

LOSS CAUSATION/ECONOMIC LOSS ...... 103

COUNTI ...... 104

For Violations of § 10(13) of the Exchange Act and Rule I Ob-5 Against All Defendants ...... 104

COUNTII ...... 107

For Violations of §20(A) of the Exchange Act Against All Defendants...... 107

PRAYER FOR RELIEF ...... 108

JURYDEMAND ...... 109

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Lead Plaintiff Hormuz Irani ("Lead Plaintiff") alleges the following based upon the investigation of Lead Plaintiff's counsel as detailed below, which included, among other things, a review of: (i) United States Securities and Exchange Commission ("SEC") filings byA123 Systems,

Inc. ("A 123" or the "Company"); (ii) A 123 regulatory filings and reports; (iii) securities analysts' reports and advisories about the Company; (iv) press releases and other public statements issued by the Company; (v) media reports about the Company; (vi) approximately 12,000 pages of documents produced to Lead Plaintiff by the United States Department of Energy ("DOE") pursuant to a

Freedom of Information Act (fOTA") request; (vii) a review of the facts in pleadings and declarations filed in the following actions: (a) In re A]23 Systems, Inc., es at., Case No. 12-12859-

KJC (Bankr. D. Del.); and (b) In re FiskerAutomosive Holdings, Inc., ci aL. Case No. 13-13087-KG

(Bankr. D. Del.); and (viii) a review of the allegations contained in pleadings filed in the following actions: (a) United States ex rel. Eric Weidner v. Fisker Automotive, Inc., C.A. No. 12-cv-7847

(KBF) (S.D.N.Y.); (h) In re 123 Systems, Inc. Securities Litigation. No. L: 12-cv- 10591 -RGS (D.

Mass.); and (c) Atlas Cap hal Management, L.P. v. Henrik Fisker, et at. Case No. 13cv02 100 (D.

DeL).Plaintiff believes that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

This is a securities class action on behalf of all purchasers of the securities of Al 23 between February 28, 2011 and October 16, 2012, inclusive (the "Class Period"), seeking to pursue remedies under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and

Rule lOb-5 promulgated thereunder. The action is brought against several executive officers and one director of A123. On October 16, 2012, A123 sought bankruptcy protection and, therefore, is not named as a defendant in this action. Case 1:13cv06883LTS Document 41 Filed 03/27/14 Page 5 of 113

2. This case is about A 123. the Company's rechargeable lithium-ion batteries and the

Company's single largest customer, fisker Automotive. Inc. ("Fisker"). A123 was principally engaged in the manufacturing of advanced rechargeable lithium-ion batteries and battery systems for electric automobiles. During the Class Period. fisker represented approximately 26% of the

Company's revenues. Fisker's first (and only) car model to be produced and sold was the fisker

Karma. During the Class Period. Defendants made materially false and misleading statements about

A123's financial condition, A123's projected financial results, the value of the Company's investment in fisker, and the safety and efficacy of the Company's batteries.

3. Unbeknownst to investors, by the start of the Class Period. Fisker was experiencing serious financial problems. had defaulted on its loan from the DOE. and was effectively insolvent.

This meant that it was just a matter of time before Fisker stopped purchasing and/or paying for A 123 batteries. Defendants had access to the non-public problems that Fisker was experiencing as A123

Vice President and executive officer Defendant Jason M. forcier ("forcier") served as adirector on

Fisker's Board of Directors (the Fisker Board") during the Class Period. Yet, during the Class

Period. Defendants continued to highlight and make positive statements about the Company's relationship with Fisker even though they knew the relationship was doomed to end in failure.

4. At the same time Defendants were reporting growing battery sales. A 123's batteries were plagued with defects. As detailed herein, A123 failed to adhere to a proper validation plan in manufacturing batteries for Fisker. A validation plan is a series of tests, including safety tests, that are typically performed by suppliers before shipping production quality components to automotive manufacturers. Defendants knew, or recklessly disregarded. that A123 failed to properly conduct a validation plan, causing the Company to ship defective batteries to Fisker that began malfunctioning almost immediately. As detailed further herein, A123's batteries were defective in numerous

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respects - a coolant leak and leaking of electrolyte fluid, among other defects. The underlying cause of the coolant leak was observed in A 123's prototype laboratory prior to the Company's commencement of battery production for the Karma. Ultimately, A123 had to replace virtually all of the batteries that they had sold to fisker.

5. investors began to learn the true facts about A123, Fisker and the Company's defective batteries through a series of disclosures. On November 4, 2011. A123 issued a press release announcing that it was revising its revenue guidance downward by 22% due to an unexpected" reduction in orders from Fisker. In response, the price of A123 stock declined from

$3.53 per share to $3.17, or 10%, on unusually heavy trading volume. Then, on February 9, 2012, public reports surfaced announcing for the first time that fisker's DOE funding had been suspended. that Fisker was suspending work on a new car project and that Fisker had laid off more than 60 workers and contractors as a result of losing its DOE funding. In response, the price of A123 stock fell from $2.47 per share to $1.88 per share, or 23%, on unusually heavy trading volume.

6. On March 8, 2012, A 123 issued a press release announcing, among other things, that future revenues from Fisker were unlikely, stating that revenue for the Company's transportation business was expected to be $130 million to $ L60 million for 2012. with $130 million coming from customers other than Fisker. Al 23 also announced that it was taking an impairment charge of$ 11.6 million for the Company's investment in Fisker.

7. Then. on March 26, 20 12. despite its prior representations that A 123's battery issues were contained to the minor" issue that caused the December 2011 recall. A 123 belatedly admitted that "virtually all of the product that we produced [ I has been effectively contaminated" with manufacturing defects. Moreover. A123 estimated that it would cost a staggering $55 million to replace the contaminated batteries - an amount that equaled approximately 25% of the Company's

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anticipated revenue for fiscal year 20 12. In response, the price of A 123 stock declined from $1.70 per share to $1.49 per share, more than 12%, on extremely heavy trading volume.

S. Finally, on October 16, 2012, A123 filed a petition for relief under Chapter 11 of the

United States Bankruptcy Code. In conjunction with its bankruptcy filing, the Company listed

Fisker as its largest customer. At the time of A 123's bankruptcy announcement, the Company had posted 14 straight quarterly losses dating back to its IPO in September 2009. On the news of A123's bankruptcy filing, the price ofAL23 common stock fell from $0.18 to $0.06, more than 74%, on extremely heavy trading volume.

9. As a result of the bankruptcy, stockholders in A123 had their stock rendered worthless.

JURISDICTION AND VENUE

10. Jurisdiction is conferred by §27 of the Exchange Act. The claims asserted herein arise under §§ 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 [L 7 C.F.R. §240.1 Ob-5].

11. This Court has jurisdiction over the subject matter of this action under 28 U.S.C.

§1331, and §27 of the Exchange Act.

12. Venue is proper in this District pursuant to §27 of the Exchange Act and 28 U.S.C.

§ 139 1(b).

13. In connection with the acts alleged in this Complaint, Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets.

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PARTIES

14. Lead Plaintiff Hormuz Irani purchased A] 23 common stock during the Class Period. as set forth in the accompanying certification and incorporated by reference herein, and has been damaged thereby.

15. Non-party A123 was headquartered in Waltham, Massachusetts during the Class

Period and designed, developed, manufactured, and sold advanced rechargeable lithium-ion batteries, including "next-generation prismatic batteries" (the "Prismatic Battery" or "Prismatic

Batteries"), and battery systems. During the Class Period, Fisker was A 123's largest customer. The

Company's common stock was listed on the NASDAQ. an efficient market, throughout the Class

Period under the ticker symbol "AONE," and, as of March 5, 2012, the Company had approximately

146.8 million shares of common stock issued and outstanding. On October 16, 2012, A 123 filed for bankruptcy protection in the United States Bankruptcy Court for the District of Delaware in a case captioned In reA]23 Systems, Inc., ci al., Case No. 12-12859-KJC. On January 28, 2013, Wanxiang

Group ("Wanxiang"). a China-based, private company. purchased the preponderance of A 123's assets out of bankruptcy. including A 123's transportation business. The A 123 assets purchased by

Wanxiang have been renamed A123 Systems LLC ("A123 LLC"). which is presently operating as a subsidiary ofWanxiang. On March 22,20 L 3. the remainder of the Company changed its name from

A123 Systems, Inc. to B456 Systems. Inc. (B456"). On June 28, 2013, Defendant Prystash

(defined below) filed a Form 15-12B with the SEC terminating B456's registration with the SEC or duty to file reports with the SEC.

16. Non-party fisker was a Delaware corporation whose principal place of business was located at 5515 E. La Palma Ave, Anaheim, CA 92807. Fisker was engaged in the design and production of plug-in hybrid electric vehicles ("PHEVs"), including its flagship and, ultimately. only production vehicle - the fisker Karma, a luxury PHEV that retailed for approximately $103,000. At -5- Case 1:13cv06883LTS Document 41 Filed 03/27/14 Page 9 of 113

all relevant times. Fisker was an original equipment manufacturer ("OEM"). meaning it was an

automotive manufacturer that acquired products and/or components produced by other entities, such

as A 123, for use in automobiles under the Fisker brand name. Fisker was a privately held company

throughout its corporate history. On November 22, 2013, fisker filed for bankruptcy protection in

the United States Bankruptcy Court for the District of Delaware in a case captioned In re Fisker

Ausomonve Holdings, Inc., ci aL, Case No. 13-13087-KG. At all relevant times during the Class

Period, the fisker Board consisted of between eight and ten directors.

17. Defendant Vieau served as CEO and President of A 123 and as a director on A] 23's

board of directors (the "Board") during the Class Period. According to the Schedule 14A that the

Company filed with the SEC on April 13, 20L2 (the "April 2012 Proxy"), Defendant Vieau received

a salary of $43 1.250 and a bonus of $225.000 in 2011. The April 2012 Proxy also disclosed that

Defendant Vieau received stock awards with a value of $488,452 and option awards with a value of

$222,432 as part of his 2011 compensation. As such, the amount of Defendant Vieau's salary and

non-equity incentive plan compensation was less than half of his total 2011 compensation.

Defendant Vieau also sold 77,777 shares of A123's common stock for $377,612 during the Class

Period, an amount of proceeds that represented 57.5% of his 20 LI salary and non-equity incentive

plan compensation. According to the Company's Form 10-K filed with the SEC on March 12,2012,

(the "2011 Form 10-K"), at all relevant times during the Class Period, Defendant Vieau was an

executive officer of the Company.

18. Defendant John R. Granara III (Granara") served as the Company's interim CFO

between January 2011 and May 11, 2011, and had served as the Vice President of Finance and

Corporate Controller from January 20 10 until May LI. 2011. On November 23.20 L 0, the Company

announced that then-CEO Michael Rubino would be leaving the Company effective January 14.

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2011 to join a Boston-based clean technology startup company.. A] 23 did not immediately announce a successor to Mr. Rubino, and Defendant Granara subsequently assumed the role of CFO on an interim basis until the Company hired Defendant Prystash. A123 announced Defendant Prystash's hiring on May 4. 2011. According to the April 2012 Proxy, Defendant Granara received a salary of

$89,605 and a bonus of $50,000, a total of $139,606, for acting as interim CEO between January 1.

2011 and May 11, 2011. According to the 2011 Form 10-K, during his employment as interim CFO,

Defendant Granara was an executive officer of the Company.

19. Defendant David J. Prystash ("Prystash") served as CFO of A 123 from May 12,2011 through the end of the Class Period. According to the April 2012 Proxy, Defendant Prystash received a salary of $221.442, a sign-on bonus of $25,000. and a cash incentive bonus of$ 122,500 in 2011. further. Defendant Prystash received stock awards with a value of $400,952 and option awards with a value of $1.324,6 10 as part of his 2011 compensation. As such, the bulk of Defendant

Prystash's 2011 compensation was in stock and option awards; only 16.4% was in salary and non- equity incentive plan compensation. According to the Declaration in Support of Chapter II Petitions and First Day Motions filed by Defendant Prystash in support of A123's bankruptcy filing on

October 16, 20 12. as CEO of A123 Defendant Prystash was responsible for overseeing the financial activities of the Company, including, but not limited to, monitoring cash flow, and tax and financial planning. According to the 2011 Form 10-K, during his employment as CFO. Defendant Prystash was an executive officer of the Company.

20. Defendant Jason M. Forcier ("Forcier") served as Vice President of A123's

Automotive Solutions Group during the Class Period. According to the 2011 Form 10-K, the

Automotive Solutions Group at Al 23 focused, in part, on the manufacturing and sale of batteries and battery systems to automotive manufacturers either directly or through suppliers for use in PHEVs,

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electric vehicles ("EVs") and hybrid electric vehicles ("HEVs"). Defendant Forcier also served as a director on the fisker Board from approximately January 2010 through May 2011. After the Class

Period, on October 9, 2013, Defendant Forcier was named as CEO of A 123 LLC and, therefore, is presently an employee of Wanxiang. According to the April 2012 Proxy. in 2011 Defendant Forcier received a salary of $314,687 and a bonus of $99,375. The April 2012 Proxy also disclosed that

Defendant Forcier received stock awards with a value of $338,033 and option awards with a value of

$ 189,230 as part of his 2011 compensation. As such, the amount of Defendant forcier's salary and non-equity incentive plan compensation for 2011 was less than half of his total compensation.

Defendant Forcier also sold 8,655 shares of A123's common stock for $37,979 during the Class

Period. Defendant Forcier's Class Period sales amounted to 48% of his A123 stock holdings that were not restricted during the Class Period. According to the 2011 Form 10-K, at all relevant times during the Class Period, Defendant Forcier was an executive officer of the Company.

21. The parties referenced above in ¶9117-20 are referred to herein as "Defendants."

22. Because of Defendants' positions with the Company, they had access to the adverse undisclosed information about its business, operations, products, operational trends, financial statements, markets and present and future business prospects via internal corporate documents

(including the Company's operating plans, budgets and forecasts, and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board meetings and committees thereof and via reports and other information provided to them in connection therewith.

23. It is appropriate to treat Defendants as a group for pleading purposes and to presume that the false. misleading and incomplete information conveyed in the Company's public filings, press releases and other publications as alleged herein are the collective actions of the narrowly

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defined group of Defendants identified above. Each of the above officers of Al 23. by virtue of their high-level positions with the Company, directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels and was privy to confidential proprietary information concerning the Company and its business, operations. products, growth, financial statements, and financial condition, as alleged herein. Said Defendants were involved in drafting, producing, reviewing and/or disseminating the false and misleading statements and information alleged herein, were aware, or recklessly disregarded, that the false and misleading statements were being issued regarding the Company, and approved or ratified these statements, in violation of the federal securities laws.

24. As officers and controlling persons of a publicly-held company whose common stock was registered with the SEC pursuant to the Exchange Act, and was traded on the NASDAQ. and governed by the provisions of the federal securities laws, Defendants each had a duty to promptly disseminate accurate and truthful information with respect to the Company's financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings and present and future business prospects, and to correct any previously-issued statements that had become materially misleading or untrue, so that the market price of the Company's publicly-traded securities would be based upon truthful and accurate information. Defendants' misrepresentations and omissions during the Class Period violated these specific requirements and obligations.

25. Defendants participated in the drafting, preparation, and/or approval of the various public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their

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executive and managerial positions and/or Board membership with A123, Defendants each had access to the adverse undisclosed information about A123's business prospects and financial condition and performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about A123 and its business materially false and misleading.

26. Defendants, because of their positions of control and authority as officers and/or directors of the Company, were able to and did control the content of the various SEC filings, press releases and other public statements pertaining to the Company during the Class Period. Each

Defendant was provided with copies of the documents alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent their issuance or cause them to be corrected. Accordingly, each Defendant is responsible for the accuracy of the public reports and releases detailed herein and is, therefore, primarily liable for the representations contained therein.

27. Each Defendant is liable as a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of A123 common stock by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme: (i) deceived the investing public regarding A123's financial reporting, business, operations and management and the intrinsic value of A123 common stock and other publicly-traded securities; (ii) enabled Company insiders to sell over $4 15,59 L of A 123 common stock to the unsuspecting public;

(iii) allowed A 123 to complete common stock, warrant, unit and note offerings that raised over $250 million at artificially inflated prices; and (iv) caused Lead Plaintiff and the Class to purchase A123 common stock and other publicly-traded securities at artificially inflated prices.

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CLASS ACTION ALLEGATIONS

28. Lead Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of all purchasers of the securities of Al 23 during the Class Period, inclusive, and who were damaged thereby (the "Class"). Excluded from the

Class are Defendants. the officers and directors of the Company, at all relevant times. members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have or had a controlling interest.

29. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, A123 common stock was actively traded on the

NASDAQ. While the exact number of Class members is unknown to Lead Plaintiff at this time and can only he ascertained through appropriate discovery. Lead Plaintiff believes that there are hundreds of thousands of members in the proposed Class. Record owners and other members of the

Class may be identified from records maintained by A123 and/or its transfer agent and may be notified of the pendency of this action by mail. using the form of notice similar to that customarily used in securities class actions.

30. Lead 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.

31. Lead Plaintiff will fairly and adequately protect the interests of the members of the

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

32. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are:

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(a) whether the federal securities laws were violated by Defendants' acts as alleged herein;

(b) whether statements made by Defendants misrepresented material facts about the business, operations and management of A 123;

(c) whether Defendants failed to include material facts in the financial statements issued during the Class Period, making those filings materially false and misleading;

(d) whether the price of A 123 common stock and other publicly-traded securities was artificially inflated during the Class Period; and

(e) to what extent the members of the Class have sustained damages and the proper measure of damages.

33. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation makes it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action.

CONFIDENTIAL SOURCES

34. In addition to the investigation conducted by and under the supervision of Lead

Plaintiff's counsel, the allegations made herein are supported by the firsthand knowledge of five confidential witnesses ("CWs"). These witnesses are former employees and/or independent contractors of A 123. each of whom were affiliated with A 123 during the Class Period and provided facts concerning the allegations contained herein. As detailed below, the CWs each served in positions at A123 that provided them with access to the information they are alleged to possess.

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35. CWI, an independent contractor. worked as a Validation Test Technician at A123 from May 2011 through October 2012. CWI was responsible for conducting tests of the components used in A123's battery packs.

36. CW2 worked as an EIE Hardware Development Engineer at AL 23 from March 2008 through November 2011. CW2 was "one of the original eight guys who came over and started A 123 in Michigan" in 2008.

37. CW3 worked as an Advanced Manufacturing Manager at A123 from May 2010 through October 2012. Prior to this. CW3 served as a consultant at A123 from February 2010 through May 2010.

38. CW4 worked as a Manager of A 123's prototype laboratory in Livonia. Michigan. from October 2008 through January 2012. CW4 was one of the Company's first thirty employees.

39. CW5 worked as a Controller of A123's Livonia, Michigan plant from October 2010 through July 2012. CW5 previously served as an Assistant Controller at A 123's Livonia plant.

SUBSTANTIVE ALLEGATIONS

The Proliferation of the Electric Vehicle Industry in the United States

40. Beginning in the mid-2000's. high and wildly fluctuating prices for oil and natural gas, coupled with increased public dialogue about the impact of petrol energy sources on global warming, suddenly thrust renewable energy to the forefront of political debate in the United States.

In fact, by July 2008, gas prices in the United States had reached record highs of more than $4 a gallon, and in 2007 former United States Vice President Al Gore won the Nobel Peace Prize for his work with the Intergovernmental Panel on Climate Change. As a result, activists and politicians alike began advocating for the adoption of renewable energy sources to replace conventional energy sources.

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41. One of the key areas of focus for renewable energy advocates was the automobile.

Traditionally powered by gasoline or diesel fuel, automobiles became a prime candidate for renewable energy adoption because advances in electric battery technology had created the potential for automobiles to run mostly or solely on rechargeable electric batteries. Public perception was also shifting, with more consumers indicating that they would be likely to purchase electric automobiles over their conventional gasoline counterparts. As a result, both established and novice automakers and battery suppliers began formulating plans to develop, manufacture and sell PHEVs, HEVs and

EVs.

42. These ambitious automakers and battery suppliers faced tremendous costs in attempting to produce economically viable PHEVs, HEVs and EVs. Recognizing this reality, politicians began advocating for the U.S. government to provide financial support for their efforts.

In fact, on the campaign trail in August 2008, then-presidential candidate Barack Obama said he would push to have one million PHEVs and EVs on America's roads by 2015.

The DOE Loan Program Is Established to Support the Electric Vehicle Industry

43. in response to the newfound public and political support for electric vehicles, in

December 2007, Congress enacted the Energy Independence and Security Act, authorizing the

Advanced Technology Vehicles Manufacturing Program (the "ATVM Program") for the purpose of. among other things, developing fuel efficient vehicles and their components. The DOE was given responsibility for evaluating and approving loan applications made to the ATVM Program.

44. Upon election. President Ohama made electric vehicles a centerpiece of his clean- energy policy. One of the goals of the Obama administration was to bring down the cost of rechargeable electric car batteries. PHEYs sell at a premium over conventionally powered vehicles in part because of battery costs. Through policy and financial incentives, the Ohama administration

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sought to ease the difficulty that automakers and their suppliers would have in manufacturing and selling electric vehicles at a profit.

45. As such, the Stimulus Act of 2009 expanded the ATYM Program, appropriating $7.5 billion in funds for the ATVM Program's credit subsidy costs and allowing the DOE's Loan

Programs Office to extend loans up to a total of $25 billion.

46. To qualify for a direct loan under the ATVM Program, the project and the sponsoring company had to meet several criteria. Pertinently, the company had to he "financially viable without the receipt of additional federal funding for the proposed project." DOE Loan Programs Office.

Description of ATVM program, available as https://lpo.energy.gov/?pae id=43.

47. The DOE provided guidance for potential applicants to the ATVM Program, which stated, in pertinent part, as follows:

The applicant will be deemed 'financially viable' for purposes of 10 C.F.R. 6 LI. I 00(a)(2) if (L) there is a reasonable prospect that the applicant will be able to pay principal and interest as and when due under the ATVM loan and (ii) the applicant has a net present value that is positive, taking all costs, existing and future, into account. (See definition of financially viable" in 10 C.F.R. 611.2). 10 C.F.R. 611.100(c) sets forth a non-exhaustive list of the factors considered by the ATVMLP in determining whether the applicant is financially viable.

48. In June 2009, the DOE awarded $8 billion in loans to automakers Ford, Nissan. and

Tesla Motors to support the development of fuel-efficient electric vehicles. These loans were the first distributions under the ATVM Program.

49. In addition to supporting renewable energy efforts in the automotive industry, the

U.S. government also authorized the DOE to extend loans to other alternative energy companies. including Solyndra. LLC. ("Solyndra"). Solyndra designed, manufactured and sold solar panels, and, in September 2009. Solyndra received a $536 million loan from the DOE. On August 31.2011,

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The Company and Its Business

50. A123 sought to benefit from the U.S. government's embrace of electric vehicle automakers and battery suppliers. Specifically, in August 2009, Al 23 received a $249 million grant under the DOE' s battery grant program (separate from the ATVM Program) to help the Company set up a manufacturing facility for its batteries in the United States.

51. At the time it announced the grant. the DOE called it the single largest investment in advanced battery technology for hybrid and electric-drive vehicles ever made." Approximately $132 million of the DOE grant funds were used by A 123 to build a 550 MWh battery plant in Livonia,

Michigan - the largest lithium-ion battery manufacturing plant in North America. The Company also used the DOE grant funds to build a plant in Romulus. Michigan.

52. Also in August 2009. A 123 hired Defendant Forcier to head up the Company's operations in Michigan.

53. Shortly thereafter, on September 29, 2009, A123 completed a $371 million initial public offering ("IPO"). According to a report from Dow Jones VentureSource, A 123's IPO was the most successful of 2009, with the Company's stock leaping more than 50% above its IPO pricing of

$13.50 per share to close at $20.29 per share after its first day of trading. The A123 IPO included the offering of 32.407.576 million shares of the Company's common stock on the NASDAQ.

54. Al 23 officially opened the Company's facility in Livonia. Michigan. on September

13, 2010. Upon its opening. the Livonia facility became the largest lithium-ion automotive battery manufacturing plant in North America. The opening of the Livonia plant was attended by senior company executives, including Defendant Vieau. In addition, reflective of the significant amount of government funding that A123 had received, the Livonia plant's opening was also attended by DOE

Secretary Steven Chu ("Chu"), and merited a phone call from President Obama. who wished to congratulate A 123 Systems on [its] tremendous milestone." - 16- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 20 of 113

55. During the Class Period, A123 had 977 employees in the United States, and owned facilities across the United States, China. Korea and Germany. The Company's United States manufacturing operations were located in Michigan and Massachusetts.

56. A] 23's business consisted primarily of three segments: (L) transportation. consisting of both heavy-duty commercial vehicles and passenger vehicles; (2) grid energy storage; and (3) commercial. The Company's largest segment was the transportation segment, in which A123 was developing, manufacturing and selling batteries and battery systems for use in PHEVs, HEVs and

EVs.

57. The Company's transportation business was pail of its Automotive Solutions Group, which, at all relevant times during the Class Period, was headed by Defendant Forcier. A 123's largest customer during the Class Period was Fisker.

A123 and Fisker Had Strong Business and Financial Ties

58. Fisker was founded in 2007 with the goal of designing, assembling and manufacturing premium PHEVs. Fisker was co-founded by former Ford Motor Company design director Henrik fisker and his business partner, Bernard Koehler ("Koehler"). At all relevant times during the Class Period, Henrik Fisker served as a director on the Fisker Board and served as CEO of

Fisker from its inception until February 2012. Henrik Fisker was the namesake for Fisker. At all relevant times during the Class Period. Koehler served as Chief Operating Officer ("COO") of

Fisker.

59. Fisker's first production vehicle for sale to consumers was named the Karma. The

Karma, initially slated to begin commercial roll-out in 2009, was one of the world's firstPHEVs and would retail for more than $100,000.

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60. The Fisker Karma platform was planned to consist of three models: (1) the K I. a 4- door sedan; (2) the K2, a convertible; and (3) the K3, a sports wagon. Though based in the United

States, Fisker manufactured the Karmas at a facility in Valmet, Finland. Fisker also planned to launch a second line of PHEVs shortly after commencing production of the Karma. referred to as

Project Nina or the Atlantic line, which was contemplated to be a more economically priced model in comparison to the Karma.

61. For the year ended December 31, 2011, Fisker accounted for approximately 26% of

A] 23's total revenue. As such, during the Class Period. A!23's ability to recognize revenues was directly tied to Fisker' s success, or lack thereof, in the manufacturing and production of the Karma and the Company's success, or lack thereof. in manufacturing batteries for the Karma.

62. Defendant Forcier joined the Fisker Board contemporaneously with A123's investment in Fisker. Specifically. on January 14, 2010, A123 and Fisker announced that A123 planned to invest $23 million in Fisker, comprising of $13 million in cash and $10 million in A123 common stock. According to the press release issued by the Company announcing its investment in

Fisker. A123's investment was meant, in pail, to "allow Fisker Automotive and A123 to work closely together to optimize the performance of future vehicles."

63. Throughout the entirety of Defendant Forcier's service on the Fisker Board,

Defendant Forcier was an executive officer of A123 and Vice President of the Company's

Automotive Solutions Group.

64. At all relevant times, fisker was a Delaware corporation. Under we] lestablished

Delaware law, Defendant Forcier' s membership on the Fisker Board entitled him to unfettered access to confidential Fisker information, including, but not limited to. Fisker's hooks and records and all documentation concerning loan and credit facilities that Fisker had with public and private

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lenders. In addition. Defendant forcier had complete access to Fisker's management and the information possessed by them, as well as to all independent legal, financial or other types of advisors retained by Fisker and the information possessed by them.

65. A] 23's investment in Fisker also helped Fisker meet the equity requirements of its loan agreement with the DOE. Fisker's loan agreement with the DOE required fisker to raise

$122.8 million in additional equity financing to close on the loan, as well as an additional $27.2 million by February 15. 2010 and an additional $50 million by October 3 L, 2010.

66. A123 further cemented its relationship with fisker by entering into an exclusive supply agreement dated January 13, 2010 (the "Supply Agreement"). Pursuant to the Supply

Agreement, fisker named A123 as the exclusive supplier of the battery systems for the Karma.

67. At the time. A123 stated that the Company would manufacture its batteries for the

Karma in its Livonia. Michigan battery plant. In addition, Fisker announced that A123 and Fisker would work together on Project Nina, with the intention of having A 123 supply batteries for that line of vehicles as well. Fisker planned to build Project Nina in the United States and manufacture the model at a volume of 75.000 to 100,000 units per year starting in 2012.

68. Under the terms of the Supply Agreement, Fisker would purchase the first 5,000 battery packs for the Karma from A 123 at a price of $14,500 per battery pack and then for different prices for additional volumes.

69. The Supply Agreement also helped fisker satisfy one of the conditions of its DOE loan. fisker was required by its loan agreement with the DOE to source more than 65% of the components for the Karma on a cost basis from United States companies. Because most of the electric automobile battery industry was (and remains) in China, South Korea, and Japan, fisker was

-'9- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 23 of 113

left with a very short list of potential suppliers. A 123 was one such supplier, making the Company one of the few viable battery suppliers to partner with Fisker.

Fisker Made Questionable Representations to the DOE in Order to Obtain Its ATVM Program Loan

70. Shortly alter the ATYM Program was established and Fisker was formed. Fisker began trying to obtain an ATVM Program loan. As such, on December 31. 2008, Fisker submitted two applications to the DOE for a multi-draw loan facility under the ATVM Program.

71. At the time of Fisker' s initial applications, Eric Weidner ("Weidner") served as

Fisker's CEO. Weidner was Fisker's CFO from December 2007 to February 2009, at which point he was replaced by James Thorburn. Thereafter. Weidner continued with Fisker in the role of Vice

President of Finance until January 18, 2010.

72. In addition to these roles, from December 2007 through January 18, 2010, Weidner was given responsibility for Human Resources and Legal Operations at Fisker, despite not being an attorney. Weidner also served as Fisker's Treasurer and Secretary.

73. After termination of his employment with Fisker. Weidner was the relator in a qul tam lawsuit filed on or about October 19, 2012, in the Southern District of New York. captioned

United States ex rel. Eric Weidner v. FiskerAusoinonve, Inc.. Case No. 12-cv-07847-KBF. In the qui tam lawsuit, Weidner alleged, among other things, that Fisker submitted false claims to the DOE in connection with the DOE's decision to award a loan to fisker pursuant to the ATVM Program.

On December 10, 2013. Weidner's lawsuit was voluntarily dismissed without prejudice.

74. Weidner alleged that he led the process of assembling the financial statements and forecasts which were included in fisker's December 2008 applications to the DOE. Weidner believed that Fisker was not "financially viable" within the meaning of 10 C.F.R. §611.2 at the time

Fisker made its December 31, 2008 applications.

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75. In early 2009. Fisker submitted a revised application to the DOE for a loan pursuant to the ATVM Program. At this time, Weidner believed that fisker was both insolvent and not

"financially viable" within the meaning of 10 C.F.R. §611.2. Weidner also believed that Fisker desperately needed the DOE loan to survive and to attract investors.

76. Intact, Weidner understood that Fisker remained insolvent throughout most of 2009.

According to Weidner, beginning in 2009. Kleiner Perkins Causfield and Byers ("Kleiner Perkins") provided Fisker with cash on a weekly basis in order to keep Fisker's operations afloat. Weidner additionally believed that, in 2009, Kleiner Perkins provided Fisker with bridge loans at a very high cost to Fisker. From 2009 through early 2012. Kleiner Perkins' partner Ray Lane ("Lane") served as

Chairman of the Fisker Board.

77. Fisker's precarious financial condition during 2009 is illustrated by an August 23,

2009. 12:29 a.m. e-mail sent by Fisker COO Koehler to DOE loan official Wailer Eccard, in which

Koehler stated, in pertinent part, that:

The latest information to delay the conditional commitment jr the Karma program until we receive the approvalfor the Kx program is pushing our supplier base and our investment group beyond the limit.

I have several items I need to discuss with you or Matt (or anybody you recommend). We need the approval jr Karma or Karma and Kx in a very short timcframe. A delay until the end of September is not possible for us or our suppliers. I need a solution for a funding scenario with debt only, starting Monday next week and an approval for the entire program within two weeks. I'm sorry if I'm very direct right now, but we don't have much time. I have to lay-offal! of my Fisker Coachbuild employees on Monday, and some of the Fisker Automotive people. This is hurting me a lot (personally and business related) and giving our competition (Tesla included) a huge advantage. We can contribute to increase the importance and awareness of the US car manufacturing industry—but we need your help like Ford, Nissan, Tesla, GM and others.

We are oversubscribed in this equity round with DOE support - and nowhere without it. I'm available to talk to you at any time.'

All emphasis in bold and italics is added, unless otherwise noted. -21- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 25 of 113

78. Koeh]er's August 23, 2009 e-mail effectively communicated that, absent DOE funding. Fisker would not be able to produce its vehicles, entice new equity investment, or pay its employees or suppliers.

79. Despite fisker's seeming failure to meet the "financial viability" requirement of 10

C.F.R. §611.2 and the alarming desperation contained in Koebler's August 23. 2009 e-mail, approximately one month later, on September 22. 2009, the DOE announced that it had awarded a

$529 million loan to Fisker for purposes of building both its first PHEV. the Fisker Karma, and

Project Nina.

80. A few days prior, on September 18. 2009, the DOE issued a conditional commitment letter to Fisker that detailed the conditions that Fisker had to meet to begin and continue to receive payments under the $528.7 million DOE loan (the Conditional Letter"). The Conditional Letter, which was not made public, listed various events that would cause Fisker to default on the DOE loan, including Fisker's failure to achieve certain milestones and to make timely loan payments to the DOE.

81. Subsequent to issuing the Conditional Letter, Fisker and the DOE engaged in negotiations over the following months, until April 2010, for purposes of finalizing contract terms for the loan.

82. Weidner was one of a select few Fisker employees - including Koehler and Henrik

Fisker - intimately involved in Fisker's negotiations with the DOE. In fact. on at least October 20,

2009, November 2, 2009 and November 12, 2009. Weidner participated in weekly status update conference calls between the DOE and Fisker.

83. In the qul tam lawsuit. Weidner alleged that the Fisker Board caused the DOE to rely on inaccurate information in determining to award the ATVM Program loan to Fisker. Specifically,

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Weidner faulted the Fisker Board for allowing high estimates of the number of automobiles that were projected to be sold for the Project Nina line to he given to the DOE without validating those estimates. Weidner recognized that submitting puffed up estimates with no basis in reality had the effect of increasing the cash flows in fisker's financial models, and. thereby, improving the likelihood that the DOE would approve Fisker's application.

84. Moreover, according to Weidner. an internal costs analysis had been performed within Fisker to determine the Engineering. Design & Development ("ED&D") and Tooling costs related to the K2 and K3 models of the Karma. The analysis. dated December 16.2009 and marked

"Confidential," was prepared by Thomas Fritz. Fisker Director of Engineering, and John Kwapis,

Fisker Director of Purchasing, with input from other Fisker engineers.

85. The December 16, 2009 analysis concluded that ED&D and Tooling costs related to the Karma K2 and K3 models would cost $148,100,000. as compared to the $43,000,000 estimate that was provided to the DOE for these costs. Thus. Weidner believed that Fisker had under- budgeted to the DOE ED&D and Tooling costs for the K2 and K3 Karma models by approximately

$105,000,000. According to Weidner, the DOE was never informed of this cost discrepancy despite the analysis being completed before the DOE's loan to Fisker was finalized.

86. On February 26.2010 - two months prior to finalizing its loan to Fisker - an internal e-mail within the DOE stated that Fisker was under collateralized.

87. In his position as a director on the fisker Board, Defendant forcier was privy to, among other things, the negotiations between the DOE and Fisker concerning the final loan agreement, as well as the forecasts, projections and presentations of Fisker's management concerning the Fisker Karma and Project Nina.

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88. Defendant forcier was not the only A 123 executive who had intimate, nonpublic access to Fisker's negotiations with the DOE. On March 30, 2010. Defendant Vieau - Al 23's CEO and a member of the Board - accompanied Defendant Forcier to a Fisker Board meeting at which

Fisker's loan agreement with the DOE was the principal topic of discussion. At the March 30, 20 10 meeting, the fisker Board unanimously resolved, among other things, to approve the LARA (defined below) and the documents incorporated as exhibits thereto. The minutes from this meeting reflect, in pertinent part. that "[a]ll participants in the meeting could hear, and be heard by. all other participants in the meeting."

89. On April 21, 2010, the entire Fisker Board —including Defendant Forcier —executed their written consent for Fisker to enter into the LARA and the documents incorporated as exhibits thereto.

90. As more fully explained herein. Fisker' s inability to timely commence commercial production of the Karma by February 2011 led the DOE to suspend its ATVM Program funding to

Fisker in June 2011, incapacitating Fisker's ability to purchase batteries from A 123 and/or fulfill its obligations under the Supply Agreement.

91. At all relevant times during the Class Period. Defendants were apprised of fisker's default of its obligations under its DOE loan because Defendant Forcier served as a director on the

Fisker Board.

Defendants [(Hew the Consequences if Fisker Defaulted on the Terms of Its Loans from the DOE

92. On April 22, 20 LO. fisker and the DOE formally entered into the Loan Arrangement and Reimbursement Agreement ("LARA"), finalizing the DOE's $529 million loan to Fisker. Under the terms of the LARA, whose principle terms closely resembled the Conditional Letter, Fisker's

-24-

Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 28 of 113

failure to meet certain funding and production milestones would result in a default of Fisker's $529

million loan from the DOE.

93. Specifically. Section 5. 1(m)(i) of the LARA states that Fisker had to provide a

business plan to the DOE at least five days prior to the execution of the LARA that contained,

among other things:

[A] reasonably detailed list of Milestones, in chronological order, together with the anticipated completion dates (each. a "Milestone ctp1erioiz Dare") for each of the Milestones, and to the extent they can be identified as of such date, the anticipated costs and expenses that the Borrower expects will be incurred in connection with, and through the completion of, each of the Milestones.

94. Annex A to the LARA provided a definition for "Milestones," which stated, in

relevant part, as follows:

"Milestones" means certain construction, production. manufacturing, financial and other milestones which Borrower and DOE agree are necessary for completion of the Projects and must be included in the Business Plan. Milestones will include:

(a) with respect to the Karma Project, (A) completion of the Karma Engineering Works. (B) completion of all other engineering integration work required for the Karma Project. (C) a schedule for completion of all vehicle certification requirements in the United States and the European Union related to vehicle safety and environmental matters; (D) commencement of commercial production of the Karma vehicle. (E) achieving Karma vehicle sales of [REDACTED], and (F) creation of a satisfactory dealer network for sales of Karma vehicles;

(b) with respect to the Nina Project, (A) purchase of the site required for the Nina Facility (to be completed no later than May 31, 2010). (B) completion of construction and/or re-equipping of the manufacturing facility for the Nina vehicle and all related tooling work required for assembly thereof. (C) completion of all engineering integration work required for tooling related to the Nina Facility. (D) a schedule for completion of all vehicle certification requirements related to safety and environmental matters for retail sales of the Nina vehicle in the United States and European Union. (E) commencement of commercial production of the Nina vehicle at the Nina Facility in quantities to be mutually agreed and (F) creation of a satisfactory dealer network for sales of Nina vehicles[.]

95. Fisker's business plan dated April 15.2010, served as the business plan for purposes

of the LARA (the "Business Plan").

Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 29 of 113

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-26- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 30 of 113

February 29, 2012, at an average price of not less than $87,900; and (iii) commence commercial production of Project Nina by June 2012.

98. Section 10.1(q) of the LARA states that, among various events of default that could occur under the LARA. Fisker's failure to achieve any milestone by the relevant "Milestone

Completion Date" would result in a breach of the LARA.

99. Under Section 10.2 of the LARA, a default by Fisker gave the DOE the ability to, among other things, terminate loan payments to Fisker indefinitely.

100. in addition, Section 10.1 (j) of the LARA contains a provision stating that if either

Koehler or Henrik Fisker were no longer responsible for the management of Fisker, this would also trigger a default of the LARA.

101. The DOE announced on April 23. 2010 that the LARA had been executed and acknowledged the importance of A123's batteries to the Karma, stating, in pertinent pail, as follows:

Fisker automobiles are driven by electric motors that get their power from a rechargeable Lithium-ion battery, or, when that is depleted, by a generator driven by an efficient gas-powered engine. The Karma and Project NINA models will have an all-electric, tailpipe-emission-free range of 40 to 50 miles on a full charge, more than most Americans drive each day. The battery can be charged at home overnight. Using gas and electric power. Fisker plug-in hybrids are expected to have a cruising range of up to 300 miles.

The Department of Energy's Advanced Technology Vehicle Manufacturing Program supports the development of advanced technology vehicles with improved fuel efficiency that help reduce the nation's dependence on oil. This is the fourth loan arrangement signed by DOE with an advanced technology vehicle manufacturer.

Defendants Knew that Fisker Defaulted on the DOE Loan and Would Lose Its DOE Funding

102. Flush with DOE funding. Fisker - with Defendant Forcier uniquely positioned as both a director on the Fisker Board and the A123 executive directly overseeing production of the

Company's batteries for the Karma - began attempting production of the Karma to meet the

February 2011 production commencement deadline. fisker, however, had promised to commence -27- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 31 of 113

commercial production of the Karma in less than one year. Even established OEMs take at least three years to launch production of new vehicles.

103. Moreover, according to Weidner, Fisker's receipt of the DOE loan did not cure its financial woes. In fact. beginning in May 2010, Weidner believed that Fisker began to operate with three different sets of forecasts:([) forecasts for internal purposes, which were an accurate reflection of Fisker's financial forecasts; (2) forecasts for investors, which were very optimistic; and (3) forecasts for the DOE, which were not accurate. Weidner believed that Fisker continued to engage in this practice for approximately one and a half years after May 2010.

104. Additionally, in June 2010, only two months after Fisker's DOE funding had been finalized, the DOE warned Fisker that its continued failure to achieve its LARA funding milestones threatened its ability to receive future funding from the DOE.

105. In February 2011 Fisker defaulted on the LARA because Fisker was unable to commence commercial production of the Karma.

106. Fisker hid the Karma's true production status from the DOE. Ina nonpublic March

2011 meeting with the DOE. Fisker representatives falsely claimed that the Company had met the production milestone for the Karma. Fisker was, therefore. able to continue taking its monthly drawdown from the DOE loan even though commercial production of the Karma had not commenced.

107. In June 2011, in a non-public meeting with the DOE, fisker finally admitted that commercial production of the Karma had not commenced.

108. Shortly after the June 2011 meeting, the DOE issued adrawstop notice to Fisker (the

"Drawstop Notice") that indefinitely suspended Fisker's loan draws under the LARA. In addition to suspending DOE loan payments to fisker, the Drawstop Notice noted that Fisker had estimated that

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it had incurred $230 million in additional costs due to delays in completing the Karma and Project

Nina.

109. By June 2011, the Obama administration was already smarting over having learned in

January 2011 that fellow DOE loan recipient Solyndra was on the brink of bankruptcy, and then being forced in February 2011 to provide another $75 million in financing to Solyndra, just to keep that faltering company afloat for a short while longer.

110. Fisker's loss of DOE funding did not deter Defendants from continuing to represent to A] 23's investors that the Company expected significant revenues from Fisker battery sales, even as Defendants began informing A123 employees of an "unexpected" slowdown in orders from

Fisker. Specifically, according to CW2, a former EIE Hardware Development Engineer at A123 from March 2008 through November 2011, at an all hands" meeting headed by Defendant Forcier.

CW2 was made aware that Fisker was going to "throttle back significantly" in receiving A123's batteries. CW2 believed that this meeting took place either on August 25, 2011 or in September

2011.

111. Moreover, according to CWI, a former Validation Test Technician at A123 from

May 2011 through October 2012. A123 held town hall meetings in September 2011 and October

2011 that were run by Defendant Vieau and the guys just under him" where employees were informed that battery production for Fisker had slowed down.

11 2. Likewise, CW3. a former Advanced Manufacturing Manager at AL 23 from May 2010 through October 2012, observed that A 123 stopped producing batteries in September 2011 because

Fisker had too much inventory sitting in Finland.

113. Coinciding with the loss of Fisker's DOE funding was a precipitous drop in the number of Karmas that Fisker believed could be built during 2011. Specifically, in October 2011,

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Fisker represented to the DOE that it would sell 542 Karmas in 2011. However, even this miniscule sales estimate was not met by Fisker, as only about 280 Karmas were sold in 2011.

114. On October 21, 2011, Fisker announced that the Karma failed to meet a promised energy-efficiency standard. Fisker also announced the same day that it was delaying production of

Project Nina until 2013.

115. On November 1, 2011, Fisker confidentially informed the DOE that it would run out of cash within three days without additional government loan money or an injection of private equity. in addition, that same day. Henrik fisker made a personal appeal by email to DOE Secretary

Chu and noted, in pertinent part, that "[Fisker had] just started delivering the first cars" to customers.

11 6. On November 4. 2011, Defendants finally acknowledged what they had known since the beginning of the Class Period - that fisker could not purchase enough of A 123's batteries for the

Company to meet its 2011 revenue forecast. In response, shares of A123's common stock fell over

10%, from $3.53 per share to $3.17.

17. Rather than disclosing Fisker's true ability to continue purchasing A] 23's batteries at this time, however. Defendants instead chose to mislead investors by labeling Fisker's order reduction as "unexpected." with the "reduction" only being "temporary." and stating that A 123's relationship with Fisker remained "strong."

118. In making these statements, and failing to disclose the actual state of affairs concerning the Company's ability to recognize revenues relating to battery sales to Fisker,

Defendants knew or consciously disregarded that, absent the DOE loan, fisker was essentially insolvent, and, therefore, incapable of purchasing A123's batteries and/or fulfilling the Supply

Agreement. Likewise, Defendants knew or consciously disregarded that, by this point in time,

Fisker had sold at most only 280 Karmas.

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119. In November 201 L.A 123 laid off 125 employees at its Michigan plants after fisker ran into production delays on the Karma.

120. On November 26. 2011, according to an article by AutoblogGreen, A123 was projecting that 7,000 Karma's would be delivered in 2012, an amount of Karma sales that would exceed those of well-known $100,000 sedans such as the Maserati Quattroporte and the Audi R8.

121. An internal DOE Corporate Quarterly Credit Report dated December 12,2011 noted that fisker had informed the DOE that it could not raise additional equity unless the DOE moved certain funding milestones in the LARA because fisker would begin breaching those milestones beginning on December 31, 2011. The Corporate Quarterly Credit Report also stated that, in response. the DOE determined that it was in the government's best interest to move these funding milestones back by one year.

122. The December 12. 2011 Corporate Quarterly Credit Report gave Fisker's debt a

"current risk rating" of CCC, which indicated that fisker's debt was extremely speculative.

123. The DOE's suspension of fisker's loan and its impact on fisker's operations eventually became public knowledge. Specifically. on February 9, 2012, it was reported by

Wunderlich Securities analyst Theodore O'Neill that Fisker's DOE funding had been suspended, that

Fisker was suspending work on Project Nina, and that Fisker had laid off more than 60 workers and contractors as a result of losing its DOE funding. Mr. O'Neill's report stated, in pertinent part, as follows:

Fisker has had its Department of Energy funding suspended and because it has become part of an intense political debate, it may never be restored.... With the loss of DOE funding, Fisker will be forced to allocate its cash sparingly and we believe this will cause it to lower Karma production expectations further as well as lay off workers. ...Without Fisker. AONE has no repeatable sales prospects of any significant size.

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124. In response, shares of A] 23's common stock fell by 23.9%. from $2.47 per share to

$1.88.

125. On February 10, 2012, it was further reported by the National Legal and Policy

Center ("NLPC") that the DOE had halted loan payments to Fisker after May 2011 because Fisker had failed to attain Karma production milestones under the LARA.

126. However, rather than disclose the actual impact of Fisker's impaired financial condition at this time, Defendants instead chose to continue misleading investors in a February 10,

2012 Cram's Detroit Business interview when Defendant Forcier stated that A 123's Livonia and

Romulus plants would be unaffected by Fisker' s financial problems. In fact, according to Defendant

Forcier. A 123's automotive operations would actually grow despite the indefinite delay to Fisker's

Project Nina, stating, in pertinent part, that:

Nina was a futuristic project and more of an engineering exercise at this point[.] This delay on the Nina project actually helps us by allowing us to pull our engineers to other programs.... We've got asolid book of business, and if the program (Nina) were to go away for whatever reason, we are still able to keep Michigan employment growing for years to come[.] We don't anticipate a change in that.

127. in making these statements, and failing to disclose the Company's true ability to recognize revenues relating to battery sales to Fisker, Defendants knew or consciously disregarded that Fisker's ability to purchase A 123's batteries was effectively incapacitated.

128. Adding to the disarray at Fisker was the fact that, on February 28, 2012, Henrik

Fisker announced that he was stepping down as Fisker CEO. Henrik Fisker's resignation violated the "Key Personnel" covenant in Section 10.1(j) of the LARA. triggering yet another default of the

LARA by fisker.

129. Despite Fisker's problems being disclosed, throughout the remainder of the Class

Period, Defendants continued to represent to A 123's investors that Fisker would comprise a sizeable portion of the Company's future revenues. In fact, as late as August 9, 2012, Defendants represented -32- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 36 of 113

in the August 2012 Form 10-Q (defined below) that Fisker "represents, and is expected to continue

to represent, a significant portion of [A 123] revenue"

130. Battery sales to Fisker in 2012 never materialized. Instead. A123 spent the majority

of 2012 looking for additional financing. While Wanxiang and A123 announced a preliminary

financing arrangement on August 8. 2012, by October 12, 2012 the deal with Wanxiang fell apart.

Out of options and capital, and with no expectation of battery sales to Fisker, on October 16, 2012,

A] 23 filed for bankruptcy and ceased operations as a publicly traded company.

131. it was not until April 17, 2013, however. when PrivCo published its exposé on Fisker

that it was publicly disclosed for the first time that Fisker had d4àulted on its DOE loan in

February 2011 by failing to meet its production milestone as the catalyst for the DOE cutting off

funding to fisker in June 2011.

Defendants Knew that A123's Batteries Were Flawed and Defectively Manufactured

132. In addition to Fisker's impaired financial condition and resultant inability to purchase

A 123's batteries and/or fulfill its obligations under the Supply Agreement, Defendants ensured

catastrophe for A!23 during the Class Period by manufacturing and selling flawed and defective

batteries to Fisker. As detailed further herein, A123 provided batteries to Fisker without undertaking

a proper validation process that would have likely discovered any defects and enabled the batteries to

be fixed prior to sale.

133. PHEYs, such as the Karma, require complex battery systems for their operation.

A] 23's Prismatic Batteries for the Karma were provided in a complex battery pack system

consisting of multiple sub-systems that supported and protected the heart of the Prismatic Batteries,

which are the battery cells.

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134, LIh- ' 7 11 iiicnjcled in the hateries that \ 12 iiijiiul*twd and sold to I i , ker incljIdL'd. in ]'1aIn flIFJ, grouping <[haticv\ cl:TN in ti!I]1LCfl1L ii.. known n1(uIc fti a mvchanism responsible forc!iiig the battri cvtH knuwn aN a thermal I

Below is an example of the A 123 battery that was manufactured for Fiskcr r map

- - c w Y - - - - -

T 4 AZI, -

135. The i 1 t thu \123 batterieN End 1111 icniird for Fisker required a strong lcNvrr. kl(\ '1cprnent. and ' iiIuUt effort in and huirsuppIier to T , 111 buttery safety and efficaL k to inl[Iernenta

(I1ILIu11 ilidaiiti plan.

136. Ava]idatiiniuu \uIIL'Iruin ( ) bMt00EM,butgenerall) CiINH IiflL]LLIL1LIcuI tests, including multiple duralu Ilk and -ai uta tuart at thn brttrrv cr11, battery modale and/or bat cry packlevels. Validation plan , I\ JHcaII\ ta ]ndu H JuN uls ofluNlinu: Design Validation ("DV"),

-34- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 38 of 113

which is usually performed on design components; and (ii) Product & Process Validation ('PV"),

which is generally performed on production components. in general, a validation plan works as

follows. Battery suppliers conduct the DV testing and provide the DV test results to the OEM. If

the DV test results meet with the satisfaction of the OEM. then the batteries move into the

production phase and PV testing is conducted by the battery supplier. After the OEM is satisfied

with the results of the PV testing, the battery supplier will commence production and shipment.

Validation plans typically use at least 50 battery packs as the sample size for both DV and PV

testing.

137. In addition, for automobile components that are high-voltage and/or are a potential

flammability hazard - of which A 123's batteries were both - OEMs and battery suppliers typically

perform additional due-diligence testing on top of the validation plan.

138. At the time the Supply Agreement was executed. Fisker did not have an established

validation plan because it was a new OEM and, prior to the Karma, had not launched commercial

production of any automobiles. Fisker's lack of a validation plan was reflected in Exhibit 2 to the

Supply Agreement, which stated, in pertinent part. that "[t]he cost to engineer and validate the

Karma PHEV Program I and Karma PHEV Program 2 pack is $2,500,000 (details to be supplied to

Fisker). This cost has been amortized over the first three years of production (i.e.. 34.000 units)."

139. The Supply Agreement failed to include a defined validation plan, which is atypical

in supply contracts between OEMs and battery suppliers. Instead, the Supply Agreement placed the

burden on A123 to provide Fisker with the details" for a validation plan.

140. Furthermore, the typical costs for engineering and validating custom high-voltage

battery packs for volume OEM production. including performing an adequate validation plan, is at

- 35 - Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 39 of 113

least $20 million or more. The Supply Agreement. however, only allocated a paltry $2.5 million for these costs.

141. The lack of a validation plan in the Supply Agreement necessitated A123 to negotiate with Fisker throughout 20 LO with respect to agreeing upon a validation plan for A L23's batteries. In these negotiations. A 123 took the position that the Company was only willing to conduct $2.5 million worth of testing because that was what the Supply Agreement included for validation.

Fisker's position was that it was A 123's obligation to conduct proper validation testing to ensure battery safety and efficacy. Ultimately, A 123 and Fisker agreed to a minimalist validation plan that was far below the testing standards of a typical validation plan between an OEM and a battery supplier.

142. As discussed herein. Fisker's production milestones under the LARA were such that

Fisker was obligated to commence commercial production of the Karma by no later than February

2011. A123 therefore had approximately one year from its entry into the Supply Agreement to develop and validate batteries for the Karma. Typical development and validation time frames for established OEMs and their suppliers, however, is generally at least three years. As such. A123 had agreed to an extremely aggressive production schedule for its batteries.

143. A123 did not meet Fisker's February 201 [ deadline. instead. A 123 started delivering batteries to Fisker beginning in May 2011. Prior to A123's delivery of batteries to Fisker, under the minimalist validation plan, A] 23 was obligated to provide validation reports to Fisker to certify that

DV and PV testing had been completed successfully. A123 never provided PV testing reports to

Fisker for production-level battery packs. For its part. Fisker installed A 123's batteries into Kaimas knowing that A123 had not met the minimalist validation plan, in part because of Fisker's concern with meeting its milestones under the LARA.

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144. At all relevant times. Defendant Forcier. as Vice President of A 123's Automotive

Solutions Group, was the final arbiter of all decisions involving negotiations between A 12 and

Fisker. In fact, Defendant Forcier was personally involved in negotiating the minimalist validation plan with Fisker. As such, and as detailed herein, at all relevant times, Defendant Forcier was apprised of A 123's minimalist validation plan and that the Company had not adhered to it.

145. Despite knowing, or recklessly disregarding, that A 123's failure to abide by even the minimalist validation plan would compromise the reliability, safety and/or efficacy of A 123's batteries, throughout the Class Period. Defendants frequently touted the capabilities of the

Company's batteries. For example, the 2010 Form 10-K (defined below), filed on March 11, 2011 and signed and certified by Defendants Vieau and Granara, stated, in pertinent part, as follows:

Our cylindrical batteries are in volume production and are commercially available for use in automotive and heavy duty vehicles. Our next generation prismatic batteries are currently being produced in our Livonia, Michigan facility, which officially opened on September 13. 2010. This 291,000 square foot facility is designed to enable the complete production process. including research and development. manufacturing of high-value components, cell fabrication, module fabrication and the final assembly of complete battery packs ready for vehicle integration.

Our energy solutions group offers a variety of fully-packaged systems as well as sub- module building blocks for battery system development. Our development of integrated systems includes not only (lie packaging of our batteries, hut aLco power electronics, safety systems, thermal management, testing, production and qualification. We design standard systems as well as custom systems using a modular design based on standard building blocks. We manufacture a variety of battery systems. in which cells or modules are connected in various configurations to meet the design requirements of specific applications. The following are examples of a modular building block based on our 32113 REV cylindrical cells and various module designs using our scalable 20Ah prismatic cells.

Our prismatic battery system's design allows for various battery configurations. providing pack design versatility for the automotive market. This design reduces retooling time when reconfiguring our assembly lines for different customers. Our battery systems are highly engineered to incorporate safety and control features

-37- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 41 of 113

that extend life and improve performance. Module-level fusing, temperature sensing and other safety controls provide additional containment safeguards to isolate and protect against cell-levelfailure. Active overvoltage protection provides monitoring and balancing of individual series elements to protect cells from abuse and to extend life. These battery systems are designed to accommodate either liquid or air-cooled thermal management systems, and have mechanical structures designed to withstand the harsh vibration and mechanical shock environment of automotive applications.

146. In stark contrast to Defendants' positive statements concerning A 123's batteries, as described herein, numerous CWs confirm that the Company knew or recklessly disregarded that

A 123's batteries were produced defectively utilizing a flawed manufacturing process and pursuant to an inadequate validation plan.

147. For instance, in the opinion of a former E/E Hardware Development Engineer at

A123, CW2 stated that, none of A 123's products went through "an adequate development cycle," including sufficient DV and PV testing. According to CW2, A123 was shipping prototypes, not production quality batteries. Specifically. CW2 observed that the batteries that A 123 was shipping did not go through "proper and adequate testing."

148. Moreover, according to CW I. who worked as a Validation Test Technician at A 123. part of CWI 's job was to conduct tests of the components that made up A 123's batteries. in this role, CWI observed "failure after failure after failure alter failure."

149. Additionally. CWI discovered that certain components that A 123 used for control systems on their battery packs were utilizing development grade components which should not have been used because they were not automotive grade. While CWI did not know whether A123 ever upgraded their components, CWI believed that A123 did not upgrade its components until there were already at least 2.000 battery packs in the field.

150. CW1 also observed A123's production staff informing their superiors that "this isn't going to work, this is junk. these cells are bad. these components aren't going to work, these fail."

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According to CW 1, when upper management found out that lower level managers and production staff complained that A 123's batteries were not going to work, upper management either removed these individuals or made life so difficult for them that they left on their own volition. CW1 believed that "this went all the way from Dave Vieau down." CWI likened the experience of working at A123 to being on a sinking ship."

151. Furthermore, according to CW5, a former Controller of At 23's Livonia, Michigan plant from October 2010 through July 2012, the problem with A 12 was that the Company was trying to rush a lot of product to the market without appropriate testing, which led to quality issues.

152. Defendants' failure to implement an adequate validation plan caused serious problems with A123's batteries. On December 21, 2011 the National Highway Traffic Safety

Administration (NHTSA") announced that it was recalling 239 fisker Karmas manufactured between July 1, 2011 and November 3, 2011 due to safety issues with A123's batteries.

153. Specifically, the NHTSA stated that A 123's batteries were observed exhibiting a coolant leak. Coolant leaks are a serious battery defect. According to the Design Failure Modes and

Effects Analysis ("DFMEA"), which OEMs utilize to determine the severity of automobile component failures, coolant leaks rank a 9 or LO (on a scale of I to LO with JO being the most severe), indicating a hazardous defect. The coolant leak observed in Al 23's batteries stemmed from an incorrect positioning of certain hose clamps, resulting in a "touch condition" that allowed coolant to leak from an internal coolant hose.

154. Defendants knew or recklessly disregarded that A123's batteries could cause a coolant leak. In fact. CW4, a former Manager of A 123's prototype laboratory in Livonia, Michigan from October 2008 through January 2012, observed a clamp issue that caused a coolant leak before

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A 123's batteries went into production. According to CW4, this precise clamp issue manifested itself during the production of A!23's batteries.

155. Moreover, typical post-testing disassembly and inspection by A123 would have easily identified even a minor "touch condition," indicating a larger issue in a full production scenario. As such, had A 123 conducted a standard validation plan utilizing a proper sample size, the failure or evidence of the "touch condition" would have likely been identified.

156. Furthermore. A 123 was apprised concerning the events leading to the NHTSA recall.

Specifically, prior to the NHTSA's recall, fisker observed the coolant leak on its manufacturing floor. Fisker immediately notified A123 of the issue. In response, Defendant Forcier insisted that there was no defect with A 123's batteries. However, when pressed as to why A 123 did not catch the coolant leak in its validation testing, Defendant Forcier never provided a response to Fisker. Within a few days after observing the initial leak, one of Fisker's dealers reported the same issue to Fisker.

As a result. Fisker contacted the NHTSA to inform them about the coolant leak caused by A 123's batteries.

157. The coolant leak was only the beginning of A123's battery problems. Shortly thereafter, on March 8, 2012. Consumer Reports announced that, while conducting speedometer calibration runs on its test track with a Fisker Karma, the car's dashboard flashed a message and sounded a 'bing' showing amajor fault." According to Consumer Reports. "[w]e buy about 80 ears a year and this is the first time in memory that we have had a car that is undriveable before it has finished our check-in process."

158. The failure experienced by Consumer Reports stemmed from a short-circuit in the insulation for the battery module subsystem that resulted in a deterioration of the battery cell pouch.

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causing an electrolyte leak. As with coolant leaks, electrolyte leaks are very serious battery defects

and rate a severity of 9 or 10 on the DFMEA scale for being hazardous.

159. Typical post-test disassembly and analysis by A123 would have identified the failed

battery cell or cells that caused the electrolyte leak that incapacitated the Karma used in the

Consumer Reports Karma test. As such, had A 123 conducted a standard validation plan utilizing a

proper sample size, the failed battery cell or cells that caused the electrolyte leak would be extremely

likely to have been identified.

160. Moreover. Defendants knew or should have known about leakage issues with the

Company's batteries because, as CW1 observed, A123 shipped battery components with high

voltage leak rates that would impair the shelf life of the Company's batteries.

161. As a consequence of the Karma failure described by Consumer Reports. on March 26,

2012. Defendant Vieau announced that A123 was voluntarily replacing all A123 batteries that

contained the electrolyte leak defect. The Company estimated that the total costs associated with the

replacement would be $55 million, a substantial portion - approximately 25% - of the Company's

projected revenues for 2012. Defendant Vieau admitted on the same day that "virtually all of the product we produced has been effectively contaminated" with manufacturing defects.

162. in response, shares of A] 23's common stock declined over 12%. from $1.70 per

share to $1.49.

163. CW5. a former Controller of A 123's Livonia, Michigan plant from October 2010

through July 2012. understood that, as a result of the voluntary replacement of the Company's

batteries in March 2012, "[b]asically everything we shipped to [Fisker] would have been free for the

most part."

-41- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 45 of 113

164. Accordingly. during the Class Period. Defendants knew or recklessly disregarded that

A] 23's batteries were defective and the Company's manufacturing process was flawed, and, as a result, A123 was unable to fulfill its obligations under the Supply Agreement.

Materially False and Misleading Statements Issued During the Class Period

165. The Class Period starts on February 28. 2011. On that day. A 12 issued a press release announcing its financial results for the fourth quarter of 2010 and full year 2010, for the quarter and year ended December 31, 2010. For the quarter. the Company reported total revenue for the fourth quarter of 20 10 of $24 million, compared to $24.5 million for the same period in the prior year. For the year. the Company reported total revenue in 2010 of $97.3 million, an increase of 7% compared to revenue of $91 million in 2009. In terms of cash. A123 reported cash and cash equivalents of $216.8 million compared to $300.8 million for the third quarter of 20 10. Defendant

Vieau commented on the announcement, stating, in pertinent part, as follows:

While costs for our capacity expansion are higher than originally anticipated, they support plans that we believe will enable A 123 to be a leading market share supplier in each of our target markets. We expect to see an inflection point in our revenue in the second quarter of 2011 with several customer programs scheduled to enter volume production. In addition, we continue to be optimistic about the expected long-term demandfor advanced battery systems, as well as A 123's technology and market leadership position.

166. That same day, A123 held an earnings conference call for analysts and investors to discuss A 123's fiscal 20 LO financial results and to provide fiscal 2011 and 2012 financial guidance.

During the conference call. Defendants Vieau and Granara stated, in pertinent part, as follows:

Defendant Vieau:

Looking into 2012, we expect to have at least 760-megawatt hours of capacity in place early in the year, which has the potential to support revenue in the range of $450 million to $550 million. We believe the continued rapid increase in production volumes and revenue will enable us to move to positive gross margins in early 2012 and our increasing scale will provide leverage on operating expenses as well. We currently expect to make consistent progress towards break-even adjusted EBITDA -42- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 46 of 113

levels in 2012, achieving that cutover point in early 2013. From there, we expect our adjusted EBITDA margins will continue to improve to healthy levels along with the rapid growth of our business.

In summary, industry demand is growing rapidly and A 123's expanding customer portfolio further validates the large size of this opportunity ahead of us. A123 just won a significant volume production program with a major North American automotive OEM, providing us production agreements with major transportation OEMs in North America, Europe and Asia. We continue to expand our market leadership position in the heavy-duty transportation and electric grid markets, both of which are projected to grow rapidly in the years ahead.

We expect to see the inflection point in our business start in the second quarter of 2011 and we have visibility into continued strong growth in 2012 and beyond based on the production dates of programs where A 123 has already been selected.

Finally, we've brought our Michigan facilities online and plan to leverage our knowledge gained as we continue to rapidly expand our capacity including another 100% of increase during the next 12 months. We are executing against plans that we believe will increase our long-term market share in each of our target markets and we believe we are creating a multi-billion dollar company with the ability to deliver attractive profit margins over the long-term.

Defendant Granara:

We expect the inflection point in our business to begin in the second quarter o.t 2011 and we believe we will drive rapid revenue growth and margin improvement in 2012 and beyond as we move into production on additional customer engagements.

Sanjay K. Shrestha - Analyst:

Okay. Great. A few more questions, if I may. So first question is on the 2011 revenue guidance. Obviously you have a pretty strong second half. So what is the level of confidence on that? How confidant are you guys that some of this existing program to sort of see that? There's always a risk of a push out. but it doesn't seem like it, listening to some of your comments, Dave. I was hoping you could sort of talk about that a bit more?

Defendant Vieau:

Yeah. sure. Well, there's two sides to that coin. The first one I'll talk about is a customer perspective on that and one of the largest customers that we have this year projected forward is obviously Fisker and the demand that they would have. So -43- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 47 of 113

we've been looking very closely at that and working closely with them over the last Jew months. We saw critical events associated with their production line builds of vehicles, in terms of how well those vehicles were coming together, and we've been monitoring - we've been physically present during production builds.

And second, we've been monitoring the overall factory readiness, in terms oft/ic position that Valmet has and their capability and competency in terms of building these vehicles, which we believe is quite high. We've sent our automotive engineering people over to do reviews of that.

Third, we've watched closely to see what the response would be from the media that did ride-and-drive on the vehicles and it was very, very enthusiastic So this is obviously a big part of our year and a critical partof our ramp up and we want to make sure that we've kept a close eye on how Fisker is doing and right now all the signs are on that are very positive.

We have dependence on their execution and certainly it's brand new, so there's risks associated with that, but we feel generally good about where that is.

Vishal Shah - Analyst:

Okay. And just on Fisker, what kind of scenarios are you modeling in your expectations? I know they talked about their goals for 20 LI shipments. But can you maybe comment on what you think is going on. based on what you have viewed so far? Thank you.

Defendant Vieau:

Well I think they've put out some different numbers. And I'm not going to speak for them, because it's really their business to communicate where they see the revenue— how many units they feel they sell.

I believe they've talked about publicly 4,500 vehicles demand so far, booked orders and channel orders and so forth. So about 4.500 so far.

And that was prior to the reviews that were taking place by the media. So I believe their confidence level in achieving sign4ficant commercial sales - sign4ficant sales of the vehicles has been lifted by the recent success.

So I think in that regard we're going to have to turn to them to provide some guidance of what their overall - at least public guidance as to what they think their numbers are.

167. The price of A123 common stock closed at a Class Period high of $9.48 per share on

February 28, 2011.

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168. On March IL, 2011. A123 filed its form 10-K with the SEC (the ­2010 Form 10-K"). which was signed and certified under the Sarbanes Oxley Act of 2002 by Defendants Vieau and

Granara, and stated, in pertinent part. that A123 had "a supply agreement with Fisker pursuant to

which [it was] providing fisker Automotive with advanced automotive battery systems over a multi- year period" and that A 123 then expect[ed] to rely on [its] supply agreement with fisker to represent a significant portion of fits/ revenue in future periods." The 2010 Form 10-K also

valued the investment assets on the Company's hooks, including the Company's holdings of fisker

preferred stock, at $21.5 million.

169. The 2010 Form 10-K also represented, in pertinent part, with respect to A123's

batteries, as follows:

Our cylindrical batteries are in volume production and are commercially available for use in automotive and heavy duty vehicles. Our next generation prismatic batteries are currently being produced in our Livonia, Michigan facility, which officially opened on September 13. 20L0. This 291,000 square foot facility is designed to enable the complete production process. including research and development, manufacturing of high-value components, cell fabrication, module fabrication and the final assembly of complete battery packs ready for vehicle integration.

Our energy solutions group offers a variety of fully-packaged systems as well as sub- module building blocks for battery system development. Our development of integrated systems includes not only the packaging of our batteries, hut aLco power electronics, safety systems, thermal management, testing, production and qualification. We design standard systems as well as custom systems using a modular design based on standard building blocks. We manufacture a variety of battery systems. in which cells or modules are connected in various configurations to meet the design requirements of specific applications. The following are examples of a modular building block based on our 32113 REV cylindrical cells and various module designs using our scalable 20Ah prismatic cells.

Our prismatic battery system's design allows for various battery configurations. providing pack design versatility for the automotive market. This design reduces retooling time when reconfiguring our assembly lines for different customers. Our battery systems are highly engineered to incorporate safety and con trol'features

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that extend life and improve performance. Module-level fusing, temperature sensing and other safety controls provide additional containment safeguards to isolate and protect against cell-levelfailure. Active overvoltage protection provides monitoring and balancing cf individual series elements to protect cells from abuse and to extend life. These battery systems are designed to accommodate either liquid or air-cooled thermal management systems, and have mechanical structures designed to withstand the harsh vibration and mechanical shock environment of automotive applications.

170. Analysts were misled by Defendants statements concerning the Company's prospects. future performance and outlook, for example. Barclays Capital analyst Vishal Shah wrote in his

March 1, 2011 report on A123 that "[m]anagement recently visited Fisker' s production facility and has confidence that the company will be able to being ramping vehicles during Q2, in line with previous expectations." In addition. RBC Capital Markets analyst Stuart Bush reported in his March

1. 2011 report on A123 that "Fisker's Karma program is likely to be a significant driver of FY11 revenue, and management visits to production facilities give us comfort in the reiteration of the production timeline"

171. The statements referenced above in ¶1[165-66; 168-69 were each materially false and misleading when made because they misrepresented and failed to disclose the following adverse facts, which were known to Defendants or recklessly disregarded by them, as follows:

(a) that Fisker was in breach of its DOE loan and, therefore, would likely lose its

DOE funding and not be able to purchase batteries from Al 23. Indeed, absent the DOE Loan, fisker was effectively insolvent, threatening its ability to pay A 123 for batteries and/or fulfill the Supply

Agreement;

(h) that A 123 was producing batteries for Fisker without a sufficient and proper validation plan thereby significantly increasing the risk that the batteries would have defects; and

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(c) that. as detailed further herein. A 123's $23 million investment in fisker preferred stock was materially impaired. overstating A 123's assets and understating its expenses and losses during the Class Period.

172. On March 28. 20 LI. AL 23 announced that it intended to offer, subject to market and other conditions, 18,000,000 shares of common stock and concurrently offer $125 million principal amount of convertible subordinated notes due 2016 in registered underwritten public offerings.

A123 also stated that it intended to grant the underwriters a 30-day option to purchase up to an additional 2.7 million shares of common stock with respect to the stock offering, and up to $18.75 million aggregate principal amount of the convertible notes. On April 4, 2011, A123 priced and sold the 18,000,000 shares at $6 each pursuant to a prospectus filed with the SEC that day. along with the

$125 million aggregate principal amount of its 3.75% convertible subordinated notes due 2016 (or a total of $143,750,000 aggregate principal amount of convertible notes if the underwriters exercised in full their option to purchase additional convertible notes.

173. On April 8, 2011, A 123 announced that the underwriters of its previously announced common stock and convertible subordinated notes offerings had exercised options to purchase

2,184,067 additional shares of its common stock and $18.75 million additional principal amount of convertible subordinated notes in respect of those offerings, bringing its total net proceeds up to

$253.9 million.

174. The registration statement issued in connection with the April 20L1 offering (the

Registration Statement") failed to disclose the adverse information detailed herein. Under the rules and regulations governing the preparation of the Registration Statement, A123 was required to disclose the problems with Fisker and the issues and uncertainties surrounding the production of batteries for fisker.

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175. On May 9, 2011, A123 issued a press release announcing A 123's first quarter 201 financial results, for the period ended March 31.2011. The Company reported total revenue for the first quarter of 2011 of $18.1 million, compared to $24.5 million for the same period in the prior year. In terms of cash, A 123 reported cash and cash equivalents of $ 136.8 million compared to

$216.8 million for the fourth quarter of 2010. A 123's reported cash for the first quarter of 2011 did not include $254 million in net proceeds from the Company's concurrent common stock and convertible notes offering that was announced on March 28, 2011. The press release quoted

Defendant Vieau, stating, in pertinent part, as follows:

Our first quarter results were in-line with our expectations. Even more importantly, in the first quarter, we commenced volume production of battery systems for Fisker. The ramping of this program reinforces our expectation for a revenue inflection point beginning in the second quarter. We continue to expect strong revenue growth throughout the second half of the year as well, which is supported by our customers already in production, as well as a number of customer programs that are expected to enter production during the year. including BMW. Daimler. and Navistar. Additionally, we advanced our relationship with Smith Electric Vehicles by entering into a production and supply agreement. and we anticipate delivering batteries tinder this program in the second half of this year.

The $254 million in funding we raised early in the second quarter further strengthens our ability to continue our rapid capacity expansion plans. The second phase of our Michigan build-out is under way, and we are expecting to more than double our current worldwide manufacturing capacity. This expansion supports our plans to capture significant market share and drive rapid revenue growth, with the goal of achieving profitability in the years ahead.

176. Later in the afternoon on May 9, 2011, A123 held an earnings conference call with analysts and investors during which Defendants Vieau and Granara provided additional positive commentary on the Company's business, including an update on the Company's progress in meeting its previously-announced financial guidance, stating. in pertinent part, as follows:

Defendant Vieau:

With strong market demand and a broadening portfolio of customers in or moving into production. we continue to target 2011 revenue in the range of $210 million to $225 million, up over 100% year-over-year and consistent with the view shared on -48- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 52 of 113

our last cal] .... he most significant of these for our 2011 revenue is Fisker and we are pleased to report that in the first quarter we began volume production of their Karma battery systems. Delivery against this customer contract is a primary driver to the expected inflection point in our revenue during the second quarter off of which we expect continued strong growth.

Looking into 2012 and 2013, stated demand from our customers, including the large North American automaker we have discussed before, is expected to require us to more than double our manufacturing capacity again from current levels to 760 megawatt hours. As stated previously, we now have better visibility into the extent of the cost of bringing new facilities online and anticipate improving capacity expansion efficiently as a result of our experience. To allow us to continue this rapid pace of expansion, we raised additional capital at the beginning of the second quarter through a concurrent stock offering and convertible note offering. Including the exercise of over allotments by our underwriters, we raised a net total of $254 million, which substantially strengthens our balance sheet. We believe this funding will be sufficient to meet our capital expenditure and operating cost requirements to the point of breakeven on adjusted EBITDA basis. At the same time, we continue to work with the Department of Energy on our proposed $233 million loan. We have been advised that we are on a shortlist of high priority applicants and we continue to be actively engaged in the process.

In summary, our first quarter played out as anticipated and we continue to expect the inflection point in our revenue to begin in the second quarter and continue throughout 2011. We are pleased with the continued development of market demand across our target markets and our solidifying A123 as a leader in the electric vehicle market not only in the heavy duty and commercial segment, but also in the passenger vehicle segment as well as in the electric grid market.

Defendant Granara:

In summary, we met our financial guidance for the first quarter and we are well posittonedfor the inflection point in revenue that we expect to begin in the second quarter. In addition, we believe we have the capital in place to fund our capacity expansion to meet customer demands.

177. On May 10,2011, A123 filed its Form 10-Q with the SEC (the "May20 LI Form 10-

Q"). which was signed and certified under the Sarbanes Oxley Act of 2002 by Defendants Vieau and

Granara, and stated, in pertinent part. that A123 had "a supply agreement with Fisker pursuant to

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which [it was] providing Fisker with advanced automotive battery systems over a multi-year period"

and that "[r]evenue from [that] supply agreement ....represents. and is expected to continue to represent, a significant portion of /A123 1s/ revenue" going forward. The May 2011 Form 10-Q

also valued the investment assets on the Company's books, including the Fisker preferred stock. at

$21.5 million.

178. Defendants' statements continued to mislead analysts and investors concerning the

Company's prospects, future performance and outlook. For example, Craig-Hallum analyst Robert

D. Brown wrote in his May 10, 2011 report on A123 that [m]anagernent announced it began

shipments for the Fisker Karma program at end of QI. We expect this program to ramp quickly in

2011 and drive a significant portion of the expected growth for the rest of this year." In addition,

Deutsche Bank analyst Dan Galves reported in his May 10, 20] 1 report on A123 that "[t]he

company reiterated its 1Q11 revenue guidance of 'sequential doubling vs QI' and its FY20 11 of

$201 MM-$225MM (vs $97MM in FY20 10). And we continue to expect 100%+ revenue growth in

2012 and 2013 based on current customer contracts."

179. The statements referenced above in 4[11175-77 were materially false and misleading

for the reasons set forth in 91171.

80. On May 11, 2011, A] 23 participated in the JMP Securities Research Conference to

discuss the Company and its business. During the conference. Defendant Forcier spoke positively

about the Company's prospects, stating, in pertinent part, as follows:

We're in an inflection point in our revenue. We said we just had our Q earnings call on Monday night. We anticipate doubling our revenue from Qi to Q2 from $18.1 million to $36.2 million in Q2. And we anticipate doubling revenue full year over that at 2010, so the guidance we've given full year is 2.10 to 2.25. That's largely driven by the ramp with the Fisker Karma. They received 3,000 to 4.000 pre orders to date, including their dealer demo. So they've started production at Valmet in Finland. And we've started production oft/ic battery packs in Michigan for that vehicle, so ramping right now in the quarter.

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Next I want to give, I'm not the CFO. but I will give you a few highlights on our financial position, and hopefully then we will leave it open for Q&A from there.

Revenue again, we've guided Wall Street to $210 million to $225 million full-year, that's a doubling, more than doubling of our revenue front last year's $97 million. QI numbers were $18.1 million, and we anticipate doubling those numbers in Q2. And you see here a list of customers that are driving the revenue growth, of course most o.tthat is anticipated to come from Fisker, but we see customers going into production like Eaton and Daimler and Navistar ramping production as well. And we have our core group of customers AES and B AE. who are also delivering revenue growth for this year. So. we have a group of strong diversified customers driving the growth. with Fisker leading the way.

181. Also on May LI. 2011, A 123 participated in the Bank of America Merrill Lynch

Small and Mid Cap Conference to discuss the Company and its business. During the conference,

Defendant Vieau spoke positively about the Company's prospects, stating, in pertinent part, as follows:

We believe that we're in an inflection point of growth. We've been in business for nine years, and we expect to see significant growth in this quarter in our production shipments. Driving that in part is a application jr new electric hybrid electric vehicles, plug-in hybrid vehicles, the Fisker Karma, which is launching the production this quarter with demand expected of significance around 7000 vehicles that we are talking about this year. And its a major driver of revenue for the company.

182. On May 16,20!], A 123 announced that effective May 12, 2011, the A 123 Board had appointed Defendant Prystash to serve as the Company's CFO.

183. On June 28, 2011, the SEC wrote to A123 to express its concern with certain representations made in the MD&A section of the Company's 2010 Form 10-K as they related to

Item 303(a)(3) of Regulation S-K.

184. In response to the SEC's June 28. 2011 letter. on July 19,2011, Defendants, through their attorneys, caused the Company to respond to the SEC, in a letter posted publicly on the SEC's website, stating, in pertinent part, as follows with respect to the SEC's comment concerning the

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MD&A section of the Company's 2010 Form JO-K: "The Company acknowledges the Staff's

comment and, in future filings, the Company will, as applicable, describe and quantify known trends that it expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations in accordance with Item 3034z)(3)(iO."

185. Defendants' statements continued to mislead analysts and investors concerning the

Company's prospects, future performance and outlook. For example, Deutsche Bank analyst Dan

Galves wrote in his July 12, 2011 report on A 123 that "[o]ur confidence in 2nd half 2011 revenue of

$I60MM+ has increased. . . Given orders from AONE's key 2011 launch customer (discounted

20% by DB), announced grid business, and orders from new comm'l truck customer Smith EV, we

believe that the company has visibility to $65MM-$75MM rev in Q3 and $90MM+ of rev in Q4."

186. The statements referenced above in ¶1 8081 were materially false and misleading

for the reasons set forth in ¶171. In addition, the statements referenced in 111180-81 concerning

A123's ability to recognize revenues from battery sales to Fisker were materially false and

misleading when made because, in June 2011, after learning that commercial production of the

Karma had not commenced, the DOE issued the Drawstop Notice and indefinitely suspended LARA

payments to Fisker.

187. On August 4, 2011, A 123 issued a press release announcing Al 23's second quarter

2011 financial results, for the period ended June 30, 2011. For the quarter. the Company reported

total revenue of $36.4 million, an increase from $22.6 million for the second quarter of 2010. In

terms of cash, A123 reported cash and cash equivalents of $294.9 million compared to $136.8

million for the first quarter of 2011. The press release quoted Defendant Vieau, who stated, in

pertinent part, as follows:

The highlight to the second quarter was a doubling in the number of our transportation programs in production. This marked an important milestone for

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A123 as we shifted our focus from building capacity to ramping production. We doubled our revenue from the first quarter, due largely to the fact that we started shipping prismatic modules and packs in volume to fisker and Smith Electric Vehicles. Overall shipments almost tripled from the first quarter, and this scale contributed to an improvement in gross margin.

We continue to anticipate that revenue for the full year will more than double from 2010 as volumes continue to climb in the second half of the year. In conjunction, A123 will he in an increasingly strong position to drive efficiencies in our manufacturing processes and position our company for profitable growth in the years ahead.

188. Later in the afternoon on August 4. 201 LI 23 held an earnings conference call with analysts and investors during which they provided additional positive commentary on the

Company's business, including Defendants Vieau and Prystash's updates on the Company's progress in meeting its previously-provided financial guidance, stating. in pertinent part, as follows:

Defendant Vieau:

Highlights for the second quarter were that, we doubled our revenue for the quarter from the first quarter, a primary drive of this dramatic growth was the ramping of shipments to Fisker and Smith Electric Vehicles.

With the strong second quarter behind us, and customer demand remaining robust, we believe the company remains on track to deliver greater than 100% year-over- year revenue growth in 2011.

With our initial capacity expansion plans in place, we are increasingly focused on cost-efficiencies, margin improvement, and cash management. As you know, we have invested significantly in our expansion over the past few years. The second quarter marked an important transition as our 600,000 square feet facilities in Livonia and Romulus, Michigan reached much more significant production volume.

We increased our staff in Michigan where we now have more than 1,000 employees. We believe this transition is an important milestone in A123's progress towards being a large scale manufacturer.

In line with that transition, we've shifted our focus to optimizing our operating efficiency and drive long-term margin improvements. We continue to anticipate that our annual manufacturing capacity will be 660 megawatt hours at the end of 2011, up from 350 megawatt hours at the end of last year. We believe this capacity level -53- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 57 of 113

supports an annualized revenue run rate of $400 million to $450 million. With the developing business pipeline in all of our target markets we now expect to increase our capacity commitment beyond the previously stated 760 megawatt hour level.

From a timings perspective, we are likely to make that commitment some time in 2012 as we judiciously balance capacity expansion with margin improvement, cash flow management and our desire to capture market share. We believe our experience, customer commitments and capital resources provide us with the foundation to continue to drive rapid cost-effective growth in the years ahead.

In summary, strong execution and customer demand drove doubling of our revenue during the quarter. With multiple customers moving into production, we continue to expect our revenue to more than double in 2011. We remain confident that our growth will continue into 2012 and beyond with a strong market demand and a growing customer portfolio across all of our target markets. As our production volume scale, we are focused on increasing efficiencies to drive margin improvements that will position us to be a leading profitable player in the market.

Defendant Prystash:

Looking forward, based on our client deliveries in the grid business and additional transportation programs moving into production, we believe the sales trend experienced in the second quarter will continue in the second half qf the year. For 2011, we continue to expect revenue to he in the range of $210 million to $225 million consistent with prior guidance.

In summary, we are pleased to see our anticipated inflection point during the second quarter that resulted in the doubling of revenue from the first quarter. We expect this momentum to carry through the second half of this year through the combination of strong execution and customer demand. We are excited to see customer relationships progressed from the development stage to production stage and our new production facility is delivering products and volume.

189. On August 5, 2011, A123 filed its Form 10-Q with the SEC (the "August 2011 Form

10-Q"). which was signed and certified under the Sarbanes Oxley Act of 2002 by Defendants Vieau

and Prystash, and stated, in pertinent part, that A] 23 had "a supply agreement with Fisker pursuant

to which [it was] providing Fisker with advanced automotive battery systems over a multi-year period" and that "[r]evenue from [that] supply agreement ....represents. and is expected to continue to represent, a significant portion of 1A123] revenue" going forward. The August20] I

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Form 10-Q also valued the investment assets on the Company's hooks. including the Fisker preferred stock, at $21.5 million.

190. Defendants' statements continued to mislead analysts and investors concerning the

Company's prospects. future performance and outlook. For example. Morgan Stanley analyst

Joshua Paradise wrote in his August 5,201! report on A123 that "[t]he company reaffirmed the steep revenue ramp for 2H1 1."

191. The statements referenced above in 1[1187-89 were materially false and misleading for the reasons set forth in 1186.

192. On August 9, 2011, Defendant Prystash presented at the Pacific Crest Global

Technology Leadership Forum and provided additional positive commentary about the Company, confirming that A 123 was still on track to meet its previouslystated financial guidance and stating, in pertinent part, as follows:

We announced earnings last week. The highlights for the earnings were we had over $36 million of revenue which was double the first quarter which was consistent with the guidance that we gave at the beginning of the year and in May as well when we announced our first quarter earnings. Going forward we reconfirmed our revenue guidance for the rest of the year which is $210 to $225 million. The second quarter really represented an inflection point in our business where many of our developmental contracts migrated into the production phase. We shipped a little bit more than 42 megawatt hours of energy which was about triple what we did in the first quarter. So all in all we were very pleased with the revenue ramp.

Erik R. Olbeter - Pacific Crest - Analyst:

But what do you think about - what's your latest intel on Fisker's production plans? Where are we now? And how do you expect that to sort of ramp in 2012:

Defendant Prystash:

Well for the near term. Fisker early on had some launch problems. What gets mass to bid is the supply chain. We actually need to supply batteries six weeks ahead of when they use it and it takes six weeks once they make the car to get it to the dealer. So they are now starting to ramp up production, and our latest, I think Dave said this

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publicly, is that their latest production schedule is about 300 a week in the fourth quarter. And in our forecast we have enough packs to fulfill that. Next year we'll see what next year brings us. I think once the car's into production and once customers start to take the vehicles, they'll probably refine that more. But we have enough capacity to handle the 10,000.

193. On September 12, 2011, A123 hosted an analyst and investor day conference at its

Livonia, Michigan battery factory. During the conference, Defendants reaffirmed the previously- provided 2011 revenue guidance of $210 million to $225 million and highlighted the importance of

Fisker's continued contribution to A123's financial results. Specifically, Defendants Forcier and

Prystash stated, in pertinent part. as follows:

Defendant Forcier:

Just some updates on some of the programs that you're familiar with that we're working on. We are in production with fisker. as I mentioned, that we're ramping production towards the goal of 300 packs a week in Q4. One thing I want to highlight here, I talked about it on the tour, is that we are six weeks ahead of Fisker' s ramp, because of the logistics timeframe. Our packs that we make here [ph] in terms of our FCAR doc (1:15:58), but it takes six weeks to get into their production process. So when you see us ramping to 300 a week, we'll be six weeks ahead of Fisker. And you also need to remember that they have to ship those cars out to the customer base, so they have another four to six weeks shipping the car.

So by the time you actually see sales hooked, you're looking at a LO-week to 12- week timeframe from the time we actually made and shipped the battery pack. So that's something to he cautious of as we talk about our ramp. But the ramp is going very well. I think you see the volumes out there starting to scale and ramp and we're pretty excited about where that program's at and we're looking forward to the market introduction over the coming weeks.

Defendant Prystash:

Okay, that's a lot of information to process in such a short period of time. As the slide says, I am to give you a financial update. You may be a little disappointed in a way, because we're not going to update much, but that's a good thing, because we still view the rest oft/ic year and the future kind oft/ic same way we did a couple of weeks ago. when we talked to you back in the second quarter earnings call.

And to just highlight what happened in the second quarter, we stated then that the business inflection point had arrived and that was culminated in doubling the revenue

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and the tripling in output. Multiple customers went around the development stage into production. The strong business pipeline continued, with more announcements like the GM announcement. We expect our full year revenue to more than double from 2010 and we're right now in the midst of shifting from a launch to an operating mode in the company.

Just to reaffirm what we said to you back in August 2010, we had $97 million of revenue. At this point, we are still comfortable that we'll be in the $210 million to $225 million range for the full year in 2011. The geography between quarters still may change a little hit. We have to get that trailer down to [ph] Chile so Chris accepts it (2:44:02) and that's one of the things that may impact the distribution between the quarters. But again, from what we see today, we think we'll he somewhere in the $210 million to $225 million range for the quarter.

Unidentified:

Can you just talk about, as you go into the fourth quarter, the risks of annualizing the fourth quarter revenue number into 2012? Obviously, it's heavily dependent on Fisker, but are there other one timers in there, like AES, that we should be thinking about?

Defendant Forcier:

The question has come up several times today on Fisker and how we are looking at Fisker for next year. and I think you mentioned it again. We said we are ramping at 300 a week on fisker in Q4. that's a 15.000 unit a year run rate. for next year's planning purposes, we are using J.D. Power's CSM to plan our financial picture. So that implies that we are taking a reduced number from the 15,000 into our financial plan.

We haven't said specifically what we are taking the number down to. But we are using third-party data to set the rate for Fisker and for all of our OEM contracts, for that matter, going forward on the automotive side. So I think, as we set the budget, you won't see us lock in at 15,000, which might he the run rate in Q4, but we are anticipating that number to come back, based on what third-party forecasting agencies are implying for our production contracts. I mean, you could look this up as well as I could, but I think CSM is around 5,000 units and I think J.D. Power's is around 7,000. And that data is out there in public, so it's in that range.

194. On October 4, 2011, A123 announced that on September 30, 2011, A123 and a

Silicon Valley Bank had entered into a Credit Agreement providing A 123 and its subsidiaries with a revolving loan facility of up to $40 million. The Current Report on form 8K that Defendants filed -57- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 61 of 113

with the SEC that day stated that the funds were "to be used to refinance the Corporation's prior outstanding revolving loan facility . and for working capital and general corporate purposes"

195. Defendants' statements continued to mislead analysts and investors concerning the

Company's prospects. future performance and outlook. For example. Morgan Stanley analyst

Joshua Paradise wrote in his September 13. 2011 report on A123 that [g]uidance unchanged.

Management reiterated 2011 revenue guidance of $2 10-225MM implying that 2H 11 revenues will be nearly triple LHI 1." Likewise, Craig-Hallum analyst Robert D. Brown wrote in his September

13, 2011 report on A 123 that [m]anagement reiterated its 2011 revenue guidance of $210 to $225 million and that visibility on the development pipeline is beginning to improve, providing increased confidence in our forward estimates."

196. The statements referenced above in ¶119293 were materially false and misleading for the reasons set forth in 11186.

A123 Reduces Its Revenue Guidance but Defendants Misleadingly Assert that the Reduction Is "Unexpected" and Will Be "Temporary"

197. On November 4. 2011 - three days after Fisker confidentially informed the DOE that it would shortly run out of money - A 123 reported that it was revising its revenue guidance downward by 22%, misleadingly blaming "an unexpected reduction in orders for battery packs from

Fisker." Defendants affirmatively downplayed the announcement. reassuring investors that the

Fisker reduction" was only"temporary," and that A123's relationship with fisker remained

"strong."

198. On this news, the price of A123 common stock closed at $3.17 per share on

November 4. 2011, down from its close of $3.53 per share on November 3, 2011.

199. On November 9, 2011, A123 issued a press release announcing its third quarter 2011 financial results, for the period ended September 30. 20 LI. The press release announced that the

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Company's total revenue had increased to $64.3 million, or 145% above its third quarter 2010 total revenue of $26.2 million. With regards to cash and cash equivalents, the Company reported that it had $225.8 million as of September 30. 2011, compared to $294.9 million as of June 30, 2011. The press release also quoted Defendant Vieau, stating, in pertinent part. as follows:

The ramp in production volumes that began during the second quarter continued into the third quarter, resulting in record quarterly revenue of $64.3 million and record quarterly shipments of 67 .7MWh. Last week, we revised our 2011 revenue guidance based on a reduction infourth-quafler orders from Fisker Automotive as it balances inventory levels from all suppliers for the Karma plug-in hybrid electric vehicle. We have taken actions to address the near-term challenges associated with this reduction in volume, and remain optimistic about Fisker and our long- term growth across each of our target markets.

During the third quarter, we were sourced for production on a new transportation program. made significant progress in our grid business, and continued to see growing demand for our commercial solutions. In addition, we believe the recent expansion of our partnership with IHI Corporation establishes a strong conduit for delivering A123's battery system technology to the Japanese market. The IHI agreements provide for proceeds of $32.5 million, which will further increases our available resources when combined with our recent $40 million asset-based lending facility that we put in place in September.

Looking ahead, we remain confident in our ability to scale 4123s business over the next several years based on the growing level of stated demand from our diverse portfolio of customers across each of our target markets. We are making progress on our cell-cost reduction strategy, and we expect to reduce our cash burn. We believe the company will be well-positioned to achieve break-even quarterly gross margins within 2012, followed by break-even adjusted EBITHA in 2013.

200. Later in the afternoon on November 9, 2011, Al 23 held an earnings conference call with investors and analysts. Defendants Vieau and Prystash updated the Company's progress on meeting its previously-stated financial guidance, with Defendant Vieau stating, in pertinent pail, as follows:

Defendant Vieau:

We expect demand for additional battery packs to remain low through the first quarter of next year, picking up in the second quarter and increasing over the course of 2012. Fisker is producing cars. It has received the necessary regulatory

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approvals and has begun delivery of production vehicles all of which strengthens our belief that Fisker has the potential to drive meaningful volumes.

* * *

In summary, we continued to make progress against our long-term goals during the quarter. It is unfortunate that the dramatic increase in our revenue run rate during the second quarter and third quarter will not continue into the fourth quarter as Risker balances inventory across its overall supplier base. But we remain on track to deliver substantial revenue growth during the 2011 and continue to be optimistic about our long-term goal. We're encouraged by the strong market demand and growing opportunities in each of our target markets. In automotive we have significant relationships in place with auto manufacturers in every global marketplace. We're seeing growing market opportunities in Japan and China and we're expanding our lead in the commercial vehicle segment In the grid market, we continued to win new programs, new regulations have the potential to stimulate market demand and we're seeing meaningful growth and opportunities both in U.S. and international markets that continue to reevaluate their energy needs. In commercial, we have 10 new programs that are moving to production next year and we're seeing a growing number of attractive applications for our products. The combination of these factors provides us with confidence in our ability to scale A123's top line over a multi-year period with expected leverage from this scale enabling an improved bottom line over the next several years.

* * *

Dan Galves - Deutsche Bank - Analyst:

Okay, got it. In terms of Fisker, it sounds like I guess I'm just trying to get a sense for the guidance, implied guidance for the fourth quarter is maybe like $46 million to $60 million of revenue. So Fm just wondering is there any Fisker production in the quarter? Should we be expecting kind of a similar run rate of revenue into the first quarter? And if you could tell us at all what your kind of Fisker revenue was through the first three quarters that would be helpful.

Defendant Vieau:

Yeah, Dan, this is Dave, we really can't give you a detailed disclosure on the Fisker revenue and it's confidential with them obviously. But we expect a dramatic drop off in the fourth quarter while they do inventory adjustment and we expected to moderately increase in Q I but not to the level that we have achieved in Q3. We do think that by Q2 their number should grow. I mean, there, this is a - I watch them perform and see how well they do on execution here. They've done meaningful progress in terms of getting through the regulatory bodies and getting the vehicles out into the dealers' hands, and getting revenue from vehicles at this point in time. So all that's very positive, but right now they've got inventory balancing going on. So we feel good that we met our ramp commitment but there's obviously certain

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other vendors that didn't and therefore they're doing catch up right now overall. I think they're very bullish on what next year will be and from our perspective, just as we have been all along, let's wait and see.

Joshua Paradise - Morgan Stanley - Analyst:

Hey, guys thanks for taking my question. Obviously, there is a lot of customer concentration right now. Looking out to 2012 and 2013 as you have more production contracts with more customers, can you try to ballpark how big the biggest customers would be as a percentage of revenue in 2012 and 2013?

Defendant Vieau:

Well, Fisker continues to be a significant percentage, I can't give you exact percentages on this. Josh, but I can say Fisker continues to be a significant contributor to revenue.

201. On November 9,2011. A 123 filed its Form 10-Q with the SEC (the "November 2011

Form 10-Q"). which was signed and certified under the Sarbanes Oxley Act of 2002 by Defendants

Vieau and Prystash, and stated, in pertinent part, that A123 had "a supply agreement with fisker pursuant to which [it was] providing Fisker with advanced automotive battery systems over a in ulti- year period" and that "[r]evenue from [that] supply agreement ....represents. and is expected to continue to represent, a significant portion of 1A1231 revenue" going forward. The November

2011 form ! 0Q also reiterated that in November 2011, [A! 23] announced revised annual revenue guidance for 2011 due to an unanticipated reduction in orders from Fiskerjór the kurt/i quarter," while reassuring investors that the Company continued to "invest in capital expenditures and build

[its] manufacturing capacity in anticipation of demand, including anticipated dernandfrom Fisker under the supply agreement.... The November 2011 Form 10-Q valued the investment assets on the Company's hooks. including the fisker preferred stock, at $21.5 million.

202. The price of A 123 common stock closed down further on this news, closing at $3.09 per share on November 9. 2011 and $2.97 on November 10, 2011.

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203. Defendants' statements on November 4 and 9, 2011 generated surprise and disappointment from both analysts and investors. For example. Deutsche Bank analyst Dan Gal yes stated in his November 4, 2011 report on A123 that "the magnitude of this reduction is surprising."

Likewise. Craig-Hallum analyst Robert D. Brown wrote in his November 10, 201 report on A 12 that A 123 previously announced that Fisker, its largest customer, unexpectedly reduced orders, which will lead to much lower Q4 revenue for A123. Q4 revenue is estimated at $55-$70 million, well below our prior estimate of $86 million. While management noted it expects lower Fisker orders to spill over into I Q 22 as well, it expects volume to pick back up in 2Q20! 2." Similarly.

Macquarie analyst Kelly Dougherty noted in her November 17, 2011 report on A123 that "[o]n

November 4th AL 23 was forced to cut its 2011 revenue guidance —20% to US$1 65m- I 85m (from

US$21 0-225m) due to the Fisker delay. The impact on 4Q!] will be significant as implied guidance is now nearly 50% lower than it was previously (now US$46-61m vs. US$91-106m)."

204. The statements referenced above in 9[1[197: 199-201 were materially false and misleading for the reasons set forth in 1186. In addition, the statements referenced in ¶91! 97; 199

201 concerning Fisker' s ability to contribute to A123's revenues for the remainder of 2011 and fiscal year 2012 were materially false and misleading because, to preclude a complete free-fall in the

Company's stock price, Defendants affirmatively downplayed Fisker's order reduction, reassuring investors that the Fisker "reduction" only reflected a "temporary" inventory reduction, and that

A 123's relationship with Fisker remained "strong" when Defendants knew that Fisker was unable to pay for future battery sales and had lost its DOE funding.

205. On November 26, 2011, less than three weeks alter the November 9, 2011 earnings announcement. AL 23 laid off 125 workers at its Michigan plants. The Company attributed the cut to

Fisker's reduced orders.

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206. On December 21, 2011. the NHTSA recalled 239 fisker Karma's due to battery

safety issues that could result in fires for Karma's manufactured between July I, 2011 and

November 3, 2011. thus implicating the safety of A 123's batteries.

207. Two days later, on December 23, 2011. Defendant Vieau authored a memo addressed

to A 123 Systems Customers. Partners, investors and all other Stakeholders" announcing that A 123

Systems "ha[s] determined that some of the battery packs [it] produce[s] for Fisker Automotive

could have a potential safety issue relating to the battery cooling system." which in "certain"

unspecified rare circumstances" could possibl[y]" cause a leak leading to an electrical short

circuit. Defendant Vieau claimed that "fewer than 50 customer cars are involved in this action."

despite NHTSA's announcement two days earlier that the potential number of units affected was

239. Defendant Vieau proclaimed that the Company "expect[cdl this situation to have minimal financial impact on it 123."

208. On January 10. 2012, Defendants Prystash and Forcier presented at the Deutsche

Bank Global Auto Industry Conference. Defendant forcier claimed that A123 had been "taking a

hard look at [its] designs" and found a "fairly minor" issue with a cooling clamp, stating further, in

pertinent part. as follows:

Obviously we were taking a hard look at our designs along with our customer base and from that found that a cooling clamp could be put on like this, instead of like this. And when you put it on like this, it interferes with the cover of the pack, which could cause the clamp to open. And theoretically then, coolant could leak out because there wasn't enough pressure on the coolant clamp into the pack and you could have a similar situation as to what, the one GM observed.

We never observed anything in the field that was related to any kind of thermal instance, but we thought it prudent to fix those 35 to 50 cars that were in the field and that's what we did. So from a cost impact standpoint it's not significant. We'll talk more about it, I think, in our Q4 call, but there were about 50 cars in the field. We went out, replaced those battery packs and then we fixed the inventory that Fisker had. And really the cost to do the fix is just the labor to drop the pack. open it up, turn the connector and put it back on.

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So thatN the full situation and thatN where it's at

209. On January 20. 2012, A 123 announced that on January 19, 20L2. AL 23 had "entered into a placement agent agreement with Lazard Capital Markets LLC relating to a registered direct offering by the Company of an aggregate of 12,500,000 units," with "[e]ach Unit consist[ing] of one share of the Company's common stock and one warrant to purchase one share of such common stock at a negotiated purchase price of $2034 per Unit." and stating that [t]he Company expect[ed] to raise gross proceeds of approximately $25.4 million from the offering of the Units."

210. The Current Report on Form 8-K that Defendants tiled with the SEC that same day,

January 20, 2012, also provided an earnings guidance update, stating, in pertinent part, as follows:

Fourth Quarier 2011 Updaie

Although the Company's financial statements for the year ended December 31,20!] are not yet complete, preliminary indications are that year-end revenue will be approximately $162 million which is lower than the previously disclosed range of $ L65 to $180 million. This is due primarily to the previously-announced reduction in Fisker's fourth quarter pack demand and the resulting decrease in shipments. The Company expects Fisker's pack demand to start increasing earlier in the first quarter of2 012 than previously anticipated and will begin to ramp up production shortly.

211. Pursuant to a prospectus that Defendants caused A123 to file with the SEC on

January 20, 2012, the security units offered for sale on January 19. 2012 were registered with the

SEC for resale.

212. The statements referenced above in fl207-08; 210 were materially false and misleading for the reasons set forth in 4[204.

Fisker's Impaired Financial Condition Is Revealed and the Company Takes an Impairment Charge on Its Investment in Fisker as Defendants Continue to Claim that A123 Will Receive Significant Future Revenues from Battery Sales to Fisker and Attempt to Downplay Defects with the Company's Batteries

213. On February 9, 2012, Wunderlich Securities analyst Theodore O'Neill reported that

Fisker's DOE funding had been suspended. that Fisker was suspending work on Project Nina, and

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that Fisker had laid off more than 60 workers and contractors as a result of losing its DOE funding.

The Wunderlich Securities report stated, in pertinent part, as follows:

Fisker has had its Department of Energy funding suspended and because it has become part of an intense political debate, it may never be restored.... With the loss of DOE funding. Fisker will be forced to allocate its cash sparingly and we believe this will cause it to lower Karma production expectations further as well as lay off workers. . Without Fisker, AUNE has no repeatable sales prospects of any significant size.

214. On this news, the price of A123's common stock closed at $1.88 per share on

February 9. 2012, down from its close of $2.47 per share on February 8, 2012.

215. On February JO, 2012. it was further reported by the NLPC that. after the DOE' s May

2011 payment to Fisker. the DOE had halted loan payments because fisker had failed to attain

Karma production milestones.

216. Rather than disclosing the actual state of affairs at this time, however. Defendants instead chose to continue to mislead investors in a February 10, 2012 Cram's Detroit Business interview when Defendant Forcier stated that A123's Livonia and Romulus plants would be unaffected by Fisker's financial problems. In fact, according to Defendant Forcier, AI23's automotive operations would continue to grow despite the indefinite delay to Fisker's Project Nina, stating, in pertinent part, that:

Nina was a futuristic project and more of an engineering exercise at this point[.] This delay on the Nina project actually helps us by allowing us to pull our engineers to other programs. . . We've got a solid hook of Inisiness. and if the program (Nina) were to go away for whatever reason, we are still able to keep Michigan employment growing for years to come[.] We don't anticipate a change in that.

217. On March 1, 2012, A123 announced preliminary financial results for the fourth quarter of 2011 and fiscal year 2011 (for the period ended December 31. 2011), stating revenues were expected to be a 68% increase" from fourth quarter 20! 0. A! 23 also claimed to have taken a number of actions to improve [A 123's] manufacturing efficiency, including the addition of anew

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Chief Operating Officer, Ed Kopowski, who [was] leading [A 123's] efforts to reduce costs, improve quality, and better utilize assets," resulting in "early indications of manufacturing yields for prismatic cells produced in Michigan reaching fitsi target range." A123 also issued preliminary revenue guidance for 2012, stating revenue would he "in the range of $230 million to $300 million. representing 67% growth from 2011 at the midpoint."

218. On March 6. 2012, the Company's Silicon Valley Bank line of credit had been modified to, among other things, increase the interest payable on outstanding amounts and decrease the revolving termination date from September 30, 2014 to June ]. 2013.

219. On March 8, 2012, A123 issued apress release announcing its financial results fertile fourth quarter of 2011 and full year 2011 financial results, for the period ended December 31. 2011.

The results were consistent with the preliminary results announced on March ]. 2012, with A! 23 predicting "strong revenue growth and improv[ed] profitability margins during 2012." For the quarter. the Company reported total revenue for the fourth quarter of 2011 of $40.4 million. compared to $24 million for the same period in the prior year. For the year, the Company reported total revenue in 2011 of $159.1 million - an increase of only 64% compared to revenue of $97.3 million in 20 LO and far less than the $210 to $225 million range that Defendant repeatedly assured

A] 23's investors throughout 2011 would be achieved. In terms of cash. A 123 reported cash and cash equivalents of $186.9 million compared to $225.8 million for the third quarter of 2011.

220. Also on March 8, 2012, A123 held an earnings conference call for analysts and investors to discuss the Company and its business. During the conference call. Defendants Vieau and Prystash stated, in pertinent pail, as follows:

Defendant Prystash:

Assets were also reduced by $11.6 million from afair value impairment charge on our existing investment in Fisker. We elected not to participate in Fisker's recent stock offering. -66- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 70 of 113

Turning to our guidance for 2012, we anticipate revenue in the range of $230 mill ion to $300 million, representing 45% to 90% growth compared to last year. This range reflects further diversification as new customers go into production in all of our business areas. We anticipate that revenue from the transportation market will he in the range of $130 million to $160 million. We are prqjected to have $130 million in transportation revenue rom customers other than Fisker.

Cohn W. Rusch - ThinkEquity - Analyst:

Hey. guys. Can you walk us through what the warranty issues were in a specific way and what you've done to resolve those so we can get some comfort that those won't be recurring going forward?

Defendant Vieau:

Yes, sure. There were two specific items that we dealt with. One of them had been very highly discussed, which is a Fisker program where we had problems with hose clamps. Now these are mechanical clamps on flexible hoses that basically was a mechanical impingement on those that occurred in the manufacturing operation. The testing that we had done on those systems that would normally detect that were done before the mechanical covers were put in place. And unfortunately, that test wasn't sufficient to cover it. So we ended up with some of that leaking out into the field, and we had to go off and replace battery packs for 35 customers in the field, and some of those are dealers.

We did identify this and in identification of it found the root cause of it and took corrective action and completed all repairs and replacements of existing packs within two weeks. So we think we did a good job of containing that particular issue. And we understand what the root cause of it was from a design and manufacturing standpoint and it has been taken care of and corrected. It certainly had nothing to do with the integrity of the packs themselves or the cells or the systems. It was really related to a $0.10 hose clamp, frankly, improperly applied.

221. ironically, on the very same day that Defendants represented to A 123's investors that the integrity of the Company's batteries remained intact despite the NHTSA recall, Consumer

Reports announced on March 8, 2012 that, while conducting speedometer calibration runs on its test track with a Fisker Karma, the car's dashboard flashed a message and sounded a 'bing' showing a major fault." According to Consumer Reports, "[w]e buy about 80 cars a year and this is the first

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time in memory that we have had a car that is undriveahie before it has finished our check-in

process."

222. On March 12, 2012. A123 filed the 2011 Form 10-K, which was signed and certified

under the Sarbanes Oxley Act of 2012 by Defendants V ieau and Prystash. and represented that A 123

had a supply agreement with fisker pursuant to which [it was] providing Fisker with advanced

automotive battery systems over a multi-year period" and that "[r]evenue from [its] supply

agreement with Fisker represent[ed]. and [was then] expected to continue to represent, a significant portion of [its] revenue" going forward. The 2011 form 10-K reiterated that in

November2011 and again in January. 2012, [A123] announced revised annual revenue guidance for

2011 due to an unanticipated reduction in orders from Fisker." but reassured investors that the

Company continued to invest in capital expenditures and build [its] manufacturing capacity in

anticipation of demand, including anticipated demand from Fisker under the supply agreement. . . ." The 2011 Form 10-K also stated, in pertinent pail, the following with respect to

A123's accounting for inventory:

We carry our inventory at the lower of historical cost or net realizable value assuming inventory items are consumed on a first-in, first-out basis. We recognize inventory losses based on obsolescence and levels in excess of forecasted demand. In these cases, inventory is written down to the estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technical obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could he required and would be reflected in the cost of revenue in the period the revision is made.

223. Additionally, the 2011 form I 0K elaborated on the impairment charge taken by the

Company with respect to its investment in Fisker, stating, in pertinent part, as follows:

During the year ended December 31. 2011, we elected not to participate in fisker's subsequent stock financing. This election not to participate resulted in the conversion of our preferred shares of Fisker to common shares on a 2:1 ratio. As

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such, we performed an analysis and valuation qf our investment in Fisker resulting to the recognition of an impairment charge of $11.6 million for the year ended December 31, 2011.

224. The 2011 form !0K also represented, in pertinent part, as follows:

Our cylindrical batteries are in volume production and are commercially available for use in automotive and heavy duty vehicles. Our next generation prismatic batteries are currently being produced in our Livonia, Michigan facility, which officially opened on September 13. 2010. This 291,000 square foot facility is designed to enable the complete production process, including research and development, manufacturing of high-value components, cell fabrication, module fabrication and the final assembly of complete battery packs ready for vehicle integration.

Our energy solutions group offers a variety of fully-packaged systems as well as sub- module building blocks for battery system development. Our development of integrated systems includes not only the packaging of our batteries, hut also power electronics, safety systems, thermal management, testing, production and qua!jfication. We design standard systems as well as custom systems using a modular design based on standard building blocks. We manufacture a variety of battery systems, in which cells or modules are connected in various configurations to meet the design requirements of specific applications. The following are examples of a modular building block based on our 32113 REV cylindrical cells and various module designs using our scalable 20Ah prismatic cells.

Our prismatic battery system's design allows for various battery configurations, providing pack design versatility for the automotive market. This design reduces retooling time when reconfiguring our assembly lines for different customers. Our battery systems are highly engineered to incorporate safety and con trol'features that extend life and improve performance. Module-level fusing, temperature sensing and other safety controls provide additional containment safeguards to isolate and protect against cell-levelfàilure. Active overvoltage protection provides monitoring and balancing of individual series elements to protect cellsfiroin abuse and to extend ljfe. These battery systems are designed to accommodate either liquid or air-cooled thermal management systems, and have mechanical structures designed to withstand the harsh vibration and mechanical shock environment of automotive applications.

225. The 2011 form 10-K listed Defendants Vieau. Prystash and forcier, as well as Louis

M. Golato, as executive officers of the Company.

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226. The February and March 2012 revelations from Defendants were poorly received by analysts and investors. For example. Deutsche Bank analyst Dan Galves stated in his March 8.2012 report on A123 that "[a]ctual customer orders has been below our and the mgmt's expectations, which has led to compounding negative effects of revenue misses, low capacity utilization. significantly negative cash gross margin, and an operating expense structure more appropriate for a larger company. Operational execution in manufacturing has also been weak."

227. The statements referenced above in fl2 16- L 7; 219-20; 222-24 were materially false and misleading for the reasons set forth in ¶204. In addition, the statements referenced in ¶216 concerning Defendants' characterization of the impact that Fisker' s cancellation of Project Nina and

Fisker's loss of DOE funding would have on A 123's revenues were materially false and misleading because, to preclude a complete free-fall in the Company's stock price. Defendants reassured investors that A123 had a "solid book of business" and that the loss of future revenues from Project

Nina would actually "help" A123 when in fact Defendants knew that Fisker had lost its DOE funding and would be unable to pay for future battery purchases. Moreover, the statements referenced infl216-17; 219-20; 222-24 were materially false and misleading because the Company was materially overstating the value of its inventory by at least $L5 million, as a material portion of its battery inventory was defective.

A123 Voluntarily Replaces Its Flawed and Defective Batteries While Defendants Continue to Tout the Company's Relationship with Fisker

228. On March 26, 2012. the Company announced in a press release "that the company has launched a field campaign to replace battery modules and packs that may contain defective prismatic cells produced at A 123's Livonia. Mich. manufacturing facility." costing a massive $55 million to be

"funded over the next several quarters." The $55 million represented approximately one quarter of

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the Company's projected annual revenue for 2012. which the Company estimated to be between

$230 million and $300 million. The press release also disclosed the following, in relevant part:

A123 has begun building replacement modules and packs and expects to begin shipping them to impacted customers this week. The company anticipates that the cost of replacing the affected customer modules and packs will he approximately $55 million and expects it will he funded over the next several quarters.

"Recently, A] 23 has discovered that some prismatic cells made in our Livonia facility may contain a defect which can result in premature failure of a battery pack or module that includes a defective cell. We have isolated the root cause of the defective cells and we are confident that we have pinpointed the source of the defect and corrected it. As a result of engineering analysis and testing, we believe this is not a safety issue, and we have determined the root cause and have taken corrective actions," said David Vieau, CEO of A123 Systems. "We are working to get replacement packs and modules to impacted customers as quickly as possible. It is important to note that this defect has been discovered only in some prismatic cells manufactured at our Livonia facility. Prismatic cells produced at another A123 facility are not impacted. Further, the cylindrical cells we make at our facilities in China for a number of other transportation programs, as well as the majority of our grid energy storage systems and commercial applications, are also not affected by this defect."

229. That same day. the Company held a "business update call" regarding the replacement of A 123's batteries. Joining Defendant Vieau on the call were Defendants Prystash and Forcier.

Defendant Vieau admitted the severity of the problem, stating, in pertinent part, as follows:

As we announced this morning. A 123 has discovered that some battery modules and packs produced with prismatic cells made in our Livonia. Michigan manufacturing facility may contain a defect, which can result in premature failure of the battery pack or module, including a decrease in performance and reduced battery life.

While we cannot discuss the specific customers that are part of this campaign. there are five transportation customer production programs that have received products from A [23 that potentially have defective cells. We are working with these customers to develop a schedule to get them replacement packs and modules to quickly remedy the situation. We have begun building replacement systems and expect to begin shipping them this week.

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As for the financial impact of this campaign, we anticipate that the cost of replacing the affected customer modules and packs will be about $55 million, and we expect it will be funded over the next several quarters. We have sufficient liquidity to fund this campaign, but expect this situation will require us to adjust our fund-raising strategy. We plan to provide an updated outlook during our next quarterly earnings call.

Sanjay K. Shrestha - Analyst:

Good morning, guys. So my first question is, so if you guys have isolated that this is related to one automated welding machine, and you have four of them at this facility, right? And given your revenue last year. that's $55 million in anticipated costs to potentially replace all this battery pack and modules seems a bit high.

So help me understand that as to why the number is $55 million. If it's really isolated to just one welding machine, it should he 25% of your capacity, and that $55 million should have been lower.

Defendant Vieau:

Well, the actual defect rate from the machine is a fraction of the product that was produced on the machine, right? It produces a small - a sort of single-digit percentage amount of cells. But when you put a large number of cells in a module or a pack. the probability that that module or pack contains a defective cell is very high in fact.

Sanjay K. Shrestha - Analyst:

Yeah.

Defendant Vieau:

So we first of all would sort out from the entire product that we produced and shipped last year, the product that was produced at our other facility has not been affected by this. So that is clear from this campaign. But we feel that virtually all of the product that we produced in this facility has been effectively contaminated by this particular defect, because of the statistical -

Sanjay K. Shrestha - Analyst:

All of them.

Defendant Vieau:

- nature of the large packs.

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230. Shortly after the Company's March 26, 2012 announcement concerning A 123's batteries. Fisker made an announcement, stating, in pertinent part, as follows:

Fisker['s] . . high-voltage battery supplier, A123 Systems, discovered a latent manufacturing defect in some prismatic cells made in Livonia, Michigan facility that could result in battery underperformance and decreased durability. As a result, it 123 is replacing all impacted battery modules and packs for the Fisker Karma.

Fisker has been working closely with A123 Systems regarding a high-voltage battery power loss experienced in one of our customer's vehicles, belonging to Consumer Reports. The problem was traced to the A123 battery pack by fisker's Quality SWAT Team.

231. On this news, A 123's common stock price plummeted $0.21 per share, or more than

12%, to close at $1.49 per share on March 26, 2012.

232. As a result of these disclosures. Deutsche Bank analyst Dan Galves immediately lowered his rating to Hold." stating that [tjhe estimated cost of this action $55 [million] over the next several quarters - represents a severe impact to a company that had $187 [million] of balance sheet cash at 201 LYE." Mr. Galves further noted that "we no longer have sufficient confidence that

[A 123] can raise sufficient capital (without massive equity dilution) and/or continue to augment their book of future business." Likewise. Barclays analyst Amir Rozwadowski wrote in his March 26,

2012 analyst report on A 12 that "A 123 estimates the impact of replacing the batteries will he

—$SSM, phased in over time. Though management is unable to provide specifics on the impact of the cost at this juncture, the unexpected and sizeable nature of the expenses is clearly a headwind for the company."

233. The Company's stock further declined an additional $0.18 per share, or nearly 13%. to close at $1.22 per share on March 28, 2012.

234. On April LI. 2012, A123 announced that on April 5, 2012. A123 and the DOE had entered into an amendment to the December 4.2009 agreement between the Company and the DOE -73- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 77 of 113

related to the terms and conditions of the $249.1 million grant that was awarded to the Company on

August 5, 2009, extending the term of the contract from December 2, 2012 to December 2, 2014.

The Current Report on Form 8-K that Defendants filed with the SEC that day also stated that

"[t]hrough December 31, 2011, the Company had received $127.0 million from the DOE in reimbursement for costs incurred."

235. On May 11, 2012, A123 issued a press release announcing its first quarter 2012 financial results (for the period ended March 3 L,2012). The release represented that revenue for the first quarter of 2012 was expected to be approximately $10.9 million "below [Defendants'] prior expectations" and "a decrease of 40% from $18.1 million in the first quarter 2011 for a predicted net loss of approximately $ L25 million. Defendants also adjusted A 123's full-year revenue forecast downward, stating that capacity for prismatic cell production [would] be constrained for the foreseeable future" and that revenue in 2012 would be in the range of $145 million to $175 million, compared to prior expectations of $230 million to $300 million.

236. The Company's May 11, 2012 press release also announced for the first time that, in addition to the March 2012 voluntary battery replacement initiative, the Company was also taking an inventory charge, stating. in pertinent part, as follows:

Net loss in the first quarter of 2012 is expected to he approximately ($125.0) million. Anticipated net loss for the first quarter includes an estimated $51.6 million warranty expense related to the previously announced field campaign to replace battery modules and packs that may contain defective prismatic cells produced at the Company's Livonia, Mich. manufacturing facility. Also included in the anticipated net loss fin, the first quarter is an estimated $15.2 million increase in inventory reserves related to battery packs, modules and cells man ufàctured in Livonia, Mich. that may he defective.

237. On May 15, 2012, A 123 held an earnings conference call for analysts and investors to discuss the Company and its business. During the conference call, Defendant Vieau stated, in pertinent part. as follows:

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Revenue for first quarter was below expectations that we discussed in our fourth quarter call. primarily due to the deferred revenue recognition for products subject to the field campaign. Net loss in the quarter was impacted by the $51.6 million warranty expense related to this campaign, and was slightly below our initial estimate of $55 million and an associated $15.2 million inventory charge.

238. Also on May 15, 2012. A123 filed its quarterly financial report on Form 10-Q with

the SEC (the "May 2012 Form 10-Q"), which was signed and certified under the Sarbanes Oxley Act

of 2002 by Defendants Vieau and Prystash, and stated, in pertinent part. that A 123 had a supply

agreement with Fisker pursuant to which [it was] providing Fisker with advanced automotive battery

systems over a multi -year period" and that "[r]evenue from [that] supply agreement .....epresents.

and is expected to continue to represent, a significant portion of IA 1231 revenue" going forward.

The May 2012 Form 10-Q also reiterated that "in November 2011 and again in January, 2012,

[A 123] announced revised annual revenue guidance for 2011 due to an unanticipated reduction in

orders from fisker." and stated that the Company was continuing to invest in capital expenditures

and build [its] manufacturing capacity in anticipation of demand, including anticipated demand from Fisker under the supply agreement. ... The May 2012 Form 10-Q stated that the Company

had performed an analysis and valuation of its investment in Fisker resulting in an adjusted

investment value of $8.9 million for the Company's investment in Fisker's preferred stock.

239. Additionally. May 15. 2012. saw A123 announce that on May IL, 2012, it had

entered into a Securities Purchase Agreement with institutional investors pursuant to which the

Company had agreed to sell $50 million aggregate principal amount of unsecured, senior convertible

notes and warrants to purchase shares of the Company's common stock equal to 30% of the number

of shares underlying the notes assuming conversion at the initial conversion price.

240. On May 30, 2012. A123 filed a Current Report on Form 8-K with the SEC

representing. among other things, that:

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• .[T]he Company's history and near term forecast of incurring significant net losses and negative operating cash flows, raise substantial doubt on the Company's ability to continue as a going concern. Management is taking actions to raise additional capital to fund cash requirements and evaluating other strategic alternatives. The Company is actively engaged in discussions with strategic partners for substantial investments in the Company. In addition. the Company is evaluating various options to raise cash in the capita] markets.

241. On July 6. 2012, A 12 disclosed that on July 5. 2012, with A123 stock trading at

$1.30 per share, the Company had entered into a placement agent agreement with Lazard Capital

Markets LLC relating to a registered direct offering by the Company of an aggregate of 7,692,308 shares of the Company's common stock and warrants to purchase additional shares of such common stock for an exercise price of $0.00 I per share; and that the Company expected to sell the shares at a negotiated purchase price of $1.30, subject to certain adjustments, based upon the exercise of the warrants per share in order to raise gross proceeds of approximately $10 million, based upon the exercise of the warrants from the offering of the shares and warrants. On July 9, 2012, A 123 filed a prospectus with the SEC registering those shares and warrants for resale to the public.

242. On July 9, 2012, A 123 also filed a second prospectus registering 250.397,531 shares for resale by other existing A 123 shareholders.

243. In August 2012, A123 hired Alvarez Marsal N.A. Company to advise as to restructuring and. most likely. bankruptcy.

244. On August 8, 2012, A 123 issued a press release announcing its second quarter 2012 financial results (for the period ended June 30, 2012). The release represented that revenue for the first quarter of 2012 was expected to he approximately $ L7 million. "a decrease of 53% from $36.4 million in the second quarter 2011." The press release mainly focused on the Company's entry into a non-binding memorandum of understanding with Wanxiang through which Wanxiang would invest up to $450 million in A123.

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245. Also on August 8. 2012. A123 held an earnings conference call for analysts and

investors to discuss the Company and its business. During the conference call. Defendant Prystash

stated, in pertinent pail, as follows:

Tom Daniels - Stifel, Nicolaus - Analyst:

Okay. Are you guys going to update your revenue guidance for the year at all?

Defendant Prystash:

No. I think our guidance - our range that we provided in the last quarter will still stand.

246. The Company's fiscal year 2012 revenue guidance made in the first quarter of 2012

was for a revenue range of $ L45 million to $175 million. As of August 8, 2012, the Company only

reported revenues of $10.9 million and $17 million for the first and second quarters of 2012,

respectively.

247. On August 9, 2012, A 123 filed its quarterly financial report on form 1O-Q with the

SEC (the August 2012 Form 1O-Q"), which was signed and certified under the Sarbanes Oxley Act

of 2002 by Defendants Vieau and Prystash, and stated, in pertinent part, that the Company had "a

supply agreement with Fisker pursuant to which [it was] providing Fisker with advanced automotive

battery systems OVCT a multi-year period" and that [r]evenue from [that] supply agreement

represents, and is expected to continue to represent, a significant portion of /A123/revenue" going

forward," and again reiterated that "in November 2011 and again in January 2012, [A123]

announced revised annual revenue guidance for 2011 due to an unanticipated reduction in orders

from Fisker for the fourth quarter" and stated that the Company continued to "invest in capital

expenditures and build [its] manufacturing capacity in anticipation of demand, including anticipated demandfrom Fisker under the supply agreement. ." As to the Fisker preferred stock, the August

2012 Form 10-Q disclosed that "[d]uring the three months ended June 30, 2012. the Company

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updated its analysis and valuation of its investment in fisker resulting in the recognition of an

[additional] impairment charge of $2.9 million for the three and six months ended June 30, 2012"

and that the "Company's investment in Fisker at June 30, 2012 had acarrying value of $6.0 million."

248. On August 16, 20L2. A 123 announced that it had executed definitive agreements with

regard to Wanxiang's strategic investment in A 123.

249. On August 21, 2012, at the prompting of the NHTSA, Fisker recalled 1.377 Kaima's

due to fires that took place in two Karmas.

250. On September 25, 2012. the Fisker Karma received a failing grade from Consumer

Reports, in part because of the Karma's battery problems.

251. By early October 2012, the common stock of A 123 was trading for $0.27 per share,

down from a 52-week high of $4.44 per share in late 2011 - and a Class Period high of $9.48 per

share on February 28, 2011.

252. In a Form 8-K filed by the Company with the SEC on October 15, 2012. A123

revealed that on October 12, 2012, the Company informed Wanxiang that A 123 was going to default

on the agreement executed on August 16, 2012. Asa result, A123's deal with Wanxiang effectively

fell apart.

253. The statements referenced above in fl228-29; 235-38; 240; 244-45; 247 were

materially false and misleading for the reasons set forth in ¶227. In addition, the statements in fl228-29; 235-38; 240; 244-45; 247 were each materially false and misleading when made because

they misrepresented and failed to disclose the following adverse facts, which were known to

Defendants or recklessly disregarded by them, as follows:

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(a) that the Company's financial position was weakening as a result of the reduced orders from Fisker and the battery replacement initiative such that the Company was nearing insolvency and would soon have to file for bankruptcy;

(h) that the battery replacement initiative had significantly disrupted the

Company's business and caused the Company to lose new business as it struggled to remedy the product defect issues with its batteries; and

(c) as a result of the foregoing. Defendants lacked a reasonable basis for their positive statements about the Company, its business, products and operations.

A123 Files for Bankruptcy

254. Despite Defendants' repeated assertions during the Class Period concerning the

Company's ability to recognize revenues from battery sales to Fisker and the safety and efficacy of

Al 23's batteries, on October 16, 2012, A123 filed for bankruptcy protection under Chapter 11, Title

11, United States Code, in the United States Bankruptcy Court for the District of Delaware, stating that the Wanxiang deal had fallen through and that the Company would sell its automotive business assets to Johnson Controls Inc. The filing listed assets of $459.8 million and liabilities of $376 million.

255. On this news, the price of A 123 common stock fell $0.18, or 74%, to $0.06 a share.

256. At the time of A 123's bankruptcy announcement, the Company had posted 14 straight quarterly losses dating back to its IPO in September 2009. In conjunction with its bankruptcy filing, the Company listed Fisker as its largest customer.

257. The market for A 123 common stock and other publicly-traded securities was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and omissions as set forth above. A123 common stock and other publicly- traded securities traded at artificially inflated prices during the Class Period. Lead Plaintiff and other -79- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 83 of 113

members of the Class purchased or otherwise acquired A 123 common stock and other publicly- traded securities relying upon the integrity of the market price of A123 common stock and other publicly-traded securities and market information relating to A123. and have been damaged thereby.

258. During the Class Period. Defendants materially misled the investing public, thereby inflating the price of Al 23 common stock and other publicly-traded securities, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make

Defendants' statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, as alleged herein.

259. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused, or were a substantial contributing cause, of the damages sustained by Lead Plaintiff and other members of the Class. As described herein, during the Class Period. Defendants made or caused to he made a series of materially false or misleading statements about A 123's business, prospects, and operations. These material misstatements and omissions had the cause and effect of creating, in the market, an unrealistically positive assessment of A 123 and its business, prospects, and operations, thus causing the Company's common stock and other publicly-traded securities to be overvalued and artificially inflated at all relevant times.

Defendants' materially false and misleading statements during the Class Period resulted in Lead

Plaintiff and other members of the Class purchasing A 123 common stock and other publicly-traded securities at artificially inflated prices, thus causing the damages complained of herein. When the true facts about the Company were revealed to the market, the inflation in the price of A123 common stock and other publicly-traded securities was removed and the price of A123 common

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stock and other publicly-traded securities declined dramatically, causing losses to Lead Plaintiff and the other members of the Class.

Post Class Period Events

260. on January 10, 2013, Fisker filed two claims in A123's bankruptcy proceedings relating to: (i) A 123's rejection of the Supply Agreement between fisker and A123; and (ii) a breach of warranty on the future potential warranty liability of A 123's batteries that were being used in the

Karma. For purposes of Fisker's claim relating to the breach of warranty. Fisker noted that A123 had agreed to replace all of the defective A 123 batteries with replacement batteries. As of January

10. 2013, however, Fisker estimated that 1.902 batteries still required replacement, of the approximately 2,600 batteries that A123 actually delivered to Fisker. Fisker estimated its resultant damages to he an aggregate amount of $48.6 million.

261. On January 28, 2013, Wanxiang purchased the preponderance of A 123's assets out of bankruptcy for $256.6 million and organized A123 LLC. On March 22, 2013, the remainder of the

Company changed its name to B456.

262. in March 2013, Fisker hired bankruptcy counsel Kirkland & Ellis LLP to prepare for its own potential bankruptcy filing.

263. On March 16. 2013, the DOE stated that. despite the fact that the ATVM Program still had $16.6 billion remaining in funds and seven pending applications, it was indefinitely suspending future loans pursuant to the ATVM Program.

264. In April 2013, fisker missed its first scheduled loan payment of $10 million to the

DOE and the DOE immediately seized more than $20 million of fisker's assets on April 11, 2013 to pay down the loan.

265. On April 5. 2013, Fisker laid off 75% of its employees, retaining only those employees necessary for negotiating with potential buyers and the DOE. -81 - Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 85 of 113

266. On or about April 17, 2013? private documents and communications between Fisker and the DOE, obtained by PrivCo, were made public and demonstrate, in pertinent part, as follows:

• The LARA listed as "Events of Default and Remedies" Fisker's "Failure to Achieve Milestones. . . by the relevant Milestone Completion Date." including "Commencement of commercial production of the Karma vehicle" by February 2011.

• Though "[un a presentation delivered by Fisker to the DOE in March 2011, Fisker claimed that the [February 2011 Karma] launch milestone was met," "[un a subsequent presentation in June 2011, Fisker presented new information calling into question whether the launch milestone had actually been met."

• On April 24, 2013, Nicholas Whitcombe - Supervisory Senior Investment Officer, Loan Programs Office, DOE - testified under oath before the House Oversight Subcommittee that fisker had in fact failed to meet a production milestone in February 2011.

• In June 2011, the DOE issued the Drawstop Notice when the DOE finally learned that Fisker had not met the February 2011 production milestone for the Karma.

• Meanwhile, despite being in default on a production milestone since February 2011. Fisker had continued to draw on its loan from the DOE, borrowing a further $29 million after its event of default;

• On October 22. 2012, the House of Representatives Committee on Oversight and Government Reform wrote a letter to the DOE requesting information on Fisker.

• Fisker spent approximately $660,000 for each Karma that it produced, despite a sticker price of approximately $100,000 and a sale price to dealers of approximately $70,000.

267. On April 24. 2013. the U.S. House of Representatives Committee on Oversight and

Government Reform held a hearing to investigate the DOE's loan to Fisker. At this hearing, the

Written Statement of Nicholas Whitcombe - Supervisory Senior Investment Officer. Loan Programs

Office. DOE - disclosed, in pertinent part, as follows:

Fisker Automotive

While the PrivCo report is dated April 17. 2013, it contains information from events which occurred after that date. through April 25. 2013.

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On April 22nd. 2010, [the] LPO closed a $529 million loan to Fisker Automotive for the development and production of two lilies of plug-in hybrid electric vehicles: the Karma and the Atlantic. To date. $192 million of the loan has been disbursed to Fisker to fund eligible Karma expenses and to partially fund the purchase of a former Genera' Motors plant in Delaware. These funds were used, for example, to support engineering for the Karma at Fisker's United States facilities in Anaheim, California to develop tools, equipment, and manufacturing processes.

From the outset, the Department established rigorous benchmarks, keyed to progress on the Karma and Atlantic product lines, as conditions precedent to any disbursements of Fisker's loan. As has been publicly reported the Department understands that fisker has recently faced certain financial difficulties, has terminated a significant portion of its workforce, and has been engaged in a process of seeking additional private investment.

The Department has acted decisively to protect the taxpayers' interest since it became evident that Fisker faced financial difficulties. In June 2011, the Department ceased making disbursements to Fisker after the company began to J411 short of the milestones required in the loan agreement. Since then, the Department has continued to communicate with Fisker as it has sought to revise its business plan and achieve profitability.

268. During his own testimony, Henrik Fisker testified that his "company met initial milestones before informing the [DOE] that it would not meet certain future milestones on time," stating "Fisker regularly apprised the [DOE] of the company's progress." Henrik Fisker also told the

Committee, in pertinent part, as follows:

Rou2h Roads

Fisker Automotive began drawing down on the Karma loan in April 2010. In October 2010, we unveiled the Karma that was to go into production with its advanced powertrain technology. In 2011, the Karma ran into several significant obstacles. first. regulatory approvals for the Karma in the United States took longer than anticipated. Since the Karma was built from scratch on a totally new platform with a new powertrain, the EPA and National Highway Transportation Safety Administration required additional time to evaluate, test, and eventually certify it. That review period and some initial parts supply issues significantly delayed our production schedule and delivery to customers.

269. Henrik Fisker further testified that commercial production of the Karma did not commence until late 2011, and that, in October 2011. Fisker had represented to the DOE that it

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would sell 542 Karmas in 2011. Henrik Fisker admitted in his testimony that even this miniscule

sales estimate was not met by Fisker, as only about 280 Karmas were ultimately sold in 201 1.

270. Fisker COO Koehler also provided testimony at the U.S. House of Representatives

Committee on Oversight and Government Reform's hearing to investigate the DOE's loan to Fisker.

Koehler testified, in pertinent part, that directors on the fisker Board "knew the financial condition of /Fisker/ and the need for additional capital."

271. On April 24, 2013, the Wall Street Journal published an exposé entitled "How the

Wheels Came Off for Fisker - Untested Electric-Car Firm Was Ripe for the Times; U.S. Loans

Saddled it with Factory Never Used." The Wall Street Journal exposé disclosed, in pertinent part. as

follows:

In May 201 [.the Obama administration, under pressure from critics of its alternative energy spending and after the high-profile failure of U.S.-backed solar panel maker solar panel maker Solyndra LLC,froze disbursements to Fisker citing delays in the Karma's rebut. Nonetheless, Fisker kept ordering parts to build Karmas, piling up costs even as the company struggled to fix software and other problems that prompted complaints from early buyers, and led to critical reviews in auto publications.

In the frill of2Oii, Fisker's battery supplier, A123 Systems Inc.,// was informed Fisker had run out of cash and wouldn't be able to take more deliveries.

Al 23, which also received a government grant to finance U. S. factories, had shipped about 3,000 battery packs to the company. The Waltham. Mass., company was ready to ramp production to 15,000 packs annually for its top customer. Its own market miscalculations and quality problems led A123 to seek bankruptcy protection last fall.

272. According to a June 17. 2013 "special report" by Reuters, a former Fisker executive

was quoted as stating that "[the Karma] cost far more to produce than we could ever charge for it."

273. On June 28, 2013, B456 filed its last quarterly financial report on Form 10-Q with the

SEC, listing the value of its "[i]nvestment in Fisker" at "less than $0.1 million" as of September 30,

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2012, stating the Company had taken additional impairment charges writing the asset down. B456 has since unregistered itself with the SEC and no longer publicly reports its financial status.

274. On September 17. 2013, the DOE put the remaining $168 million that Fisker owed on its loan out to hid in a public auction.

275. By October 9.2013. Wanxiang had hired Defendant forcier to serve as A 123 LLC's

CEO.

276. On November 22, 2013. fisker filed for bankruptcy protection in the District of

Delaware.

277. In early January 2014, it was reported that Wanxiang - the private, China-based company that owns A 123 LLC and presently employs Defendant forcier as A 123 LLC's CEO - was contemplating a hid for Fisker's assets in fisker's bankruptcy proceedings. if Wanxiang was successful in purchasing Fisker's assets at the bankruptcy auction, industry analysts expected that

Wanxiang would re-launch Fisker with the A123 technology that it also owns - all of which

Wanxiang would have acquired in U.S. bankruptcy proceedings.

278. On February 14, 2014. Wanxiang won the bankruptcy auction to purchase Fisker's assets.

279. On February 19, 2014. Wanxiang announced its plans to immediately" restart production of the Fisker Karma.

Defendants Were Required to Disclose Not Only that Fisker Was Unable to Purchase A123's Batteries and that the Company's Batteries Were Flawed, but Also the Impact of These Issues on the Company's Business

280. During the Class Period, A 123 filed Forms IO-Q and I 0K with the SEC. As detailed herein, these filings failed to disclose material information required to be disclosed pursuant to controlling SEC rules and regulations.

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281. The SEC created specific rules governing the content of disclosures made by public companies in their filings with the SEC. SEC Regulation S-K requires that every Form [O-Q and

Form 10-K filing contain "Management's Discussion and Analysis of Financial Condition and

Results of Operations" ("MD&A"), drafted in compliance with Item 303 of Regulation S-K, 17

C.F.R. §229.303. The MD&A requirements are intended to provide material historical and prospective textual disclosures that enable investors and others to assess the financial condition and results of operations of a company. with emphasis on that company's prospects for the future.

282. Specifically. item 303(a)(3) of Regulation S-K requires that the MD&A section of a company's filings with the SEC (i.e., Forms 10-Q and 10-K), among other things:

(i) Describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations and, in each case, indicate the extent to which income was so affected. In addition, describe any other significant components of revenues or expenses that, in the registrant's judgment, should be described in order to understand the registrant's results of operations.

(ii) Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.

283. Regulation S-K also states that "[t]he discussion and analysis [section] shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition."

284. Defendants violated the affirmative disclosure duties imposed by Regulation S-K, and thus Section 10(b) of the Exchange Act, by failing to disclose, among other things, the following material information in the Company's Forms !O-Q and I 0-K filed during the Class Period: (i) that

A123's largest and most important customer. Fisker, had lost its critical DOE funding because it -86- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 90 of 113

failed to timely launch commercial production of the Karma; and (ii) that the batteries that A 123 had produced for its largest customer, fisker, had been produced without a sufficient testing and validation process thereby significantly increasing the risk that the batteries would have defects.

285. The foregoing facts were required to be disclosed because they were, among other things: (i) material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition;" (ii) "known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations;" and (iii) "unusual or infrequent events or transactions or [] significant economic changes that [were] materially affect[ing] the amount of reported income from continuing operations."

286. Defendants' violations of Item 303(a)(3) of Regulation S-K are even more egregious considering that on June 28, 201 L,the SEC specifically identified for A 123 portions of the MD&A section in the Company's 2010 form I0K that caused the SEC concern.

287. With respect to the MD&A section in the 2010 Form 10-K, the SEC commented, in pertinent part. as follows:

We note the statements by your CEO during your fourth quarter 2010 earnings call conducted on February 28. 2011 indicating that total revenue was expected to increase by over 100% sequentially in the second quarter and that unabsorbed manufacturing expenses were expected to approximately double in the first quarter as compared to fourth quarter levels. In your future filings, as applicable, please revise your disclosure to describe and where applicable, quantj' known trends that you reasonably expect will have a materialjàvorable or unfavorable impact on net sales or revenues or income from continuing operations. Please rtfer to Item 303 (a)(3) (ii).

In future filings please more fully describe the material factors contributing to significant changes in revenues as referred to in your disclosure, including a description of the underlying reasons for the cited increases and decreases. In -87- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 91 of 113

general, the discussion of reven lies should describe the underlying business reasons for factors cited as responsible for material changes in revenues, such as changes arising from varying demand, changing prices, new products, new markets and other significant matters. For guidance please refer to Item 303 (a) (3) of Regulation S-K and Securities Act Release 33-8350, Interpretation: Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations.

288. In response to the SEC's June 28. 2011 letter. on July 19,2011, Defendants, through their attorneys, caused the Company to respond to the SEC, in a letter posted publicly on the SEC's website. In addressing the two comments listed above, the Company responded, in pertinent part, as follows:

The Company acknowledges the Staff's comment and, in future filings, the Company wig as applicable, describe and quandjj' known trends that it expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations in accordance with Item 303(a)(3)(ii)."

The Company acknowledges the Staff's comment and, in future Form 10-K and Form 1O-Q filings, the Company will more fully describe the material factors contributing to significant changes in revenues, including a description of the underlying reasons for the cited increases and decreases.

289. Defendants, however, did no such thing during the Class Period. In fact, by the time

Defendants caused the July 19, 2011 letter to be publicly posted to the SEC's website. Defendants already knew or consciously disregarded that Fisker had lost its critical DOE funding because commercial production of the Karma had not been timely commenced, and, thereby. Fisker's ability to purchase A123's batteries was incapacitated. Additionally. Defendants already knew or consciously disregarded that A] 23's batteries were flawed and defective. However, not only did

Defendants fail to retroactively amend the 2010 Form 10-K. Defendants also affirmatively chose not to disclose these facts in each of the Forms 10-Q and 10-K that the Company subsequently filed throughout the remainder of the Class Period. As a result. Defendants were aware, or consciously disregarded, that they violated Regulation S-K during the Class Period.

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A123's False and Misleading Financial Statements

290. During the Class Period, as detailed herein, A 123 falsely represented that the financial statements it issued to investors were presented in conformity with Generally Accepted

Accounting Principles ("GAAP") and the accounting and disclosure rules and regulations of the

SEC. By failing to file financial statements with the SEC which conformed to GAAP. Defendants repeatedly disseminated financial statements of A123 that were presumptively misleading and/or inaccurate See, e.g.. Regulation S-X [17 C.F.R. §210.4-01(a)(1)] (financial statements filed with the

SEC that are not prepared in conformity with GAAP are presumed to he misleading and inaccurate).

291. As detailed herein. Defendants knew or recklessly ignored that the Company's financial representations during the Class Period were materially false and misleading when made because A 12 improperly: (1) failed to timely recognize an impairment in the value of its fisker investment, and (2) failed to disclose its unrealized loss on its Fisker investment.

292. Defendants were motivated to engage in this improper practice to mask Fisker's financial distress because, as the Company represented in the 20 LO Form 10-K. A 123 "expect[ed] to rely on [its] supply agreement with Fisker to represent a significant portion of [its] revenue in future periods. If Fisker is unable to fulfill its commitment under the supply agreement our revenues could be materially lower than our forecasts and we may have under-utilized manufacturing capacity."

293. in the Company's financial statements filed with the SEC in the 2010 form !OK.

A123 disclosed, in pertinent part, the following with respect to its investment in Fisker's convertible preferred stock:

Cost-Method Investments

In January 20 10. the Company entered into an agreement to purchase preferred stock of a maker of plug-in hybrid electric vehicles in the United States (the Automaker"). The Company agreed to invest cash of $13.0 million and shares of the Company's common stock, which, when transferred to the Automaker, had a fair market value of $7.5 million. As of December 31, 2010, all cash and stock consideration had been _89- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 93 of 113

transferred to the Automaker in return for preferred stock of the Automaker and the Company has recorded an investment of $20.5 million in the consolidated balance sheet. The Company is accounting for its investment under the cost method. Through December 31, 2010, there have been no changes in circumstances that may have a significant adverse effect on the fair value of the investment.

294. Pursuant to GAAP, in the Financial Accounting Standards Board's Accounting

Standards Codification ("ASC") Topics 320 and 325, an equity investment accounted for under the cost method is measured initially at cost. Thereafter, cost method investments are to be individually reviewed for impairment when an event or circumstance indicates that the value of the investment may have decreased. GAAP provides examples of impairment indicators, which include, but are limited to: (i) a significant deterioration in the investee's earnings performance, credit rating, asset quality, or business prospects; (ii) a significant adverse change in the investee's regulatory, economic, or technological environment experience; (iii) a significant adverse change in the investee's operating environment; or (iv) the investee's ability to continue as a going concern is called into question.

295. When an impairment indicator is present. the investor is required to estimate the fair value of the investment. An investment is considered impaired when the fair value of the investment is less than its cost. When the impairment is other-than-temporary in nature, a loss is be recognized in an amount equal to the difference between the investment's cost and its fair value at the balance sheet date of the financial statement reporting period.

296. The staff of the SEC has long cautioned its registrants not to delay the recognition of an other-than-temporary impairment in the value of its investments, and the SEC's Staff Accounting

Bulletin No. 59 provides that"other-than-temporary" does not mean permanent."

297. Consistent with the above noted provisions of GAAP, in the Company's 2010 Form

10-K tiled with the SEC. AL23 disclosed, in pertinent part, the following with respect to its accounting for investments: _90- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 94 of 113

We regularly monitor these non-publicly traded investments for impairment and record reductions in the carrying values when necessary. Circumstances that indicate an other-than-temporary decline include valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted market price and declines in operations of the issuer. There can be no assurance that cost or equity method investments will not face risks of loss.

The Company evaluates investments for impairment whenever events or changes in circumstances indicate that the market value may be less than the carrying value, which if determined to he other-than-temporary, could result in an impairment loss.

298. By no later than June 30, 2011, and by as early as February 2011, significant events indicated that A123's investment in fisker had suffered a non-temporary impairment in value.

Specifically, in February 2011, Fisker failed to timely launch commercial production of the Karma in violation of the LARA. furthermore, in June 2011. when Fisker finally admitted this fact to the

DOE, the DOE issued the Drawstop Notice and ceased making disbursements to Fisker under the

LARA. Moreover, A123 knew that, absent the DOE loan, Fisker was effectively insolvent.

299. Despite these impairment indicators, Defendants fraudulently caused A 123 to delay the recognition of an other-than-temporary impairment loss on the Company's investment in Fisker when they knew of adverse events and/or circumstances evidencing Fisker' s financial distress, had impaired the value of A 123's investment by no later than the fiscal quarter ended June 30, 2011.

300. First, as disclosed in the 2010 form 10K. investments held in non- public companies were characterized by A123 as being "a critical accounting policy."

301. Second. when A123 announced its investment in fisker, it represented that the two companies intended to work closely together" and establish a strategic relationship" in delivering innovative technologies for safe and reliable PHEYs.

302. Third. shortly after A 123 invested in fisker, Defendant Forcier became a director on the Fisker Board. As such, Defendant fisker had the responsibility to monitor Fisker's business -91- Case 1:13-cv-06883-LTS Document 41 Filed 03/27/14 Page 95 of 113

risks, review its financial statements and timely monitor and report Fisker's performance to its stakeholders, including his employer. A!23. Moreover, Defendant Forcier was appointed to the

Fisker Board, in part, to monitor A 123's investment in Fisker.

303. In fact, just weeks after the Company filed the August 2011 Form I0-Q. which included A 123's financial statement for the fiscal quarter ended June 30, 2011, Defendant Forcier held an "all hands" meeting wherein he made certain A123 employees aware that Fisker was going to significantly curtail its purchases of the Company's batteries.

304. Even assuming, arguendo. that Defendants believed the impairment of the fisker investment was not other-than-temporary, GAAP requires that A123's financial statements disclose - which they did not - the Company's unrealized loss on the Fisker investment and charge such unrealized loss against the Company's other comprehensive income. See, e.g.. ASC Topic 320.

305. Nonetheless. Defendants, in violation of GAAP, caused A123 to issue financial statements during the Class Period that failed to disclose the unrealized loss on the Company's investment in fisker in A 123's financial statements during the Class Period.

306. Thereafter, almost one year after Fisker defaulted on the LARA in February 2011, when A 123 announced its financial results in the 2011 Form 10-K. the Company recognized a $11.6 million impairment charge on its investment in fisker. Throughout the remainder of the Class

Period, the Company continued to write down its investment in Fisker, valuing it at just $6 million on August 9, 2012. in AL 23's last Form 10-Q before the Company filed for bankruptcy.

307. in addition to the foregoing, A 123 failed to timely record an impairment in the value of its battery inventory during the Class Period.

308. GAAP, in ASC Topic 330, provides, in pertinent part. that:

A departure from cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility

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of goods, in their disposal in the ordinary course of business, will be less than cost. whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market.

309. Accordingly, for financial reporting purposes, pursuant to GAAP, obsolescence, physical deterioration, changes in price levels, or other factors cause inventory to he worth less than its stated cost.

310. During the Class Period, A123 falsely represented that it complied with these accounting rules. Specifically. in the 201 I Form LO-K, A 123 falsely represented. in pertinent part. the following with respect to its accounting for inventory:

We carry our inventory at the lower of historical cost or net realizable value assuming inventory items are consumed on a first-in, first-out basis. We recognize inventory losses based on obsolescence and levels in excess of forecasted demand. In these cases. inventory is written down to the estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technical obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could he required and would he reflected in the cost of revenue in the period the revision is made.

311. In violation of GAAP and the Company's accounting policy, A123's financial statements and related disclosures filed with the SEC for periods no later than the year ended

December 31. 2011 were materially false and misleading because the Company overstated its reported inventory by $L5.2 million. As a result, A123's income was also overstated by $15.2 million for the same periods.

312. As detailed herein, numerous confidential witnesses noted significant problems in the manufacturing and production of A123's batteries. Thereafter, in December 2011. the NHTSA required approximately 239 defective A!23 batteries he removed from the Karma and replaced.

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313. As a result, the defective AL 23 batteries that had been installed in the Karma and the

Company's then-existing inventory of defective batteries were unusable, of no value and had to be discarded.

314. Accordingly. Defendants knew, or recklessly disregarded, that by no later than

December 31. 2011, the value of A123's defective battery inventory was materially impaired.

Nonetheless. Defendants knowingly or recklessly failed to cause A123 to timely record an impairment in the value of its defective battery inventory.

315. in causing the above-described violations of GAAP. Defendants materially overstated

A123's operating results and misled investors concerning the true state of the Company's operations.

Defendants were motivated to engage in these false and misleading financial statement manipulations to mask Fisker's financial distress because Fisker was a significant A!23 customer that was expected to generate a substantial amount of the Company's future revenues.

ADDITIONAL SCIENTER ALLEGATIONS

316. As alleged herein, Defendants acted with scienter in that they knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws.

As set forth elsewhere herein in detail, these Defendants, by virtue of their receipt of information reflecting the true facts regarding A 123, their control over, and/or receipt and/or modification of

A123's allegedly materially misleading statements and/or their associations with the Company which made them privy to confidential proprietary information concerning A123, participated in the fraudulent scheme alleged herein.

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317. Defendant forcier served on the Fisker Board during the Class Period. According to

Fisker COO Koehler's testimony before Congress, directors on the Fisker Board were informed regarding the financial condition of Fisker. Under established Delaware law, as a Fisker director,

Defendant forcier had access to, among other things. Fisker's books and records, as well as information possessed by Fisker's management and advisors. As a result of Defendant Forcier's service as a director on the Fisker Board, Defendants knew (or were reckless in that they were aware, but acted in a highly unreasonable manner that constituted an extreme departure from the standards of ordinary care by disregarding), of the following non-public information concerning fisker:

(i) by February 2011, Fisker was in default of the production milestone in the LARA to commence commercial production of the Karma, which threatened to terminate Fisker's DOE funding and impair Fisker's ability to pay A123 for batteries and/or fulfill the Supply Agreement;

(ii) in March 2011, in a non-public meeting with the DOE, fisker misrepresented to the DOE that it had met its February 2011 production milestone in the LARA in a desperate attempt to maintain Fisker's ability to continue drawing down on the DOE loan;

(iii) in June 2011, after learning that commercial production of the Karma had not commenced, the DOE issued the Drawstop Notice and indefinitely suspended LARA payments to Fisker;

(iv) fisker was not going to meet its production milestone under the LARA to sell 11,000 Karma's at an average price of not less than $87,900 by February 29. 2012, which would cause another default of the LARA and consequentially further impair Fisker's ability to pay A 123 for batteries and/or fulfill the Supply Agreement;

(v) absent the DOE Loan. Fisker was effectively insolvent, threatening its ability to pay A 123 for batteries and/or fulfill the Supply Agreement;

(vi) prior to the Class Period, Fisker made questionable representations to the DOE during the course of negotiating the LARA;

(vii) Fisker spent $660,000 on each Karma that it produced despite selling the Karma to dealerships for approximately $70.000. further indicating the precarious financial condition of Fisker;

(viii) beginning in May 2010, and continuing for approximately another year and a half, fisker began utilizing three sets of financial forecasts: (L) forecasts for internal

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purposes, which were an accurate reflection of Fisker's financial forecasts; (2) forecasts for investors, which were very optimistic; and (3) forecasts for the DOE, which were not accurate, further indicating the precarious financial condition of Fisker;

(ix) by June 2010, only two months after fisker's DOE funding had been finalized, the DOE warned Fisker that its continued failure to achieve funding milestones under the LARA threatened its ability to receive future funding from the DOE. which threatened to terminate Fisker's DOE funding and impair Fisker's ability to pay A] 23 for batteries and/or fulfill the Supply Agreement;

(x) on February 28, 2012, Henrik Fisker announced that he was stepping down as CEO of Fisker, which violated the "Key Personnel" covenant in the LARA, triggering another default of the LARA by fisker, further indicating the precarious financial condition of Fisker; and

(xi) beginning in 2009. Kleiner Perkins provided Fisker with cash on a weekly basis in order to keep Fisker's operation afloat, and, additionally in 2009. Kleiner Perkins provided fisker with bridge loans at a very high cost to fisker, further indicating the precarious financial condition of Fisker.

318. Defendants further knew (or were reckless in that they were aware, but acted in a

highly unreasonable manner that constituted an extreme departure from the standards of ordinary

care by disregarding). that Fisker was unable to purchase A123's batteries because by at least

September 2011, Defendants informed A 123's employees that Fisker was going to "throttle back

significantly" in receiving A 123's batteries.

319. Likewise, Defendant Vieau admitted on the Company's February 28, 2011

conference call that A123 was physically present during Fisker's production builds, further

evidencing that Defendants knew (or were reckless in that they were aware, but acted in a highly

unreasonable manner that constituted an extreme departure from the standards of ordinary care by

disregarding) that Fisker was not going to meet its production milestones under the LARA, thereby jeopardizing Fisker's ability to purchase A 123's batteries and/or fulfill its obligations under the

Supply Agreement.

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320. Moreover, Defendants Vieau and forcier were participants at the March 30. 20 LO

Fisker Board meeting where the Fisker Board approved the LARA and the documents cited as exhibits thereto, showing that Defendants knew (or were reckless in that they were aware, but acted in a highly unreasonable manner that constituted an extreme departure from the standards of ordinary care by disregarding) about the LARA milestones and the consequences of fisker defaulting.

321. Furthermore. Defendants knew (or were reckless in that they were aware, but acted in a highly unreasonable manner that constituted an extreme departure from the standards of ordinary care by disregarding) that the Company's process for manufacturing its batteries in the

Company's Livonia. Michigan plant was flawed and that any meaningful validation plan had not been conducted, which resulted in defective batteries that had a significant and material adverse impact on the Company's revenues and expenses. including A123's ability to supply batteries to

Fisker and/or fulfil] the Supply Agreement.

322. Defendants were motivated to engage in the fraudulent scheme alleged herein because the fortunes of A123 and Fisker were inextricably linked and any admission by Defendants of problems at fisker would cause A 123's investors to lose confidence in the Company, thereby impairing the value of Defendants' substantial stock options in A!23 and jeopardizing Defendants' continued employment with the Company.

323. Defendants were further motivated to engage in the fraudulent scheme alleged herein in order to enable Defendant Vieau to sell his personally held A [23 common stock to the unsuspecting public at artificially inflated prices while he was in the possession of material, non- public information about the Company. Defendant Vieau sold 77,777 shares for $377,612 during the

Class Period, an amount of proceeds that represented 57.5% of his 2011 salary and non-equity

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incentive plan compensation. As such. Defendant Vieau profited greatly by withholding material information and disseminating misleading information as detailed herein to the unsuspecting public.

324. Defendant Vieau's stock sales were purportedly undertaken pursuant to a stock trading plan conforming to SEC Rule lObs-I (the "Vieau Trading Plan"). The applicable Forms 4

Statement of Changes in Beneficial Ownership of Securities" filed with the SEC on behalf of A 123 in accordance with § 16(a) of the Exchange Act (the "Forms 4") were signed by Eric J. Pyenson. as

Attorney-in-fact for Defendant Vieau. Defendant Vieau was responsible for the preparation of the

Forms 4. The Vieau Trading Plan has never been publicly disclosed.

325. Even if Defendant Vieau's stock sales were made in accordance with the Vieau

Trading Plan. Defendant Vieau was motivated to withhold material information and not reveal the truth about A123 until the stock sales were consummated pursuant to the Vieau Trading Plan. In withholding material information and refraining from revealing the truth about A123, the share price of A 123's common stock remained artificially high while the sales were undertaken purportedly pursuant to the Vieau Trading Plan. The Vieau Trading Plan was entered into as part of Defendant

Vieau's scheme to defraud the investing public.

326. Defendant Vieau was further motivated to sell his shares in A123 in order to greatly increase his level of compensation over his regular salary and bonus. According to the April 2012

Proxy, in 2011 Defendant Vieau received a salary of $431,250 and a bonus of $225,000. Defendant

Vieau also received stock awards worth $488,452 and option awards worth $222,432. As such,

Defendant Vieau's total compensation for 2011 was $1,367,134. As a result, the amount of salary and non-equity incentive plan compensation that Defendant Vieau earned in 2011 was less than hail of his total compensation.

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327. Accordingly. Defendant Vieau depended on the sale on his Company stock to greatly increase his levels of compensation, personal net worth, and cash access. This provided a clear motive for Defendant Vieau to keep the truth about the Company, its operations and its prospects, and the resultant impact on the Company's revenue, from A 123's investors and the market.

328. Defendants were further motivated to engage in the fraudulent scheme alleged herein in order to enable Defendant Prystash to enhance his net worth. Defendant Prystash held A123 common stock at artificially inflated prices while he was in the possession of material, non-public information about the Company.

329. According to the April 2012 Proxy, Defendant Prystash received a salary of

$221,442, a sign-on bonus of $25.000, and a cash incentive bonus of $122.500 in 2011. Further,

Defendant Prystash also received stock awards with a value of $400.952 and option awards with a value of $1,324,610 as part of his 2011 compensation. As such, the bulk of Defendant Prystash's

2011 compensation was in stock and option awards; only 16.4% was in salary and non-equity incentive plan compensation. In other words, over 85% of Defendant Prystash's 2011 compensation was directly related to the performance of the Company's stock.

330. Accordingly. Defendant Prystash depended on the artificially inflated price of his

Company stock to greatly increase his levels of compensation, personal net worth, and cash access.

This provided a clear motive for Defendant Prystash to keep the truth about the Company, its operations and its prospects. and the resultant impact on the Company's revenue, from A 123's investors and the market.

331. Defendants were further motivated to engage in the fraudulent scheme alleged herein in order to enable Defendant Forcier to sell his personally held A L23 common stock to the unsuspecting public at artificially inflated prices while he was in the possession of material. non-

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public information about the Company. Defendant Forcier sold 8,655 shares for $37.979 during the

Class Period. Defendant Forcier's sales comprised 48% of his total holdings in Al 23 that were not restricted during the Class Period. As such, Defendant Forcier was able to profit by withholding material information and disseminating misleading information as detailed herein to the unsuspecting public.

332. Defendant Forcier was further motivated to sell his shares in A123 in order to greatly increase his level of compensation over his normal salary and bonus. According to the April 2012

Proxy, Defendant Forcier received a salary of $314,687 and a bonus of $99,375 in 2011. The April

2012 Proxy also disclosed that Defendant Forcier received stock awards with a value of $338,033 and option awards with a value of $ 189.230 as part of his 2011 compensation. As a result,

Defendant Forcier's total compensation for 2011 was $941,325. As such, the amount of Defendant

Forcier's salary and non-equity incentive plan compensation for 2011 was less than half of his total compensation.

333. Accordingly, Defendant forcier depended on the sale of his Company stock to greatly increase his levels of compensation, personal net worth, and cash access. This provided a clear motive for Defendant forcier to keep the truth about the Company. its operations and its prospects. and the resultant impact on the Company's revenue, from A!23's investors and the market.

NO SAFE HARBOR

334. The "Safe Harbor" warnings accompanying A123's reportedly forward-looking statements ("ELS") issued during the Class Period were ineffective to shield those statements from liability. To the extent that projected revenues and earnings were included in the Company's financial reports prepared in accordance with GAAP, including those filed with the SEC on Form

8-K, they are excluded from the protection of the statutory Safe Harbor. Sec IS U.S.C. §78u-

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335. Defendants are also liable for any false or misleading ELS pleaded because, at the time each ELS was made, the speaker knew the FLS was false or misleading and the FLS was authorized and/or approved by an executive officer of A123 who knew that the ELS was false. None of the historic or present tense statements made by Defendants were assumptions underlying or relating to any plan, projection or statement of future economic performance, as they were not stated to be such assumptions underlying or relating to any projection or statement of future economic performance when made, nor were any of the projections or forecasts made by Defendants expressly related to or stated to be dependent on those historic or present tense statements when made.

APPLICATION OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET

336. Lead 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 orfailed to disclose material facts during the Class Period;

(h) the omissions and misrepresentations were material;

(c) the Company's common stock and other publicly-traded securities traded in an efficient market;

(d) the misrepresentations alleged would tend to induce a reasonable investor to misjudge the value of the Company's common stock and other publicly-traded securities; and

(e) Lead Plaintiff and other members of the Class purchased A123 common stock and other publicly-traded securities 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.

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337. At all relevant times, the market for A] 23 common stock and other publicly-traded securities was efficient for the following reasons, among others:

(a) A123 common stock met the requirements for listing, and was listed and actively traded on the NASDAQ, a highly efficient, electronic stock market;

(b) as a regulated issuer. A 123 filed periodic public reports with the SEC and the

NASDAQ;

(c) A 123 regularly communicated with public investors via established market communication mechanisms, including regular disseminations of press releases on the national circuits of major newswire services and other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and

(d) A123 was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports were publicly available and entered the public marketplace.

338. As a result of the foregoing, the market for A123 common stock and other publicly- traded securities promptly digested current information regarding A 123 from all publicly available sources and reflected such information in the prices of the stock. Under these circumstances, all purchasers of A123 common stock and other publicly-traded securities during the Class Period suffered similar injury through their purchase of A 123 common stock and other publicly-traded securities at artificially inflated prices and a presumption of reliance applies.

339. A Class-wide presumption of reliance is also appropriate in this action under the

Supreme Court's holding in Affiliated Ute Citizens of Utah v. U.S., 406 U.S. 128(1972), because the

Class' claims are grounded on Defendants' material omissions. Because this action involves

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Defendants' failure to disclose material adverse information regarding A 123's business operations and financial prospects - information that Defendants were obligated to disclose - positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in making investment decisions. Given the importance of the Class Period material misstatements and omissions set forth above, that requirement is satisfied here.

LOSS CAUSATION/ECONOMIC LOSS

340. During the Class Period, as detailed herein, Defendants made false and misleading statements and engaged in a scheme to deceive the market and a course of conduct that artificially inflated the price of A123 common stock and other publicly-traded securities and operated as a fraud or deceit on Class Period purchasers of A 123 common stock and other publicly-traded securities by misrepresenting the value of the Company's business and prospects by overstating its earnings and concealing the significant defects in its internal controls. As Defendants' misrepresentations and fraudulent conduct became apparent to the market, the price of Al 23 common stock and other publicly-traded securities fell precipitously, as the prior artificial inflation came out of the price. As a result of their purchases of A123 common stock and other publicly-traded securities during the

Class Period, Lead Plaintiff and other members of the Class suffered economic loss, i.e., damages, under the federal securities laws.

341. By failing to disclose to investors the adverse facts detailed herein. Defendants presented a misleading picture of A 123's business and prospects. Defendants' false and misleading statements had the intended effect and caused A 123 common stock to trade at artificially inflated levels throughout the Class Period, reaching as high as $9.48 per share on February 28, 2011.

342. As a direct result of Defendants' prior misrepresentations and fraudulent conduct being leaked to the market, the price of A 123 common stock and other publicly-traded securities fell - L03- Case 1:13cvM6883LTS Document 41 Filed 03/2 7/14 Page 107 of 113

as detailed herein. The economic loss. i.e.. damages, suffered by Lead Plaintiff and the other Class members was a direct result of Defendants' fraudulent scheme to artificially inflate the prices of

A123 common stock and other publicly-traded securities.

COUNT I

For Violations of §10(B) of the Exchange Act and Rule lOb-S Against All Defendants

343. Lead Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.

344. During the Class Period. Defendants carried out a plan. scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public. including Lead Plaintiff and the Class, as alleged herein; (ii) enable the Company's insiders to sell their common stock at artificially inflated prices; (iii) allow A123 to complete common stock, warrant, unit and note offerings that raised over $250 million at artificially inflated prices; and (iv) cause Lead Plaintiff and the Class to purchase A!23's common stock and other publicly-traded securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, Defendants, and each of them, took the actions set forth herein.

345. Defendants: (a) employed devices, schemes, and artifices to defraud; (h) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon Lead Plaintiff and others similarly situated in connection with their purchases of

A123 common stock and other publicly-traded securities during the Class Period in violation of

Section 10(b) of the Exchange Act and Rule I Oh-i All Defendants are sued as primary participants in the wrongful and illegal conduct charged herein and as controlling persons as alleged below.

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346. Defendants, individually and in concert. directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and future prospects of A 123 as specified herein.

347. These Defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of A 123's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about A 123 and its business operations and future prospects in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of A 123 common stock and other publicly-traded securities during the Class

Period.

348. Each of Defendants' primary liability, and controlling person liability, arises from the following facts: (i) Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company's management team or had control thereof; (ii)

Defendants, by virtue of their responsibilities and activities as senior officers and/or directors of the

Company, were privy to and participated in the creation, development and reporting of the

Company's internal budgets, plans, projections and/or reports; (iii) Defendants enjoyed significant personal contact and familiarity with the other Defendants and were advised of and had access to other members of the Company's management team, internal reports and other data and information about the Company's finances, operations, and sales at all relevant times; and (iv) Defendants were

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aware of the Company's dissemination of information to the investing public, which they knew or recklessly disregarded was materially false and misleading.

349. Defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such Defendants' material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing A 123's operating condition and future business prospects from the investing public and supporting the artificially inflated price of its common stock and other publicly-traded securities. As demonstrated by Defendants' overstatements and misstatements of the Company's business, operations and earnings throughout the Class Period. Defendants, if they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading.

350. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set forth above, the market price of A123 common stock was artificially inflated during the Class Period. In ignorance of the fact that market prices of A123 common stock were artificially inflated, and relying directly or indirectly on the false and misleading statements made by Defendants, or upon the integrity of the markets in which the common stock and other publicly-traded securities trade, and/or on the absence of material adverse information that was known to or recklessly disregarded by Defendants but not disclosed in public statements by

Defendants during the Class Period, Lead Plaintiff and the Class acquired A123 common stock and other publicly-traded securities during the Class Period at artificially high prices and were damaged thereby.

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351. At the time of said misrepresentations and omissions, Lead Plaintiff and the Class were ignorant of their falsity, and believed them to be true. Had Lead Plaintiff and the Class and the marketplace been apprised regarding the actual state of affairs concerning the problems that A123 was experiencing, which were not disclosed by Defendants, Lead Plaintiff and the Class would not have purchased or otherwise acquired their A 123 common stock and other publicly-traded securities, or, if they had acquired such common stock and other publicly-traded securities during the Class

Period, they would not have done so at the artificially inflated prices which they paid.

352. By virtue of the foregoing. Defendants have violated § 10(b) of the Exchange Act, and

Rule l0b-5 promulgated thereunder.

353. As a direct and proximate result of Defendants' wrongful conduct, Lead Plaintiff and the Class suffered damages in connection with their respective purchases and sales of the Company's common stock and other publicly-traded securities during the Class Period.

COUNT H

For Violations of §20(A) of the Exchange Act Against All Defendants

354. Lead Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.

355. Defendants acted as controlling persons of A123 within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the Company's operations and/or intimate knowledge of the false financial statements filed by the Company with the SEC and disseminated to the investing public, Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which Lead Plaintiff contends are false and

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misleading. Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by Lead Plaintiff lobe misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to he corrected.

356. in particular, each of these Defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.

357. As set forth above. Defendants each violated Section 10(b) and Rule lOb-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons.

Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of Defendants' wrongful conduct, Lead Plaintiff and the Class suffered damages in connection with their purchases of the Company's common stock and other publicly-traded securities during the

Class Period.

ti ii i mu ci

WHEREFORE, Lead Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, certifying Lead Plaintiff as Class

Representative under Rule 23 of the Federal Rules of Civil Procedure and Lead Plaintiff's counsel as

Class Counsel;

B. Awarding compensatory damages in favor of Lead Plaintiff and the other Class members against all Defendants, jointly and severally, for all damages sustained as a result of

Defendants' wrongdoing, in an amount to be proven at trial. including interest thereon;

C. Awarding Lead Plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and - L08- Case 1:13cv06883LTS Document 41 Filed 03/2 7/14 Page 112 of 113

D. Awarding such equitable/injunctive or other relief as deemed appropriate by the

Court.

JURY DEMAND

Lead Plaintiff hereby demands a trial by jury.

DATED: March 27, 2014 ROBBINS GELLER RIJDMAN & DOWD LLP SAMUEL H. RUDMAN DAVID A. ROSENFELD MARY K. BLASY MICHAEL U. CAPECI

A/ Samuel H. Rudman SAMUEL H. RUDMAN

58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) srudman @ rgrdlaw.coni [email protected] [email protected] [email protected]

Lead (]ounsel fOr Plaintiff

HOLZER & HOLZER. LLC COREY D. HOLZER MARSHALL P. DEES 200 Ashford Center North, Suite 300 Atlanta, Georgia 30338 Telephone: 770/392-0090 770/392-0029 (fax) [email protected] [email protected]

Additional Counsel fOr Plaintiff

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CERTIFICATE OF SERVICE

I hereby certify that on March 27, 2014, 1 caused the foregoing Amended Complaint for

Violations of the Federal Securities Laws to be electronically filed with the Clerk of the Court using the CM/ECF system, which will send notification of such public filing to all counsel registered to receive such notice.

/v/Samuel H. Rudman SAMUEL H. RUDMAN