Case 1:08-cv-10361-RWZ Document 20 Filed 09/24/08 Page 1 ...securities.stanford.edu/.../2008924_r01c_08CV10361.pdf · 1:08-cv-10361-RWZ CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Case 1:08-cv-10361-RWZ Document 20 Filed 09/24/08 Page 1 of 60

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

MATT GUNTHER, Individually And On Behalf of All Others Similarly Situated,

Plaintiff,

vs.

ENERNOC, INC., TIMOTHY G. HEALY, T.J. GLAUTHIER, WILLIAM D. LESE, DAVID B. BREWSTER, ADAM GROSSER, NEAL C. ISAACSON, RICHARD DIETER, MORGAN STANLEY & CO. INC., and CREDIT SUISSE SECURITIES (USA) LLC,

CIVIL ACTION NO.: 1:08-cv-10361-RWZ

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

) JURY TRIAL DEMANDED )

Defendants. ) )

NATURE OF THE ACTION

1. Lead Plaintiff Matt Gunther, appointed by Order of this Court on August 12,

2008, seeks to recover damages arising from defendants’ violations of the Securities Act of 1933

(“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) on behalf of

himself and the Classes described herein below.

2. This class action is brought pursuant to Rules 23(a) and (b)(3) of the Federal

Rules of Civil Procedure on behalf two classes of purchasers of EnerNOC, Inc. (“EnerNOC” or

“Company”) securities: (1) those who purchased EnerNOC common stock between November

1, 2007 and February 27, 2008 (“Exchange Act Class”), and (2) those who purchased EnerNOC

1


common stock pursuant or traceable to the Company’s November 14, 2007 Secondary Public

Offering (“SPO”) of 2.5 million shares of common stock (“Securities Act Class”). In connection

with the SPO – during which 500,000 shares of EnerNOC common stock were sold by the

Company and 2 million shares were sold by insiders – defendants raised gross proceeds of at

least $107.5 million in addition to $16.125 million realized through the exercise of underwriters’

over-allotment option. 1

JURISDICTION AND VENUE

3. The claims asserted herein arise under Sections 11, 12(a)(2), and 15 of the

Securities Act [15 U.S.C. §§77k and 77o], and rules promulgated thereunder by the SEC, and

Sections 10(b) and 20(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)] and Rule 10b-5

promulgated thereunder by the SEC [17 C.F.R. § 240.10b-5].

4. This Court has jurisdic tion over the subject matter of this action pursuant to 28

U.S.C. §§ 1331 and 1337, Section 22 of the Securities Act [15 U.S.C. §77v], and Section 27 of

the Exchange Act [15 U.S.C. § 78aa].

5. Each defendant named herein has sufficient minimum contacts with this District,

state, or the United States so as to render the exercise of jurisdiction by this Court permissible

under traditional notions of fair play and substantial justice.

6. Venue is proper in this District pursuant to 28 U.S.C. § 1391(b) and (c),

Section 22 of the Securities Act [15 U.S.C. §77v] , and Section 27 of the Exchange Act [15

U.S.C. § 78aa]. Defendants are residents of and/or transact business in this District. Defendant

1 In total, insiders (including several of the defendants named herein) sold at least 2.2 million shares, including those shares sold by Underwriters pursuant to the Over-subscription Option Agreement, to realize gross proceeds of at least $94.6 million.

2


EnerNOC maintains its principal place of business within this District and each defendant

conducts business in, and many of the acts giving rise to the violations complained of herein,

including the preparation and dissemination of materially untrue and misleading information,

occurred in substantial part in this District. In addition, defendants Morgan Stanley & Co. Inc.

and Credit Suisse Securities (USA), LLC each conduct business in, and the conduct at issue took

place in, this District.

7. In connection with the acts alleged herein, 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.

INTRODUCTION

8. EnerNOC describes itself as a leading developer and provider of “clean and

intelligent energy solutions to utilities and electric power grid operators, as well as commercial,

institutional, and industrial customers.” EnerNOC uses its Network Operations Center (“NOC”)

to remotely manage and reduce electricity consumption to enable a more responsive electric

power grid. EnerNOC’s customers are power grid operators and utilities, as well as end-users of

electricity. As an alternative to increasing capacity (to prevent disruptions such as brownouts

and blackouts) by building additional power plants and lines, EnerNOC offers “demand response

solutions.”

9. EnerNOC enters into contracts with the end-use customers of grid operators and

utilities which call upon them to reduce their electricity usage on demand. The Company makes

payments to end-users of electricity for both contracting to reduce electricity usage and for

actually doing so when called upon. EnerNOC then monitors electricity consumption and alerts

its end-user customers to reduce their usage. For these monitoring and reduction services,

3


termed managing “demand response,” the grid operators and utilities pay EnerNOC a “stream of

recurring revenues,” as claimed in the Company’s SEC filings.

10. Importantly, the primary way the Company earns revenue is from the number of

megawatts the Company has been able to place “under management.” The Company can

increase its megawatts under management, and therefore revenue, in two ways: (1) by entering

into long-term with the end-users of electricity, and (2) by bidding in open market programs. In

open market programs, grid operators and utilities seek bids from companies such as EnerNOC.

After contracting with a grid operator or utility, the Company “ramps up” to aggregate

megawatts capacity to fulfill that contract. Once that capacity is aggregated and the end-user

“enabled,” the megawatts are considered to be “under management” and are able to generate

revenue.

11. In the Company’s November 1, 2007 third quarter 2007 (3Q:07) earnings

conference call – which discussed the Company’s growth and revenue metrics -- the Company

discussed ways in which analysts and investors could understand and evaluate EnerNOC’s

business growth. Defendants announced that EnerNOC phased out its previously used

“megawatts under contract” metric because it was not “an effective tool for [the Company] to

model and analyze [its] megawatt growth.” Rather, Defendants directed investors to concentrate

upon a different metric known as “megawatts under management.” This metric, according to

Defendants, would alert investors that revenues would be even greater than it appeared from the

Company’s previously-employed metric, megawatts under contract, because, in addition to its

contracts, the Company was able to continue “to sell into [] open markets month after month

after month and continue to add megawatts.” Defendants augmented this announcement with

outstanding revenues and third quarter results, announcing revenues of $19.1 million for the

4


quarter (an increase of $8.2 million from the same period of the previous year) – “the highest

quarterly revenue performance in company history.”

12. Importantly, on the November 1, 2007 earnings conference call, Defendants led

analysts and investors to believe that the Company gets “paid [] upfront and then [has] this nice

stream of cash flows out into the future.” As discussed in detail below, however, this was not the

case. In truth, there was an ongoing and increasing disconnect between EnerNOC’s provision of

certain services and the receipt of cash revenue, which was having, and would continue to have,

a harmful effect on EnerNOC’s financial results.

13. Soon after the November 1, 2007 conference call, on November 14, 2007,

Defendants’ SPO Prospectus and Registration Statement (collectively, the “Prospectus”) became

effective. The Prospectus conditioned investors to believe that the Company would experience a

stream of recurring revenues on a monthly basis and that its spending levels were in line with its

expectations for those revenues. It also made untrue statements regarding the Company’s

compliance with the generally accepted accounting principles of the United States (GAAP). The

Company’s SPO again allowed investors to believe the Company’s monitoring of its growth

indicated that “recurring payments [to EnerNOC] significantly increase the visibility and

predictability of [its] future revenues.”

14. However, certain true, adverse facts about the Company were undisclosed to

investors during the Class Period – including at the time of the SPO. These facts, which were

necessary to make Defendants’ previous statements not untrue or misleading, included that:

• Costs for the fourth quarter – the period already halfway complete at the time of the SPO - were rising at a rate that would dramatically outpace revenue growth.

• The Company had entered “forward capacity” contracts with grid operators including PJM Interconnection (“PJM”) which entailed materially delayed revenues, a drastic

5


change from EnerNOC’s traditional contracts. Traditionally, EnerNOC received revenues within a month of enabling a new megawatt. In forward capacity markets, however, the Company could not recognize revenue for up to a year, including in PJM’s forward capacity markets.

• As a result, the Company’s megawatts growth would not generate immediate revenue growth, as it had in the past, creating a new and materially adverse trend of rising costs outpacing revenue growth. This undisclosed trend strained capital and tied up resources.

• Insofar as the Company had to hire additional marketing employees and engineers (incurring substantial costs) and had to ramp-up well in advance of its obligations to start aggregating capacity, the Company enabled megawatts in PJM at least as early as June 2007, well in advance of the Company’s SPO.

• Nevertheless, the Defendants failed to reveal the significant revenue delay of these forward capacity contracts when making public statements about the Company’s key “megawatts under management” metric that it announced in 3Q:07.

• Defendants’ failure to accurately and fully define and describe “megawatts under management” -- especially as it relates to the timing of revenue relative to the expenses that the Company incurred acquiring assets to generate that revenue – led analysts to underestimate the loss the Company would incur in 4Q:07 drastically.

• The Company was not in compliance with GAAP because, among other reasons, it failed to provide accurate information about its financial performance, it failed to disclose its financial metrics and revenue recognition policies, and its rapidly increasing expenses were creating an undisclosed negative trend.

• EnerNOC failed to fully inform investors about the Company, its performance, and its policies, and failed to ensure that the Company’s public statements did not contain untrue and/or misleading statements and/or omissions.

15. Prior to the disclosure of these adverse facts following Defendants’ February 27,

2008 4Q:07 earnings release and subsequent earnings conference call, investors had been led to

believe that the Company’s rapidly growing megawatts under management would allow the

Company to report a dramatic and immediate increase in revenue and that the costs being

incurred to sustain this growth were in pace with such revenues. Investors learned the truth,

however, when the Company’s February 27, 2008 earnings release and conference call reported

a more significant loss than analysts expected and disclosed costs that far outpaced revenues. It

6


was then also made clear that Defendants had not provided an accurate metric to track these

revenues. In the two days after investors learned the truth about the Company, the price of

EnerNOC shares plummeted, plummeted – falling $11.74 per share from $25.50 on February 26,

2008 to close at $12.76 on February 28, 2008 on unusually heavy trading volume.

PARTIES

Plaintiff

16. Lead Plaintiff MATT GUNTHER (“Gunther”) purchased shares of EnerNOC

common stock issued pursuant and/or traceable to the Company’s materially untrue and

misleading Prospectus and also purchased shares during the Exchange Act Class Period,

including those shares detailed in his Certification, attached to his initial complaint and

incorporated herein by reference, and was damaged thereby. Therefore, Gunther is a member of

both the Securities Act Class and the Exchange Act Class.

Corporate Defendant

17. Defendant ENERNOC, INC. is a Delaware corporation which maintains its chief

executive offices and principal place of business at 75 Federal Street, Suite 300, Boston, MA

02110. EnerNOC commenced its listing on the Nasdaq Global Market (“Nasdaq”) on May 18,

2007. According to the Company’s press releases, EnerNOC is a leading developer and provider

of “clean and intelligent energy solutions to utilities and electric power grid operators, as well as

commercial, institutional, and industrial customers.” The Company’s energy management

solutions enabled the Company to optimize the balance of electric supply and demand to

remotely manage and reduce electricity consumption across a network of commercial,

institutional, and industrial customer sites.

7


Individual Defendants

18. The individuals identified as defendants in subparagraphs (a) - (g) below, are

referred to collectively as the “Individual Defendants.” The Individual Defendants are each

liable for the materially untrue and misleading statements detailed below, both because they

personally signed such statements and because the statements were “group-published”

information. The Individual Defendants include the following:

(a) Defendant TIMOTHY G. HEALY (“Healy”) was, at all relevant times,

Chairman of the Board of Directors and Chief Executive Officer of EnerNOC. Defendant Healy

signed the materially untrue and misleading Prospectus filed with the SEC. Also in connection

with the SPO, defendant Healy sold over $2.631 million in EnerNOC shares he owned or

controlled. Defendant Healy also made materially untrue and misleading statements in the

Company’s November 1, 2007 earnings conference call.

(b) Defendant DAVID B. BREWSTER (“Brewster”) was, at all relevant

times, President and Chief Operating Officer and a member of the Board of Directors of

EnerNOC. Defendant Brewster signed the materially untrue and misleading Prospectus filed

with the SEC. In addition, Defendant Brewster made materially untrue and misleading

statements in the Company’s November 1, 2007 earnings conference call. In connection with the

SPO, defendant Brewster sold over $5.751 million EnerNOC shares he owned or controlled. On

January 7, 2008, the Company appointed Darren Brady as the new Chief Operating Officer,

although Brewster remained President of the Company.

(c) Defendant NEAL C. ISAACSON (“Isaacson”) was, at all relevant times,

Chief Financial Officer and Treasurer of EnerNOC. Defendant Isaacson signed the materially

untrue and misleading Prospectus filed with the SEC. In addition, Defendant Isaacson made

8


materially untrue and misleading statements in the Company’s November 1, 2007 earnings

conference call. In connection with the SPO, defendant Isaacson sold over $1.022 million

EnerNOC shares he owned or controlled.

(d) Defendant RICHARD DIETER (“Dieter”) was, at all relevant times, a

member of the Board of Directors of EnerNOC. Defendant Dieter signed the materially untrue

and misleading Prospectus. Dieter served on the Company’s Audit Committee and the

Compensation Committee.

(e) Defendant T.J. GLAUTHIER (“Glauthier”) was, at all relevant times, a

member of the Board of Directors of EnerNOC. Defendant Glauthier signed the materially

untrue and misleading Prospectus filed with the SEC. Glauthier served on the Company’s Board

of Directors’ Audit Committee and the Compensation Committee.

(f) Defendant ADAM GROSSER (“Grosser”) was, at all relevant times, a

member of the Board of Directors of EnerNOC. Defendant Grosser signed the materially untrue

and misleading Prospectus. Also in connection with the SPO, defendant Grosser sold over

$27.199 million in EnerNOC shares he owned or controlled. Grosser served on the Company’s

Compensation Committee.

(g) Defendant WILLIAM D. LESE (“Lese”) was, at all relevant times, a

member of the Board of Directors of EnerNOC. Defendant Lese signed the materially untrue

and misleading Prospectus. Also in connection with the SPO, defendant Lese sold over $18.796

million in EnerNOC shares he owned or controlled. Lese served on the Company’s Audit

Committee and the Compensation Committee.

9


Underwriter Defendants

19. MORGAN STANLEY & CO., INC. (“Morgan Stanley”) and CREDIT

SUISSE SECURITIES (USA) LLC (“Credit Suisse”), (collectively, the “Underwriter

Defendants”), acted as Lead Underwriters of the SPO. The Underwriter Defendants managed

the distribution of 1.7 million shares of EnerNOC stock to investors, plus additional shares upon

exercise of the underwriters’ over-allotment option.

20. In connection with the SPO, the Underwriter Defendants were paid gross fees

totaling over $3.56 million, indirectly by purchasers of the Company’s shares. The underwriters

were paid at least $2.0963 per share in connection with the sale of the 2.875 million shares --

including shares sold pursuant to the exercise of the underwriter’s over-allotment option.

CLASS ACTION ALLEGATIONS

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

Procedure 23(a) and (b)(3) on behalf of two Classes: (1) the Securities Act Class consisting of all

persons who purchased EnerNOC common stock pursuant or traceable to the November 2007

registration statement and prospectus; and (2) the Exchange Act Class consisting of all those who

purchased or otherwise acquired EnerNOC common stock during the Exchange Act Class

Period. Excluded from the Classes are defendants, present and former officers and directors of

the Company, 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.

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

adjudication of this controversy because 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 make it impossible for members of the Class to redress the wrongs

10


done to them individually. There will be no difficulty in the management of this action as a class

action.

23. The members of the Classes are so numerous that joinder of all members is

impracticable. EnerNOC’s common stock was actively traded on the Nasdaq at all relevant

times. While the exact number of Class members is unknown at this time, and can only be

ascertained through appropriate discovery, there are likely hundreds or thousands of members in

the proposed Classes. Record owners and other members of the Classes may be identified from

records maintained by the Company or its transfer agent, who 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.

24. Lead Plaintiff’s claims are typical of the claims of the members of the Classes as

all members of the Classes are similarly affected by defendants’ conduct complained of herein.

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

the Classes and has retained counsel competent and experienced in class and securities litigation.

26. Common questions of law and fact exist as to all members of the Classes and

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

(a) Among the questions of law and fact common to the Securities Act Class are:

• Whether the federal securities laws were violated by defendants’ acts as alleged herein;

• Whether the EnerNOC SPO registration statement and prospectus misrepresented and omitted material facts; and

• To what extent the members of the Class have sustained damages and the proper measure of damages.

(b) Among the questions of law and fact common to the Exchange Act Class are:

11


• Whether the federal securities laws were violated by defendants’ acts as alleged herein;

• Whether statements made by defendants to the investing public during the Exchange Act Class Period misrepresented or omitted material facts about the business, operations, and management of EnerNOC;

• Whether the alleged materially misstatements and omissions about the business, operations, and management of EnerNOC caused the Class members’ loss; and,

• To what extent the members of the Class have sustained damages and the proper measure of damages.

CLAIMS PURSUANT TO THE SECURITIES ACT ON BEHALF OF PLAINTIFF AND THE SECURITIES ACT CLASS

27. EnerNOC, its entire Board of Directors, Chief Financial Officer, and the lead

underwriters of the SPO, are each charged with publishing a materially untrue and misleading

Prospectus with the SEC, in direct violation of the Securities Act.

MATERIALLY UNTRUE STATEMENTS AND OMISSIONS IN THE COMPANY’S SPO REGISTRATION STATEMENT AND PROSPECTUS

28. On November 14, 2007, EnerNOC initiated its SPO and sold 2.5 shares at $43.00

per share – well above the $26.00 per share price at which defendants had conducted its Initial

Public Offering only six months before – for $107.5 million in gross proceeds. The Prospectus

contained materially untrue and misleading statements and omissions regarding the Company’s

success, growth, revenue recognition, and compliance with GAAP and SEC reporting rules. The

Prospectus omitted the fact that expenses and compensation costs were already trending higher

than normal at the time of the SPO and that it was already foreseeable that the Company’s

revenues would be far outweighed by those costs in the fourth quarter. Defendants failed to

disclose that expenses were outpacing revenue growth and that, although the number of capacity

contracts was increasing, these contracts involved substantial upfront costs and a prolonged and

12


material “lag” in the ability to recognize revenue. Such a lag strained EnerNOC’s capital

resources in a materially adverse way.

29. Touting EnerNOC’s growth, the Prospectus led investors to believe there was a

direct and immediate correlation between growth in megawatts under management and revenue

increases:

Grid operators and utilities pay us a stream of recurring revenues for managing this demand response capacity. With approximately 2,034 customer sites in our demand response network and approximately 918 megawatts, or MW, of demand response capacity under our management as of September 30, 2007, we believe that we are the largest national demand response solutions provider focused on the commercial, institutional and industrial market. Our revenues grew from $0.8 million in 2004 to $26.1 million in 2006. Our revenues for the nine month period ended September 30, 2007 were $41.1 million.

[Emphasis added.]

30. The Prospectus went on to lead investors to believe the Company’s “Competitive

Strengths” had and would allow the Company to generate immediate revenue and monitor that

revenue stream when defendants stated, in part, as follows:

Recurring Revenues . We engage in long-term contracts and participate in open market programs with grid operators and utilities through which we are paid recurring payments, typically on a monthly basis, for the capacity that we make available, whether or not we are called upon to reduce our end-use customers' electricity consumption from the electric power grid. These long-term contracts generally range between three and 10 years in duration. These recurring payments significantly increase the visibility and predictability of our future revenues. In addition, we enter into long-term agreements with commercial, institutional and industrial customers that provide us with demand response capacity. These contracts contribute to customer loyalty and foster end-use customer retention. Although not part of their initial arrangement, a portion of these recurring cash flows can be used by our commercial, institutional and industrial customers to purchase our suite of energy management solutions.

[Emphasis added.]

31. The Prospectus stated the following regarding revenue recognition:

13


Our revenues can fluctuate from quarter to quarter based upon the following factors: (i) the seasonality of our demand response business in some of the markets in which we operate, where payments under some long-term contracts can be concentrated in particular seasons and months and pursuant to certain open markets for demand response capacity that function only in certain seasons or months, (ii) the timing of the recognition of our revenues based upon verification of our ability to deliver committed demand response capacity, (iii) the implementation by grid operators and utilities of temporary market programs in response to forecast short-term strains on available capacity in particular regions and (iv) the timing of any acquisitions we may make.

[Emphasis added.]

32. The above statements were materially untrue and misleading because the

Prospectus failed to disclose that, given a material change in EnerNOC’s business mix and

contractual terms, an increase in megawatts did not automatically result in an immediate increase

in revenue and that an increasing number of EnerNOC’s contracts – its forward capacity

contracts -- involved substantial upfront costs with a prolonged “lag” in the ability to recognize

revenue. The Prospectus failed to disclose that a material amount of the Company’s megawatts

under management were in “forward capacity markets” – which meant they were not generating

revenue, and would fail to do so until up to a year after becoming under management. This delay

in revenue was magnified because the Company needed to begin making substantial

expenditures to ramp up for providing these megawatts, well before they would become “under

management” and well before they would eventually begin generating revenue to compensate for

their steep costs. Investing so much capital to delayed-revenue contracts was a risky and averse

change which should have been disclosed. The Prospectus also failed to warn investors that

revenues would fluctuate from quarter to quarter because of these forward market contracts and

not just because of generic, unforeseeable events. This is something investors would have found

important in assessing whether or not to purchase EnerNOC shares, as it materially and

14


negatively increased the stock’s volatility, made capital needs greater and more difficult to

predict, and would lead to greater than usual quarterly operating losses.

33. The Company’s risk factors were also materially untrue and misleading, and

insufficient to warn investors about the increasing and material discrepancy between costs and

revenues that the Company was facing at the time of the SPO. For example, the Company

warned:

Our results of operations could be adversely affected if our operating expenses do not correspond with the timing of our revenues.

Most of our operating expenses, such as employee compensation and rental expense for properties, are either relatively fixed in the short-term or incurred in advance of sales. Moreover, our spending levels are based in part on our expectations regarding future revenues. As a result, if revenues for a particular quarter are below expectations, we may not be able to proportionately reduce operating expenses for that quarter. For example, if a demand response event or metering and verification test does not occur in a particular quarter, we may not be able to recognize revenues for the undemonstrated capacity in that quarter. This shortfall in revenues could adversely affect our operating results for that quarter and could cause the market price of our common stock to decline substantially.

[Emphasis Added.]

34. This statement was materially untrue and misleading because although the

Prospectus warned that specific unforeseeable instances – such as the failure of a demand

response event or metering and verification test to occur – could cause a shortfall in revenue, it

omitted the material fact that the Company had already spent well more than it could expect in

revenues for that quarter, and that this mismatch between expenditures and revenues would

likely continue in future quarters, and even accelerate. As noted, this development placed a

strain on capital resources of a negative nature not heretofore experienced by the Company. In

addition, the risk factors also failed to disclose that forward market contracts prevented the

15


Company from recognizing revenues for a material amount of its megawatts under management

for the near future quarters – despite being associated with high costs.

35. The Prospectus also represented that the Company’s “financial statements are

prepared in accordance with accounting principles generally accepted in the United States, or

GAAP.”

36. In truth, Defendants failed to disclose material information in violation of GAAP

and SEC reporting requirements.

37. As set forth in Financial Accounting Standards Board (“FASB”) Statements of

Concepts (“Concepts Statement”) No. 1, one of the fundamental objectives of financial reporting

is to provide accurate and reliable information concerning an entity’s financial performance

during the period being presented. In that regard, Concepts Statement No. 1 states:

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

[Emphasis added.]

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

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

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

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

the AICPA:

[F]inancial statements are management’s responsibility . . . . [ M]anagement is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent

16


with management’s assertions embodied in the financial statements. The entity’s transactions and the related assets, liabilities and equity are within the direct knowledge and control of management . . . . Thus, the fair presentation of financial statements in conformity with Generally Accepted Accounting Principles is an implicit and integral part of management’s responsibility.

[Emphasis added.]

39. EnerNOC’s Prospectus (and other Class Period financial statements, as discussed

below) were materially untrue and misleading because they failed to disclose :

(a) All material aspects of EnerNOC’s key financial metrics and all material

aspects of its revenue recognition policies,

(b) that EnerNOC would incur significant up-front costs associated with the

expansion of the number of megawatts under management and the infrastructure necessary to

enable such megawatts in the forward capacity market, and would not be able to show revenue

growth in line with cost growth;

(c) in certain forward capacity contracts, which EnerNOC had been engaged

in since at least as early as July 2007, it would take longer for EnerNOC to begin earning

revenues, in some cases up to a year after enablement;

(d) expenses would rise far more quickly than revenues, thus creating a

negative trend, and the increasing number of megawatts under management involved prolonged

lags in EnerNOC’s ability to recognize revenue, along with a material strain on capital resources

and increasing earnings volatility.

40. The Prospectus also failed to explain the Company’s revenue recognition

practices adequately, particularly as they related to the timing of such revenue. For example, at

the time of the SPO, expenses were already rising far faster than revenues, thus creating a

17


disparity and adversely impacting the Company’s earnings. Moreover, the increasing number of

megawatts under management involved prolonged lags in the ability to recognize revenue.

41. GAAP provides that the usefulness of financial statements in making economic

decisions depends significantly upon the investors’ understanding of the accounting policies

followed by a company. Accounting Principles Board (“APB”) Opinion No. 22, Disclosure of

Accounting Policies ¶ 7 (April 1972). In fact, GAAP states that information about the

accounting policies adopted by a reporting company is “essential” for financial statement users.

Id. ¶ 8. Accordingly, paragraph 12 of APB Opinion No. 22 provides:

In general, the disclosure should encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods; in particular, it should encompass those accounting principles and methods that involve any of the following:

(a) A selection from existing acceptable alternatives;

(b) Principles and methods peculiar to the industry in which the reporting

entity operates, even if such principles and methods are predominantly followed in that industry;

(c) Unusual or innovative applications of generally accepted accounting

principles (and, as applicable, of principles and methods peculiar to the industry in which the

reporting entity operates).

42. Accordingly, EnerNOC’s financial statements during the Class Period were also

materially untrue and misleading and failed to comply with GAAP because they failed to identify

and describe important judgments associated with its accounting for revenue recognition. To be

sure, the Company failed to disclose (1) the definition of megawatts under management as it

relates to when EnerNOC started earning revenue; and (2) the timing of EnerNOC’s revenue

relative to expenses incurred in acquiring assets that generate that revenue. Accordingly,

18


investors were unable to assess the appropriateness of principles relating to and corresponding

impact to revenue recognition and allocation of asset costs to current and future periods.

43. As a result of the foregoing, EnerNOC’s financial statements violated, among

other things, the following provisions of GAAP for which each Defendant is necessarily

responsible:

(a) The principle that financial reporting should provide information that is

useful to present and potential investors and creditors and other users in making rational

investment, credit and similar decisions (FASB Concepts Statement No. 1, ¶ 34);

(b) The principle that financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources, and effects of transactions,

events and circumstances that change resources and claims to those resources (FASB Concepts

Statement No. 1, ¶ 40);

(c) The principle that financial reporting should provide information about

how management of an enterprise has discharged its stewardship responsibility to owners

(stockholders) for the use of enterprise resources entrusted to it. To the extent that management

offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in general (FASB Concepts Statement

No. 1, ¶ 50);

(d) The principle that financial reporting should be reliable in that it

represents what it purports to represent. That information should be reliable as well as relevant

is a notion that is central to accounting (FASB Concepts Statement No. 2, Qualitative

Characteristics of Accounting Information ¶¶ 58-59 (May 1980));

19


(e) The principle of completeness, which means that nothing is left out of the

information that may be necessary to insure that it validly represents underlying events and

conditions (FASB Concepts Statement No. 2, 1 79); and

(f) The principle that conservatism be used as a prudent reaction to

uncertainty to try to ensure that uncertainties and risks inherent in business situations are

adequately considered. The best way to avoid injury to investors is to try to ensure that what is

reported represents what it purports to represent (FASB Concepts Statement No. 2, 11 95, 97).

44. Although the Company’s Prospectus allowed investors to expect a recurring and

near-immediate stream of revenues from this high-growth company, and spending levels that

would be in line with revenues, the Company was already experiencing costs that were

outpacing revenues and was already engaged in forward market contracts that was causing and

would increasingly cause a material amount of the Company’s megawatts under management to

experience delayed revenues, as provided by contract.

ADDITIONAL ALLEGATIONS REGARDING THE UNDERWRITER DEFENDANTS

45. Shareholders paid over $3.56 million in fees to compensate the Underwriter

Defendants for conducting a purported significant “due diligence” investigation into EnerNOC in

connection with the SPO. The Underwriter Defendants’ due diligence investigation was a

critical component of the SPO and was supposed to provide investors with important safeguards

and protections.

46. The due diligence investigation that Underwriter Defendants were required to

oversee and perform should have included a detailed investigation into EnerNOC sales and

forecasting, contracts, market and industry outlook, controls, and procedures, and it also required

the Underwriter Defendants to test the assumptions and verify the projections adopted or ratified

20


by defendants to the extent a reasonable investor with access to such confidential corporate

information would. A reasonable due diligence investigation would have extended well beyond

a mere casual view of EnerNOC’s books and records, accounting and financial reports, and

operational and financial controls. The failure of the Underwriter Defendants to conduct an

adequate due diligence investigation was a substantial contributing factor leading to the harm

complained of herein.

47. Like the Individual Defendants, it is also appropriate to treat the Underwriter

Defendants as a group for pleading purposes and to presume that the untrue, 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 defined group of

defendants identified above. Moreover, because of the Underwriter Defendants’ positions, they

each had access to the adverse undisclosed information about EnerNOC’s business, contracts,

operations, products, operational trends, financial statements, markets and present and future

business prospects via access to 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 of Directors meetings and committees thereof and via reports and other

information provided to them in connection therewith.

COUNT I For Violation of Section 11 of the Securities Act Against All Defendants on

Behalf of Plaintiff and the Securities Act Class

48. Lead Plaintiff repeats and re-alleges each and every allegation contained above.

Plaintiff expressly excludes from this Count any allegation of any paragraph that alleges that

21


defendants' misconduct was done intentionally, knowingly, or with reckless disregard for the

truth or any allegation that otherwise sounds in fraud.

49. This count is predicated upon defendants’ strict liability for making materially

untrue and misleading statements in the Registration Statement and Prospectus. This Count is

asserted by plaintiff on behalf of the Securities Act Class against all defendants by and on behalf

of persons who acquired shares of the Company pursuant or traceable to the untrue and

misleading Registration Statement and Prospectus issued in connection with the SPO.

50. EnerNOC is the issuer of the stock issued via the untrue and misleading

Registration Statement and Prospectus. As such, EnerNOC is strictly liable for each untrue and

misleading statement contained therein. The Individual Defendants Timothy G. Healy, T.J.

Glauthier, William D. Lese, David B. Brewster, Adam Grosser, Neal C. Isaacson, and Richard

Dieter are each signatories of the Registration Statement or the Lead Underwriters of the SPO

and, therefore, each of these defendants had a duty to make a reasonable investigation of the

statements contained in the Registration Statement and Prospectus to ensure that said statements

were true and that there was no omission to state any material fact required to be stated in order

to make the statements contained therein not misleading. In the exercise of reasonable care,

defendants should have known of the material misstatements and omissions contained in the

Registration Statement and Prospectus and also should have known of the omissions of material

fact necessary to make the statements made therein not misleading. As such, each of these

defendants is liable to plaintiff and the Securities Act Class.

51. Each of the defendants identified in Count I issued, caused to be issued and

participated in the issuance of materially untrue and misleading written statements to the

investing public which were contained in the Prospectus and Registration Statement which

22


misrepresented or failed to disclose, inter alia, the facts set forth above. By reasons of the

conduct alleged herein, each defendant violated, and/or controlled a person who violated § 11 of

the Securities Act.

52. As a direct and proximate result of defendants’ conduct, plaintiff and the

Securities Act Class suffered substantial damages in connection with their purchase of EnerNOC

common stock.

53. Plaintiff and other members of the Securities Act Class acquired their EnerNOC

stock without knowledge of the untruths and/or omissions alleged herein. Plaintiff and the other

members of the Class were thus damaged by defendants’ actions and by the material

misstatements and omissions of the aforementioned Registration Statement and Prospectus.

54. This action was brought within one year after the discovery of the untrue

statements and omissions and within three years after the November 2007 SPO of EnerNOC

common stock.

COUNT II For Violations of Section 12(a)(2) of the Securities Act Against All Defendants On Behalf of

Plaintiff and the Securities Act Class

55. Plaintiff repeats and re-alleges each and every allegation contained above.

Plaintiff expressly excludes from this Count any allegation of any paragraph that alleges that

defendants' misconduct was done intentionally, knowingly, or with reckless disregard for the

truth or any allegation of a paragraph that otherwise sounds in fraud.

56. This Count is brought by Plaintiff pursuant to Section 12(a)(2) of the Securities

Act [15 U.S.C. §77l(a)(2)] on behalf of all purchasers of EnerNOC common stock in connection

with and/or traceable to the November 2007 SPO. This cause of action is brought against

EnerNOC, the Individual Defendants, and the Underwriter Defendants.

23


57. The Company, the Individual Defendants, and Underwriter Defendants were

sellers, offerors, and/or solicitors of sales of the EnerNOC shares offered pursuant to the

November 2007 Registration Statement and Prospectus.

58. EnerNOC, as the issuer, successfully solicited and actually transferred title of the

securities; the Underwriter Defendants successfully solicited the purchase of the securities; and

each of the Individual Defendants is a solicitor seller because he/she signed those documents that

solicit the sale of securities – the Prospectus and/or Registration Statement.

59. The EnerNOC Registration Statement and Prospectus contained untrue statements

of material facts or omitted to state material facts necessary to make the statements, in light of

the circumstances under which they were made, not misleading. Defendants' actions of

solicitation included participating in the preparation of the Prospectus and Registration Statement

which contained materially untrue statements and omissions.

60. Defendants owed to the purchasers of EnerNOC shares, which were sold in the

SPO, the duty to make a reasonable and diligent investigation of the statements contained in the

Prospectus and Registration Statement, to ensure that such statements were true and that there

was no omission to state a material fact required to be stated in order to make the statements

contained therein not misleading. These Defendants, in the exercise of reasonable care, should

have known of, the misstatements and omissions contained in the SPO materials as set forth

above.

61. Plaintiff and other members of the Securities Act Class purchased EnerNOC

common stock pursuant to and traceable to the defective Registration Statement and Prospectus.

Plaintiff did not know, or in the exercise of reasonable diligence could not have known, of the

untruths and omissions contained therein.

24


62. Plaintiff, individually and representatively, hereby offers to tender to Defendants

those securities which Plaintiff and other Securities Act Class members continue to own, on

behalf of all members of the Class who continue to own such securities, in return for the

consideration paid for those securities together with interest thereon.

63. By reason of the conduct alleged herein, these Defendants violated §12(a)(2) of

the Securities Act. Accordingly, Plaintiff and members of the Securities Act Class who hold

EnerNOC shares purchased in the SPO have the right to rescind and recover the consideration

paid for their EnerNOC shares and, hereby elect to rescind and tender their EnerNOC shares to

the Defendants sued herein. Plaintiff and Securities Act Class members who have sold their

EnerNOC shares are entitled to recissory damages.

64. Less than three years elapsed from the time that the securities upon which this

Count is brought were sold to the public to the time of the filing of this action. Less than one

year elapsed from the time when Plaintiff discovered or reasonably could have discovered the

facts upon which this Count is based to the time of the filing of this action.

COUNT III For Violations of Section 15 of the Securities Act Against the Individual Defendants On

Behalf of Plaintiff and the Securities Act Class

65. Lead Plaintiff incorporates by reference each and every allegation contained

above as if set forth herein. Plaintiff expressly excludes from this Count any allegation of any

paragraph that alleges that defendants' misconduct was done intentionally, knowingly, or with

reckless disregard for the truth or any allegation that otherwise sounds in fraud. This Count is

asserted against the Individual Defendants Timothy G. Healy, T.J. Glauthier, William D. Lese,

David B. Brewster, Adam Grosser, Neal C. Isaacson, and Richard Dieter.

25


66. Throughout the Securities Act Class Period, the Individual Defendants acted as

controlling persons of EnerNOC within the meaning of §15 of the Securities Act. By reason of

their stock ownership, senior management positions and/or directorships at the Company, as

alleged above, these defendants, individually and acting pursuant to a common plan, had the

power to influence and exercised the same to cause EnerNOC to engage in the acts and conduct

complained of herein.

67. By reason of such conduct, the defendants named in this Count are liable pursuant

to §15 of the Securities Act. As a direct and proximate result of defendants’ conduct, plaintiffs

and the Securities Act Class suffered damages in connection with their acquisition of EnerNOC

common stock.

26


CLAIMS PURSUANT TO THE EXCHANGE ACT ON BEHALF OF PLAINTIFF AND THE EXCHANGE ACT CLASS

MATERIALLY FALSE & MISLEADING STATEMENTS AND OMISSIONS MADE WITH SCIENTER DURING THE CLASS PERIOD

68. Between November 1, 2007 and February 27, 2008, the Exchange Act Class

Period, Defendants made a series of statements and filed reports with the SEC regarding the

financial performance, health, and stability of the Company that were materially false and

misleading and were known by defendants to be false at that time, or were recklessly disregarded

as such thereby, in violation of the Exchange Act

69. On November 1, 2007, EnerNOC released its third quarter 2007 (3Q:07) earnings

and held a conference call during which Defendants touted the Company’s purported growth to

make it appear as if an increase in megawatts under management was unequivocally positive,

and that the manner in which the increase was achieved and the contractual terms that called for

such new megawatts to be placed “under management” posed no issues that would be of material

concern to investors. In that regard, EnerNOC CEO Defendant Healy stated:

We are very pleased with our quarterly results, and the progress that we have made along our strategic road map that we outlined during our road show.

Let me share with you some of those successes. Our megawatts under management grew to approximately 918 at the end of the third quarter, up from approximately 756 megawatts at the end of the second quarter. It's an increase of 162 megawatts during the quarter. [Emphasis added.]

70. The Company’s CFO, Defendant Isaacson, stated in that call that “[d]uring the

quarter, we organically increased our megawatts under management, we successfully acquired

and commenced the integration of MDEnergy, and we delivered the best quarterly revenue

performance in our company's history.”

71. Defendant Issacson went on to explain the materiality of the Company’s increase

in megawatts under management, stating that “[s]ales of our demand response solutions

27


continued to account for substantially all of our revenue during the third quarter and correlates

to our increase in megawatts under management. ” [Emphasis added.]

72. The above statements were materially false and misleading when made because

defendants knew, but failed to disclose, or recklessly disregarded that EnerNOC’s “strategic road

map” involved entering into forward capacity contracts that required substantial upfront costs,

and also resulted in a prolonged “lag” in the ability to recognize revenue. As a result, an increase

in megawatts under management during the quarter did not necessarily equate to an increase in

revenue during that quarter, or in near future quarters. Moreover, the undisclosed deferred

revenue aspect of EnerNOC’s increasingly important contracts strained EnerNOC’s capital

resources, diverted resources from other needs, and introduced new and material volatility into

EnerNOC’s revenue stream and earnings picture. It also caused and would continue to cause

materially increased quarterly operating losses from those historically experienced by the

Company.

73. In that earnings call, Defendant Healy asserted that its previous megawatt growth

metric – megawatts under contract – had not been “effective,” but that the Company would

continue to “monitor and own” the appropriate metrics, stating:

You may notice that we have phased out our megawatts under contract number for reporting purposes. It is because we believe it is not really proving to be an effective tool for us to model and analyze our megawatt growth. We are going to continue to monitor and own all of our metrics moving forward as we believe appropriate.

[Emphasis added.]

74. In response to a question from Thomas Weisel Partners analyst Dilip Warrier

regarding whether the Company had “sufficient megawatts under contract” to allow the

Company to continue its run rate (of adding 200 plus megawatts in the third quarter, compared to

115 per quarter over the last 12 months) into the fourth quarter, Defendant Healy purported to

28


clarify the Company’s growth potential for megawatts under management and explain why the

Company was abandoning the “megawatts under contract” metric. Defendant Healy, stated, in

part:

So I think, you know, I am actually thankful you asked that question because it gets to something that we're trying to make sure that people understand. Contracts are not the only way that we are allowed or obligated or have the opportunity to increase our megawatts under management, the contracts of the utilities are only one piece of the equation. The other piece is the ISO or Independent System Operator run open markets. So, these open markets, we don't have, you know, a 5-year contract with an open market operator that says you must bring us 500 megawatts over the next 5 years. It's not the way those markets work. The way those markets work is, we can continue to sell into those open markets month after month after month and continue to add megawatts under those open market programs. And so, the megawatts under contract number becomes virtually irrelevant as you think about us growing into more and more megawatts under management in the open market activity.

Both of those activities combined and we have that, you know, 44 person sales force that is doing that activity, both of that combined allows us to continue to grow our megawatts under management. So, I hope, you know, that gives you a sense of why we're not -- unlike maybe other demand response competitors out there who basically are perhaps only growing into their megawatts under contracts, we're growing into megawatts under management in both of those arenas . . . .

[Emphasis Added.]


defendants knew, or were reckless in not knowing, that the Company’s new metric did not

distinguish between contracts that were earning EnerNOC cash, and those that were not doing so

then, or in the near future, and the Company was unable to “monitor and own” its financial

results as appropriate. It was not until after the individual defendants dumped their shares in the

SPO that they revealed that megawatts under management were of two very different types—

earning and non-earning--a distinction that made an enormous difference. While touting the

Company’s ability to grow megawatts under management in two different areas – contracts and

29


the open market – the Company concealed the fact that this growth in megawatts under

management would not correlate to an immediate increase in revenues. Instead, a material

amount of these megawatts under management were not generating revenues at all. The

Company and the Individual Defendants knew or recklessly disregarded this key “revenue

deferral” element of one of their most important business relationships, as planning for the

deferred revue growth would, while increasing operating costs, have also starkly changed

EnerNOC’s business model. It also caused and would continue to cause materially increased

quarterly operating losses from those historically experienced by the Company.

76. Regarding the correlation between megawatts under management and revenues,

and the Company’s shift away from the “megawatts under contract” metric, Board President and

COO Defendant Brewster and an analyst had the following exchange during the November 1,

2007 earnings call:

JONATHAN HOOPES: Okay, well then thank you for that description there David. Or I guess notwithstanding Tim's previous times, then why not disclose the growth in the under contract number? I understand that we've got this two furniture, since you are experiencing faster growth in the bilateral segment, and I like looking at the metric because it did give somewhat of a congruency to your larger size opportunities, why not give that out any more?

DAVID BREWSTER: Sure. Because exactly that we're anxious that people will think that that's the full picture. Let me explain it, let's pretend for a second that we gave out a number of 918 megawatts as we did today that are under management and we said that we had, you know, 1100 megawatts under contracts. Meaning, you count all of the under management because those are under contract now, and you would add all of the unfulfilled contracts amount that we still need to grow into. But we don't want people to do for math, it is to say, "oh okay". So, their sales force has an opportunity only right now they're limited to go and only sell up to 1100 megawatts. And that's actually not the case at all.

We -- you know, if possible that the next time we report our numbers, you know, we could be at, you know, 1230 megawatts let's say. But, we wouldn't have signed another new open -- another new bilateral contract. So, people will be saying, how could it be at 1230 if you didn't even have that many under contracting, you never made a new announcement of a megawatt under contract.

30


So, what we're trying to do is just make it simple to say, there are two ways that we can add megawatts under management . One is through fulfilling our megawatt under contract number and 2) is through adding megawatts under management in open market. So that's -- that's really the only reason that we did it because as you saw we added, you know, very significant amount of new megawatts under contract. I think in fact we've never announced as many megawatts -- as many new utility contracts as we did this quarter. So, you know, certainly if anything we might be short changing ourselves by not, you know, adding to that number, but it's just isn't about trying to bolster a number. It's trying to paint a picture so that you understand how this company is managed, how we grow, how we continue to look at the most relevant metrics for us which is, how many megawatts do we have under management that we can actually be earning revenues on, plain and simple.

TIMOTHY HEALY: But Jonathan, we also -- you know, we will continue as we always had to issue press releases, announcing new utility contracts, you know, we talked briefly on this call about some of the details of our [FEE] contract, for example messaging and ramps up to 160 megawatts in the last two years of that agreement. So, we'll continue to provide some detail and I think that you guys you will get a good sense of, you know, the deals we have and the prospectus we have underneath these utility contracts.

JONATHAN HOOPES: Great. So, if [I] understand it correctly then you are removing a ceiling to your growth risk -- your growth risk.

TIMOTHY HEALY: That's perfect. That's the perfect way to describe it.

[Emphasis added.]

77. After stating that “we don’t want people to do [the] math,” Defendant Brewster

opted to “paint a picture” that intentionally led investors to believe that the Company’s growth in

megawatts under management for a given quarter resulted in an increase in revenues derived

therefrom for that given quarter. These statements were materially false and misleading when

made because if Defendants were “continu[ing] to look at the most relevant metrics” and were

focused on “how many megawatts [the Company had] under management that [it could] actually

be earning revenues on,” then Defendants knew or recklessly disregarded that an increasing

number of megawatts under management were not earning immediate revenues. Defendants

were removing the “ceiling” from investors’ perception of the Company’s potential growth when

31


in truth, that growth would be materially slowed by the Company’s forward capacity market

contracts.

78. The November 2007 earnings call also contained the following exchange

regarding timing of revenues and cash profitability:

JOHN QUEALY: And, I am sorry, Tim just one last one. How do we look on cash profitability of the new megawatts getting at and what's the good reference to or timeframe to look at for cash on cash positive?

TIMOTHY HEALY: Well, I mean this is the basic question about the entire EnerNOC business model when you really peel it all back and the entire EnerNOC business model is about going out there, building what we have built in terms of this infrastructure, this infrastructure that we have to support whether we are managing a 100 megawatts or 10,000 megawatts, you have got to support your base infrastructure and network operation centers, all the overhead, the executive cost and corporate cost and all of that. And then when we bring more and more megawatts on, that gets dispersed. That cost gets dispersed and gets loaded onto more and more megawatt. So, I think it's a combination of factors. There is -- we are not seeing pricing pressure of the $80,000 number. We are not seeing as we just talked about -- we feel very strongly about where the margins are. You are seeing the trends with our sales force, that you see and we like those. And then the cost to service these megawatts, as our company gets better and better, our operations team, our network operations team, they can service these megawatts, these additional customers very effectively, we are putting more and more process in place to make that scalable as well.

So, I think you are asking a basic question about the model and we have never been more excited or more bullish about what this looks like as you go from having 700 megawatts under management to over 900 and then start to continue to grow that. Eventually you reach an inflection point simply because of the way the model works and that inflection point in our minds has not changed. We continue to see excitement growing in the future.

[Emphasis added.]

79. Following Defendant Healy’s response, one analyst made clear his conception of

the Company’s business model as payment being made upfront:

MICHAEL HORWITZ: Very good. So, I might follow up with John and not to belabor the point, but it really is interesting. When you look at these business models then you understand that you go out there, you signed up new customers, you sign up new megawatts and you almost get paid for it upfront and then you have this nice stream of cash flows out into the future . . . .

32


80. Defendant Healy did nothing to correct Mr. Horwitz’s understanding or to

disclose the true nature of forward capacity contracts where megawatts under management did

not provide cash flow for up to a year. Instead, Mr. Healy responded “yeah,” and went on to

discuss the Company’s low customer turnover.


defendants knew, but failed to disclose, or recklessly disregarded that the sales involved forward

capacity contracts that required substantial upfront costs, and also resulted in a prolonged “lag”

in the ability to recognize revenue. Defendant Healy’s statements instead conditioned analysts

and investors to believe that organic growth during the quarter equated to a direct increase in

cash profitability during the same quarter. Defendant Healy allowed analysts and investors to

believe that the Company “get[s] paid for [new customers] up front and then [has a] stream of

cash flows out into the future.” Defendant Healy’s success in bolstering this falsely positive

outlook was further evidenced when the Company’s earnings fell well below analysts’

expectations.

82. A former employee of the Company (Confidential Witness 1), who worked for

EnerNOC in Business Development throughout the Class Period, stated that EnerNOC's

infrastructure costs rose as the Company's sales created a large need for full time employees.

These employees were hired to install equipment and monitor companies' energy consumption --

costly undertakings for which the Company would be unable to report the near-immediate

recurring revenue that it had reported in prior quarters. Thus, the EnerNOC business model had

experienced a material, yet undisclosed, adverse change.

83. On November 5, 2007, the Company released its 10-Q for the 3Q:07. Regarding

revenue recognition, the 10-Q stated, in part:

33


In accordance with SAB No. 104 , we recognize demand response revenues when we have provided verification to the grid operator or utility of our ability to deliver the committed capacity under the agreement . Committed capacity is verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenues are recognized and future revenues become fixed and determinable and are recognized monthly until the next verification event.

84. In truth, EnerNOC did not always recognize revenues when it had the ability to

deliver committed capacity. As later disclosed to investors, in forward capacity markets, the

Company does not get paid for new capacity enabled on a month basis; rather, the Company

commits capacity on annual cycles. In other words, there is a longer average lag time from a

point when a megawatt becomes “under management” (the point when the Defendants

represented in the 10-Q that they would recognize revenue) to when it becomes a revenue

generating megawatt.

85. The Company’s November 5, 2007 10-Q again purported to be in compliance

with GAAP, stating, for example:

The unaudited condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (GAAP).

86. These statements were materially false and misleading for the reasons discussed

above (¶¶ 37-43 ].

87. In addition, Item 303 of Regulation S-K requires public companies to disclose

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.

Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii).

34


88. In addition, the SEC, in Interpretive Release No. 34-26831, has indicated that

registrants should employ the following two-step analysis in determining when a known trend or

uncertainty is required to be included in the MD&A disclosure pursuant to Item 303 of

Regulation S-K:

A disclosure duty exists where a trend, demand, commitment, event or uncertainty is both presently known to management and is reasonably likely to have a material effect on the registrant’s financial condition or results of operations.

89. According to Securities Act Release No. 6349:

[i]t is the responsibility of management to identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.

90. Accordingly, defendants’ failure to disclose to investors the true risk and

uncertainties regarding its revenue recognition practices acted as an implicit and false

representation as to the timing of such revenue and expenses incurred in acquiring assets to earn

such revenue, and its corresponding impact on earnings.

91. As alleged herein, each of the defendants acted with scienter in that each

defendant knew or recklessly disregarded that the public documents and statements issued or

disseminated in the name of the Company were materially false and misleading or omitted to

state material facts; knew or recklessly disregarded 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. Moreover, defendants, by virtue of their receipt of

information reflecting the true facts regarding EnerNOC, their control over, and/or receipt and/or

modification of EnerNOC’s allegedly materially misleading misstatements and/or their

35


associations with the Company which made them privy to confidential proprietary information

concerning the Company, participated in the fraudulent scheme alleged herein.

THE TRUTH IS DISCLOSED CAUSING INVESTORS’ ECONOMIC LOSS

92. On February 27, 2008, the Company announced its 4Q:07 results, which were

well below analysts’ expectations. The Company reported a loss of $0.48 per share, 60% worse

than consensus estimates of a loss of $0.30 per share. The net loss rose from $4.1 million in

4Q:06 to $9.0 million in 4Q:07. Operating losses exceeded $9 million.

93. Despite a 234% year-over-year increase in revenue, cost of revenues and

operating expenses for 4Q:07 nearly tripled from the same period in 2006, with cost of revenues

rising from $4.5 million in 4Q:06 to $12.7 million in 4Q:07 and operating expenses rising from

$5.4 million to $16.5 million.

94. The Company further announced that its total operating expenses for the year

ended December 31, 2007 were $48.2 million (inclusive of $7.6 million of non-cash stock-based

compensation expense), compared to $14.9 million for the year ended December 31, 2006

(inclusive of $0.4 million of non-cash stock-based compensation expenses), an increase of $33.3

million. The Company attributed this increase in operating expenses to “the Company continuing

to invest in headcount in order to capture market share and take advantage of growth

opportunities.”

95. Also on that day, the Associated Press released an article entitled “EnerNOC

shares tumble after company reports much wider 4th-qtr loss on surging costs” which stated:

Shares of EnerNOC, Inc. tumbled Wednesday after the company reported a much greater fourth-quarter loss than Wall Street had expected.

EnerNOCshares fell $7.61, or 29.8 percent, to $17.89 in afternoon trading.

The company, which makes products that allow utilities and electric grid operators to

36


regulate supply and demand, lost $9 million, or 48 cents per share, last quarter. That compares with a loss of $4.1 million, or $1.07 per share in the year-ago period, when the company had almost 80 percent fewer outstanding shares.

Analysts had forecast a much smaller loss of 30 cents per share, on average, according to a Thomson Financial survey.

EnerNOC's revenue more than tripled during the quarter to $19.7 million from $5.9 million as it added more customers and increased megawatts of capacity under management. However, costs outpaced the sharp revenue growth as the company added more employees for its Texas and Ontario markets and posted higher stock-compensation expenses.

For the full year, EnerNOC's loss widened to $23.6 million, or $1.80 per share, from $5.8 million, or $1.60 per share. Revenue climbed to $60.8 million from $26.1 million.

96. EnerNOC conducted an earnings conference call, also on February 27, and

disclosed for the first time that one of its key metrics – megawatts under management – had

been inadequately “defined.” Defendant Healy stated, in part:

As you know, one of the key metrics that we have defined for everyone is our megawatts under management. We define a megawatt under management as a megawatt that we can reduce [with] the electricity grid and for which we can start earning revenue within about a month's time. To help model our financial performance, especially as it relates to the timing of our revenue relative to the expenses that we incur acquiring assets that generate that revenue, we believe that this definition needs more precision as it relates to when we start earning revenue for some of our megawatts under management.

97. Whereas the Company had generally been paid within a month of adding each

new megawatt, forward capacity markets – with which the Company contracted with at least as

early as June 2007 with PJM – generate revenue on a yearly basis, disclosed by Defendant Healy

in the conference call as follows:

In New England, as well as most of the other markets in which we originally focused our growth, we generally get paid within about a month's time for each new megawatt that we add to our network. In PJM's forward capacity markets, however, we do not get paid for new capacity that we enable on this monthly basis, rather PJM's capacity market operates on a June to May fiscal basis and we, in turn, commit capacity on these annual cycles . More specifically, a megawatt that we've enabled in PJM after the beginning of the 2007, 2008 delivery year, which commenced

37


June '07, must wait until the '08, '09 delivery year, which commences June '08, to start earning revenue. Thereafter, any megawatt that we add in PJM after June '08 will not start generating revenue for us until June '09 and so on.

98. These new contracts resulted in a substantial lag in revenue. Specifically, more

than 7% of the megawatts under management in the Company’s revenue at the end of 2007 were

not generating revenue, and would not be able to do so for at least six months following the SPO.

Importantly, on the November 1, 2007 conference call, defendants had reported that the “PJM

interconnection region is basically the world's largest interconnection region and that has been

one of the strongest territories for our growth. ” Specifically, on the conference call, Defendant

Healy went on to state:

The affect is that this market feature creates a longer average lag time across our portfolio from the point in time when a megawatt becomes under management to when it becomes a revenue generating megawatt for us. Of the 1,113 megawatts in our network as of December 31st, 2007, 82 megawatts were subject to this PJM lag and will not start generating revenue for us until June '08 .

[Emphasis added].

99. In addition to this delay in revenue, the Company was forced to make substantial

expenditures to “ramp-up” well in advance of the Company’s obligations to start aggregating

capacity for its markets, which must occur prior to the contracted megawatts becoming “under

management,” and therefore well in advance of the receipt of revenue from those markets. The

lag associated with forward capacity market contracts (7% of the Company’s megawatts under

management), when accompanied with Company’s usual ramp-up delay, meant that more than

23% of the Company’s megawatts under management in place at the end of the 4Q:07 were not

generating revenue. Importantly, despite entering into the delayed-revenue PJM contract more

than 8 months prior to this conference call, the Company had not yet disclosed that an increasing

38


portion of revenues were and would be materially deferred. On the Call, Defendant Healy

finally stated, in part, that investors should “track now” non-earning megawatts, while providing

no explanation as to why EnerNOC had not previously revealed this accelerating situation at the

time of the SPO, or at any prior time:

We simply cannot wait until the month before the reliability period enrollment deadline to start aggregating capacity, rather we have to ramp-up well in advance of these obligations. We believe this has become an important metric to track now that we are growing so substantially in markets with this feature . The affect of this lag, combined with our normal deployment queue, represented 258 megawatts of nonrevenue generating capacity as of the end of last year. In other words, of those 1,113 megawatts in our network as of December 31st, 2007, that I just mentioned, 855 were generating revenue.

[Emphasis added].

100. The Individual Defendants knew or were reckless in not knowing that, as

megawatts under management was EnerNOC’s key metric, by November 1, 2007 and thereafter

such a significant percentage (7% due to the lag associated with PJM, and 23% when the

Company’s ramp-up time period was taken into account) of the megawatts under management in

the quarter ending December 2007 was not generating revenue. The inference of scienter is

especially compelling as this percentage was increasing, and posed serious business problems for

EnerNOC in terms of cash allocation, earnings, and expense management.

101. An industry expert contacted by Lead Plaintiff's counsel in the course of

investigation reported that it was generally known in the industry that forward capacity contracts

would cause such revenue delays. When asked about the delays, which could last up to a year,

the expert responded: “[I]n the broadest sense, this is common knowledge.”

102. Despite touting the Company’s growth and revenues during the Class Period,

Defendant Healy abruptly attempted to steer investors away from a focus on profitability.

39


PAUL CLEGG, ANALYST, JEFFERIES & CO.: Hey, guys. Thanks for the call. Just kind of revisiting this whole issue of personnel ramp of 40% to 50% a year, can you maybe help bracket that number a little bit? What could you end up getting to for G&A on a percentage of sales basis, for example? And has that changed your outlook internally on when you get to profitability?

TIM HEALY: I don't think it's changed our outlook about when we get to profitability, simply because as we've mentioned in past calls and as we mentioned again today, the focus on profitability at this point in time we believe would be the wrong approach to take in such a Greenfield [sic] market. We believe that it has to be about making an investment, capture the huge and growing market, make sure that we are well positioned to be operational in every market and every opportunity.

So what you're seeing in that headcount growth number, just to explain what goes into the cost to acquire a megawatt, the cost to acquire a megawatt is not just the salesperson cost. The cost to acquire a megawatt includes a portion of a fulltime equivalent in regulatory affairs, it includes the cost of a fulltime equivalent in marketing, and the cost of a fulltime equivalent in an operations resource that is helpful in the sales process. So you can think of these folks as sort of sales engineers that in our Operations Department. All of those things are important in every new market that we go into, and they're important that as we bring on sales resources we're bringing on partial bodies in these other locations, as well, to help with that acquisition cost.

What's really nice is that you do start to see some leverage gain because when you go into a new market, you got to hire that one -- you can't hire a portion of a sales, or a portion of a marketing body, so you may see that we're hiring a marketing body that's going to serve two, three, or four salespeople. You can't hire a portion of a person, so you're going to see some timing issues related to those costs. The same for regulatory affairs, the same for the operations personnel.

NEAL ISAACSON: Sure. Paul, let me just address one of the questions that you asked about the percentage, SG&A as it relates to the percentage of sales. Remember, we're hiring to enable marketing to sell these megawatts and in some cases, many cases, as Tim talked about in great detail, we're not generating any current revenue today, it's future revenues. Therefore, we're incurring those costs, and when you look at it as a percentage of revenue, it may seem higher. Moving into 2008 even with the additional headcount that we plan to add, we believe that as a percentage of revenues those costs will start to drop.

PAUL CLEGG: Okay. Okay. As a percentage of sales, and so at some point you get to a critical mass, the headcount, and you start to see some scaling benefits? Obviously, there's a step function to that as you continue to move forward, but over time we should start to see the scaling benefit kick-in, and you expect to start seeing that later in 2008; is that a fair way of assessing that?

40


TIM HEALY: Yes, I mean and, again, I think I would be -- I'd be cautious there in terms of the magnitude of the scaling benefits that you're seeing because I think we've talked about it -- right now, it does -- the cost to acquire a megawatt relative to the cost to manage a megawatt is dramatically different, and right now we're on a pace to acquire more megawatts than we have under management, so you're sort of exacerbating that dynamic, and that's going to show-up because the sales aspects of things are a part of the operational cost, and we've got to take that into account, and we want to keep growing.

PAUL CLEGG: And with R&D it's the same issue, it's headcount that's driving up the R&D?

TIM HEALY: Yes, it's headcount that's driving up the R&D. That's correct.

103. On this news, EnerNOC stock plummeted – falling $11.74 per share from a close

of $25.50 on February 26, 2008 to close at $12.76 on February 28, 2008 on unusually high

trading volume (approximately 5.5 millions shares traded over those two days).

104. On that date, investors learned that Defendants were not operating the Company

according to plan, and that fourth quarter 2007 results were already expected to be adversely

impacted prior to the SPO. Although defendants touted EnerNOC’s increases in revenue, these

increases paled in comparison to the increases in operating expenses – for example, revenue

increased 133.1% from 2006 to 2007, while during the same period, operating expenses

increased 233.5%. The materiality of the increases are reflected in the table below:

For the Year Ended December 31,

(dollars in thousands) 2007 2006

Revenue

$ 60,838 $ 26,100 Operating expenses:

Selling and marketing expense

$17,145

$5,932 General and administrative

expenses

27,917

8,000 Research and development

expenses

3,097

955

Total $ 48,159 $ 14,887

Percentage Change

133.1%

189.0%

249.0%

224.3%

223.5%

41


105. As a result of the impact of the disparity between revenue and expenses, a “[n]et

loss for the fourth quarter of 2007 was $9.0 million, or $0.48 cents per share basic and diluted,

[and a] Net loss for the year ended December 31, 2007 was $23.6 million, or $1.80 per share

basic and diluted . . . .” The surprise to investors and analysts was dramatic, as reflected on

Bloomberg News , which reported that it surveyed five analysts which had estimated a loss of

only 29 cents a share. EnerNOC’s February 27, 2008 press release further disclosed that “[t]he

increase in operating expenses was primarily the result of the Company continuing to invest in

headcount in order to capture market share and take advantage of growth opportunities.”

106. Investors finally learned that these costly growth opportunities may not draw

revenue for the Company until a year or more after the contracting for added megawatts in

forward capacity markets. The Company had to invest significant time and money to ramp up

and aggregate capacity to enable its megawatts under management, and, previously undisclosed

to investors, forward capacity markets created an additional year-long lag after enablement to

generate revenue. Investors finally learned that the Company did not even have appropriately

defined metrics in place to account for the 7% of megawatts under management that would not

generate revenue after enablement.

107. The decline in EnerNOC’s stock price following defendants’ belated disclosures

was a direct result of the nature and extent of defendants’ materially false and misleading

statements and omissions during the Exchange Act Class Period becoming known to investors

and to the market. The timing and magnitude of EnerNOC’s stock price decline negates any

inference that the losses suffered by plaintiff and the other members of the Exchange Act Class

were caused by changed market conditions, macroeconomic or industry factors, or even

42


Company-specific facts unrelated to defendants’ illegal and improper conduct. During the same

period in which EnerNOC’s share price fell over 60% as a result of defendants’

misrepresentations and omissions being revealed, the Standard & Poor’s 500 securities index

was relatively unchanged.

POST EXCHANGE ACT CLASS PERIOD DISCLOSURES

108. Beginning March 28, 2008, when the Company issued its 10-K for 2007,

Defendants disclosed the high costs and true revenue risk associated with its forward capacity

markets:

We incur significant up-front costs associated with the expansion of the number of MW under our management and the infrastructure necessary to enable such MW. In most of the markets in which we originally focused our growth, we generally begin earning revenues from our MW under management within approximately one month from enablement of such MW. However, in certain forward capacity markets in which we choose to participate, it may take longer for us to begin earning revenues on MW that we enable, in some cases up to a year after enablement. For example, the PJM Interconnection, or PJM, forward capacity market, which is a market in which we materially increased our participation during the first quarter of 2008 and in which we expect to continue to increase our participation and derive revenues, operates on a June to May delivery-year basis, which means that a MW that we enable after June of each year will typically not begin earning revenue until June of the following year. This results in a longer average lag time in our portfolio from the point in time when we consider a MW to be under management to when we earn revenues from such MW. The up-front costs we incur to expand our MW under management in PJM and other similar markets, coupled with the delay in receiving revenues from such MW, could adversely affect our operating results and could cause the market price of our common stock to decline substantially.

[Emphasis added.]

109. The Company’s 2007 10-K also provided a more accurate disclosure of why the

revenue/expense disparity existed and its corresponding adverse impact on earnings. For

example:

In certain forward capacity markets in which we choose to participate, such as PJM, we may enable our commercial, institutional and industrial customers up to twelve months in advance of enrolling them in a particular program. This market feature creates a longer average lag time across our portfolio from the point in time when we consider a MW to

43


be under management to when we earn revenues from such MW. Because we incur selling and marketing and operational expenses, including salaries and related personnel costs, at the time of enrollment, we believe there may be a trend of higher up-front costs than we have incurred historically.

INSIDER SELLING SUPPORTS A STRONG INFERENCE OF SCIENTER

110. Rather than disclose the true operational and financial condition of the Company,

in connection with the November 2007 SPO, insiders -- including certain of the defendants

named hererin -- sold millions of dollars worth of their privately held EnerNOC shares, while in

possession of material adverse non-public information about the Company. The Defendants’

insider sales and profits on the day of the SPO are summarized as follows:

Date Insider

Shares

Type

Value Foundation Capital Mgmnt. Co. IV LLC (1)

19-Nov-07 19-Nov-07 19-Nov-07 19-Nov-07 19-Nov-07 19-Nov-07 19-Nov-07

Adam Grosser Timothy Healy David Brewster David Brewster

Neal Isaacson William Lese

665,000 665,000 64,352 18,125

122,500 25,000

459,563

Indirect Indirect Direct

Indirect Direct Direct

Indirect

$27,199,000 $27,199,000 $2,631,996 $741,000

$5,010,250 $1,022,500

$18,796,000

TOTAL $82,599,746.00 (1) Defendant Grosser is a manager of Foundation Capital Management Co.

IV, LLC and shares voting and dispositive power over these shares

111

Moreover, in addition to the tens of millions of dollars in defendants’ and others’

insider stock sales, on February 26, 2008, the Company also filed with the SEC a Form 8-K

(signed by defendant Isaacson), that reported the award of millions of dollars in purported

performance-based salary and bonuses to certain of the individual defendants, in part, as follows:

2007 Bonuses for Named Executive Officers

At a meeting held on February 20, 2008 (the “Meeting”), the Compensation Committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of

44


EnerNOC, Inc. (the “Company”) recommended to the Board, and the Board approved, performance-based bonuses to the Company’s “named executive officers” (as used in Instruction 4 to Item 5.02 of Form 8-K) (collectively, the “Named Executives”), as set forth below:

Name and Position Timothy G. Healy (1) Chief Executive Officer David B. Brewster (1) President Neal C. Isaacson Chief Financial Officer Gregg Dixon (1) Senior Vice President

2007 Performance-Based

Bonus Amount

$ 325,000

$ 265,000

$ 160,000

$ 255,000

(1) The Named Executive will receive 100% of his 2007 bonus amount in shares of the Company’s common stock at a price per share of $31.34, which represents the closing price of the Company’s common stock as reported on The NASDAQ Global Market on the date of the Meeting.

ADDITIONAL ALLEGATIONS OF SCIENTER REGARDING THE COMPANY AND INDIVIDUAL DEFENDANTS

112. In addition, at the time of the SPO, a majority of the Company’s revenues was

reported to be generated from contracts with, and open market sales to one customer, ISO-New

England, Inc., which accounted for 61% of the Company’s total revenues in the nine months

ending September 30, 2007.

113. In the third quarter alone, as announced on November 1, 2007 - - only days prior

to the SPO - - at least $2.5 million of a total of $19 million in gross revenues reported in 3Q:07

was related to “price-based demand response revenue” related to fees purported to be earned in

connection with participation in the ISO-New England “Day-Ahead Load Response Program”

(“DALRP”)

114. During the Exchange Act Class Period, the concentrated nature of the Company’s

customer base was also purported to give EnerNOC distinct marketing advantages, including

45


lower marketing and up-front installation costs, and a more regular and stable revenue stream.

Moreover, EnerNOC’s participation in ISO-New England’s DALRP program was supposed to

further the Company’s competitive advantages by providing it the opportunity to commit to Day-

Ahead load reductions, that it could deliver in real-time, should ISO-New England’s grid

requirements reach pre-determined levels.

115. An Order issued April 4, 2008, by the Federal Energy Regulatory Commission

(“FERC”), described the ISO-New England DALRP program, in part, as follows:

Participants whose load reduction offers clear in the DALRP are paid the day-ahead LMP for the amount cleared. If they reduce more in real time than the amount cleared in the DALRP as measured against their Customer Baseline, they are paid for the excess at the real-time LMP. If they reduce less in real time relative to their cleared day-ahead offer, DALRP participants must buy back the difference at the real-time LMP. Load reductions are computed, for purposes of the DALRP, as the difference between a demand response asset's Customer Baseline and the asset's actual load during the hours in which the asset's DALRP load reduction offer was accepted.

116. While the minimum DALRP offer was set in 2003 at $50/MWh, and remained

unchanged at the time of the SPO, the April 4, 2008 FERC Order (the “FERC Order”) explained

the rationale for this below market floor, in part, as follows:

The DALRP anticipated that Market Participants would make offers that reasonably reflected the reductions that their demand response assets could deliver in real-time, at prices that reflected their opportunity costs. ISO-NE explains that in particular, the intent of the $50/MWh minimum offer price for the DALRP was to avoid paying for apparent, rather than real, load reductions. The $50/MWh minimum offer price was designed to be high enough to tie the DALRP's impact to high-price hours, but not so high as to discourage legitimate participation in the program.

117. According to the April 2008 FERC Order, the sudden surge in the ISO-New

England DALRP participation in August 2007 -- the quarter in which EnerNOC earned almost

15% of its revenues from participation in that program, and an amount which also equaled

almost 15% of all of ISO-New England’s DALRP payments for all of 2007 -- was the result of

46


“gaming” the DALRP program, and providing no real benefit for a material amount of the fees

charged.

118. So sudden and aggressive was the abuse of the ISO-New England DALRP

program that this utility immediately began to conduct an investigation into program

participants’ pricing and, by early-February 2008, adopted changes in the manner it would pay

out under the DALRP. Later, in ratifying the request made by ISO-New England in favor of

supporting its unilateral revision of the Minimum Offering Price in the DALRP (to index this

minimum, so as to protect itself from manipulation and pricing abuse by DALRP participants

such as EnerNOC), the FERC Order concluded, in part, the following:

In its filing to revise the Minimum Offer Price in the DALRP, ISO-NE offers evidence that certain DALRP participants are intentionally establishing a static Customer Baseline in order to receive energy and capacity payments “even though the customer is taking no action to reduce its usual consumption levels .” Many of these participants are offering the minimum load reduction at the Minimum Offer Price, in order to ensure that their offers will clear in the DALRP, and that they will maintain a static Customer Baseline (since the Customer Baseline is not adjusted on days where day-ahead offers are accepted). As demonstrated by IECG, many industrial customers have even shifted their production work to off-peak hours. This enables such customers to maintain their original Customer Baseline (that was derived during peak DALRP hours), but at the same time to offer demand reduction into the DALRP that is not genuinely available during those hours. Moreover, based on ISO-NE’s evidence, other participants have actively inflated their Customer Baseline by either turning off their behind-the-meter generation during the initial metering period while the Customer Baseline is being established, or (for an asset with a relatively higher summer load profile) by withdrawing from the program and reenrolling in order to reestablish their Customer Baseline during the higher load summer season. It is clear that by the sudden growth in DALRP participation and resulting payouts that this problem is expanding rapidly . (Notes omitted)

[Emphasis added.]

119. In addition to the foregoing, the FERC Order also reported the assertions made by

ISO-New England that DALRP participants were engaged in manipulative pricing actions by

“making offers every weekday that are keyed to the $50/MWh minimum offer price.” This

47


allowed such DALRP participants to be able to “engage in strategic behavior that overstates their

respective Customer Baseline,” and allowed them to “inflate capacity payments” for “illusory

load reductions.”

120. The FERC Order further supports a strong inference of scienter with respect to the

Company and the Individual Defendants

121. Also in regard to each of the Individual Defendants, by virtue of their high-level

positions with the Company (as well as those high-level positions with the Company’s

subsidiaries and affiliates), directly participated in the management of the Company, was directly

involved in the day-to-day operations of the Company at the highest levels, each had access to

the adverse undisclosed information, and was privy to confidential proprietary information

concerning the Company and its business, operations, products, operational trends, financial

statements, markets, and present and future business prospects via access to 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 of Directors meetings and committees

thereof, and via reports and other information provided to them in connection therewith.

Accordingly, the Individual Defendants were also involved in drafting, producing, reviewing

and/or disseminating the untrue and misleading statements and information alleged herein, and

approved or ratified these statements, in violation of the federal securities laws. It is appropriate

to treat the Individual Defendants as a group for pleading purposes and to presume that the false,

misleading, and incomplete information conveyed in the Company’s SPO registration statement

and prospectus, as alleged herein, are the collective actions of the narrowly defined group of

defendants identified above.

48


122. As officers and controlling persons of a publicly-held company whose common

stock was, and is, 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, the Individual Defendants

each had a duty to disseminate promptly 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 common stock would be based upon

truthful and accurate information. The Individual Defendants’ misrepresentations and omissions

made in connection with the issuance of common stock in November 2007 violated these

specific requirements and obligations.

123. The Individual 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 at the time of

the SPO. Each Individual Defendant was provided with and/or signed 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 of

the Individual Defendants is responsible for the accuracy of the public reports and releases

detailed herein and are therefore primarily liable for the representations contained therein.

124. Because of their membership on the Board of Directors and/or membership on

committees of the Board of Directors and/or executive and managerial positions with EnerNOC,

each of the Individual Defendants had access to the adverse undisclosed information about the

Company’s financial condition and performance, growth, operations, financial statements,

49


business, products, markets, management, earnings, and present and future business prospects

and knew, or were reckless in not knowing, that adverse facts rendered the positive

representations made by or about EnerNOC and its financial condition and performance, growth,

operations, financial statements, business, products, markets, management, earnings, and present

and future business prospects issued or adopted by the Company were materially false and

misleading.

125. The Individual Defendants each had a duty to ensure that defendants and the

Company each complied with all legal obligations and requirements, and a duty to ensure that

the Company was operated in a diligent, honest, and prudent manner in compliance with all

applicable federal, state, and local laws, rules, and regulations.

FRAUD ON THE MARKET DOCTRINE: PRESUMPTION OF RELIANCE

126. At all relevant times, the market for EnerNOC common stock was an efficient

market for the following reasons, including, among others:

(a) EnerNOC stock qualified for trading on the Nasdaq -- a highly-efficient,

open, developed, and automated markets, free of manipulation;

(b) As a regulated issuer, EnerNOC, defendants, and insiders of the Company

filed periodic reports with the SEC, which were publicly available and readily accessible;

(c) EnerNOC regularly communicated with public investors via established

market communication mechanisms, including through regular dissemination of press releases

on the national circuits of major newswire services and through other wide-ranging public

disclosures, such as communications with the financial press and other similar reporting services;

50


(d) EnerNOC was followed by securities analysts employed by major

brokerage firm(s) who wrote reports which were distributed to the sales force and certain

customers of their respective brokerage firm(s), funds, and investment management companies;

(e) Defendants presented and participated in conferences attended by

securities analysts and other interested parties;

(f) Information about the Company made its way to the internet instantly,

simultaneously, or close in time to the point at which such information was disseminated,

became public, or disclosed;

(g) During the Exchange Act Class Period, EnerNOC stock enjoyed

substantial daily, weekly, or monthly trading volumes;

(h) There were numerous market makers for EnerNOC stock; and,

(i) The movement of EnerNOC’s stock price, as detailed above, shows a

cause and effect relationship between corporate events and an immediate response in the stock

price.

127. As a result of the foregoing, the market for EnerNOC securities promptly digested

current information regarding the Company from all publicly available sources and fully

reflected such information in EnerNOC’s stock price. Under these circumstances, all purchasers

of EnerNOC common stock during the Exchange Act Class Period suffered similar injury

through their purchase of EnerNOC common stock at artificially inflated prices and a

presumption of reliance applies.

NO SAFE HARBOR

128. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false or untrue statements pleaded in this

51


complaint. Many of the specific statements pleaded herein were not identified as “forward-

looking statements” when made. To the extent there were any forward-looking statements, there

were no meaningful cautionary statements identifying important factors that could cause actual

results to differ materially from those in the purportedly forward-looking statements.

Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking

statements pleaded herein, defendants are liable for those false forward-looking statements

because at the time each of those forward-looking statements was made, the particular speaker

knew, or was reckless in not knowing, that the particular forward-looking statement was false,

and/or the forward-looking statement was authorized and/or approved by an executive officer of

EnerNOC who knew, or was reckless in not knowing, that those statements were false when

made.

COUNT IV Violation of Section 10(b) Of the Exchange Act and Rule 10b-5

Against the Company and the Individual Defendants on behalf of Plaintiff and the Exchange Act Class

129. Lead Plaintiff incorporates each and every allegation above as if stated herein.

130. During the Exchange Act Class Period, defendants carried out a plan, scheme and

course of conduct which was intended to and did, throughout the Exchange Act Class Period: (a)

deceive the investing public regarding EnerNOC’s business, operations, management and the

intrinsic value of the Company’s common stock; (b) enable defendants to obtain funding for and

to negotiate the acquisitions of several other companies, often using Company stock as partial

consideration, while in possession of material adverse non-public information about EnerNOC;

and (c) cause Lead Plaintiff and all other members of the Exchange Act Class to purchase the

Company’s common stock at artificially-inflated prices. In furtherance of this unlawful scheme,

52


plan and course of conduct, defendants, jointly and individually (and each of them) took the

actions set forth herein.

131. Defendants (a) employed devices, schemes, and artifices to defraud; (b) 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 the purchasers of the Company’s common stock in violation

of Section 10(b) of the Exchange Act and Rule 10b-5. All defendants are sued either as primary

participants in the wrongful and illegal conduct charged herein and/or as controlling persons.

132. 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 EnerNOC as specified herein.

133. 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 the Company’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 the Company 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 EnerNOC

common stock during the Exchange Act Class Period.

53


134. Each of the Individual Defendant’s primary liability, and controlling person

liability, arises from the following facts: (a) the Individual 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; (b) each of these defendants, by virtue of

his responsibilities and activities as a senior officer and/or director of the Company was privy to

and participated in the creation, development and reporting of the Company’s internal budgets,

plans, projections and/or reports; (c) each of these defendants enjoyed significant personal

contact and familiarity with the other defendants and was 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 (d) each of these

defendants was aware of the Company’s dissemination of information to the investing public

which they knew or recklessly disregarded was materially false and misleading, or omitted to

state material facts necessary to make the statements not misleading.

135. Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted recklessly in disregarding the truth, in that they failed to

ascertain and to disclose such facts. Such defendants’ material misrepresentations and/or

omissions were done knowingly or deliberately for the purpose and effect of concealing

EnerNOC’s operating condition and future business prospects from the investing public and

supporting the artificially inflated price of its common stock. As demonstrated by defendants’

overstatements, omissions, and misstatements about the Company’s business, operations, and

earnings throughout the Exchange Act Class Period, defendants, if they did not have actual

knowledge of the misrepresentations and omissions alleged, were deliberate in failing to obtain

such knowledge by refraining from taking those steps necessary to discover whether those

54


statements were false or misleading, or omitted to state material facts necessary to make the

statements not misleading.

136. 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 EnerNOC common

stock was artificially inflated during the Class Period. In ignorance of the fact that market prices

of the Company’s publicly-traded 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

market in which the securities trade, and/or on the absence of material adverse information that

was known to or deliberately disregarded by defendants but not disclosed in public statements by

defendants during the Exchange Act Class Period, Lead Plaintiff and all other members of the

Exchange Act Class acquired EnerNOC common stock during the Exchange Act Class Period at

artificially-high prices and were damaged thereby.

137. At the time of said misrepresentations and omissions, Lead Plaintiff and all other

members of the Exchange Act Class were ignorant of their falsity, and believed them to be true.

Had Lead Plaintiff and all other members of the Class and the marketplace known the truth about

EnerNOC that were not disclosed by defendants, Lead Plaintiff and all other members of the

Exchange Act Class would not have purchased or otherwise acquired their shares of the

Company’s common stock, or, if they had acquired such common stock during the Exchange Act

Class Period, they would not have done so at the artificially-inflated prices which they paid.

138. By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act, and Rule 10b-5 promulgated thereunder.

139. As a direct and proximate result of defendants’ wrongful conduct, Lead Plaintiff

and all other members of the Exchange Act Class suffered damages in connection with their

55


respective purchases and sales of the Company’s common stock during the Exchange Act Class

Period.

COUNT V Violation of Section 20(a) of the Exchange Act Against Individual Defendants on Behalf of

Plaintiff and the Exchange Act Class

140. Lead Plaintiff incorporates each and every allegation above as if stated herein.

141. The Individual Defendants acted as controlling persons of EnerNOC 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, the Individual 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 misleading. The Individual Defendants

were provided with or had unlimited access to copies of the Company’s reports, press releases,

public filings and other statements alleged by plaintiff to be 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 be corrected.

142. In particular, each of the Individual 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.

143. As set forth above, EnerNOC and the Individual Defendants each violated

Section 10(b) and SEC Rule 10b-5 by their acts and omissions as alleged in this Complaint. By

virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to

56


Section 20(a) of the Exchange Act. As a direct and proximate result of defendants’ wrongful

conduct, Lead Plaintiff and other members of the Exchange Act Class suffered damages in

connection with their purchases of the Company’s common stock.

PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiff prays for judgment as follows:

(i) Determining that this action is a proper class action and certifying

Lead Plaintiffs as class representatives under Rule 23 of the Federal Rules of Civil Procedure;

(ii) Awarding compensatory damages in favor of Lead Plaintiffs 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;

(iii) Awarding Lead Plaintiffs and the Classes their reasonable costs

and expenses incurred in this action, including attorney fees and expert/consultant fees;

(iv) Awarding extraordinary, equitable and/or injunctive relief as

permitted by law, equity and the federal statutory provisions sued hereunder, pursuant to Rules

64 and 65 and any appropriate state law remedies to assure that the Classes have an effective

remedy; and

(v) Such other and further relief as the Court may deem just and

proper.

57


JURY TRIAL DEMANDED

Lead Plaintiff and the Classes hereby demand a trial by jury.

Dated: September 24, 2008 /s/ Lewis Kahn Lewis Kahn KAHN GAUTHIER SWICK, LLC 650 Poydras Street, Suite 2150 New Orleans, LA 70130 Telephone: (504) 455-1400 Facsimile: (504) 455-1498

- and -

Kim E. Miller Melissa Ryan Clark KAHN GAUTHIER SWICK, LLC 12 East 41 st Street, 12th Floor New York, NY 10017 Telephone: (212) 696-3730 Facsimile: (504) 455-1498

Lead Counsel for Lead Plaintiff and the Class

Matthew F. Pawa, BBO 652933 LAW OFFICES OF MATTHEW F. PAWA, P.C . 1280 Centre Street, Suite 230 Newton Centre, MA 02459 Telephone: (617) 641-9550 Facsimile: (617) 641-9551

Local Counsel for Plaintiffs & the Class

Roy L. Jacobs ROY JACOBS & ASSOCIATES 60 East 42nd Street 46th Floor New York, NY 10165 Telephone: 212-867-1156 Facsimile: 212-504-8343

- and –

Laurence D. Paskowitz PASKOWITZ & ASSOCIATES 60 East 42nd Street, 46th Floor New York, NY 10165

58


Telephone: (212) 685-0969 Facsimile: (212) 685-2306

Additional Counsel for Lead Plaintiff and the Class

59


CERTIFICATE OF SERVICE

I, Lewis S. Kahn, hereby certify that a true and accurate copy of the above Consolidated

Amended Class Action Complaint for Violations of Federal Securities Laws was served on all

counsel registered with the ECF system on the 24th day of September, 2008.

Dated: September 24, 2008 /s/ Lewis Kahn Lewis Kahn KAHN GAUTHIER SWICK, LLC 650 Poydras Street, Suite 2150 New Orleans, LA 70130 Telephone: (504) 455-1400 Facsimile: (504) 455-1498

60

Documents

Case 1:08-cv-10361-RWZ Document 20 Filed 09/24/08 Page 1 ...securities.stanford.edu/.../2008924_r01c_08CV10361.pdf · 1:08-cv-10361-RWZ CONSOLIDATED AMENDED CLASS ACTION COMPLAINT