A new federal lawsuit filed Friday claims executives at
Generac Holdings Inc. misled investors and failed to disclose information related to a
recall of some of the company’s portable generators.
Town of Genesee-based Generac recalled roughly 321,000 generators made from June 2013 to June 2021. The company had received seven reports of finger amputations and one finger crushing from an issue with the handle on some of its 6,500- and 8,000-watt portable generators. A user’s finger could be pinched against the generator’s frame if the handle was unlocked when the generator was moved, according to an announcement from the U.S. Consumer Product Safety Commission.
The lawsuit, filed by investor Nahil Khami in the U.S. District Court for Central California, claims the company and its executives made misleading statements or failed to disclose the portable generators’ “unreasonable risk of injury to users” and the need to stop sales of the models in June and announce the recall in late July.
Specifically, the lawsuit points out the end of sales and recall came before hurricane and wildfire seasons touted for benefiting the company’s sales.
In an email, a Generac spokesperson said the company "strongly dispute the allegations in the complaint."
"We intend to vigorously defend the matter. We cannot comment further since this is pending litigation," the spokesperson said.
Generac has seen a sharp increase in demand for its products in recent years as it made an effort to increase distribution in California and has benefitted from high-profile power outage events. the company generally benefits from these events with immediate sales of portable generators and over the following months with increased interest in home standby generators.
Generac also saw a benefit from the COVID-19 pandemic. With people spending more time at home, including for work, the reliability of home electricity became more important, leading to increased demand for home standby generators.
The demand has continued to increase to the point where Generac has twice raised its guidance for the full year, upping it to a 45-50% increase after the second quarter. The increase would put the company's sales for the year near $3.7 billion, up from nearly $2.5 billion in 2020.
Meeting the increased demand comes with its own challenges as the lead time for a new home standby unit is at 28 weeks, even after the company added additional capacity to its production.
While the home standby generators have accounted for much of Generac’s growth, the lawsuit points out a number of instances where the company highlighted growth in both standby and portable products.
The recall does not cover all of Generac’s portable generators and the company still lists 30 models for sale on its website.
All of the increased sales and raised guidance has helped Generac’s stock price. At the beginning of March 2020, Generac stock was trading around $93 per share. By the start of August 2020, the price had more than double to around $190 and it reached nearly $250 by the start of 2021.
The climb continued and by July 23, just before Generac reported its second quarter results, the price reached nearly $450 per share. On July 28, when the company reported earnings, the stock closed at around $431. The recall was announced on July 29 and by Aug. 3, the price dipped to as low as $397. The stock dipped below $390 on Aug. 17 but has since recovered to around $415.
The lawsuit specifically points to a 7% drop in Generac’s stock price from July 28 to Aug. 2 as the damage caused to investors by the recall news. The complaint, which seeks class action status, claims that Generac’s stock was artificially high because of “false and misleading statements” made by the company and its executives.
“Had plaintiff and the other members of the class been aware that the market price of the company’s securities had been artificially and falsely inflated … they would not have purchased the company’s securities at the artificially inflated prices that they did, or at all,” the complaint says.
Court documents indicate Khami bought 300 shares for $437-$448 on July 26 and 27 and sold 300 for $423 and $436 on July 28, which amounts to a $4,400 loss. The documents only address transactions during the class period, which covers Feb. 23 to July 29, and does not indicate if Khami owns or owned other Generac shares.
The lawsuit seeks certification of a class action case, payment of damages by Generac, plus interest and other costs. The complaint does not attempt to specify the total potential damages.
