Case 1:09-cv-01951-RJH Document 92 Filed 06/30/10 Page 1 of 89
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
: : : : : Civ. No. 09-CIV-1951 (RJH) In re General Electric Co. Sec. Litig. : : ECF CASE : : :
MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS GENERAL ELECTRIC COMPANY, IMMELT, SHERIN, NEAL, BORNSTEIN, CARY, AND THE DIRECTOR DEFENDANTS’ MOTION TO DISMISS THE SECOND CONSOLIDATED CLASS ACTION COMPLAINT
WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York 10153 (212) 310-8000
Attorneys for General Electric Company, Jeffrey Immelt, Keith Sherin, Michael Neal, Jeffrey S. Bornstein, William H. Cary, and the Director Defendants
June 30, 2010
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ...... 1 STATEMENT OF FACTS ...... 8 A. GE...... 9 B. The Global Economic Crisis of 2007-2009...... 10 C. The October Offering...... 11 D. The Volatile Third and Fourth Quarters of 2008...... 14 E. The Economic Crisis Worsens in the First Quarter of 2009...... 17 F. GE Responds to an Increasingly Difficult Economic Environment with Further Disclosures ...... 18 G. GE is Affected by Further Economic and Market Deterioration in the First Quarter of 2009...... 20 H. Mr. Paulson and Mr. Immelt Allegedly Discuss GE’s Commercial Paper Program in September and October 2008...... 21 ARGUMENT...... 22 I. PLAINTIFF FAILS TO STATE A CLAIM UNDER SECTION 10(b) AND RULE 10b-5...... 23 A. Plaintiff Fails to Allege Any Facts Giving Rise to a Strong Inference of Scienter ...... 23 1. Motive and Opportunity...... 24 2. Conscious Misbehavior and Recklessness...... 25 3. Plaintiff’s Allegations Regarding Confidential Witnesses Are Insufficient to Support a Strong Inference of Scienter ...... 37 4. Competing Inferences Under Tellabs ...... 41 B. Plaintiff Fails to Plead Particularized Facts Demonstrating the Falsity of the Exchange Act Defendants’ Statements as Required by Rule 9(b) and the PSLRA ...... 42 1. Statements Concerning the AAA Rating...... 43 2. Statements Concerning the Dividend...... 46 3. Statements Concerning Earnings and Loan Loss Reserves ...... 49 4. Statements Concerning GECC’s Exposure to Sub-Prime and Below-Investment-Grade Debt ...... 52 5. Statements concerning GECC’s CP program ...... 55
i
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TABLE OF CONTENTS (continued) Page
6. Statements Concerning the October Offering...... 57 7. Statements by Messrs. Neal, Bornstein, and Cary...... 59 C. Plaintiff Fails to Plead Loss Causation...... 61 II. PLAINTIFF FAILS TO STATE A CLAIM BASED ON ALLEGED GAAP VIOLATIONS ...... 65 A. Adequacy of Loan Loss Reserves...... 66 1. Plaintiff Misapplies GAAP...... 66 2. Plaintiff Fails to Plead Particularized Facts to Support Its Allegation That GE Did Not Record Adequate Loan Loss Reserves and Impairments...... 68 B. Reclassification of Assets...... 70 C. Failure to Disclose the “Concentrations of Credit Risk” (or “Risk Profile”) Within GECC’s Loan Portfolio ...... 71 III. PLAINTIFF FAILS TO STATE A CLAIM UNDER SECTION 20(a) OF THE EXCHANGE ACT...... 72 IV. PLAINTIFF FAILS TO STATE A CLAIM UNDER SECTIONS 11 AND 12(a)(2) OF THE 1933 ACT...... 72 A. Plaintiff’s Sections 11 And 12(a)(2) Claims Sound In Fraud...... 72 B. With Respect To Its 1933 Act Claims, Plaintiff Fails To Satisfy Rule 9(b)...... 74 C. The Challenged Statements Are Protected under the PSLRA Safe Harbor and the Bespeaks Caution Doctrine ...... 76 V. PLAINTIFF FAILS TO STATE A CLAIM UNDER SECTION 15 OF THE 1933 ACT...... 77 CONCLUSION...... 77
ii
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TABLE OF AUTHORITIES
CASES
In re AOL Time Warner, Inc. Sec. Litig. , 503 F. Supp. 2d 666 (S.D.N.Y. 2007)...... 72
Acito v. IMCERA Group, Inc. , 47 F.3d 47 (2d Cir. 1995)...... 54
In re Alcatel Sec. Litig. , 382 F. Supp. 2d 513 (S.D.N.Y. 2005)...... 43
In re Am. Express Co. Sec. Litig. , 2008 WL 4501928 (S.D.N.Y. Sept. 26, 2008), aff’d sub nom. , Slayton v. American Exp. Co. , 604 F.3d 758 (2d Cir. 2010) ...... 40
Ashcroft v. Iqbal , 129 S. Ct. 1937 (2009)...... 22, 23
In re Axis Capital Holdings Ltd. Sec. Litig. , 456 F. Supp. 2d 576 (S.D.N.Y. 2006)...... 53, 73
Bell Atl. Corp. v. Twombly , 550 U.S. 544 (2007)...... 22, 23
Bond Opportunity Fund v. Unilab Corp. , 2003 WL 21058251 (S.D.N.Y. May 9, 2003) ...... 52
Caiafa v. Sea Containers Ltd. , 525 F. Supp. 2d 398 (S.D.N.Y. 2007), aff'd , 331 F. App'x 14 (2d Cir. 2009)...... 55, 65, 69
Caiafa v. Sea Containers Ltd. , 331 F. App'x 14 (2d Cir. 2009)...... 73, 74
CalPERS v. Chubb Corp. , 394 F.3d 126 (3d Cir. 2004)...... 38, 65
Campo v. Sears Holdings Corp. , 2010 WL 1292329 (2d Cir. April 6, 2010) ...... 37, 39
Chill v. Gen. Elec. Co. , 101 F.3d 263 (2d Cir. 1996)...... 25
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In re Citigroup Inc. S'holder Derivative Litig. , 2009 WL 2610746 (S.D.N.Y. Aug. 25, 2009)...... 43
City of Brockton Ret. Sys. v. Shaw Group, Inc. , 540 F. Supp. 2d 464 (S.D.N.Y. 2008)...... 40
City of Omaha Civilian Employees' Ret. Sys. v. CBS Corp. , 2010 WL 1029290 (S.D.N.Y. Mar. 16, 2010) ...... 51
Coronel v. Quanta Capital Holdings, Ltd. , 2009 WL 174656 (S.D.N.Y. Jan. 26, 2009) ...... 49, 69, 70, 74
In re Countrywide Fin. Corp. Deriv. Litig. , 554 F. Supp. 2d 1044 (C.D. Cal. 2008) ...... 67
In re DRDGOLD Ltd. Sec. Litig. , 472 F. Supp. 2d 562 (S.D.N.Y. 2007)...... 60, 61
Denny v. Barber , 576 F.2d 465 (2d Cir. 1978)...... 42, 44
In re Downey Sec. Litig. , 2009 WL 2767670 (C.D. Cal. Aug. 21, 2009)...... 69
In re Duane Reade Inc. Sec. Litig. , 2003 WL 22801416 (S.D.N.Y. Nov. 25, 2003), aff'd sub nom. , Nadoff v. Duane Reade, Inc., 107 F. App'x 250 (2d Cir. 2004)...... 60
Dura Pharms., Inc. v. Broudo , 544 U.S. 336 (2005)...... 23, 61, 62
ECA & Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co. , 553 F.3d 187 (2d Cir. 2009)...... 24, 25, 26, 36, 54, 77 In re Elan Corp. Sec. Litig. , 543 F. Supp. 2d 187 (S.D.N.Y. 2008)...... 40
Fadem v. Ford Motor Co. , 2003 WL 22227961 (S.D.N.Y. 2003)...... 40
Fadem v. Ford Motor Co. , 352 F. Supp. 2d 501 (S.D.N.Y.), aff'd , 157 F. App'x 398 (2d Cir. 2005)...... 27
Fait v. Regions Fin. Corp. , 2010 WL 1883487 (S.D.N.Y. May 10, 2010) ...... 51
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Faulkner v. Beer , 463 F.3d 130 (2d Cir. 2006)...... 9
First Nationwide Bank v. Gelt Funding Corp. , 27 F.3d 763 (2d Cir. 2004)...... 62
Fort Worth Employers’ Retirement Fund v. Biovail Corp. , 615 F. Supp. 2d 218 (S.D.N.Y. 2009)...... 64
Fulton County Empl. Ret. Sys. v. MGIC Inv. Corp. , 2010 WL 601346 (E.D. Wis Feb. 18, 2010)...... 54
Ganino v. Citizens Utils. Co. , 228 F.3d 154 (2d Cir. 2000)...... 62
Garber v. Legg Mason, Inc. , 537 F. Supp. 2d 597 (S.D.N.Y. 2008), aff'd , 347 F. App'x 665 (2d Cir. 2009).....45, 54, 56, 64
Higginbotham v. Baxter Int'l, Inc. , 495 F.3d 753 (7th Cir. 2007) ...... 37
In re IAC/InterActiveCorp Secs. Litig. , 478 F. Supp. 2d 574 (S.D.N.Y. 2007)...... 46, 47, 48, 54, 60
In re IBM Corp. Sec. Litig., 163 F.3d 102 (2d Cir. 1998)...... 46, 47
In re JP Morgan Chase Sec. Litig. , 363 F. Supp. 2d 595 (S.D.N.Y. 2005)...... 26
Kalnit v. Eichler , 264 F.3d 131 (2d Cir. 2001)...... 24, 26
Kramer v. Time Warner, Inc. , 937 F.2d 767 (2d Cir. 1991)...... 31
Laborers' Pension Fund v. Blackmore Sewer Constr., Inc. , 298 F.3d 600 (7th Cir. 2002) ...... 31
Ladmen Partners v. Globalstar, Inc. , 2008 WL 4449280 (S.D.N.Y. Sept. 30, 2008)...... 75
Lapin v. Goldman Sachs Group, Inc. , 506 F. Supp. 2d 221 (S.D.N.Y. 2006)...... 73
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Lattanzio v. Deloitte & Touche LLP , 476 F.3d 147 (2d Cir. 2007)...... 61, 62
Lentell v. Merrill Lynch & Co. , 396 F.3d 161 (2d Cir. 2005)...... 62, 64
Lesavoy v. Lane , 304 F. Supp. 2d 520 (S.D.N.Y. 2004), aff’d in part, vacated in part on other grounds sub nom. , Lesavoy v. Gattullo-Wilson , 171 F. App’x 721 (2d Cir. 2006) ...... 59
Leykin v. AT&T Corp. , 423 F. Supp. 2d 229 (S.D.N.Y. 2006), aff’d , 216 F. App’x 14 (2d Cir. 2007)...... 64
In re Livent Inc. Sec. Litig. , 78 F. Supp. 2d 194 (S.D.N.Y. 1999)...... 72
In re Loral Space & Commc'ns Sec. Litig. , 2004 WL 376442 (S.D.N.Y. Feb. 27, 2004)...... 37, 66, 69
Lovelace v. Software Spectrum , 78 F.3d 1015 (5th Cir. 1996) ...... 67
Makor Issues & Rights, Ltd. v. Tellabs, Inc. , 513 F.3d 702 (7th Cir. 2008) ...... 37
Malin v. XL Capital Ltd. , 499 F. Supp. 2d 117 (D. Conn. 2007), aff’d , 312 F. App’x 400 (2d Cir. 2009)...... 38
In re Merrill Lynch & Co. Research Reports Sec. Litig. , 568 F. Supp. 2d 349 (S.D.N.Y. 2008)...... 62, 64
In re Moody's Corp. Sec. Litig. , 599 F. Supp. 2d 493 (S.D.N.Y. 2009)...... 25, 62
Nolte v. Capital One Fin. Corp. , 390 F.3d 311 (4th Cir. 2004) ...... 52, 53
Novak v. Kasaks , 216 F.3d 300 (2d Cir. 2000)...... passim
In re PXRE Group, Ltd. Sec. Litig. , 600 F. Supp. 2d 510 (S.D.N.Y. 2009), aff'd sub nom., Condra v. PXRE Group Ltd., 2009 WL 4893719 (2d Cir. Dec. 21, 2009) ...... passim
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Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce , 2010 WL 961596 (S.D.N.Y. Mar. 17, 2010) ...... 26, 28, 30, 52, 53
Police & Fire Ret. Sys. v. SafeNet, Inc. , 645 F. Supp. 2d 210 (S.D.N.Y. 2009)...... 27, 28
In re Progress Energy, Inc. , 371 F. Supp. 2d 548 (S.D.N.Y. 2005)...... 45
In re Radian Sec. Litig , 612 F. Supp. 2d 594 (E.D. Pa. 2009) ...... 66
In re Radian Litig. , 2010 WL 1767195 (E.D. Pa. April 30, 2010)...... 62
Rombach v. Chang , 355 F.3d 164 (2d Cir. 2004)...... passim
Rosen v. Textron, Inc. , 321 F. Supp. 2d 308 (D.R.I. 2004)...... 69
S. Cherry St., LLC v. Hennessee Group LLC , 573 F.3d 98 (2d Cir. 2009)...... 25
In re Salomon Analyst Level 3 Litig. , 350 F. Supp. 2d 477 (S.D.N.Y. 2004)...... 52
In re Salomon Analyst Level 3 Litig. , 373 F. Supp. 2d 248 (S.D.N.Y. 2005)...... 53
Shields v. Citytrust Bancorp. , 25 F.3d 1124 (2d Cir. 1994)...... 36, 37
Slayton v. Am. Express Co. , 604 F.3d 758 (2d Cir. 2010)...... 3, 77
Sotheby's, Inc. v. Minor , 2009 WL 73134 (S.D.N.Y. Jan. 6, 2009) ...... 59
Staehr v. Hartford Financial Services Group , 547 F.3d 406 (2d Cir. 2008)...... 31
Steinberg v. Ericsson LM Tel. Co. , 2008 WL 5170640 (S.D.N.Y. Dec 10, 2008) ...... 38
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Sterling Heights Police & Fire Ret. Sys. v. Vodafone Group Pub. Ltd. Co. , 655 F. Supp. 2d 262 (S.D.N.Y. 2009)...... 36, 50, 51, 65, 69
Teamsters Local 445 Freight Div. Pension Fund v. Dynex , 531 F.3d at 190 (2d Cir. 2008)...... 26, 27, 37, 41
Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308 (2007)...... 7, 23, 24, 37
Tsereteli v. Resident Asset Securitization Trust 2006-A8 , 692 F. Supp. 2d 387 (S.D.N.Y. 2010)...... 53
In re UBS Auction Rate Secs. Litig. , 2010 WL 2541166 (S.D.N.Y. June 10, 2010) ...... 31
Virginia Bankshares, Inc. v. Sandberg , 501 U.S. 1083 (1991)...... 52
West Virginia Inv. Management Bd. v. Doral Financial Corp. , 344 Fed. Appx. 717, 720 (2d. Cir 2009)...... 65
Xerion Partners I LLC v. Resurgence Asset Mgmt., LLC , 474 F. Supp. 2d 505 (S.D.N.Y. 2007), aff’d sub nom., Bay Harbour Mgmt. LLC v. Carothers , 282 F. App’x 71 (2d Cir. 2008)...... 44, 50
Yu v. State Street Corp. , 686 F. Supp. 2d 369 (S.D.N.Y. 2010)...... 55
STATUTES
17 C.F.R. § 240.10b-5...... 23, 46, 58, 72
Fed. R. Civ. P. 8(a) ...... 55
Fed. R. Civ. P. 9(b) ...... passim
Fed. R. Civ. P. 12(b)(6) ...... 1, 9, 22, 31
Fed. R. Evid. 201(b)...... 31
Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)...... passim
Securities Act of 1933 (15 U.S.C. 77)
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§ 11...... 72, 73, 77 § 12(a)(2) ...... 72 § 15...... 77
Securities Exchange Act of 1934 (15 U.S.C. 78) § 10(b)...... 23, 47, 58, 61, 72 § 20(a) ...... 72
MISCELLANEOUS
Anusha Shrivastava, Commercial Paper Market Crunched, Borrowing Costs Spike , Dow Jones, September 16, 2008...... 32
Anusha Shrivastava, Commercial Paper Still In Demand, But Rates Higher , Dow Jones, Sept. 17, 2008...... 32
Federal Reserve Bank of New York, Commercial Paper Funding Facility: Frequently Asked Questions , October 19, 2008, available at : http://www.newyorkfed.org/markets/cpff_faq.html ...... 34
Henry M. Paulson, Jr., On the Brink: Inside the Race to Stop the Collapse of the Global Financial System (2010) ...... passim
Issue Indicated Dividend Rate Change, available at : http://www2.standardandpoors.com/spf/xls/index/INDICATED_ RATE_CHANGE.xls ...... 18
Prabha Natarajan, Commercial Paper Mkt Operating ‘Smoothly’ - Trader , Dow Jones, Sept. 23, 2008...... 31
Prabha Natarajan, Investors Jump Into Commercial Paper, Cheered By US Tsy Plan , Dow Jones, Sept. 19, 2008...... 31
Press Room, Department of the Treasury, Treasury Announces Guarantee Program for Money Market Funds , Sept. 19, 2008, available at : http://www.ustreas.gov/press/releases/hp1147.htm ...... 10
Rachel Layne, GE’s Immelt Disagrees With Paulson’s Memory of Talks, Bloomberg, Feb. 11, 2010, http://www.bloomberg.com/apps/news?pid =20601108&sid=aZzcAxzDhlPo ...... 4
Richard J. Lane and Mark L. Wasden, Moody’s Comments on GE initiatives , Moody’s Investors Service, September 25, 2008 ...... 56
Robert Schulz and Scott Sprinzen, GE and General Electric Capital Corp.
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‘AAA/A-1+’ Ratings Affirmed; Outlook Stable , September 25, 2008 ...... 56
Robert T. Cornell, Barclays Capital Company Note , October 24, 2008 ...... 32, 35
Short-Term Fixed Income Research Note , J.P.Morgan US Fixed Income Weekly, October 2, 2009 ...... 32
Temporary Liquidity Guarantee Program (“TLGP”), available at : http://www.fdic.gov/regulations/resources/tlgp/index.html ...... 34
Treasury Announces Guaranty Program for Money Market Funds , September 19, 2008, available at : http://www.treasury.gov/press/releases/hp1147.htm ...... 10
Vanguard Money Market Funds Annual Report, for the period ending August 31, 2009 (filed on Oct. 28, 2008) at 14, available at : http://www.sec.gov/Archives/edgar/data/ 106830/000093247108001925/moneymarketfinal.htm ...... 33
Vanguard Money Market Reserves Form N-Q, for the period ending November 30, 2008 (filed on Jan. 29, 2009), available at : http://www.sec.gov/Archives/edgar/data/ 106830/000093247109000102/moneymarketfinal.htm ...... 33
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Defendants General Electric Company (“GE”), Jeffrey Immelt, Keith Sherin, Michael
Neal, Jeffrey S. Bornstein, William H. Cary, and the Director Defendants (collectively, the “GE
Defendants”) respectfully submit this memorandum of law in support of their motion to dismiss the Second Consolidated Class Action Complaint (“SAC”) under Rules 9(b) and 12(b)(6) of the
Federal Rules of Civil Procedure and under the Private Securities Litigation Reform Act of 1995,
15 U.S.C. § 78u-4(b) (the “PSLRA”). 1
PRELIMINARY STATEMENT
The SAC suffers from multiple fatal defects that require dismissal of all of Plaintiff’s
claims.
Other than adding allegations regarding GE Capital Services, Inc.’s (“GECC’s”)
commercial paper (“CP”) program, the SAC repeats the same defective core allegations of its
predecessors, that: (a) at all times during the financial crisis of 2008-2009, the GE Defendants
fully understood, but intentionally concealed the risks that GE would have to reduce its dividend
and lose its AAA credit rating; (b) GECC falsely projected that it would earn $5 billion in 2009;
and (c) GE violated GAAP by under-reserving for loan losses and improperly reclassifying
assets. In asserting these claims, Plaintiff studiously ignores that throughout the Class Period,
although GE could not predict the course and severity of what became an unprecedented
financial crisis, it explicitly and repeatedly warned investors of the precise risks that Plaintiff
claims were concealed. First, on September 25, 2008, the very first day of the Class Period, GE
warned: “[w]e’ve got unprecedented financial market volatility . . . we’re going to have higher
delinquencies . . . and as you have higher delinquencies we will put up higher [loan loss]
1 Capitalized terms used but not defined herein shall have the same meaning as in the SAC.
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provisions” and “[t]his is a story about financial services taking us out of our previous range.” 2
Then, six days later, on October 1, 2008, GE filed a preliminary prospectus supplement, containing specific cautionary language warning of the very risks that Plaintiff claims were concealed, including, inter alia , the risks that (i) GE’s board might decide to reduce or eliminate
GE’s dividend in response to a material future deterioration in business conditions; (ii) given the
uncertain credit market, the credit rating agencies might lower GE’s AAA rating; (iii) GECC
could be adversely affected by credit risk; (iv) if the economy continued to deteriorate, the value
of GECC’s assets could decline; (v) because difficult conditions in the financial markets were
not likely to improve in the near future, “we expect our [GE’s] consolidated earnings will be
lower and GECC’s earnings will be substantially lower . . . ; and (vi) “although GE Capital has
continued to issue commercial paper, there can be no assurance that such markets will continue
to be a reliable source of short-term financing for GE Capital” and that “[i]f current levels of
market disruption and volatility continue or worsen, or if we cannot lower our asset levels as
planned, we would seek to repay [retire] commercial paper as it becomes due.” 3
Under the PSLRA safe harbor, forward-looking statements – such as GE’s statements challenged by Plaintiff relating to GE’s payment of future dividends, maintenance of the AAA rating, earnings projections, future economic performance, and issuance of commercial paper – cannot be the basis of a claim under the 1933 Act if the statements are (i) accompanied by meaningful cautionary language; or (ii) if the plaintiff fails to plead that the speaker made the
2 See Tr. of GE Investor Update Conference Call, at 4-5, 12 (Sept. 25, 2008) (Exh. 1). All exhibits, including a true and correct copy of this transcript, are attached to the accompanying declaration of Greg A. Danilow, dated June 30, 2010 (“Danilow Decl.”). 3 See General Electric Co., Preliminary Prospectus Supplement (Form 424B2), at S-1-4, S-7 (Oct. 1, 2008) (Exh. 2).
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statements with actual knowledge that the statements were false or misleading. 15 U.S.C. §77z-
2(c)(1). Given the cautionary language in the preliminary prospectus supplement, under the
PSLRA safe harbor and the related “bespeaks caution” doctrine, Plaintiff’s 1933 Act claims must
be dismissed. Plaintiff’s 1933 Act claims also fail because Plaintiff does not plead facts showing
that any Defendant made, or approved, any forward-looking statement with actual knowledge
that it was false. Indeed, Plaintiff expressly disclaims “allegations of knowing or reckless
misconduct on the part of any Defendant” in connection with its 1933 Act claims. SAC ¶ 14.
Accordingly, Plaintiff’s 1933 Act claims should also be dismissed under the “actual knowledge”
prong of the safe harbor. 4
With respect to Plaintiff’s claims under the 1934 Act, the SAC also completely ignores that GE’s third-quarter 2008 Form 10-Q, filed on October 30, 2008, contained voluminous, detailed disclosure of these same risks. Plaintiff’s 1934 Act claims boil down to the assertion that it was not enough for GE to have warned investors that, in light of the ongoing economic crisis, GE’s dividend might be diminished, its credit rating downgraded, its earnings reduced, and its assets devalued. Instead, Plaintiff demands that – against the backdrop of the most volatile and unpredictable economy since the Great Depression – GE should also have disclosed which of those risks would come to pass and when and to what extent. See e.g , SAC ¶¶ 162(a)-
(i), 252(a). But throughout the Class Period, GE made comprehensive disclosures about its
financial services business and the risks that could materialize during the financial crisis,
including disclosures concerning actual loan delinquencies in its consumer finance, consumer
4 Slayton v. Am. Express Co. , 604 F.3d 758, 762 (2d Cir. 2010) (affirming dismissal of complaint and holding that “the defendants’ allegedly misleading statement [was] protected by the actual knowledge prong of the safe harbor because the plaintiffs did not plead facts demonstrating that the statement was made with actual knowledge that the statement was false or misleading”) (quotation omitted).
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mortgage, and commercial loan portfolios, and actual and estimated credit losses and reserves in
those portfolios.
All that is new in the SAC are eight pages of allegations claiming that the GE Defendants
made material misstatements about GECC’s CP program. In making these allegations, Plaintiff
relies heavily on former Treasury Secretary Henry Paulson’s new book, On the Brink , which includes Mr. Paulson’s account of five conversations, two in September and three in October
2008, with GE’s CEO Jeffrey Immelt that, according to the SAC, contradict all of the GE
Defendants’ public statements about GECC’s CP program during the Class Period. 5
But an examination of Mr. Paulson’s account of these conversations readily confirms that, even as described by Mr. Paulson, Mr. Immelt’s alleged statements are entirely consistent with and supportive of the GE Defendants’ public statements, and that Plaintiff has mischaracterized these conversations. According to Mr. Paulson, on September 8, 2008, Mr.
Immelt told Mr. Paulson that GECC was “having problems” selling its commercial paper. SAC
¶ 10a; Exh. 3. One week later, on September 15, 2008, Mr. Immelt clarified that GECC was
“finding it very difficult to sell its commercial paper for any term longer than overnight.” SAC ¶
10b; Exh. 3. Although Mr. Paulson does not state anywhere in his book that Mr. Immelt said either that GE was unable to sell CP or was having difficulty funding itself, the SAC nonetheless
5 See Exh. 3. GE has publicly disputed Mr. Paulson’s recollection of the September 2008 conversations, which are based on Mr. Paulson’s recollection of one call and one meeting out of many dozens of calls and meetings that took place during one of the most tumultuous months ever to confront a Treasury Secretary. See Rachel Layne, GE’s Immelt Disagrees With Paulson’s Memory of Talks , Bloomberg, Feb. 11, 2010, http://www.bloomberg.com/apps/news?pid=20601108&sid=aZzcAxzDhlPo (Exh. 4). And in the introduction, Mr. Paulson cautioned that the recollections in his book are based solely on his memory and not on any notes. HENRY M. PAULSON , JR., On the Brink: Inside the Race to Stop the Collapse of the Global Financial System xiii-xiv (2010) (Exh. 3). As required for the purpose of this motion, however, the GE Defendants assume the truth of Plaintiff’s allegations.
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alleges that these September 2008 conversations contradict such public statements as “GE
Capital has continued to issue commercial paper” (SAC ¶ 117a) and “[w]e have had no issues
funding ourselves.” SAC ¶ 171a. The SAC then repeatedly resorts to rewriting Mr. Paulson’s
account of the conversations, claiming, for example, that “GE . . . privately inform[ed] [Mr.
Paulson] of GECC’s inability to sell commercial paper in private markets” (SAC ¶ 10(e)) and
that “GE privately admitted to Mr. Paulson that GE was having difficulty selling its commercial
paper in the private market and thus funding itself.” SAC ¶ 122.
Nor does Mr. Paulson’s account of the Paulson-Immelt October 2008 conversations help
Plaintiff. According to Plaintiff, Mr. Paulson says that Mr. Immelt lobbied to have GE included
in the Temporary Loan Guarantee Program (“TLGP”), a governmental program guaranteeing the
CP of eligible institutions. Specifically, Plaintiff claims that, after GECC became eligible to
participate in the program, GECC’s use of the TLGP shows that GECC could not sell CP without
governmental help. SAC ¶ 10g. But Plaintiff acknowledges – as it must – that “[a]ccording to
Paulson, Mr. Immelt complained that investors would not want to buy GE’s [then still AAA
rated] debt when they could purchase the debt of other financial institutions receiving an FDIC
guarantee.” SAC ¶ 10d. In other words, Mr. Immelt was worried about the prospective
competitive advantage that institutions in the new program would enjoy over GECC by being
able to issue government-guaranteed CP – a concern that never materialized because GECC
became eligible to participate in the TLGP. SAC ¶ 196b. Further, there is no allegation
whatsoever that the alleged problems with GECC’s CP program injured GE.
Separately, Plaintiff fails to state a claim under the 1934 Act because Plaintiff has not,
and cannot, allege loss causation. The SAC does not satisfy the Second Circuit’s loss causation
pleading requirement because it fails to distinguish the decline in GE’s stock price caused by the
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worldwide financial crisis of late 2008-2009 from any decline supposedly caused by the alleged
misconduct. Instead, Plaintiff simply alleges that the entire decline in GE’s stock price between
September 2008 and March 2009 resulted from “corrective disclosures” of the alleged fraud, not
from the general market decline that decimated stock prices during the Class Period. SAC ¶ 423.
But the uncontroverted public record demonstrates that the great bulk of the decline in GE’s
stock price during the Class Period occurred before January 23, 2009, the date of the first alleged
corrective disclosure. Between the beginning of the Class Period on September 25, 2008 through
January 22, 2009, GE’s stock declined from $25.68 to $13.48. 6 Given this, it is frivolous for
Plaintiff to claim that the “timing and magnitude of the common stock price decline [during the
Class Period] negates any inference that the loss suffered by . . . the Class was caused by
changed market conditions, macroeconomic or industry factors or Company-specific facts
unrelated to” the alleged fraud. SAC ¶ 423. See infra Point I.C. Further, with respect to
GECC’s CP program, the SAC’s loss causation allegations suffer from still another defect:
Plaintiff has not even attempted to allege any corrective disclosure revealing the falsity of the
Exchange Act Defendants’ statements relating to CP, much less a corrective disclosure relating to CP that negatively affected GE’s stock price. Id.
Furthermore, although Plaintiff’s claims under both the 1933 Act and the 1934 Act sound in fraud (see infra Point IV.A.), and are thus subject to the heightened pleading requirements of
Rule 9(b), the SAC lacks any particularized factual allegations with respect to such crucial elements as the GE Defendants’ alleged scienter, how statements during the Class Period were false and misleading when made, and how GE’s financial statements during the Class Period allegedly violated GAAP.
6 Source: available at http://google.com/finance (Exh. 5).
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Turning first to scienter, for the 1934 Act claims, Plaintiff pleads only generalized motive allegations: that the Exchange Act Defendants perpetrated a fraud to enhance their reputations, preserve GE’s credit rating, and meet analysts’ earnings estimates – each of which is insufficient under Second Circuit authority. Plaintiff’s allegations regarding conscious misbehavior and recklessness are equally deficient. Indeed, Plaintiff fails to plead any particularized facts showing that any Exchange Act Defendant was aware of contradictory information when each challenged statement was made. Given these failings, and given that GE’s risk disclosures negate any suggestion of scienter, the competing inferences of non-fraudulent intent – that GE’s reduced earnings, credit rating downgrade, and decision to reduce its dividend resulted from the massive economic turmoil that decimated financial markets and corporate profits worldwide – are so overwhelming as to be dispositive. Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S.
308 (2007). See infra Point I.A.4. In addition, for the 1933 Act claims, the SAC expressly disclaims that Defendants acted with scienter, and thus those claims, because they sound in fraud, fail for this reason as well. See infra Point IV.B.
With respect to the Exchange Act Defendants’ allegedly false and misleading statements,
although Plaintiff spends approximately 66 pages of the SAC on this subject, it engages only in
impermissible “laundry list” or “puzzle” pleading. Plaintiff quotes in block from GE press
releases, interviews, and SEC filings – without identifying the specific portion of each block
quote that supposedly constitutes a false or misleading statement and without providing
particulars about how any specific portion was false or misleading when made. Then Plaintiff
summarily asserts that all the block quotes are false and misleading based on an unparticularized
laundry list of reasons set forth in ¶ 181(a)-(i) (1934 Act claims) and ¶¶ 122, 129, 132, and 138
(1933 Act claims) of the SAC. See infra Point I.B.
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With respect to GE’s alleged GAAP violations, Plaintiff ignores that under recent Second
Circuit authority, GAAP violations alone do not state a securities fraud claim. See infra Point II.
Further, Plaintiff spends another 30 pages of the SAC quoting or paraphrasing a litany of GAAP provisions on reclassification of assets, asset valuation, and loan loss reserves, but fails to plead even one example of a misclassified asset, an overvalued asset, or an under-reserved loan. Nor does it plead when the alleged GAAP violations occurred. Instead, Plaintiff merely describes a
GAAP provision and then summarily pleads that it was violated. See, e.g. , SAC ¶¶ 324-25.
Finally, Plaintiff ignores GE’s repeated disclosures on September 25, in the October Offering
Preliminary Prospectus, and then in GE’s Form 10-Qs and investor presentations throughout the
Class Period, that conditions in the financial market were negatively affecting its business,
increasing loan loss delinquencies, and resulting in increased loan loss provisions.
The SAC should be dismissed in its entirety and, at this juncture, with prejudice.
STATEMENT OF FACTS
Throughout the Class Period, GE repeatedly warned the public of the precise risks that
Plaintiff contends were concealed. First, on September 25, 2008, the very first day of the Class
Period, GE warned: “We’ve got unprecedented financial market volatility . . . we’re going to
have higher delinquencies . . . and as you have higher delinquencies we will put up higher [loan
loss] provisions” and “[t]his is a story about financial services taking us out of our previous
range.” Exh. 1 at 4-5, 12. Second, on October 1, 2008, just six days into the Class Period, GE filed a preliminary prospectus supplement discussing the possibility of asset write-downs, higher loss provisions, lowered earnings, the potential that “in this environment” loan losses could exceed reserves, the potential for, and circumstances under which, GE might lose its AAA credit rating, the possibility that “in the event of material future deterioration in business conditions”
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GE’s board “may determine to reduce or eliminate” the dividend, and that “there can be no
assurance that [CP] markets will continue to be a reliable source of short-term financing for GE
Capital.” 7 Third, on October 30, 2008, 35 days into the Class Period, GE disclosed not only the same risks identified on October 1, but further disclosed details about its financial services portfolio, and warned investors of the possibility of “increased levels of losses,” and that “if current levels of market disruption and volatility continue or worsen, or if we cannot lower our asset levels as planned, we would seek to repay commercial paper as it becomes due or to meet our other liquidity needs using the Federal Reserve’s CPFF Program.” 8 And throughout the
Class Period, GE continued to make similarly candid disclosures, notably in its 2008 Annual
Report. 9 Nevertheless, Plaintiff alleges that GE intentionally concealed these risks from the public. See, e.g. , SAC ¶¶ 11, 138, 162, 163, 181.
A. GE
GE, a New York corporation, is one of the world’s largest corporations, with its principal place of business located in Fairfield, Connecticut. SAC ¶¶ 2, 21. 10 GE operates as a
technology, media, and financial services company worldwide. SAC ¶ 21. GE produces a
7 See General Electric Co., Preliminary Prospectus Supplement (Form 424B2), at S-3-5, S-7 (Oct. 1, 2008) (Exh. 2). 8 See General Electric Co., Quarterly Report (Form 10-Q) at 41-44, 48-50 (Oct. 30, 2008) (Exh. 6). 9 See General Electric Co., Annual Report (Form 10-K), at 3, 13-14, 38-44 (Feb. 18, 2009) (Exh. 7). 10 All the facts set forth below are drawn from the SAC, documents integral to the SAC, or facts of which judicial notice may properly be taken. “Consideration of materials outside the complaint is permissible on a 12(b)(6) motion if the documents are integral to the complaint, it is clear on the record that no dispute exists regarding the authenticity or accuracy of the document, and the relevance of the document is undisputed.” In re PXRE Group, Ltd. Sec. Litig. , 600 F. Supp. 2d 510, 518 n.9 (S.D.N.Y. 2009), aff’d sub nom , Condra v. PXRE Group Ltd. , 2009 WL 4893719 (2d Cir. Dec. 21, 2009) (citing Faulkner v. Beer , 463 F.3d 130, 134 (2d Cir. 2006)).
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variety of items, from aircraft engines to medical imaging equipment. Id. GE has a financial services arm, GECC, which operates in commercial finance, consumer finance, leasing and real estate services. Id.
B. The Global Economic Crisis of 2007-2009
The global economic crisis of 2007-2009 has been called the most serious financial crisis
since the Great Depression. In particular, the Class Period was a time of extreme and
extraordinary upheaval in the global financial markets. SAC ¶¶ 2-3.
The economic crisis reached a critical point in September 2008. On September 7, 2008,
the U.S. government placed Fannie Mae and Freddie Mac into conservatorship. Then, in just
three days, September 14-16, 2008, several of the world’s largest and most venerable financial
institutions fell: Merrill Lynch was sold in a fire sale to Bank of America, the Federal Reserve
Bank rescued American International Group, and Lehman Brothers filed for bankruptcy, the
largest in U.S. history. SAC ¶ 4.
In response to the economic crisis, the U.S. government took unprecedented action. On
September 19, 2008, the U.S. Department of the Treasury announced a guaranty program to
insure the holdings of money market funds. 11 On September 20, 2008, the President proposed a
$700 billion bailout of financial institutions. After a week of Congressional indecision that
caused the stock and credit markets to gyrate – including the single largest drop in New York
Stock Exchange history on September 29, 2008 – the Emergency Economic Stabilization Act
was signed into law on October 3, 2008 and authorized the Treasury Secretary to spend up to
11 Treasury Announces Guaranty Program for Money Market Funds (Sept. 19, 2008), available at http://www.treasury.gov/press/releases/hp1147.htm (Exh. 8).
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$700 billion to purchase distressed assets, including mortgage-backed securities, and make
capital injections into banks. SAC ¶ 6.
C. The October Offering
Responding to the unprecedented events of the preceding weeks, on September 25, 2008,
GE announced that it planned to take steps to “‘strengthen its already strong capital and liquidity
positions’” (SAC ¶ 167), including increasing capital in GECC; reducing GECC’s dependence
on CP; and “[r]esizing GE to deliver 60%/40% industrial-financial services earnings split by the
end of 2009.” 12 GE also stated that its board of directors had approved management’s plan to
maintain GE’s quarterly dividend at existing levels. Exh. 9; SAC ¶ 166. GE’s Chairman and
CEO, Jeffrey Immelt, stated in GE’s September 25, 2008 press release: “We run the company
for the long term and are taking the actions expected from a Triple-A-rated company. Given the
recent dramatic developments in the financial markets, we have made some tough decisions to
further reduce risk and strengthen our balance sheet while maintaining our dividend.” Exh. 9;
SAC ¶ 128.
In the hours after GE’s announcement and the days after September 25, the world
financial markets suffered further extreme volatility, uncertainty, and turmoil. On September 26,
2008, governmental regulators seized Washington Mutual Inc. and sold its branches and assets to
JPMorgan Chase & Co. in the biggest U.S. bank failure in history. 13 Over the weekend of
12 General Electric Co., Form 8-K (Sept. 25, 2008) (Exh. 9); SAC ¶ 125. 13 Ari Levy and Elizabeth Hester, WaMu Fails; JP Morgan To Buy Deposits , Bloomberg News, Sept. 26, 2008 (Exh. 10).
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September 27 and 28, Congress debated, but vacillated over passing, a $700 billion bailout
package. 14
On Monday, September 29, the U.S. stock market plunged after the House rejected the
$700 billion bailout package. The Dow Jones Industrial Average fell 778 points – its largest one-day point drop ever. 15 GE’s stock dropped $2.15 per share, or 8.5%, in a single day. 16 The
next day, September 30, the U.S. stock market rebounded based on reports that Congress would
reach an agreement on the bank bailout package. GE’s stock price rose 10.4%, closing at
$25.50. 17
In light of developments following GE’s September 25 announcement, on October 1,
2008, GE issued a press release in which it announced “plans to offer at least $12 billion of common stock to the public.” 18 In addition, GE announced that it had “reached agreement to sell
$3 billion of perpetual preferred stock in a private offering to Berkshire Hathaway, Inc.” Id. In the release, Mr. Immelt stated, “[t]his action does two things for GE investors. First, it enhances our flexibility and allows us to execute on our liquidity plan even faster. Second, it gives us the opportunity to play offense in this market should conditions allow.” Exh. 13; SAC ¶ 116. Mr.
Immelt cautioned, however, that “[t]he economic environment remains volatile.” Exh. 13; SAC
¶ 117.
14 Carl Hulse and David M. Herszenhorn, Bailout Plan in Hand, House Braces for Tough Vote , N.Y. Times, Sept. 29, 2008 (Exh. 11). 15 Steven C. Johnson, Dow posts record point drop as house rejects bailout , Reuters, Sept. 29, 2008 (Exh. 12). 16 Source: available at http://google.com/finance (Exh. 5). 17 Source: available at http://google.com/finance (Exh. 5). 18 General Electric Co., Form 8-K (Oct. 1, 2008) (Exh. 13); SAC ¶ 82(d).
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Also on October 1, 2008, GE filed a Form 8-K announcing the Berkshire Hathaway investment. This filing contained “a discussion of certain risks associated with the Company’s operations.” 19 That same day, GE filed a preliminary prospectus supplement for the October
Offering. Exh. 2. On October 2, 2008, GE filed the finalized prospectus supplement for the
October Offering (the “Prospectus”), that included a discussion of the same detailed risk factors
identified both in GE’s Form 8-K and in the preliminary prospectus filed on October 1, 2008.
Exhs. 14 and 2. Specifically:
• Difficult conditions in the financial services markets have materially and adversely affected the business and results of operations of GE Capital and we do not expect these conditions to improve in the near future. General Electric Co., Prospectus Supplement (Form 424B2), at S-3 (Oct. 2, 2008) (Exh. 15);
• On September 25, 2008, we announced that our board of directors had approved management’s plan to maintain GE’s quarterly dividend of $0.31 per share, totaling $1.24 per share annually, through the end of 2009. However, in the event of material future deterioration in business conditions, our board may determine to reduce or eliminate our common stock dividend. Id. at S-7;
• GE Capital’s third quarter and full year 2008 earnings have been adversely affected by, among other things, higher loss provisions related to some of its lending assets, lower gains on the sale of financial assets and a decrease in the size of its asset base. Id. at S-4;
• [GE Capital engages in] transactions [which] expose GE Capital to credit risk in the event of default of its counterparty or client. In addition, GE Capital’s credit risk may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to it. GE Capital also has exposure to these financial institutions in the form of equity investments and unsecured debt instruments. There can be no assurance that any such losses or impairments to the carrying value of its financial assets would not materially and adversely affect GE Capital’s business and results of operations. Id. at S-4;
• Our allowance for loan losses on these mortgage loans is based on our analysis of current and historical delinquency and loan performance, as well as other management assumptions that may be inaccurate predictions of credit performance in this environment. Id. at S-4;
19 General Electric Co., Form 8-K, EX-99.1 (Oct. 1, 2008) (Exh. 14).
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• On September 25, 2008, we reaffirmed our longstanding commitment to maintaining our ‘Triple A’ ratings and announced that we are taking certain steps to strengthen our capital and liquidity position . . . . In light of the difficulties in the financial services industry and the difficult financial markets, however, there can be no assurance that we will successfully complete these steps or, in the event of further deterioration in the financial markets, that completion of these steps and any others we might take in response, will be sufficient to allow us to maintain our ‘Triple A’ ratings. Failure to do so could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets. Id. at S-4, S-5.
With respect to GECC’s CP program, GE disclosed that the program was subject to the same difficult and uncertain market conditions:
• [A]lthough GE Capital has continued to issue commercial paper, there can be no assurance that such markets will continue to be a reliable source of short-term financing for GE Capital. If current levels of market disruption and volatility continue or worsen, or if we cannot lower our asset levels as planned, we would seek to repay commercial paper as it becomes due or to meet our other liquidity needs using the net proceeds of this offering and the Berkshire Investment, by drawing upon contractually committed lending agreements primarily provided by global banks and/or by seeking other funding sources. However, under such extreme market conditions, there can be no assurance such agreements and other funding sources would be available or sufficient. Id. at S-3;
D. The Volatile Third and Fourth Quarters of 2008
GE reported its third quarter 2008 earnings in a press release on October 10, 2008. In that release, Mr. Immelt stated: “On September 25, we revised our third-quarter and full-year
2008 guidance to reflect the current volatile environment. Reported earnings are fully in line with guidance, and we have continued to take decisive steps to strengthen GE in a tough environment.” 20
Also on October 10, 2008, GE hosted an analyst conference call to discuss the
Company’s third-quarter 2008 earnings. On the call, Mr. Immelt said that “the environment remains very volatile. The global financial system is tough . . . . We continue to increase our
20 General Electric Co., Form 8-K, EX-99 at 1 (Oct. 10, 2008) (Exh. 16); SAC ¶¶ 166-67.
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reserves to reflect the higher loss environment.” 21 GE’s Vice Chairman and CFO, Keith Sherin,
similarly warned that “[w]e’re going to see higher delinquencies; we are already seeing those.
As we have higher delinquencies we’re going to put up more loss provisions.” Exh. 17 at 8-9;
SAC ¶ 187.
On October 30, 2008, GE filed its Form 10-Q for the period ended September 30, 2008,
explicitly warning investors of the same risks outlined on October 1, 2008 and further
cautioning:
• At September 30, 2008, we had approximately $1.5 billion of exposure to residential subprime credit . . . . Our qualitative review attempts to identify issuers’ securities ‘at- risk’ of impairment, that is, with a possibility of other-than-temporary impairment recognition in the following 12 months. Of securities with unrealized losses at September 30, 2008, $0.5 billion was at risk of being charged to earnings in the next 12 months. Continued uncertainty in the capital markets may cause increased levels of losses. Exh. 6 at 41-42;
• The current financial market turmoil and tight credit conditions may continue to lead to a higher level of commercial delinquencies and provisions for financing receivables and could adversely affect results of operations at [Commercial Lending & Leasing]. Id. at 44;
• Delinquency rates on consumer financing receivables increased from December 31, 2007, and September 30, 2007, to September 30, 2008, primarily as a result of continued deterioration in our U.S. portfolio, the effects of tighter credit conditions in our secured financing business in the U.K. . . . In response, GE Money will continue . . . its process of regularly reviewing and adjusting reserve levels in response to when it is probable that losses have been incurred in the portfolio. This environment may result in higher provisions for loan losses and could adversely affect results of operations at GE Money. Id. at 44;
• The global credit markets have recently experienced unprecedented volatility, which has affected both the availability and cost of our funding sources . . . . We continue to access the commercial paper markets without interruption, although we have been doing so at shorter average maturities than historically. Id. at 45;
• [A]lthough GE Capital has continued to issue commercial paper, there can be no assurance that such markets will continue to be a reliable source of short-term financing
21 Tr. of GE 3Q 2008 Earnings Call, Oct. 10, 2008, at 3-4 (Exh. 17); SAC ¶ 185.
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for GE Capital. If current levels of market disruption and volatility continue or worsen, or if we cannot lower our asset levels as planned, we would seek to repay commercial paper as it becomes due or to meet our other liquidity needs using the Federal Reserve’s CPFF Program, the net proceeds of our equity offering and the investment by Berkshire Hathaway Inc., drawing upon contractually committed lending agreements primarily provided by global banks and/or by seeking other funding sources. However, under such extreme market conditions, there can be no assurance such agreements and other funding sources would be available or sufficient. Id. at 48.
On December 2, 2008, GE issued a press release announcing that GE was “evaluating
restructuring and other charges to accelerate cost out and reviewing losses in current credit
environment . . . expecting a $1.0-1.4 billion after tax charge.” 22 In the release, Mr. Sherin stated
that “[w]e are taking a number of tough, but prudent actions to make GE Capital safer, stronger
and more secure during this financial crisis. We are committed to being a Triple-A company.”
Exh. 18; SAC ¶ 205.
On the same day, GE held a webcasted Financial Services Investor Meeting about GECC
financing at which GE laid out in detail various exposures, including projections of credit losses
associated with the consumer and commercial portfolios, projected reserves for 2009 in the
consumer and commercial portfolios, and the assumptions underlying those projections, thereby
allowing investors to make their own informed assessment. 23 GE also disclosed specific current
delinquency rates in the U.S. consumer portfolio and current losses and reserves, and projected a
$4.2 billion loss in that portfolio. Exh. 19 at 26. GE provided similar delinquency information
about GECC’s consumer mortgage portfolio and disclosed that, in the U.S., it expected estimated
losses to increase from $300 million to $600 million. Id. at 27. During that conference, GE
22 Press Release, General Electric Co., GE Provides Updated Strategic Framework for GE Capital and Total Company 4Q’08 Outlook (Dec. 2, 2008) (Exh. 18); SAC ¶ 204. 23 Exh. 18 at 1 (explaining that GE was providing investors with “a detailed update” on its financial services business, including a review of “losses in [the] current credit environment”); General Electric Co., GE Capital Finance Overview (webcast presentation), at 2, 24 (Dec. 2, 2008) (Exh. 19).
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stated that its board had approved management’s plan to retain the annual stock dividend at
$1.24 per share and outlined the initiatives it had taken to improve liquidity and strengthen its
capital base. Exh. 19; SAC ¶ 208.
On December 16, 2008, GE held an Annual Outlook Meeting, at which Mr. Immelt stated
that GECC had “[a] decent performance in a tough environment.” Tr. of GE Annual Outlook
Meeting, Dec. 16, 2008, at 4 (Exh. 20). Mr. Immelt also noted that GE’s board had recently
approved the plan to pay an annual dividend of $1.24 per share. When asked about the AAA
rating “in the context of . . . the dividend,” Mr. Immelt stated: “I just think both are important in
this cycle.” Exh. 20 at 16; SAC ¶ 226.
E. The Economic Crisis Worsens in the First Quarter of 2009
In early 2009, the economic picture worsened. The Federal Reserve Board reported that
“the unemployment rate has risen to its highest level since the early 1990s . . . along with the sizable losses of equity and housing wealth and the tightening of credit conditions.” 24 The
Federal Reserve noted that “nearly all major sectors of the U.S. economy recorded sizable declines in activity in late 2008, and the weakness has extended into early 2009.” Exh. 16 at 12.
And on February 10, 2009, Treasury Secretary Timothy Geithner announced another governmental effort to stem the ongoing crisis, admitting that earlier efforts were “not comprehensive or quick enough to withstand the deepening pressure brought on by the weakening economy.” 25
24 Federal Reserve Board, Monetary Policy Report to the Congress at 1 (Feb. 24, 2009) (Exh. 21); see also Peter S. Goodman, Sharper Downtown Clouds Obama Spending Plans , N.Y. Times, Feb. 28, 2009 (“The economy is spiraling down at an accelerating pace.”) (Exh. 22). 25 Remarks by Treasury Secretary Timothy Geithner Introducing the Financial Stability Plan , Feb. 10, 2009 (Exh. 23, p. 2).
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In the wake of this bad news and volatility, companies across the economy struggled with declining revenues, saw their credit ratings slashed, and reduced dividends to retain liquidity. 26
In the 12 months leading up to September 2009, 67 highly rated companies – including Ambac,
Renault and AAA stalwart Berkshire Hathaway – saw their credit ratings cut. 27 During the first
quarter of 2009, a record 367 public companies (including Alcoa, Dow Chemical, and Pfizer) cut
dividends, representing a 332% increase from the 83 issuers that cut their dividends during the
first quarter of 2008. 28
F. GE Responds to an Increasingly Difficult Economic Environment with Further Disclosures
On January 23, 2009, GE reported its fourth quarter 2008 results in a press release and analysts’ conference call. General Electric Co., Press Release (Form 8-K) (Jan. 23, 2009) (Exh.
31); SAC ¶ 232. In the release, Mr. Immelt stated that “[w]e expect 2009 to be extremely difficult. However, we have taken strong actions to prepare the Company, including strengthening cash flow and liquidity; managing costs; taking restructuring charges; intensifying risk mitigation; accelerating cycle of management reviews; and protecting revenue.” Exh. 32;
SAC ¶ 233. Mr. Sherin also explained that GE expected “both the commercial and the consumer delinquencies to continue to get worse in 2009,” and further noted that GE had increased its
26 See Standard & Poors’ Monthly Dividend Action Report (Feb. 27, 2009) (Exh. 24); id. (Mar. 31, 2009) (Exh. 25). 27 John Kell, S&P: Global Fallen-Angel Tally Rises by One to 67 in 2009 , Wall St. J., Oct. 9, 2009 (Exh. 26); Dena Aubin, Over $200 bln debt cut to junk status this year-S&P , Reuters, Jul. 13, 2009 (Exh. 27); Scott Patterson, Moody’s Strips Berkshire of Top Rating , Wall St. J., Apr. 9, 2009 at A1 (Exh. 28). 28 See Press Release, Standard & Poor’s, Q1 Worst Quarter for Dividends Since 1955; Companies Reduce Shareholder Payments by $77 Billion (Apr. 7, 2009) (Exh. 29). See also Issue Indicated Dividend Rate Change, available at: http://www2.standardandpoors.com/spf/xls/index/INDICATED_RATE_CHANGE.xls (Exh. 30).
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reserves. Tr. of Q4 2008 GE Earnings Conference Call, Jan. 23, 2009, at 8 (Exh. 32); SAC
¶ 238. On the same day, Mr. Immelt was interviewed on CNBC and discussed GE’s goals of
maintaining both its dividend and its AAA credit rating. SAC ¶ 247.
On February 6, 2009, GE issued a press release in which Mr. Immelt said, “[t]he Board
and I believe that it is in the best interests of the Company’s shareholders to continue to pay an
attractive dividend.” 29 He cautioned, however, that “the Board and I will continue to evaluate the Company’s dividend level for the second half of 2009 in light of the growing uncertainty in the economy, including U.S. government actions, rising unemployment and the recent announcements by the rating agencies.” Id.
In GE’s 2008 Annual Report, released on February 18, 2009, Mr. Immelt wrote that
“2008 was a tough year, and we expect 2009 to be even tougher.” He explained that “the current challenging credit and economic environment [will] continue to affect our earnings in 2009. . . .
We are in a recession and, at times like these, it is difficult to predict how bad and for how long.” 30 In its Form 10-K filed that same day, GE warned once again of the precise risks that
Plaintiff contends were concealed during the Class Period. Specifically, GE cautioned, inter alia , that:
• [P]articular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: . . . the adequacy of our cash flow and earnings and other conditions which may affect our ability to maintain our quarterly dividend at the current level. General Electric Co., Annual Report (Form 10- K), at 3 (Feb. 18, 2009) (Exh. 7);
• [A]lthough we have established allowances for losses in GE Capital’s portfolio of financing receivables that we believe are adequate, significant and unexpected further deterioration in the economy and in default and recovery rates could require us to
29 SAC ¶ 257; Press Release, General Electric Co., GE Board of Directors Authorizes Regular Quarterly Dividend (Feb. 6, 2009) (Exh. 33). 30 General Electric Co., 2008 Annual Report at 2 (Exh. 34); SAC ¶ 274.
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increase these allowances and write-offs, which, depending on the amount of the increase, could have a material adverse effect on our business, financial position and results of operations.” Id. at 13;
• GE Capital has policies relating to initial credit rating requirements and to exposure limits to counterparties… which mitigate credit and liquidity risk. There can be no assurance, however, that any losses or impairments to the carrying value of financial assets would not materially and adversely affect GE Capital’s business, financial position and results of operations. Id. at 14;
• On January 24, 2009, Moody’s Investment Services placed the long-term ratings of GE and GE Capital on review for possible downgrade…. In light of the difficulties in the financial services industry and the difficult financial markets, there can be no assurance that we will successfully implement our 2009 operational and funding plan for GE Capital or, in the event of further deterioration in the financial markets, that completion of our plan and any other steps we might take in response will be sufficient to allow us to maintain our ‘Triple-A’ ratings. Failure to do so could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets. Id. at 14;
• The Board will continue to evaluate the company’s dividend level for the second half of 2009 in light of the growing uncertainty in the economy, including U.S. Government actions, rising unemployment and the recent announcements by the rating agencies. Id. at 23.
G. GE is Affected by Further Economic and Market Deterioration in the First Quarter of 2009
On February 27, 2009, GE announced in a press release that it was cutting the dividend
for the second half of 2009 from $0.31 to $0.10, saving $9 billion. 31 Mr. Immelt recognized “the significance of this decision, but [GE] believe[d] it [was] the right precautionary action at this time” (Exh. 35), and later explained that cutting the dividend was “not something that [GE] want[ed] to do.” 32
31 General Electric Co., Form 8-K (Feb. 27, 2009) (Exh. 35) SAC ¶¶ 13, 279. 32 Tr. of GE Capital Investor Meeting, Mar. 19, 2009, at 3 (Exh. 36).
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The economy continued to worsen, and on March 9, 2009, the S&P 500 Index hit a 12½- year low of 676.53. 33 On March 12, 2009, S&P reduced GE’s credit rating from AAA to AA+, and Moody’s followed with a comparable cut on March 23, 2009. SAC ¶ 293, 115. That same day, S&P placed GE on “stable outlook,” upgrading the outlook from the previous “negative outlook” designation. 34 After news of the credit rating downgrade and “stable outlook”
designation was released, GE’s stock price rose to $9.57, up from the previous day’s closing
price of $8.49. 35
On March 19, 2009, GE held an investor meeting to discuss its plans for GECC and to provide a detailed description of GECC’s business and the effects of the economic crisis on that business. SAC ¶ 294. GE reported, inter alia , that it had successfully “reduced [its] reliance on
commercial paper” and “prefunded what [it] need[ed] to do in the debt markets to make sure [it]
completed 2009.” 36
H. Mr. Paulson and Mr. Immelt Allegedly Discuss GECC’s CP Program in September and October 2008
The SAC adds eight pages of allegations regarding GECC’s CP program, all of which center on purported conversations Mr. Immelt had with Mr. Paulson during September and
October 2008.
In Mr. Paulson’s book, On the Brink , published in February 2010, Mr. Paulson describes
his experiences as Treasury Secretary during the 2007-2009 financial crisis, including five
33 Rita Nazareth and Lynn Thomasson, U.S. Stocks Fall on Buffett, World Bank Warning About Economy , Bloomberg News, Mar. 9, 2009 (Exh. 37). 34 Press Release, General Electric Co., GE Statement on S&P Ratings Action (Mar. 12, 2009) (Exh. 38). 35 Source: available at http://google.com/finance (Exh. 5). 36 Tr. of GE Capital Investor Meeting, Mar. 19, 2009, at 2-3 (Exh. 36).
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conversations he purportedly had with Mr. Immelt regarding GECC’s CP program in September
and October 2008. SAC ¶ 10a-d; Exh. 3. Specifically, Plaintiff alleges that:
• On September 8, 2008, Mr. Immelt told Mr. Paulson that “GE was having problems selling its commercial paper.” SAC ¶ 10b; Exh. 3;
• On September 15, 2008, Mr. Immelt elaborated on his prior statement and told Mr. Paulson that GE was “finding it very difficult to sell its commercial paper for any term longer than overnight.” SAC ¶ 10b; Exh. 3;
• On October 13, 2008, one day after privately expressing his support for the program to Mr. Paulson, Mr. Immelt allegedly told Mr. Paulson that, with respect to GE’s participation in TLGP, “GE officials were nervous about TLGP, believing that it would hurt GE because it was being left behind in the bailout” and that “I’m worried about my company and our ability to roll over paper in the face of this [TLGP].” SAC 10d; Exh. 3;
• On October 16, 2008: “Jeff Immelt had come to my office on the 16th to make the case that the FDIC should guarantee GECC’s debt issues. He believed our new programs put GE at a huge disadvantage, making it difficult for the company to fund itself. Nonbanks like GE could tap the Fed’s Commercial Paper Funding Facility, but they weren’t eligible for TARP funds or the FDIC’s new debt guarantee, known as the Temporary Liquidity Guarantee Program. Why would investors buy GE debt when they could purchase the debt of other financial institutions with an FDIC guarantee? ‘We are the ones out there making the loans that the banks aren’t, and we need help,’ Immelt said.” Id. ; Exh. 3.
ARGUMENT
In deciding a motion to dismiss under Rule 12(b)(6), a court must assume that well- pleaded factual allegations in the complaint are true. See Bell Atl. Corp. v. Twombly ,
550 U.S. 544, 555 (2007). But a court need not accept legal conclusions, naked assertions, mere
conclusory statements, or implausible inferences. See Ashcroft v. Iqbal , 129 S. Ct. 1937, 1949
(2009) (citing Twombly , 550 U.S. at 555). A claim must raise more than just the “mere possibility of misconduct” – a plaintiff must plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 1949,
1950. Considered together, the allegations of the SAC and documents properly before this Court
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demonstrate that Plaintiff has failed to allege facts sufficient to satisfy the plausibility standard
set forth in Twombly , 550 U.S. at 555 (and confirmed in Iqbal , 129 S. Ct. at 1949), much less the heightened pleading standards of Rule 9(b) and the PSLRA.
I. PLAINTIFF FAILS TO STATE A CLAIM UNDER SECTION 10(b) AND RULE 10b-5
For the reasons set forth below, Plaintiff has failed to plead the elements of a Section
10(b) and Rule 10b-5 claim with the requisite particularity. 37
A. Plaintiff Fails to Allege Any Facts Giving Rise to a Strong Inference of Scienter
To sufficiently plead a violation of Section 10(b) and Rule 10b-5, the PSLRA requires
that, for each misstatement or omission alleged, a complaint must “state with particularity facts
giving rise to a strong inference” of scienter for each defendant. 15 U.S.C. § 78u-4(b)(2).
When a complaint fails to do so, “the court shall, on the motion of any defendant, dismiss the
complaint.” 15 U.S.C. § 78u-4(b)(3)(A).
In Tellabs, Inc. v. Makor Issues & Rights , Ltd., 551 U.S. 308, 314 (2007), the Supreme
Court clarified the meaning of a “strong inference” of scienter under the PSLRA. “To qualify as
‘strong’” under Tellabs , the inference of scienter “must be more than merely plausible or reasonable – it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id. This requires a “comparative evaluation,” under which courts
consider “not only inferences urged by the plaintiff . . . but also competing inferences rationally
drawn from the facts alleged.” Id. “A complaint will survive . . . only if a reasonable person
37 To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege (i) a material misrepresentation or omission, (ii) with scienter, (iii) in connection with the purchase or sale of a security, (iv) reasonable reliance by the plaintiff on the representation or omission, (v) economic loss, and (vi) a loss proximately caused by the misrepresentation or omission. See Dura Pharms., Inc. v. Broudo , 544 U.S. 336, 341-42 (2005).
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would ” – not just “could ” – “deem the inference of scienter cogent and at least as compelling as any opposing inference [of non-fraudulent intent] one could draw from the facts alleged.” Id. at
324 (emphasis added); see also id. at 314.
The Second Circuit has repeatedly held that a complaint pleads the requisite strong
inference of scienter by alleging with particularity facts showing either: (1) “that defendants had
both motive and opportunity to commit fraud” or (2) “strong circumstantial evidence of
conscious misbehavior or recklessness.” Kalnit v. Eichler , 264 F.3d 131, 138 (2d Cir. 2001)
(quotations omitted).
Under both Tellabs and the Second Circuit’s two-pronged test, Plaintiff has not
adequately pleaded a strong inference of scienter.
1. Motive and Opportunity
“In order to raise a strong inference of scienter through ‘motive and opportunity’ to
defraud, Plaintiff[] must allege that [the defendants] ‘benefitted in some concrete and personal
way from the purported fraud.’” ECA & Local 134 IBEW Joint Pension Trust v. JP Morgan
Chase Co. , 553 F.3d 187, 198 (2d Cir. 2009) (quoting Novak v. Kasaks , 216 F.3d 300, 307
(2d Cir. 2000)). But “[m]otives that are common to most corporate officers, such as the desire for the corporation to appear profitable and the desire to keep stock prices high to increase officer compensation, do not constitute ‘motive.’” Id.
Here, Plaintiff alleges that the Exchange Act Defendants were motivated to make the allegedly fraudulent statements (i) by “reputational and other pressures” (SAC ¶¶ 409-15);
(ii) “to ‘protect’ the Company’s AAA credit rating” (SAC ¶ 162(g)); see also SAC ¶ 414; and
(iii) to ensure that GE met stated earnings per share targets or targets set by investment analysts.
SAC ¶¶ 409-15. None of these allegations raise any inference of scienter.
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Plaintiff’s claims of motive derived from “reputational pressures” fail. See In re
Moody’s Corp. Sec. Litig. , 599 F. Supp. 2d 493, 515 (S.D.N.Y. 2009) (“Nor does the preserva- tion of reputation constitute a cognizable motive for fraud.”). So do Plaintiff’s claims of motive predicated upon a desire to maintain a AAA rating. There is an unbroken line of authority holding that motive to maintain a credit rating – even in circumstances so dire that the credit rating is necessary to a company’s very survival – does not support an inference of scienter. See, e.g. , In re PXRE Group, Ltd. Sec. Litig. , 600 F. Supp. 2d 510, 530-33 (S.D.N.Y. 2009), aff’d sub nom , Condra v. PXRE Group Ltd. , 2009 WL 4893719 (2d Cir. Dec. 21, 2009) (holding that threat of a credit rating downgrade does not establish scienter, even when credit rating was necessary to company’s survival); S. Cherry St., LLC v. Hennessee Group LLC , 573 F.3d 98,
108-09 (2d Cir. 2009) (citations omitted) (desire to maintain a high credit rating, sustain the appearance of corporate profitability, or the success of an investment are insufficient to show scienter).
Pleading motive based on a desire to meet earnings targets has also been repeatedly rejected. See ECA , 553 F.3d at 200 (“Earning profits for the shareholders is the essence of the duty of loyalty, and therefore it would be an unusual case where accomplishment of this objective constitutes the requisite motive to defraud the shareholders.”); Chill v. Gen. Elec. Co. ,
101 F.3d 263, 268 (2d Cir. 1996) (“[t]he motive to maintain the appearance of corporate
profitability . . . does not entail concrete benefits” sufficient to support an inference of scienter)
(quotation omitted). In sum, each of the SAC’s motive allegations fails as a matter of law.
2. Conscious Misbehavior and Recklessness
Plaintiff also fails to satisfy the alternative prong for pleading scienter. Where, as here, a
plaintiff has not alleged motive, the strength of its allegations of conscious misbehavior or
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recklessness must be “‘correspondingly greater.’” See ECA , 553 F.3d at 187, 199 (quoting
Kalnit , 264 F.3d at 142); accord PXRE , 600 F. Supp. 2d at 535. To plead conscious
misbehavior, a plaintiff must allege with particularity that a defendant engaged in “deliberate
illegal behavior.” Novak , 216 F.3d at 308. And the bar for pleading recklessness is equally high: a plaintiff must plead “conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.” Id.
(internal quotations and citations omitted). “Recklessness in the scienter context cannot be
merely enhanced negligence.” In re JP Morgan Chase Sec. Litig. , 363 F. Supp. 2d 595, 624
(S.D.N.Y. 2005).
Plaintiff contends that the Exchange Act Defendants acted with scienter because they allegedly were aware of, or recklessly disregarded, the falsity of the allegedly material statements when making these statements. See, e.g., SAC ¶¶ 181(d), 255-56, 303, 341. The
Second Circuit requires that, when a plaintiff contends defendants “knew facts or had access to
information suggesting that their public statements were not accurate,” for each and every
challenged statement, the plaintiff “‘must specifically identify the reports or statements’ that are
contradictory to the statements made.” Plumbers & Steamfitters Local 773 Pension Fund v.
Canadian Imperial Bank of Commerce , 2010 WL 961596, at *9 (S.D.N.Y. Mar. 17, 2010)
(“CIBC ”) (emphasis in original) (quoting Novak , 216 F.3d at 309) and (citing Teamsters Local
445 Freight Div. Pension Fund v. Dynex , 531 F.3d at 190, 196 (2d Cir. 2008) (requiring a “high degree” of specificity)).
But Plaintiff alleges only that (a) because of “up the chain” reporting and the existence of a “‘Data Parking Lot’ system,” “GE management, including the Exchange Act Defendants, were
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regularly apprised of the mounting financial difficulties at GE Capital” (SAC ¶¶ 377-408); 38 and
(b) because of the alleged Paulson-Immelt conversations, the Exchange Act Defendants knew
that GE was unable to fund itself. See, e.g. , SAC ¶¶ 196(d), 421a.
a. Plaintiff’s allegations concerning “up the chain” reporting do not support an inference of scienter
Plaintiff’s allegations concerning “up the chain” reporting and the existence of a “Data
Parking Lot’ system” fail to supply the requisite strong inference of scienter. It is impossible to discern from the SAC exactly what allegedly contradictory information Plaintiff is relying on.
Plaintiff also fails to allege how that information made any of the challenged statements false.
Plaintiff also fails to identify when that allegedly contradictory information was known by, or available to, any of the Exchange Act Defendants. And Plaintiff does not explain how that information became known by each (or even any) of the Exchange Act Defendants. Thus, this set of allegations fail to adequately allege conscious misbehavior or recklessness. 39 See, e.g. ,
Dynex , 531 F.3d at 196 (holding that plaintiffs had failed to plead scienter when they merely made “broad reference” to “data” allegedly made available to “senior executives”).40
38 See e.g. , SAC ¶ 407 (employees from GE Capital and GE Corporate attended “big meetings” at which participants had “long faces” due to the need to write down assets); SAC ¶ 383 (“‘Portfolio Groups’’ . . . prepared a ‘Portfolio Quarterly Report’ that addressed the status of loans in the portfolio, and made recommendations regarding asset write-downs for any nonperforming loans.”). 39 Plaintiff’s scienter allegations also fail because Plaintiff does not distinguish between the mental states of the Exchange Act Defendants. See, e.g. , SAC ¶¶ 377-415; Police & Fire Ret. Sys. v. SafeNet, Inc. , 645 F. Supp. 2d 210, 234 (S.D.N.Y. 2009) (holding that “the Complaint failed to allege scienter against the . . . Defendants” because “Plaintiffs d[id] not even attempt to distinguish between the mental states of the four individuals”). 40 See Fadem v. Ford Motor Co. , 352 F. Supp. 2d 501, 522-23 (S.D.N.Y. 2005), aff’d , 157 F. App’x 398 (2d Cir. 2005) (holding that “the existence of [information] channels is not enough” to support an inference of scienter without “evidence of what information was actually passed through these channels,” and refusing to “accept that the existence of an internal communication
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b. Plaintiff’s allegations concerning GECC’s CP program do not support an inference of scienter
Plaintiff’s allegations concerning GECC’s CP program also fail to supply the requisite strong inference of scienter for the simple, but fatal, reason that the alleged Paulson-Immelt conversations do not contradict, but are consistent with, the challenged Exchange Act
Defendants’ statements regarding GECC’s CP program.
In the SAC, Plaintiff alleges that GE failed to disclose that it was “unable to fund itself”
(SAC ¶ 113) and that GECC was “having difficulty selling its commercial paper” (SAC ¶ 138), thereby allegedly rendering all of the Exchange Act Defendants’ statements concerning GECC’s
CP program and GE’s liquidity from September 2008 through November 2008 false and misleading when made. 41 Plaintiff’s sole support for its claims are: (i) alleged conversations
between Mr. Immelt and Mr. Paulson that reportedly took place in September and October 2008
(as set forth in Mr. Paulson’s book), and (ii) a statement by CW6, a former underwriter in GE’s
Transportation Finance division, that based on Plaintiff’s allegations, CW6 never made. SAC
¶ 73. But Plaintiff mischaracterizes both the Paulson-Immelt conversations and CW6’s
purported “awareness” of the CP market.
network, in and of itself, sufficiently supports a theory of scienter based upon reckless conduct.”); CIBC , 2010 WL 961596, at *10 (“Plaintiff has not ‘specifically identified any reports or statements’ or any dates or time frame in which Defendants were put on notice of contradictory information.”) (citations omitted); SafeNet, 645 F. Supp. 2d 210, 235 (S.D.N.Y. 2009) (“The Complaint fails to specify how each of the [defendants] were reckless, what they each knew about the alleged [contradictory information], and how they knew about these [contradictory facts]. In short, the Complaint fails to allege scienter against the defendants”). 41 GE’s statements from September 25, 2008 through November 2008 that Plaintiff alleges were false and misleading include: “GE Capital has continued to issue commercial paper” (SAC ¶ 117a); “We have had no issues funding ourselves” (SAC ¶ 171a); “[w]e have great CP [commercial paper] programs” (SAC ¶ 181(c)); “We haven’t had any trouble funding ourselves.” SAC ¶ 193c. See also SAC ¶¶ 115, 122, 129, 183(d), 196(b), 196(d), 196g, 200d.
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Specifically, Plaintiff alleges that on September 8, 2008, Mr. Immelt told Mr. Paulson that GE was “having problems selling its commercial paper.” SAC ¶ 10b. One week later, on
September 15, 2008, Mr. Immelt allegedly stated that GE was “finding it very difficult to sell its commercial paper for any term longer than overnight.” Id . But nowhere in Mr. Paulson’s book does Mr. Immelt state, or even imply, anything that contradicts GE’s public statements.
Mr. Immelt’s purported statement to Mr. Paulson that GE was having “difficulty” selling commercial paper for any term longer than overnight does not mean that GECC’s CP program had halted or that GE was unable to fund itself. Nonetheless, making several illogical and unsupported leaps, the SAC alleges that these September 2008 conversations contradict such GE public statements as “GE Capital has continued to issue commercial paper” (SAC ¶ 117a) and
“We have had no issues funding ourselves.” SAC ¶ 171(a). 42 The SAC then repeatedly resorts
to rewriting Mr. Paulson’s account of the conversations, claiming, for example, that “GE . . .
privately inform[ed] [Mr. Paulson] of GE Capital’s inability to sell commercial paper in private
markets” (SAC ¶ 10e) and that “Immelt privately admitted to [Mr.] Paulson on September 8,
2008 that GE was having difficulty selling its commercial paper in the private market and thus
funding itself.” SAC ¶ 122; see also SAC ¶¶ 196(d), 196b, 196g.
Further, the unprecedented speed with which the financial markets changed after
September 15 also forecloses any possibility that these conversations provided the Exchange Act
Defendants with any allegedly contradictory information at the time the challenged statements were made. CIBC , 2010 WL 961596, at *9 (finding no scienter when “the [c]omplaint ma[de] no reference to internal . . . documents or confidential sources discrediting Defendants’
42 See also SAC ¶¶ 11, 112a, 113, 122, 129, 138, 138b, 162, 181(c).
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assertions that they were only adapting to a rapidly changing economic landscape during a once-
in-a-century credit tsunami.”) (quotation marks omitted).
The September 15 conversation took place on the first trading day after Lehman Brothers
filed for bankruptcy – a day of remarkable volatility and uncertainty across the financial markets.
It was generally known in the market at the time, and has been widely reported since, that
because of liquidity concerns during this “economic environment of unprecedented uncertainty”
(SAC ¶ 8), investors did not want to invest in long term maturities, instead preferring overnight
paper. As explained by Federal Reserve Bank of St. Louis economists, “[t]he events of mid-
September 2008 made money market investors (who prize liquidity) hesitant to purchase assets
with maturities longer than a day. In normal times, approximately 5 to 10 percent of daily CP
issuance is 91-day maturity, and represents 20 to 25 percent of all outstanding paper. In mid-
September, 91 day issuance fell to near zero. On Friday, September 12, for example, 60 percent
of issuance was 1-4 day maturity; by Wednesday, September 17, 87 percent was 1-4 day
maturity.” 43
Whatever Messrs. Immelt and Paulson discussed on that frightening day was superseded almost immediately after the government – in part at Mr. Paulson’s urging – intervened to stabilize the CP market. Four days later, on September 19, 2008, recognizing the importance of money market funds to capital markets financing, the Treasury Department implemented a guarantee program for money market funds, 44 which are major buyers of CP. 45 Immediately, the
43 The Commercial Paper Market, the Fed, and the 2007-2009 Financial Crisis , Richard G. Andersen and Charles S. Gascon, November/December 2009 (Exh. 39). See also infra fn. 50. 44 See Press Room, Department of the Treasury, Treasury Announces Guarantee Program for Money Market Funds , Sept. 19, 2008 (Exh. 40). 45 See The Commercial Paper Market, the Fed, and the 2007-2009 Financial Crisis , Richard G. Andersen and Charles S. Gascon, November/December 2009 (“During the period spanning
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CP market began to stabilize and operated at higher than average volume. 46 The success of this governmental guarantee in stabilizing and reinvigorating the CP market is readily revealed by publicly available Federal Reserve Board data. 47
According to this data, immediately before the beginning of the Class Period, i.e. , during the week of September 25, the volume of CP being issued was significantly higher than usual.
On September 22 and 23, CP issuances were $185 billion and $194 billion respectively, significantly higher than the 2008 daily average of $150 billion. See Exh. 42. By September 23,
after the start of the money market guarantee program, the media reported that the CP market
was operating “smoothly,” 48 and that although interest rates were elevated, “both credit-worthy
borrowers and not-so highly rated companies were able to find money.” 49 On September 24, the
1972-92, MMMFs [Money Market Mutual Funds] held 18.2 percent of all outstanding CP; in 2008, it was almost 40 percent”) (Exh. 39). 46 See Prabha Natarajan, Investors Jump Into Commercial Paper, Cheered By US Tsy Plan , Dow Jones, Sept. 19, 2008 (“The Treasury plan has brought investors back to the markets.”) (Exh. 41). 47 The Federal Reserve Board data are available at http://www.federalreserve.gov/releases/cp/ and are summarized in Exh. 42 to the Danilow Decl. This Court can take judicial notice of publicly available governmental data. See Laborers’ Pension Fund v. Blackmore Sewer Constr., Inc. , 298 F.3d 600, 607 (7th Cir. 2002) (taking judicial notice of information on the FDIC’s website); see also Fed. R. Evid. 201(b), (d). 48 See Prabha Natarajan, Commercial Paper Mkt Operating ‘Smoothly’ - Trader , Dow Jones, Sept. 23, 2008 (Exh. 43). 49 Id. This Court can take judicial notice that these articles describe a recovering and smoothly operating CP market because they are “offered to show that certain things were said in the press,” Staehr v. Hartford Financial Services Group, 547 F.3d 406, 425 (2d Cir. 2008), and that it is not only possible to infer, based on publicly available Federal Reserve Board data, that there was no CP-related liquidity crisis in September 2008 or thereafter but also that many market observers drew this same inference. Similarly, on a Rule 12(b)(6) motion, the Court in Kramer v. Time Warner, Inc. , 937 F.2d 767, 773 (2d Cir. 1991), relied on newspaper articles describing the junk bond market, not for their truth, but because they articulated an alternative inference showing why scienter could not plausibly be inferred from plaintiffs’ allegations. See also In re UBS Auction Rate Secs. Litig. , 2010 WL 2541166, *14-15 (S.D.N.Y. June 10, 2010) (taking judicial notice of media articles discussing risks that plaintiffs claimed defendants had concealed
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day before the GE investor call, $206 billion in CP was sold, more than any other day that
month. Id.
Other reports published contemporaneously with these events in September and October
2008 made precisely the same points, reporting a contraction in the CP market immediately after
Lehman’s bankruptcy on September 15, 50 but observing that, even then, demand for CP remained high, although maturities were shorter and interest rates were higher. 51 On October 2,
2008, JPMorgan Chase reported that “[i]t is almost universally false that high grade non- financials are unable to roll commercial paper, and Federal Reserve data demonstrates this . . .
[W]e are not aware of any situation driven specifically by the inability of an issuer to roll CP” and “Fed data on CP volume shows that across the CP market issuance has been strong, but heavily concentrated in shorter maturities.” 52 Similarly, Barclays Capital on October 24, 2008 described the CP market as “improving significantly.” 53
relating to auction rate securities and holding that “press publications . . . are properly subject to judicial notice” on a motion to dismiss even when there is “no showing that Plaintiffs ever read, received, or had any knowledge of these exhibits.” The Court reasoned that “[i]t is clear that what information was available to the investing public regarding the ARS market – even if not specific to Defendants – and when that information was made available are relevant to the Court’s consideration of this motion to dismiss.”). 50 See Anusha Shrivastava, Commercial Paper Market Crunched, Borrowing Costs Spike , Dow Jones, Sept. 16, 1008 (“In a replay of last year’s dramatic crunch in short-term corporate debt markets, the cost of borrowing in the commercial paper market moved sharply higher Tuesday. The asset-backed sector of the commercial paper market has felt the brunt of rising concerns about cash shortages at financial companies such as [AIG]…. ‘Investors are more reluctant to buy longer-dated paper,’ said one trader, who noted 30-day maturities saw ‘very limited flow.’”) (Exh. 44). 51 See Anusha Shrivastava, Commercial Paper Still In Demand, But Rates Higher , Dow Jones, Sept. 17, 2008 (“Investors are continuing to buy commercial paper Wednesday morning . . . . [A] buyer’s strike . . . has not materialized. . . .”) (Exh. 45). 52 Short-Term Fixed Income Research Note , J.P.Morgan US Fixed Income Weekly, Oct. 2, 2009, at 1 (Exh. 46). 53 Robert T. Cornell, Barclays Capital Company Note , Oct. 24, 2008, at 2 (Exh. 47).
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The disclaimer in the Prospectus was completely consistent with this market data and reports: “although GE Capital has continued to issue commercial paper, there can be no assurance that such markets will continue to be a reliable source of short-term financing for GE
Capital.” Exh. 15 at S-3. Similarly, GE’s October 30, 2008 Form 10-Q disclosed that “[t]he global credit markets have recently experienced unprecedented volatility, which has affected both the availability and cost of our funding sources.” 54 The Form 10-Q also disclosed that
“[w]e continue to access the commercial paper markets without interruption, although we have been doing so at shorter average maturities than historically.” Id.
Nevertheless, in an effort to bolster its allegations regarding GECC’s CP Program,
Plaintiff wrongly states that the public filings of Vanguard Money Market Reserves
(“Vanguard”) reveal that in September 2008, Vanguard stopped investing in GECC’s CP. SAC
¶ 10f. In Vanguard’s Annual Report for the period ending August 31, 2008, Vanguard reports holding approximately $1.5 billion of GECC’s CP (face value). 55 Vanguard’s quarterly filing for
the period ended November 30, 2008 shows that between August 31, 2008 and November 30,
2008, Vanguard increased its holdings in GECC’s CP from $1.5 billion face value to $2.48
billion. 56 And nothing in Vanguard’s public filing supports any suggestion that Vanguard did not continue to purchase GECC CP in September 2008.
54 Exh. 6 at 45. 55 Vanguard Money Market Funds Annual Report, for the period ending August 31, 2008 (filed on Oct. 28, 2008) (Exh. 48) available at : http://www.sec.gov/Archives/edgar/data/106830/000093247108001925/moneymarketfinal.htm 56 Vanguard Money Market Reserves Form N-Q, for the period ending November 30, 2008 (filed on Jan. 29, 2009) (Exh. 49) available at : http://www.sec.gov/Archives/edgar/data/106830/000093247109000102/moneymarketfinal.htm .
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Plaintiff also claims that the Exchange Act Defendants misled investors about GE’s
“plan” to participate in two governmental funding programs – the Commercial Paper Funding
Facility (“CPFF”) and TLGP – and the reasons underlying GE’s decision to participate. See, e.g. , SAC ¶ 196b. First, Plaintiff alleges that with respect to GE’s participation in the TLGP, Mr.
Immelt allegedly told Mr. Paulson on October 13 that “GE officials were ‘nervous’ about TLGP, believing that it would ‘hurt’ GE because it was ‘being left behind in the bailout.’” SAC ¶ 10d.
During that same conversation, Mr. Immelt also purportedly stated: “I’m worried about my company and our ability to roll over paper in the face of this [TLGP].” Id. Three days later, Mr.
Paulson recalls meeting with Mr. Immelt so that Mr. Immelt could “make the case that the FDIC
should guarantee GE Capital’s debt issues.” Id. During the October 16 meeting, Mr. Paulson
recalls that if the TLGP was enacted and GE was not able to participate, Mr. Immelt “believed
[TLGP] put GE at a huge disadvantage” because “[w]hy would investors buy GE debt when they
could purchase the debt of other financial institutions with an FDIC guarantee?” Exh. 3.
On October 7, the Federal Reserve implemented CPFF, to enhance the liquidity of the
commercial paper market by providing a government “liquidity backstop to U.S. issuers of
commercial paper.” SAC ¶ 6a.57 On October 14, 2008, the FDIC announced the Temporary
Liquidity Guarantee Program (“TLGP”), which would, among other things, guarantee certain senior unsecured debt of certain financial institutions. SAC ¶ 6b.58
57 Federal Reserve Bank of New York, Commercial Paper Funding Facility: Frequently Asked Questions , October 19, 2008, available at : http://www.newyorkfed.org/markets/cpff_faq.html (Exh. 50) 58 See also http://www.fdic.gov/regulations/resources/tlgp/indExh.html (Exh. 51). GE publicly announced its registration with the CPFF on October 24, 2008 (SAC ¶ 196c), and, on November 12, 2008, GE announced that it had enrolled in the TLGP. SAC ¶¶ 10d, 200a.
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Plaintiff makes the unsupported assertion that “GE’s need for government assistance to sell its commercial paper to maintain its liquidity was most clearly demonstrated by its use of
TLGP and CPFF to issue debt” (SAC ¶ 10g) and that “GE’s use of the CPFF was . . . necessary for the company to fund itself.” SAC ¶ 200. Turning first to CPFF, the SAC lacks any factual allegation, much less any adequately particularized allegation, supporting the claim that GE was having trouble funding itself, much less needed CPFF to fund itself in October 2008.
GECC’s participation in the CPFF program was consistent with sound business judgment, not the result of any funding shortfall. CPFF provided a willing buyer – the federal government – for CP up to a three-month maturity. 59 While GECC continued to sell CP
throughout October 2008, in an effort to provide additional liquidity for the company and its CP
investors and enable GECC to sell CP across maturities, and signal that the federal program was
an overall benefit to the CP market, GECC participated in the CPFF program. As explained by
Mr. Sherin on October 24, 2008, GE’s participation in the CPFF “will improve the liquidity of
the GE paper our investors hold and reduce our rollover risk” (SAC ¶ 196c) and “provide
investors with confidence to purchase more longer-term CP again.” SAC ¶ 196e. Indeed, as
Barclays Capital noted that same day, “[w]e believe [GE’s] plan to access the Fed’s [CPFF]
should not be viewed as a negative, but as a positive, as a tool to extend the avg maturities at
comp. mkt rates. Fed backstop gives GE further flexibility w/ regard to use $15B of proceeds
recently raised.” 60
59 Exh. 50 at 1.
60 Exh. 47 at 2 (“We think GE probably will access the Fed’s CP funding facility given the rates wouldn’t differ much from what GE is currently able to achieve in the market and our view that it could extend the average maturities out to 90 days. We believe GE’s use of the new Fed CP facility would not be received negatively by the rating agencies. ”) (emphasis in original).Robert T. Cornell, Barclays Capital Company Note , October 24, 2008, at 1.
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Nor does GE’s participation in the TLGP show a desperate need for governmental assistance to shore up GE’s liquidity. SAC ¶ 196(b). Indeed, Plaintiff acknowledges – contradicting itself – that according to Mr. Paulson’s account, the reason why GE wished to participate in TLGP was because GE was worried about the prospective competitive advantage
in the marketplace that banks would enjoy when they could begin to issue CP that was
guaranteed by the FDIC but GECC could not. See supra p.34.
Finally, Plaintiff’s allegations concerning Mr. Immelt’s “secret lobbying” are legally irrelevant. Even if GE had “secretly lobbied” Mr. Paulson, Plaintiff has failed to plead, as it must, how or why this is material. See infra Point I.
c. Plaintiff’s allegations concerning GAAP violations do not support an inference of scienter
Finally, Plaintiff’s generalized allegations that “personnel at the GE ‘Corporate’ level” engaged in “reckless violations” of GAAP similarly do not give rise to an inference of scienter.
SAC ¶¶ 350, 353. See ECA , 553 F.3d at 200 (“Only where [allegations of GAAP violations or
accounting irregularities] are coupled with evidence of corresponding fraudulent intent might
they be sufficient” to support an inference of scienter) (quotation omitted). 61 Plaintiff fails to
plead the requisite facts concerning when and how each Exchange Act Defendant knew of the
alleged GAAP violations, how those alleged GAAP violations rendered a specific challenged
statement false or misleading, or why the alleged failure to comply with GAAP was fraudulent
rather than just the result of differences of opinion over how to apply GAAP. See Shields v.
61 See also Sterling Heights Police & Fire Ret. Sys. v. Vodafone Group Pub. Ltd. Co. , 655 F. Supp. 2d 262, 270 n.1 (S.D.N.Y. 2009) (alleged “GAAP [violations] neither establishes nor shields guilt in a securities fraud case,” without corresponding fraudulent intent) (quotation omitted).
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Citytrust Bancorp. , 25 F.3d 1124, 1129-1130 (2d Cir. 1994) (finding no scienter based on
allegation of inadequate loan loss reserves because “misguided optimism is not a cause of
action” and there was no particularized allegation that company’s impairment disclosures
conflicted with current data).62
Accordingly, Plaintiff’s scienter allegations fail.63
3. Plaintiff’s Allegations Regarding Confidential Witnesses Are Insufficient To Support a Strong Inference of Scienter
Plaintiff relies on the statements of 15 anonymous confidential witnesses (“CWs”) to
show that Defendants acted with scienter. But these allegations lack the requisite particularity.
The SAC’s scienter allegations based on CW accounts also should be discounted because “[i]t is
hard to see how information from anonymous sources could be deemed ‘compelling’ or how we
could take account of plausible opposing inferences. Perhaps these confidential sources have
axes to grind. Perhaps they are lying. Perhaps they don’t even exist.” Higginbotham v. Baxter
Int'l, Inc. , 495 F.3d 753, 757 (7th Cir. 2007). As the Second Circuit recently held in Campo v.
Sears Holdings Corp. , 2010 WL 1292329, at *5 n.4 (2d Cir. April 6, 2010), “[t]he anonymity of the sources of plaintiffs’ factual allegations concerning scienter frustrates the requirement, announced in Tellabs , that a court weigh competing inferences to determine whether a complaint
62 See also In re Loral Space & Commc’ns Sec. Litig. , 2004 WL 376442, at *17 (S.D.N.Y. Feb. 27, 2004) (finding no scienter when Plaintiffs failed to allege “an incorrect application of [GAAP], much less an error so grievous that it exceeded differences over accounting principles and rose to the level of fraud”). 63 Where, as here, Plaintiff has failed to adequately allege scienter on the part of any GE employee that could be attributed to GE, scienter cannot be imputed to GE. See Dynex , 531 F.3d at 195 (“When the defendant is a corporate entity, this means that the pleaded facts must create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter.”). And Plaintiff has not alleged statements so “dramatic[ally]” false that the statements raise a strong inference of corporate scienter. See id. at 195-96 (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc. , 513 F.3d 702, 710 (7th Cir. 2008)).
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gives rise to an inference of scienter that is cogent and at least as compelling as any opposing
inference of nonfraudulent intent.” (quotation omitted).
Whether considered separately or collectively, the anonymous CW accounts fail to
establish that (1) there was contemporaneous information demonstrating the falsity of any
challenged statement; (2) GE’s accounting violated GAAP; (3) any Exchange Act Defendant had
contemporaneous knowledge of the allegedly contradictory information or of the alleged GAAP
violations; or (4) the CWs occupied positions within GE that would provide them with access to
the information they allege. See Novak , 216 F.3d at 314 (finding no scienter when plaintiffs did
not describe their CWs “with sufficient particularity to support the probability that a person in
the position occupied by the source would possess the information alleged.”); Steinberg v.
Ericsson LM Tel. Co. , 2008 WL 5170640, at *13 (S.D.N.Y. Dec 10, 2008) (finding no scienter when plaintiffs’ CWs had “no contacts or communications with Defendants”).
Notably, five of these CWs did not even work at GE during the Class Period and thus do not have information supporting Plaintiff’s allegations of fraud. 64 And the CW accounts neither show the falsity of a single challenged statement 65 nor support Plaintiff’s allegations of GAAP
64 See SAC ¶ 73 (CW2 stopped working at GE Capital in June 2008; CW4 stopped working at GE Capital in May 2008; CW9 stopped working at GE Capital in May 2008; CW11 stopped working at GE Capital in June 2008; and CW13 stopped working at GE in September 2008). Relatedly, although CW15 appears to have worked at GE through March 2009, he or she purports to have relevant information only “beginning in mid-2007 and continuing into 2008.” See Malin v. XL Capital Ltd. , 499 F. Supp. 2d 117, 141-42 (D. Conn. 2007), aff’d 312 Fed. App’x 400 (2d Cir. 2009) (holding that CW accounts were “insufficient to support an inference of scienter” because, inter alia , “information relayed by the CWs relate[d] to the time prior to the start of the Class Period”); CalPERS v. Chubb Corp., 394 F.3d 126, 154 (3d Cir. 2004) (same). 65 See, e.g. , SAC ¶ 73 (CW10: who “described Corporate Financial Services as offering credit to companies that were ‘distraught’”; CW7: alleging that “it was not unusual for energy company borrowers to have trouble repaying GE Capital”; CW5: “as of the end of 2008, GE Capital was beginning to reduce its assets . . . [intending to] eliminate[e] its overall risk”).
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violations. 66 See Campo , 2010 WL 1292329, at *3-4 (affirming dismissal when confidential witnesses did not provide facts showing that the challenged statements were false and when they lacked knowledge whether the individual defendants “actually accessed or reviewed” reports that allegedly contained contradictory information); PXRE , 600 F. Supp. 2d at 536 (dismissing
complaint and finding no scienter because plaintiffs had not alleged that “the information [of the
confidential witnesses] was available at the same time that Defendants made the challenged
statements.”).
Nor do the positions and responsibilities of these CWs support the probability that
employees in their positions would possess the information alleged. Conspicuously, CW6, a
“former GE Capital employee who worked as an underwriter in GE Transportation Finance” is
alleged to know – based solely on the fact that he or she worked at GECC – about GE’s decision
to pay the quarterly dividend, ability to maintain its AAA rating, and about the CP market
becoming “frozen” at some unidentified point during the Class Period. SAC ¶ 73. This strains
credibility past the breaking point. 67
Moreover, the SAC contradicts itself about what CW6 allegedly knew. On the one hand,
in support of the CP allegations, Plaintiff alleges throughout the SAC that CW6 knew the CP
66 In fact, the CWs suggest that GE complied with GAAP. See infra Point II.B. 67 Plaintiff’s other CW allegations are equally deficient. See SAC ¶ 73 (CW14: an administrative assistant that purportedly has information concerning increasing default rates at GE Capital by virtue of discussions he or she overheard between other unidentified employees; CW1, purportedly an analyst in GE’s insurance division, whose knowledge of purported GAAP violations derives from his attendance at quarterly “impairment meetings” with unidentified senior executives; CW15 allegedly held “several positions with the Company from 1997 through March 2009” but Plaintiff does not allege how, in any one of these positions, CW15 would reasonably have knowledge of GE’s reclassification of assets. And although Plaintiff claims that CW15 believed that Mr. Immelt was “involved in the decision making with respect to larger transactions,” Plaintiff does not allege a single specific “reclassification” transaction to which Mr. Immelt (or any of the Exchange Act Defendants for that matter) was privy.
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markets were “frozen as of September 25, 2008,” the first day of the Class Period. See, e.g. ,
SAC ¶¶ 73, 138b, 181(c), 183d, 196b, 196g, 399. But when the SAC introduces each CW and
describes what each allegedly knew, the SAC alleges that CW6 was aware only that at some
unidentified point “during the Class Period, the commercial paper market became ‘frozen,’
which impacted GE Capital’s business.” SAC ¶ 73. See Fadem v. Ford Motor Co ., 2003 WL
22227961, *7 (S.D.N.Y. 2003) (granting defendants’ motion to dismiss because, inter alia , plaintiffs failed to describe confidential witnesses “‘with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.’”) (citing Novak , 216 F.3d at 314).68
Finally, not one of the CWs has set forth any facts, much less the requisite particularized facts, showing that the information alleged in the SAC was known to any of the Exchange Act
Defendants at any time, let alone when each statement was made. See generally SAC ¶ 73. See
City of Brockton Ret. Sys. v. Shaw Group, Inc. , 540 F. Supp. 2d 464, 473 (S.D.N.Y. 2008)
(finding no scienter when informants offered no information “from which one could infer that either of the individual defendants knew or had reason to know anything about the mistaken application of [FASB guidance]”). 69
68 See also In re Elan Corp. Sec. Litig. , 543 F. Supp. 2d 187, 217 (S.D.N.Y. 2008). 69 See also In re Am. Exp. Co. Sec. Litig. , 2008 WL 4501928, at *8 (S.D.N.Y. Sept. 26, 2008) aff’d sub nom. , Slayton v. Am. Exp. Co. , 604 F.3d 758 (2d Cir. 2010) (finding no scienter when “Plaintiffs . . . failed to allege any facts showing that the confidential sources . . . had any contact with the Individual Defendants or would have knowledge of what they knew or should have known during the Class Period”); In re Elan , 543 F. Supp. 2d at 220 (holding that allegations based on confidential sources were insufficient to establish scienter when there were no facts to establish that the confidential sources would have known what information was communicated to senior executives).
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4. Competing Inferences Under Tellabs
In PXRE , a case directly on point, the Court explained that where (as here) plaintiffs fail
to allege that defendants were motivated to obtain a “concrete and personal” benefit, “‘a number
of competing inferences regarding scienter arise.’” 600 F. Supp. 2d at 534 (quoting Dynex , 531
F.3d at 197). “One of these competing inferences,” the Court noted, “is that Defendants, without
motive to defraud, simply failed . . . to calculate accurately” the impact of unique, unanticipated
events. In PXRE , it was the “full extent of losses that were incurred by the unique phenomenon presented by the 2005 hurricane season.” Id. In this case, it was the unpredictable volatility and
consequences of the “unique phenomenon” of the 2007-2009 economic downturn.
Considering the dramatic upheaval in the financial markets throughout the Class Period,
and the efforts of large corporations and financial institutions to respond to an unprecedented and
rapidly shifting economic environment, by far the most compelling inference is that the
Exchange Act Defendants had no motive to defraud, but simply did not, and could not, predict
with the precision desired by Plaintiff, at the time desired by Plaintiff, the full impact that the
ongoing crises would have on GECC and GE. See e.g , SAC ¶¶ 162, 252(a).
Similarly, because Plaintiff fails to plead conscious misbehavior or recklessness, the opposing non-culpable inference is much more cogent and compelling: during a time of “utmost unprecedented uncertainty in the financial markets” (SAC ¶ 85), GE attempted in good faith to make appropriate disclosures. But just like every financial institution, just like every governmental regulator, and just like almost every investor, GE was unable to predict just how long-lasting, volatile, and punishing the downturn would be. Much as Plaintiff wishes – and claims in its SAC – that GE should have predicted earlier the actual impact of the economic
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crises on the businesses and earnings of GECC (see e.g. , SAC ¶¶ 162, 252(a)), it is black-letter
law that the federal securities laws do not demand clairvoyance. 70
Further, GE’s repeated, candid disclosures of risks relating to GE and GECC’s performance and to GECC’s issuance of CP resulting from unpredictable and volatile market conditions – the very risks Plaintiff contends that the Exchange Act Defendants concealed – negates the inference of scienter proposed by Plaintiff that GE “knew of these negative facts throughout the Class Period and failed to disclose them to investors.” SAC ¶ 303. PXRE , 600 F.
Supp. 2d at 533-34.
Finally, for all the reasons set forth in Point I.A.2., supra , Plaintiff’s purported inference of scienter derived from its new CP-related allegations – that GE intentionally concealed an inability to fund itself in order to avoid disclosing a purported liquidity crisis – fails to articulate a cogent, much less compelling, inference of scienter. Similarly, with respect to GE’s participation in CPFF and TLGP, the competing inference of non-fraudulent intent – that GE participated in CPFF and TLGP not because GE was unable to fund itself but because GE was concerned about the competitive advantage other institutions would enjoy if GE was not eligible to participate – is far more compelling. Id.
B. Plaintiff Fails to Plead Particularized Facts Demonstrating the Falsity of the Exchange Act Defendants’ Statements as Required by Rule 9(b) and the PSLRA
Plaintiff’s 1934 Act claims must satisfy the heightened pleading requirements of Rule
9(b) and the PSLRA. 71 Here, Plaintiff attempts to support its 1934 Act claims with a series of
70 See Novak , 216 F.3d at 309 (“Corporate officials need not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them.”) (citing Denny v. Barber , 576 F.2d 465, 470 (2d Cir. 1978)).
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block quotes from SEC filings, press releases, and media interviews of GE senior management
during the Class Period. As set forth below, Plaintiff fails to identify a single actionable
misstatement or omission in 56 pages. Furthermore, Plaintiff fails to identify which of the many
statements in the block quotations are false or misleading (see, e.g. , SAC ¶¶ 166-80) and then
recites a litany of wholly conclusory assertions that the block-quoted statements were fraudulent.
See SAC ¶ 181. 72 This “laundry list” pleading fails to meet the level of particularity required to
state a securities fraud claim. See, e.g. , In re Citigroup Inc. S’holder Deriv. Litig. , 2009 WL
2610746, at *10 & n.19 (S.D.N.Y. Aug. 25, 2009) (Stein, J.) (holding that plaintiffs failed to satisfy Rule 9(b) and the PSLRA because they failed to specify “which of the scores of statements contained in the quotations plaintiffs allege to be fraudulent”). 73
In addition, as set forth below, Plaintiff fails to plead facts sufficient to show that a
single challenged statements was false when made.
1. Statements Concerning the AAA Rating
Plaintiff alleges that, starting on September 25, 2008 and continuing through the
Class Period, each of the Exchange Act Defendants’ statements concerning GE’s commitment to
71 Under Rule 9(b), a complaint alleging securities fraud must “(1) specify the statements that the Plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Rombach v. Chang , 355 F.3d 164, 170 (2d Cir. 2004). Additionally, the PSLRA requires that plaintiffs “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading” and “state with particularity facts giving rise to a strong inference that a defendant acted with the required state of mind.” See 15 U.S.C. § 78u-4(b)(1)(B); 15 U.S.C. § 78u-4(b)(2). 72 See also SAC ¶¶ 196, 200, 203, 218, 231, 246, 252, 256, 262, 272, 278 (alleging that Exchange Act Defendants’ statements “were false and misleading for the reasons set forth in ¶ 181”). 73 See also In re Alcatel Sec. Litig. , 382 F. Supp. 2d 513, 534 (S.D.N.Y. 2005) (dismissing claims when plaintiffs failed “to make it clear what portion of each quotation constitutes a false representation, or which statements link up with which issues in the laundry list”).
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maintaining the AAA rating was false and misleading because on March 12, 2009, GE’s credit
rating was downgraded from AAA to AA+. 74 This improperly pleads fraud by hindsight. See
Novak , 216 F.3d at 309 (“we have refused to allow plaintiffs to proceed with allegations of
‘fraud by hindsight’”) (quotation omitted); Denny , 576 F.2d at 470 (allegations of fraud by hindsight do not state a securities fraud claim).75 These allegations also do not support a claim
under the 1934 Act because Plaintiff alleges no facts sufficient to show that the Exchange Act
Defendants knew or should have known that any of the statements concerning the AAA rating
were false or misleading when made. See supra Points I.A.2. and I.B. 76
Plaintiff also alleges that the Exchange Act Defendants’ statements about maintaining the
AAA rating were false and misleading because “the Company was aware of the serious threat to
its AAA credit rating including the rating agencies’ conditioning GE’s maintenance of its AAA
credit rating on [GECC] earning $5 billion in FY 2009.” SAC ¶ 252(a); see also SAC ¶¶ 218(a),
231(a), 292. This claim fails for several reasons. First, Plaintiff does not, and cannot, point to a
74 See SAC ¶¶ 181(d) (September 25, 2008 “statements with respect to GE’s AAA credit rating” were false and misleading because “the truth . . . was ultimately demonstrated by the S&P and Moody’s downgrades”). Plaintiff repeats this allegation for each allegedly false and misleading statement concerning the AAA credit rating. See SAC ¶¶ 196, 218, 231, 246, 252, 262, 272. 75 Similarly, Plaintiff’s allegations in SAC ¶¶ 181(e), 181(g), 196(b), 218(b) and 300 rely on disclosures subsequently made at the March 19, 2009 investor conference and therefore also impermissibly plead fraud by hindsight. See supra Point I.B.1.; Xerion Partners I LLC v. Resurgence Asset Mgmt., LLC , 474 F. Supp. 2d 505, 518 (S.D.N.Y. 2007); aff’d sub nom. , Bay Harbour Mgmt. LLC v. Carothers , 282 F. App’x 71, 76 (2d Cir. 2008) (holding that plaintiffs failed to plead facts sufficient to show that defendants’ statements were false when made because they improperly relied on write-downs that occurred months later to “conclude that [earlier] statements… must have been false when made”). 76 Further, the unadorned assertion that “the Company was… aware that,” inter alia , “earnings . . . would remain dramatically lower than forecast at GE Capital . . . and that those circumstances resulted in their being grave threats to GE’s AAA rating” (SAC ¶ 181(d)) lacks particularity for the reasons discussed above – i.e. , Plaintiff has not pleaded facts sufficient to show that the Exchange Act Defendants were aware of this allegedly contradictory information when they made the statements concerning the AAA rating. See supra Points I.A.2. and I.B.
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single document or report – much less one that the Exchange Act Defendants were aware of on
the dates of the allegedly false statements about GE’s credit rating – showing that GECC would
be unable to meet its earnings target or that GECC not meeting this target would result in a
downgrade.
Second, in alleging that the Exchange Act Defendants concealed “very real threats to
GE’s credit rating,” Plaintiff completely ignores GE’s repeated, explicit disclosures throughout
the Class Period cautioning investors that GE could not guarantee maintaining the AAA rating
for a variety of specific detailed reasons, including that the rating depended on factors beyond
GE’s control. See, e.g. , supra pp. 13-15, 19-20.
Further, Mr. Immelt’s January 23, 2009 statements concerning GE’s ability to
maintain the AAA rating (see SAC ¶ 252(a)) were not, and could not, be false and misleading, because the risks to the AAA rating that Plaintiff contends were concealed – that GECC’s earnings might be lower than anticipated and that lower earnings might negatively impact GE’s ability to maintain the AAA rating – had already been publicly disclosed by GE and S&P. See supra pp. 13-15, 19-20. 77 Finally, Plaintiff erroneously
asserts that statements in GE’s January 27, 2009 press release were false and misleading
because “the Exchange Act Defendants knew or recklessly disregarded the fact that a
77 See Standard & Poor’s, General Electric Co, GECC Outlooks to Negative On Difficult 2009 Prospectus; Ratings Affirmed (Dec. 18, 2008) (Exh. 52) stating “[w]e would reexamine our credit opinions if, for example, GE failed to generate free cash flow (after dividends and assets sales) in 2009 or 2010. This would likely require a combination of events, which could include: net earnings below the $14 billion area, which could occur if GECC’s earnings are much weaker than the $5 billion that GE expects; a reduction of 25 basis points or more in the industrial gross margin; and GE’s being unsuccessful in managing working capital or asset sales in 2009.” See Garber v. Legg Mason, Inc. , 537 F. Supp. 2d 597, 611 (S.D.N.Y. 2008) (aff’d , 347 F. App’x 665 (2d Cir. 2009) (“‘It is well-established law that the securities laws do not require disclosure of information that is publicly known.’”) (quoting In re Progress Energy, Inc. , 371 F. Supp. 2d 548, 552-53 (S.D.N.Y. 2005)).
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downgrade in GE’s credit rating would have a significant impact on the Company’s cost
of borrowing and its stock price.” SAC ¶¶ 253-55. It is hardly conceivable that investors
did not fully understand the negative impact of a downgrade – an impact repeatedly
described by GE throughout the Class Period. See supra pp. 13-15, 19-20. 78
2. Statements Concerning the Dividend
Plaintiff alleges that the Exchange Act Defendants’ statements during the Class Period concerning GE’s commitment to maintaining its $0.31 per share quarterly dividend and its
“financial strength to protect [the] dividend to shareholders” (SAC ¶ 181(i)) 79 were false and
misleading because GE could not afford to pay the dividend as a result of GECC’s “dire financial
straits” and “inability” to sell its commercial paper in the private market without government
backing. SAC ¶¶ 181(i), 164. This claim can be dismissed on any one of several independent
grounds.
First, the Second Circuit has held that statements regarding a company’s intent to pay
dividends in the future are forward-looking statements or statements of opinion, and, therefore,
immaterial as a matter of law. See In re IBM Corp. Sec. Litig. , 163 F.3d 102, 107-09 (2d Cir.
1998). In IBM , plaintiffs brought an action under Section 10(b) and Rule 10b-5, claiming that
“IBM made various untrue statements when it announced that its dividend was secure and that it had no plans to cut it.” Id. at 106. The Second Circuit affirmed dismissal of these claims on
78 Furthermore, because of GE’s repeated disclosure of the risks related to the maintenance of its credit rating (see supra pp. 13-15, 19-20), “further disclosure would not have significantly altered the total mix of information made available” and, therefore any alleged misstatements or omissions on this topic are immaterial as a matter of law. In re IAC/InterActiveCorp Secs. Litig. , 478 F. Supp. 2d 574, 594 (S.D.N.Y. 2007) (quotation omitted). 79 See also SAC ¶¶ 184-85, 190, 192, 196-97, 200-01, 203, 207-08, 218, 220-21, 225-26, 228, 231-32, 234, 240, 243, 245-46, 248-49, 251-52, 257, 262, 269, 272, 275, 278 (alleging that Defendants’ statements concerning payment of GE’s dividend in 2009 were false and misleading).
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summary judgment because “[t]he statements challenged by plaintiffs [were] expressions of
optimism or projections about the future. Each statement plaintiffs challenge in this action
concerns an uncertain future event – the payment of dividends.” Id. at 107.
Second, even if these statements were potentially actionable, Plaintiff’s allegations would
still not support its claims because they fail to satisfy Rule 9(b) and the PSLRA. Specifically,
Plaintiff does not allege any facts showing that the Exchange Act Defendants knew, at the time
of any of the challenged statements, that GE would be unable to maintain the $0.31 quarterly
dividend. Indeed, throughout the Class Period, GE paid the quarterly dividend of $0.31 per share
that Plaintiff claims it was unable to pay. 80
Third, as set forth on pp. 13-14 supra , at the very start of the Class Period on October 1,
2008, GE explicitly warned investors that “in the event of material future deterioration in business conditions, our board may determine to reduce or eliminate our common stock dividend.” Exhs. 1 and 10 at S-7. 81
Finally, the public record flatly contradicts Plaintiff’s far-fetched allegation that GE’s statements about its plans to pay the dividend in 2009 were false and misleading because frozen
CP markets made GECC unable to fund itself and deprived GE of cash necessary to pay the dividend. SAC ¶¶ 181(i), 164. Plaintiff’s claim is belied by the amount of GE’s cash and cash equivalents, which increased in the second quarter of 2009 to over $52 billion from $46.8 billion
80 General Electric Co., Annual Report (Form 10-K), at 19 (Feb. 18, 2009) (Exh. 7); General Electric Co., Quarterly Report (Form 10-Q), at 3 (May 1, 2009) (Exh. 53). 81 Because of GE’s repeated warnings that its board might consider reducing or eliminating the dividend under certain circumstances, any alleged misstatements or omissions on this topic are immaterial as a matter of law. See IAC , 478 F. Supp. 2d at 594.
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in the first quarter of 2009 – higher than they had been at any time during the Class Period. 82
As GE explained on February 27, 2009, GE’s board, in the exercise of its business judgment, decided to reduce payment of the dividend as a “prudent measure to further enhance [GE’s] balance sheet and provide [GE] with additional flexibility for potential future opportunities.” 83
And, for the reasons discussed in Point I.A.2., infra , Plaintiff’s conclusory assertion that GE was
unable to fund itself is not supported by Mr. Paulson’s book and is readily controverted by
Federal Reserve Board data and media reports. Accordingly, Plaintiff cannot plausibly contend
that the decision to reduce the dividend was anything but a well-reasoned capital allocation
decision. IBM , 163 F.3d at 107 (“Under New York law, corporations cannot guarantee the payment of dividends because the directors of a corporation owe a duty to shareholders to declare dividends only when it is in the best interests of the corporation to do so.”). 84
Plaintiff also alleges that Mr. Immelt misled GE shareholders on February 6, 2009 by
stating: “‘The Board and I believe that it is in the best interests of the Company’s shareholders
to continue to pay an attractive dividend.’” SAC ¶¶ 257-62. But this statement is completely
accurate. And this statement is immediately followed by cautionary language that warned
investors of the exact risk that Plaintiff claims was concealed (i.e. , that GE was evaluating its
plan to maintain the quarterly dividend at 2008 levels). Specifically, Mr. Immelt cautioned:
82 General Electric Co., Quarterly Report (Form 10-Q), at 5 (Aug. 3, 2009) (Exh. 54). See IBM , 163 F.3d at 108 (“it was not economically necessary for IBM to reduce the dividend because IBM maintained sufficient cash balances to pay the . . . dividend in full. As a result, at the time these statements were made they were truthful.”). 83 General Electric Co., Press Release (Form 8-K, EX-99), at 1 (Feb. 27, 2009) (Exh. 35). 84 Plaintiff contends that Defendants’ statements regarding the fact that GE’s Board has approved the plan to maintain the dividend at $0.31 a share per quarter through 2009 were false and misleading. SAC ¶ 181(i). But these statements are not actionable because they were accurate statements of historical fact. In re IAC , 478 F. Supp. 2d at 594 (holding that accurate statements of historical fact are not actionable under the securities laws).
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“The Board and I will continue to evaluate the Company’s dividend level for the second half of
2009 in light of the growing uncertainty in the economy . . . and the recent announcements by the
rating agencies.” SAC ¶ 257.
3. Statements Concerning Earnings and Loan Loss Reserves
Plaintiff alleges – again, in wholly conclusory terms – that GE’s statements describing its
earnings were false and misleading because GE failed “to record adequate loan loss reserves and
impairments.” SAC ¶¶ 181(b). 85 Plaintiff also contends that Defendants’ statements in the Form
10-Q, filed October 30, 2008, concerning GE’s “allowance for loan losses of $4.6 billion . . .
‘representing [GE’s] best estimate of probable losses inherent in the portfolio and reflecting the current credit and economic environment’” (SAC ¶ 198) were false and misleading for the same reasons. See SAC ¶ 200.
But Plaintiff fails to allege a single particularized fact showing that (i) GE’s reserves
were inadequate; or (ii) the Exchange Act Defendants knew or should have known, at the time of
the statements, that earnings were overstated because of inadequate loan loss reserves or a failure
to recognize certain impairments. See supra Point I.A.2.; infra Point II.A.2.; Coronel v. Quanta
Capital Holdings, Ltd. , 2009 WL 174656, at *27 (S.D.N.Y. Jan. 26, 2009) (dismissing similar
claims and reasoning that “[s]imply put, because the SAC alleges no specific facts demonstrating
that Defendants possessed – at the time they made the allegedly false statements concerning the
reserve amounts – information contradicting their statements, fraud has not been shown”); id. at
85 See also SAC ¶¶ 246(a), 306.
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*29 (“the Complaint has not shown with any particularity that the Company’s reserve estimates
were false and that Defendants knew that they were false.”). 86
Moreover, the SAC’s attack on GE’s disclosures regarding loan losses and impairments fails because it fails to allege (1) when and how much loan loss reserves should have been increased or impairments should have been taken and (2) why the alleged failure to increase reserves or take impairments earlier was so egregious that it amounted to fraud.
In Sterling Heights Police & Fire Ret. Sys. v. Vodafone Group Pub. Ltd. Co. , 655 F.
Supp. 2d 262 (S.D.N.Y. 2009), Judge Castel dismissed a complaint for lack of particularity when the principal allegation was that the defendants failed to take timely impairment charges for the company’s declining goodwill. Id. at 272. The Court rejected the argument that the impairment
should have been recorded sooner on the same grounds urged by the GE Defendants that the
plaintiffs were unable to point to a specific time when an impairment charge should have been
taken:
The Complaint in this action fails to plead a viable claim of securities fraud. It is undermined by a failure to allege at what point in time an impairment charge should have been taken and which specific losses known to the Company should have triggered an impairment charge. It contains a litany of non-actionable allegations that can fairly be characterized as broad and conclusory.
Id. at 269-270.
As in Vodafone , Plaintiff here fails to specify when and by how much loan loss reserves should have been increased or impairments should have been recognized. And, as in Vodafone ,
86 See also Xerion Partners I LLC v. Resurgence Asset Mgmt. , LLC, 474 F. Supp. 2d 505, 518 (S.D.N.Y. 2007); aff’d sub nom. Bay Harbour Mgmt. LLC v. Carothers , 282 F. App’x 71, 76 (2d Cir. 2008) (dismissing Section 10(b) claim alleging overvaluation of certain assets when plaintiffs relied on subsequent write-downs to show falsity of earlier statements. The court explained, “Plaintiffs have failed to plead with particularity sufficient facts to show why any of the [challenged] statements… were false when made.”).
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Plaintiff attempts to show that the Defendants’ statements during the Class Period were
fraudulent by referring to disclosures made on March 19, 2009, months after the allegedly false
statements were made. SAC ¶¶ 304-06. But, just as in Vodafone , Defendants’ failure to predict the rapidly changing business and market conditions of the Class Period does not amount to fraud. 655 F. Supp. 2d at 269 (“management’s failure to accurately forecast evolving business conditions does not equate to fraudulent conduct”).87
Similarly, in City of Omaha Civilian Employees’ Ret. Sys. v. CBS Corp. , 2010 WL
1029290, at *9 (S.D.N.Y. Mar. 16, 2010), Judge Castel dismissed securities fraud claims when the plaintiffs did “not point to any triggering event” requiring an impairment charge and did not
“set forth a coherent explanation as to what facts were known to the defendants in February 2008 that required them to test for an impairment, and reasoning that “[t]he Complaint does not… plausibly allege or plead with particularity why the impairment charge should have been recognized [earlier].”
In addition, statements concerning estimates of appropriate reserve levels are statements of opinion and, therefore, not actionable, absent allegations that the speaker actually believed that his or her opinion was wrong. Fait v. Regions Fin. Corp. , 2010 WL 1883487, at *5
(S.D.N.Y. May 10, 2010) (“Whether [defendant] had adequate reserves for its predicted loan losses is not a matter of objective fact. The reserves instead were statements of opinion by defendants as to the portion of the stated value of [defendant’s] loans that would prove to be uncollectible.”). Plaintiff must – but fails to – allege with particularity facts showing that these
87 For the same reasons, Plaintiff’s other allegations concerning GE’s loan loss reserves, impairments and earnings fail to support a claim. See SAC ¶¶ 162, 163, 196, 198, 200, 211, 212, 218, 228, 236-38, 240-42, 244, 246, 267-68, 272, 276, 278, 283.
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opinions were objectively and subjectively false. 88 It is not enough for Plaintiff to allege that
Defendants’ opinions concerning loan loss reserves are wrong. See CIBC , 2010 WL 961596, at
*11 (dismissing complaint when “Plaintiffs d[id] not allege that Defendants knew of the error [in
calculating exposure to sub-prime assets] and used it to mislead others. One cannot reasonably
conclude that, because the [sub-prime] calculations were mistaken, Defendants had the
subjective intent to defraud.”).
4. Statements Concerning GECC’s Exposure to Sub-Prime and Below-Investment-Grade Debt
Plaintiff’s allegation that the Exchange Act Defendants failed to disclose additional
information concerning GECC’s exposure to sub-prime and below investment grade debt (SAC
¶¶ 299-305) fails to state a claim of securities fraud. GE had no duty to disclose individual line
item exposures to specific types of debt (see also infra Point II.C.) and Plaintiff does not allege with any specificity how the Exchange Act Defendants’ statements were inaccurate or incomplete without that disclosure. Absent an express duty to disclose, courts routinely reject securities fraud claims based on allegations that a company failed to break out details concerning its financial exposures. See Nolte v. Capital One Fin. Corp. , 390 F.3d 311, 316-17 (4th Cir.
2004) (company had no duty to specify the size of its subprime portfolio when the company had
88 See In re Salomon Analyst Level 3 Litig. , 350 F. Supp. 2d 477, 489 (S.D.N.Y. 2004) (“It is well established that liability under section 10(b) can be predicated on statements of opinion, where it can be shown not merely that a proffered opinion was incorrect or doubtful, but that the speaker deliberately misrepresented his actual opinion. However, to survive a motion to dismiss on a false statement of opinion claim, a plaintiff must allege with particularity provable facts to demonstrate that the statement of opinion is both objectively and subjectively false. It is not sufficient for these purposes to allege that an opinion was unreasonable, irrational, excessively optimistic, not borne out by subsequent events, or any other characterization that relies on hindsight or falls short of an identifiable gap between the opinion publicly expressed and the opinion truly held.”) (citing Virginia Bankshares, Inc. v. Sandberg , 501 U.S. 1083, 1093-98 (1991) and Bond Opportunity Fund v. Unilab Corp. , 2003 WL 21058251, at *5 (S.D.N.Y. May 9, 2003)) (quotations omitted).)
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met its regulatory obligations by disclosing its capital and loan loss reserves); CIBC , 2010 WL
961596, at *11 (granting motion to dismiss because, inter alia , the plaintiff did not “identify any obligation requiring Defendants to make a complete disclosure of all CIBC’s mortgage-backed holdings”); In re Axis Capital Holdings Ltd. Sec. Litig. , 456 F. Supp. 2d 576, 590 (S.D.N.Y.
2006) (“Absent identification of some duty to disclose and specific allegations as to how [the defendant]’s existing disclosure was rendered false, plaintiffs fail to state a claim upon which relief may be granted.”).
Moreover, valuations – particularly, valuations of sub-prime assets – are opinions.
Tsereteli v. Resident Asset Securitization Trust 2006-A8 , 692 F. Supp. 2d 387, 393 (S.D.N.Y.
2010) (holding that valuation of subprime loans underlying mortgage-backed securities was
“subjective opinion based on the particular methods and assumptions the appraiser use[d]”);
CIBC , 2010 WL 961596, at *11 (holding that defendant’s valuation of subprime assets was an opinion “even assuming the [valuation] was neither forward-looking nor accompanied by appropriate cautionary language.”) 89 Accordingly, Plaintiff’s failure to allege particularized facts
showing that the Exchange Act Defendants’ statements about GE’s sub-prime assets were false
when made, and that the Exchange Act Defendants made those statements with scienter, is fatal
to its claim.
Independently, this claim fails because Plaintiff pleads fraud by hindsight when it asserts that the Exchange Act Defendants engaged in a “scheme” to conceal GECC’s exposure to sub- prime and below-investment-grade debt throughout the Class Period. See SAC ¶¶ 162(a),
181(e), 181(g), 196(b), 218(b), 303-04 (all relying on statements made at the March 19, 2009
89 See also In re Salomon Analyst Level 3 Litig. , 373 F. Supp. 2d 248, 251-52 (S.D.N.Y. 2005) (“[V]aluation models depend so heavily on the discretionary choices of the modeler . . . that the resulting models and their predictions can only fairly be characterized as subjective opinions.”).
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investor conference to establish falsity). It is axiomatic that “[m]ere allegations that statements
in one report should have been made in earlier reports do not make out a claim of securities
fraud.” Acito v. IMCERA Group, Inc. , 47 F.3d 47, 53 (2d Cir. 1995).
Erroneously equating risk of loss with the face value of sub-prime and below-investment- grade assets in GECC’s loan portfolios, Plaintiff also claims that GE was required to disclose
“the poor credit quality of GECC’s borrowers” because it was “a negative fact[]” (SAC ¶ 303) that was “crucial to determining, among other things, the value of GE’s balance sheet and the loss exposure facing GE.” SAC ¶ 305. To establish materiality, however, Plaintiff must show “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.”
ECA & Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co. , 553 F.3d 187, 197 (2d
Cir. 2009) (internal quotations omitted). 90 But given GE’s myriad disclosures concerning the
key facts relating to the risk of loss in its portfolios, and GE’s regular, meaningful, and specific warnings regarding the risks facing GECC’s portfolio and business operations (see supra pp. 13-
15, 19-20), and GE’s regular provision of detailed information concerning its loan portfolios (see supra pp. 13-14, 16-19, 20) “no reasonable investor could have been misled” concerning the risk
of loss from GE’s portfolio of assets. In re IAC , 478 F. Supp. 2d at 593. 91
90 Neither CWs 5 nor 10 – who merely describe “segments of GE Capital’s commercial borrowers as being ‘second-and-third-tier manufacturers’ or ‘distressed’ corporate borrowers” (SAC ¶ 181(e)) – supply the requisite particularity.
91 See also Garber v. Legg Mason, Inc. , 537 F. Supp. 2d 597, 612-13 (S.D.N.Y. 2008) (plaintiff failed to plead materiality of alleged omissions when defendants had disclosed the very risks allegedly concealed), aff’d , 347 F. App’x 665 (2d Cir. 2009); Fulton County Empl. Ret. Sys. v. MGIC Inv. Corp. , 2010 WL 601364, at *17 (E.D. Wis. Feb. 18, 2010)(“[B]ecause defendants disclosed that liquidity was a concern, stated that C-BASS had been subject to increasing margin calls, and made truthful statements regarding the amount of cash that remained available, Draghi’s failure to also disclose the precise dollar amount of the margin calls that C-BASS had
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Finally, the SAC does not contradict Mr. Sherin’s statement on October 10, 2008 regarding GE’s lack of exposure to SIVs, CDOs and CDSs. SAC ¶ 196(b). Instead, all that
Plaintiff does is point to a disclosure five months later that “GE was exposed to substantial losses related to risky assets in its loan portfolios.” Id. But this is a non sequitur. That disclosure,
concerning GE’s exposure to sub-prime borrowers and non-investment grade issuers, says
nothing about SIVs, CDOs and CDSs and in no way contradicts Mr. Sherin’s statement.
5. Statements concerning GECC’s CP program
The allegation underlying all Plaintiff’s new allegations concerning GECC’s CP program
– that “GE was having difficulty selling its commercial paper in the private market and thus
funding itself” (e.g. , SAC ¶ 122) – lacks the factual support required under Rule 8(a), much less that required under Rule 9(b) and the PSLRA. Plaintiff fails to plead any facts showing that GE was unable to meet its short-term funding needs due to a disruption in the CP market, much less particularized facts concerning on what day(s) or by how much GE failed to meet its funding needs at any time during the Class Period, or any other indicia of funding shortfall. Absent this factual support, Plaintiff fails to state a claim based on GE’s alleged funding difficulties. See Yu v. State Street Corp. , 686 F. Supp. 2d 369, 376-77 (S.D.N.Y. 2010) (dismissing claim that defendants overvalued the fund’s mortgage-related holdings “because the Complaint [did] not aver a single concrete fact to suggest that defendants deviated from the prescribed valuation methods.”); Caiafa v. Sea Containers Ltd. , 525 F. Supp.2d 398, 410-11 & n.10 (S.D.N.Y. 2007), aff’d , 331 F. App’x 14 (2d Cir. 2009) (dismissing securities fraud claim because the complaint
received during the opening days of the third quarter cannot reasonably be considered an omission that rendered his statement about the amount of cash remaining misleading.”).
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did not specify the amount by which certain assets should have been written down, and failed to
allege when the write-downs should have occurred). 92
Plaintiff also alleges that GE “made untrue statements and omitted material facts in touting the benefits of GE’s AAA credit rating given that as of September 8, 2008, GE Capital was unable to sell commercial paper in the private market.” SAC ¶ 115. This allegation fails to state a claim because Plaintiff has not pleaded facts demonstrating that the company was “unable to fund itself,” (see supra Point I.A.2.), much less that such funding difficulties bore any relation to GE’s AAA rating. Indeed, on September 25, 2008, Moody’s and S&P reaffirmed GE’s AAA rating, and Moody’s stated that “GECC has been successful at meeting its funding needs in both the short term and long term capital markets worldwide.” 93
Finally, Mr. Immelt’s statements during the September 25, 2008 GE conference call that
“‘[w]e have great CP [commercial paper] programs,’ (SAC ¶ 171a), ‘[t]he liquidity profile has
been strong; it’s now stronger,’ and that “we feel very secure about how the funding looks”
(SAC ¶ 177) are non-actionable statements of corporate optimism and puffery. 94 And the
statement on October 8, 2008, that the “unsecured commercial paper markets [] we believe will
92 Plaintiff’s allegations in SAC ¶¶ 11, 112a, 113, 122, 129, 138, 138b, 162, 181(c) similarly fail to support a securities fraud claim. 93 Richard J. Lane and Mark L. Wasden, Moody’s Comments on GE initiatives , Moody’s Investors Service, September 25, 2008 (Exh. 55). See also Robert Schulz and Scott Sprinzen, GE and General Electric Capital Corp. ‘AAA/A-1+’ Ratings Affirmed; Outlook Stable , September 25, 2008 (“The ratings on Fairfield, Conn.-based General Electric Co. (GE) reflect its excellent business risk profile, the minimally leveraged balance sheet for its industrial operations, its significant cash flow and liquidity . . .”; “GE has substantial liquidity”). (Exh. 66) Information already known to the market cannot sustain a claim under the federal securities laws. See Garber , 537 F. Supp. 2d at 611 (“‘It is well-established law that the securities laws do not require disclosure of information that is publicly known.’”) (quotation and citation omitted). 94 See Rombach v. Chang , 355 F.3d 164, 174 (2d Cir. 2004) (“expressions of puffery and corporate optimism do not give rise to securities violations.”).
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continue to be a reliable source of short-term financing” (SAC ¶ 183b) is an expression of
opinion for which Plaintiff fails to allege specific facts showing that Mr. Immelt did not believe
it when made. See infra p. 60. 95
6. Statements Concerning the October Offering
Plaintiff claims that Mr. Immelt’s statements regarding the possibility of a new equity offering were fraudulent because such a “significant and complex” offering must have been in the “discussion stages as of September 25, 2008,” and, therefore, “Immelt’s denials of GE’s plans for an equity offering were necessarily false or misleading when made.” SAC ¶ 181(a).
Plaintiff’s claim should be dismissed not only for failure to meet the heightened pleading requirements of the PSLRA and Rule 9(b) but also because this claim is already the subject of a pending action before Judge Sullivan, Waters v. General Electric Co. , 08-CV-8484 (RJS)
(S.D.N.Y.).
In Waters , plaintiffs, on behalf of a proposed class of purchasers of GE common stock
from September 25, 2008 through October 1, 2008, alleged that Defendants GE, Immelt, and
Sherin (the “Waters Defendants”) violated Section 10(b) and Rule 10b-5 by making false and
misleading statements concerning the possibility of, and need for, the October Offering. See e.g. , Waters Compl. ¶¶ 82, 107-09, 120 (Exh. 57). Lead Plaintiff in this action – that is not a
95 Plaintiff also claims that Mr. Sherin’s statement on the October 10, 2008 investor call that “we don’t plan on using [CPFF]” was false and misleading because GE was “very concerned it would not have access to the TLGP” and thus lobbied Mr. Paulson to alter the TLGP eligibility rules. SAC ¶ 196(d). This allegation makes no sense. GE’s intention (or lack thereof) to take advantage of CPFF has nothing to do with GE’s eligibility for the TLGP. Further, given the extensive qualifying language accompanying Mr. Sherin’s statement such as “we’ll have to see what happens as we go forward here,” “we could use [CPFF] if we wanted to” and “I think that [CPFF] would be available to us and would . . . be certainly a priority in front of ever going to the bank lines” (SAC ¶ 193c), to the extent material, no reasonable investor could have been misled about the possibility that GE might use CPFF.
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member of the proposed class in Waters , but that purports to represent purchasers of GE common shares during the Waters Class Period (September 25, 2008 through October 1, 2009) 96
– brings an identical claim, alleging that the Exchange Act Defendants (that include the Waters
Defendants) violated Section 10(b) and Rule 10b-5 by misleading investors concerning GE’s
intention to engage in the October Offering and the need for that offering. See, e.g. , SAC
¶¶ 162(d), 177, 181(a), 196(a), 200.97 On March 15, 2010, the Waters plaintiffs filed a third
amended complaint. Exh. 59. The only purportedly “new” allegations in that complaint
concerned GECC’s CP program and the alleged Paulson-Immelt conversations of September
2008 – the very same allegations that Plaintiff here included in its SAC. Defendants’ motion to
dismiss the Waters action is sub judice.
Plaintiff’s attempt to assert the Waters claim here violates the PSLRA. Under 15 U.S.C.
§ 78u-4(a)(3)(A)(i), on October 3, 2008, the Waters plaintiffs published notice to potential class members informing them of their right to move to serve as lead plaintiff. Exh. 60. The Waters
plaintiffs’ motion to be appointed lead plaintiff was unopposed, and, on January 5, 2009, Judge
Sullivan appointed lead plaintiffs. Plaintiff cannot now ignore the existence of the Waters action and the appointment of lead plaintiffs in that action and assert the same claims on behalf of the same class here, thereby forcing the GE Defendants to defend, and this Court to decide, the same claim now pending before another Judge in this District.
96 Lead Plaintiff’s Certification, attached as Exhibit C to the Declaration of Jeffrey C. Block in support of the Motion of State Universities Retirement System of Illinois for Consolidation, Appointment of Lead Plaintiff, and Approval of its Selection of Counsel as Lead Plaintiff, certifies that Lead Plaintiff in this action bought GE shares for the first time during the Class Period on October 2, 2008. Exh. 58. 97 Lead Plaintiff, who purchased shares for the first time during the Class Period on October 2, 2008, cannot assert a claim based on GE’s purported failure to disclose its intention to undertake the share offering that took place the day before its share purchase, on October 1, 2008.
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Rather than repeat the arguments set forth by the Waters Defendants in their motion to
dismiss the Waters action, we respectfully refer the Court to the parties’ memoranda of law in the Waters action, attached as Exhibit 61 to the Danilow Decl. For all the reasons set forth in the
Waters defendants’ memoranda, Plaintiff’s allegations of misstatements related to the October
Offering – whether asserted in the Waters action or here – fail to support its claims under the
1934 Act and must be dismissed.
In addition, this Court should use its discretion under the “first-filed” doctrine to stay or
dismiss the duplicative claim asserted by Plaintiff here. 98
7. Statements by Messrs. Neal, Bornstein, and Cary
Finally, each of Plaintiff’s allegations of false and misleading statements by Defendants
Neal, Bornstein, and Cary – all made at GE’s December 2, 2008 Financial Services Investor
Meeting – fail to support Plaintiff’s claims. See SAC ¶¶ 206, 209-13, 216, 218.
Plaintiff quotes several statements made by Mr. Neal, but fails to specify which of these
statements, if any, were false or misleading, and offers no well-pleaded facts demonstrating the
falsity of those statements. SAC ¶¶ 206, 209, 212, 216. For example, Plaintiff alleges that
Mr. Neal’s statement “concerning GE Capital having ‘established a framework for GE Capital to
earn approximately $5 billion in 2009’ was false and misleading” given that “Neal failed to
disclose the fact that the $5 billion target had particular significance . . . .” SAC ¶ 218(a);
98 See , e.g. , Sotheby’s, Inc. v. Minor , 2009 WL 73134, at *1 (S.D.N.Y. Jan. 6, 2009) (“It is a well-settled principle in this circuit that where proceedings involving the same parties and issues are pending simultaneously in different federal courts the first-filed of the two takes priority.”) (quotation omitted); Lesavoy v. Lane , 304 F. Supp. 2d 520, 535-36 (S.D.N.Y. 2004) (“Under [the first-filed] doctrine, the Court has the inherent power to dismiss or stay [an] action in favor of the prior litigation presenting the same claims and issues.”) (quotations omitted), aff’d in part, vacated in part on other grounds sub nom. , Lesavoy v. Gattullo-Wilson , 170 F. App’x 721 (2d Cir. 2006).
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see also SAC ¶ 206. But Plaintiff has failed to allege particularized facts showing that Mr. Neal knew or should have known that GECC could not meet its earnings targets, or that failing to meet this target would result in a downgrade.
Mr. Neal’s December 2, 2008 earnings projections (SAC ¶¶ 209, 212) are non-actionable statements of opinion and optimism. In re IAC/InterActiveCorp Secs. Litig. , 478 F. Supp. 2d
574, 594 (S.D.N.Y. 2007) (citing, inter alia , In re Duane Reade Inc. Sec. Litig. , 2003 WL
22801416, at *6 (S.D.N.Y. Nov. 25, 2003), aff’d sub nom. , Nadoff v. Duane Reade, Inc. , 107 F.
App’x 250, 252 (2d Cir. 2004)). 99 And Mr. Neal’s accurate statements of historical fact
concerning GECC’s level of loan loss reserves in 2007 as compared to its loan loss reserves in
2008 (SAC ¶ 212) are also not actionable. IAC , 478 F. Supp. 2d 574, 594 (holding that
statements of historical fact are not actionable under the securities laws).
The two allegedly false and misleading statements by Mr. Bornstein similarly fail to
support Plaintiff’s claims. Plaintiff’s allegation that Mr. Bornstein’s statements about GECC’s
UK mortgage portfolio were false and misleading (SAC ¶ 218(b)) impermissibly pleads fraud by
hindsight (see supra Points I.B.1.) because Plaintiff premises the alleged falsity of those
statements solely on GE’s later disclosures on March 19, 2009. Id. Plaintiff also alleges that Mr.
99 Similarly, Mr. Sherin’s statements on September 25, 2008 concerning the strength and quality of GE Capital’s loan portfolios – including that “[w]e have a fantastic real estate portfolio. It’s very high quality” (SAC ¶ 172, 181(f); see also SAC ¶ 218) – is a quintessential example of corporate optimism and puffery that is not actionable under the securities laws. Rombach v. Chang , 355 F.3d 164, 174 (2d Cir. 2004) (“expressions of puffery and corporate optimism do not give rise to securities violations.”). Moreover, these statements are expressions of opinion for which Plaintiff fails to allege specific facts showing that Defendants did not believe the statements when made. See In re DRDGOLD Ltd. Sec. Litig. , 472 F. Supp. 2d 562, 569 (S.D.N.Y. 2007) (explaining that for a statement of opinion to be actionable, a plaintiff must plead “with particularity that defendants did not sincerely believe the opinion they purported to hold”); see also supra Point I.A.2. And Plaintiff’s reliance on confidential witness accounts is unavailing for the reasons discussed above. See supra Point I.A.3.
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Bornstein’s statement “that GE Capital ‘enjoyed a fairly benign loss environment’ [was] false
and misleading,” based on reports provided by certain CWs. But, as discussed in Point I.A.3.,
supra , the CW reports fail to show how any of the Exchange Act Defendants, much less Mr.
Bornstein in particular, knew or had reason to know that the challenged statements were false
when made, nor has Plaintiff pleaded facts showing the falsity of Mr. Bornstein’s statement.
Finally, Plaintiff alleges only one misstatement by Mr. Cary, namely, “[w]e feel pretty
good about our plans around both collections and our forecast for new volume.” SAC ¶ 218(d).
This is a non-actionable statement of opinion and optimism unaccompanied by particularized
allegations that Mr. Cary did not sincerely believe what he said. See In re DRDGOLD , 472 F.
Supp. 2d at 569 (S.D.N.Y. 2007).
C. Plaintiff Fails to Plead Loss Causation
A failure to plead loss causation is grounds to dismiss a Section 10(b) claim. See , e.g. ,
Lattanzio v. Deloitte & Touche LLP , 476 F.3d 147, 157-58 (2d Cir. 2007) (affirming dismissal
of securities fraud claim for failure to plead loss causation). To adequately allege loss causation,
“‘a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the
cause of the actual loss suffered,’ i.e. , that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.” Lentell v.
Merrill Lynch & Co. , 396 F.3d 161, 173 (2d Cir. 2005) (citation omitted) (affirming dismissal of securities fraud claim for failure to plead loss causation). But, “the logical link between the inflated share purchase price and any later economic loss is not invariably strong . . . [because] that lower price may reflect, not the earlier misrepresentation, but changed economic circum- stances, changed investor expectations, new industry-specific or firm-specific facts, conditions,
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or other events, which taken separately or together account for some or all of that lower price.”
Dura Pharms., Inc. v. Broudo , 544 U.S. 336, 341-43 (2005); 15 U.S.C. § 78u-4(b)(4).
Where, as here, “the plaintiff’s loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by the fraud decreases, and a plaintiff’s claim fails when it has not adequately ple[]d facts which, if proven, would show that its loss was caused by the alleged misstatements as opposed to intervening events.” Lentell , 396 F.3d at 174 (affirming dismissal) (internal quotation omitted). See also
Lattanzio , 476 F.3d at 157-158 (affirming dismissal of complaint because “Plaintiffs have not alleged facts to show that Deloitte’s misstatements, among others (made by Warnaco) that were much more consequential and numerous, were the proximate cause of plaintiffs’ loss; nor have they alleged facts that would allow a factfinder to ascribe some rough proportion of the whole loss to Deloitte’s misstatements.”) (citing Lentell, 396 F.3d at 177).100
During the Class Period, the S&P Index dropped by almost 50% from 1,209.18 101 to
784.04, bottoming out on March 9, 2009 at 676.53. 102 The Dow Jones Industrial Average
100 See also In re Merrill Lynch & Co. Research Reports Sec. Litig. , 568 F. Supp. 2d 349, 363-64 (S.D.N.Y. 2008) (dismissing securities fraud claim for failure to plead loss causation and holding that when plaintiff’s loss coincides with a general marketwide decline, “although plaintiffs need not quantify the fraud-related loss, they must “ascribe some rough proportion of the whole loss to [the alleged] misstatements” and “distinguish the alleged fraud from the ‘tangle of [other] factors’ that affect a stock’s price” (including, for example, “bursting of the Internet bubble” and “cratering of the internet market.”)); In re Radian Litig. , 2010 WL 1767195, at *8 (E.D. Pa. April 30, 2010) (“when the plaintiff’s loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by the fraud decreases”) (citing First Nationwide Bank v. Gelt Funding Corp. , 27 F.3d 763, 772 (2d Cir. 2004)). 101 The Court may take judicial notice of stock price “when assessing the sufficiency of the Plaintiffs’ loss causation allegations.” In re Moody’s Corp. Sec. Litig. , 599 F. Supp. 2d 493, 512 n.5 (S.D.N.Y. 2009) (citing Ganino v. Citizens Utils. Co. , 228 F.3d 154, 166 n.8 (2d Cir. 2000)). 102 Source: http://google.com/finance (Exh. 5).
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suffered a similar decline, dropping from 11,022.06 to 7,400.80, bottoming out on March 9, 2009
at 6,547.05. 103 But Plaintiff refuses to acknowledge this marketwide decline and instead asserts
that:
[t]he timing and magnitude of the common stock price decline [during the Class Period] negates any inference that the loss suffered . . . by . . . the Class was caused by changed market conditions, macroeconomic or industry factors or Company-specific facts unrelated to [the alleged fraud].
SAC ¶ 423; see also SAC ¶¶ 424-29.
Because Plaintiff fails to disentangle the effects of the alleged fraud from the general marketwide decline, its claims must be dismissed.
Further, practically the entire decline in GE’s shares during the Class Period occurred
before the date of the first allegedly corrective disclosure and therefore cannot possibly be
attributed to any “revelation” of any alleged fraud. GE’s stock closed at $25.68 on September
25, 2008 (the first day of the Class Period) and declined to $13.48 on January 22, 2009 (the day
before the first alleged corrective disclosure). Between the close of trading on January 22, 2009
and March 19, 2009 (the last day of the Class Period) GE’s stock declined only from $13.48 to
$10.13.
In addition, with respect to the post-January 22, 2009 decline in GE’s stock price,
Plaintiff does not even attempt to allege facts disentangling the effect (if any) of the alleged
corrective disclosures on GE’s stock price from the continuing marketwide decline resulting
from the unprecedented global financial crisis during the same period.
Furthermore, Plaintiff has failed to allege any actionable misstatements or omissions.
See supra Point I.B. Thus, the allegedly “corrective” disclosures (SAC ¶¶ 425-28) are not
103 Source: http://google.com/finance (Exh. 5).
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“corrective” because they do not show that any of Defendants’ prior statements were false when
made. Lentell , 396 F.3d at 175 n.4 (“These allegations do not amount to a corrective disclosure, however, because they do not reveal to the market the falsity of the prior recommendations.”).
Instead, these purportedly corrective disclosures merely disclosed non-actionable “bad news.” 104
Plaintiff similarly fails to plead the materialization of a concealed risk. 105 As discussed above, each of the risks that Plaintiff claims were concealed were repeatedly and explicitly disclosed by
GE at the start of, and throughout, the Class Period. See supra pp. 13-16, 19-20. Plaintiff’s failure to plead either a corrective disclosure or the materialization of a concealed risk is “fatal under Second Circuit precedent.” Lentell , 396 F.3d at 175.106
Plaintiff’s new allegations concerning GECC’s CP program do nothing to rescue
Plaintiff’s deficient loss causation allegations. Plaintiff does not – and cannot – allege that (1)
GE or its shareholders were harmed by GECC’s alleged difficulties in issuing CP, or (2) any of the purported “corrective disclosures” (SAC ¶¶ 425-28) demonstrate the falsity of any challenged statement about GECC’s CP program. Plaintiff alleges five corrective disclosures.
SAC ¶¶ 425-428. But not one of these disclosures even mentioned GECC’s CP program, much less revealed the alleged falsity of GE’s prior statements concerning that program. Moreover,
104 See Leykin v. AT&T Corp. , 423 F. Supp. 2d 229, 245 (S.D.N.Y. 2006) aff’d 216 F. App’x 14 (2d. Cir. 2007) (finding that the revelation of “bad news” unrelated to allegedly fraudulent conduct is insufficient to demonstrate loss causation). 105 In order to adequately plead loss causation, Plaintiff must plead either a corrective disclosure or the materialization of a concealed risk. See In re Merrill Lynch & Co. Research Reports Sec. Litig. , 568 F. Supp. 2d 349, 359 (S.D.N.Y. 2008). 106 See also Garber , 537 F. Supp. 2d at 617 (dismissing, for failure to plead loss causation, claims based on events that were not the subject of any corrective disclosure); Fort Worth Employers Retirement Fund v. Biovail Corp. , 615 F. Supp. 2d 218, 229 (S.D.N.Y. 2009) (loss causation not pleaded when the complaint did not “identify any ‘corrective disclosure’ that revealed the existence of some prior alleged misrepresentation by Defendants and so caused Biovail’s stock price to decline”).
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Plaintiff does not even attempt to show how the alleged misstatements about CP caused GE any
harm or that any risk concealed by the alleged misstatements regarding CP materialized.
II. PLAINTIFF FAILS TO STATE A CLAIM BASED ON ALLEGED GAAP VIOLATIONS
Plaintiff alleges a series of GAAP violations related to GE’s supposed reclassification of
assets and the supposed inadequacy of GE’s loan loss reserves. See, e.g. , SAC ¶¶ 85-94, 102-08,
162(e), 181(b), (g), (h), 309-64. But Plaintiff’s allegations suffer from four defects – each of which, standing alone, requires dismissal of these claims. First , to be actionable, Plaintiff’s
alleged GAAP violations must be coupled with well-pleaded scienter allegations. But, as set
forth in Points I.A.1-2., supra , Plaintiff has not come close to adequately pleading scienter for
any Defendant. Accordingly, Plaintiff’s allegations of GAAP violations are not actionable under
the federal securities laws. See West Virginia Inv. Management Bd. v. Doral Financial Corp. ,
344 F. Appx. 717, 720 (2d. Cir 2009) (“failure to comply with General Accepted Accounting
Practices or other such irregularities are insufficient to establish recklessness.”).
Second , as set forth in Points II.A.1. and II.C., infra , Plaintiff’s proffered interpretations
of GAAP are demonstrably incorrect. Third , Plaintiff fails to allege GAAP violations with the particularity required by Rule 9(b) and the PSLRA. 107 Finally , even assuming arguendo Plaintiff
107 See Caiafa v. Sea Containers Ltd. , 525 F. Supp. 2d 398, 410-11 & n.10 (S.D.N.Y. 2007), aff’d , 331 F. App’x 14 (2d Cir. 2009) (dismissing securities fraud claim because the complaint did not specify the amount by which certain assets should have been written down, and failed to allege when the write-downs should have occurred). See also Vodafone , 655 F. Supp. 2d 262, 269-270 (dismissing complaint for lack of particularity because allegations of GAAP violations were “undermined by a failure to allege at what point in time an impairment charge should have been taken and which specific losses known to the Company should have triggered an impairment charge”); CalPERS v. Chubb Corp. , 394 F.3d 126, 153 (3d Cir. 2004) (affirming dismissal of §§ 11 and 10(b) claims when plaintiffs failed to plead alleged GAAP violations with particularity because, inter alia , plaintiffs failed to “provide any particulars regarding the amount by which reserves were distorted, or how much revenue was improperly recognized”).
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had adequately pleaded violations of GAAP with the required particularity, the allegations
remain deficient because “whether the requirements of the accounting principles were satisfied,
necessarily involve[s] issues of judgment” and Plaintiff has not alleged “an error so grievous that
it exceeded differences over accounting principles and rose to the level of fraud.” In re Loral
Space & Commc’ns Sec. Litig. , 2004 WL 376442, at *17 (S.D.N.Y. Feb. 27, 2004). See supra
Point I.A.2. 108
A. Adequacy of Loan Loss Reserves
1. Plaintiff Misapplies GAAP
Plaintiff contends that Defendants failed to record adequate loan loss reserves and impairments. Plaintiff conclusorily alleges that Defendants failed “to record adequate reserves as compared to industry standard metrics in connection with known or reasonably ascertainable loan losses in GE Capital’s loan portfolios.” SAC ¶ 162(b), see also id. ¶ 306. But Plaintiff’s suggested approach – setting loan loss reserves based on industry-wide comparables – conflicts with GAAP that requires those reserves to be based upon the actual loans and receivables owned by a particular corporation and the unique combinations of factors that inform management’s judgment at that corporation about an appropriate estimate for the level of reserves. 109 Indeed,
108 See also , e.g. , In re Radian Sec. Litig. , 612 F. Supp. 2d 594, 615 (E.D. Pa. 2009) (dismissing claim relating to allegedly underfunded reserves where, as here, plaintiff has not alleged facts showing that the reasons “involved not merely simple, or even inexcusable negligence, but an extreme departure from the range of reasonable business treatments permitted under GAAP.”). 109 SEC Staff Accounting Bulletin (“SAB”) 102 Topic 6L, Financial Reporting Release No. 28, Accounting for Loan Losses by Registrants Engaged in Lending Activities (Exh. 62) explains that: Generally accepted accounting principles (GAAP) for recognition of loan losses is provided by Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS No. 5) and No. 114, Accounting by Creditors for Impairment of a Loan (SFAS No. 114) (Exh. 41). An estimated loss from a loss contingency, such as the collectibility of receivables, should be accrued when,
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“the setting of loan loss reserves involves a great deal of discretion.” In re Countrywide Fin.
Corp. Deriv. Litig. , 554 F. Supp. 2d 1044, 1070 (C.D. Cal. 2008).
Plaintiff’s claim concerning GE’s loan loss reserves is further undercut by its failure to provide any information regarding the industry-standard metrics against which it claims GE’s reserve levels were inadequate. The result is a “bare allegation about industry custom,” which
“is precisely the type of conclusory allegation that motivated the heightened pleading standards of Rule 9(b) in the first place.” 110
Relatedly, Plaintiff misapplies GAAP when it claims that GE “overstated its earnings during the Class Period by failing to provide for an allowance for loan losses that matched the full amount of GE Capital’s reported ‘nonearning’ financing receivables.” SAC ¶¶ 325, 342; see also SAC ¶¶ 162(c), 181(c). Plaintiff does not cite any GAAP guidance that requires a loan in non-accrual status to be reserved at 100% of the carrying amount of the loan. The operative
based on information available prior to the issuance of the financial statements, it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. SAB 102 Topic 6L also describes the factors that the SEC staff would expect a registrant to consider in developing its loan loss reserve methodology in interpretive response to question 1 of Topic 6L: The staff normally would expect a registrant that engages in lending activities to develop and document a systematic methodology to determine its provision for loan losses and allowance for loan losses as of each financial reporting date. It is critical that loan loss allowance methodologies incorporate management's current judgments about the credit quality of the loan portfolio through a disciplined and consistently applied process. A registrant's loan loss allowance methodology is influenced by entity-specific factors, such as an entity's size, organizational structure, business environment and strategy, management style, loan portfolio characteristics, loan administration procedures, and management information systems…. 110 Lovelace v. Software Spectrum , 78 F.3d 1015, 1020 (5th Cir. 1996) (affirming dismissal of securities fraud claim for failure to satisfy the particularity requirements of Rule 9(b)).
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guidance – that Plaintiff concedes is Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan (“SFAS 114”) (Exh. 41) (SAC ¶ 349) – is not
to write off or reserve the entire value of the loan, but to estimate the amount that will be
collected, either through payments under the loan or sale of the underlying collateral, and reserve
for, or write down, only the difference between that amount and the carrying value of the loan. 111
2. Plaintiff Fails to Plead Particularized Facts to Support Its Allegation That GE Did Not Record Adequate Loan Loss Reserves and Impairments.
Plaintiff fails to even state, much less offer particularized facts about, why, when, how, or by how much, GE was under-reserved, and fails to allege when an impairment charge should have been taken and which specific losses known to GE should have resulted in an impairment charge.
Unable to allege any facts to support its claim, Plaintiff simply supplies a chart purporting to show GE’s allowances for loan losses – which Plaintiff concedes increased during the Class Period (SAC ¶ 341) – and, after reciting the relevant guidance (SFAS 5 and 114), concludes that GE was under-reserved. SAC ¶¶ 341-42, 347-50. But absent “details about when and to what level the [loans] should have been written down, when and to what level the
111 SFAS 114 (Exh. 63), paragraph 13, provides, in part: When a loan is impaired as defined in paragraph 8 of this Statement, a creditor shall measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate…. If the present value of expected future cash flows (or, alternatively, the observable market price of the loan or the fair value of the collateral) is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), a creditor shall recognize an impairment by creating a valuation allowance with a corresponding charge to bad-debt expense or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to bad-debt expense. (footnotes omitted).
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allowances should have been changed, why the allowance made by the corporation was
unreasonable in light of the bad debt experienced, and how many accounts ultimately were
uncollectible,” Plaintiff’s claims must be dismissed. In re Downey Sec. Litig. , 2009 WL
2767670, at *4 (C.D. Cal. Aug. 21, 2009) (quotation omitted); see also Caiafa , 525 F. Supp. 2d at
410-11 & 411 n.10. 112
Moreover, Plaintiff fails to state with particularity any facts showing that Defendants knew or should have known that GE should have increased its loan reserves and impairments at the specific time stated by Plaintiff. 113
Finally, the fact that GE reported at its March 19, 2009 investor conference that it would have to increase loss reserves does not help Plaintiff. See, e.g. , SAC ¶ 295. “[M]anagement’s
failure to accurately forecast evolving business conditions does not equate to fraudulent
conduct.” Vodafone , 655 F. Supp. 2d 262, 269. Moreover, throughout the Class Period,
Defendants repeatedly warned investors about increased loss estimates as circumstances
changed. See, e.g. , supra pp. 12, 17. “Accordingly, it follows logically that as the Company’s loss reserve estimates change[d] over time due to better awareness of actual losses, the
Company’s consequent financial statements, which reflect these loss estimates . . . also
112 As discussed above, GAAP does not require GE to reserve for its non-accrual loans at 100%. See supra Point II.A.1. Therefore, the chart provided in SAC ¶ 342 is not only misleading but it also has no bearing on whether GE maintained adequate loan loss reserves. 113 See, e.g. , Rosen v. Textron, Inc. , 321 F. Supp. 2d 308, 326 (D.R.I. 2004) (dismissing complaint because plaintiffs failed “ to set forth in sufficient detail facts showing that [defendants] knew prior to [their subsequent disclosure of accounting adjustments] that the writedown was required); Loral , 2004 WL 376442, at *17 (dismissing securities fraud claim because the complaint contained “no allegations that there were any internal reports that suggested that the failure to take an impairment charge earlier was an incorrect application of accounting principles, much less an error so grievous that it exceeded differences over accounting principles and rose to the level of fraud.”).
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change[d].” Coronel v. Quanta Capital Holdings, Ltd. , 2009 WL 174656, at *20 (S.D.N.Y. Jan.
26, 2009).
B. Reclassification of Assets
Plaintiff alleges – again avoiding any specifics – that Defendants improperly transferred loan assets from a held-for-sale account to a held-for-investment account. SAC ¶¶ 85-94,
181(g), 181(h), 358-64. Notably, Plaintiff fails to provide a single example of an improperly transferred asset, much less a material improperly transferred asset, and Plaintiff fails to specify when that asset was improperly transferred, or the magnitude of any write-down that should have been taken but was not, before the transfer. Furthermore, as Plaintiff concedes, transferring assets to a long-term account complies with GAAP, provided the company (i) has the ability and intent to hold the asset for the long term, and (ii) transfers the asset at the lower of cost or fair value. See SAC ¶¶ 92, 362. 114 Here, Plaintiff does not allege that the GE Defendants transferred a single asset in any manner that violated GAAP – specifically, the SAC does not allege that GE did not have the ability and intent to hold a particular asset for the long term, or that GE failed to transfer the asset at the lower of cost or fair value. See SAC ¶¶ 85-87, 363. Indeed, the CW
accounts confirm GE’s compliance with GAAP and that GE had the ability and intent to hold
114 The applicable GAAP guidance, as noted by Plaintiff, is Statement of Financial Accounting Standards No. 65, Accounting for Certain Mortgage Banking Activities (“SFAS 65”) at 6 (Exh. 64), which provides, in part: A mortgage loan transferred to a long-term-investment classification shall be transferred at the lower of cost or fair value on the transfer date. Any difference between the carrying amount of the loan and its outstanding principal balance shall be recognized as an adjustment to yield by the interest method. A mortgage loan shall not be classified as a long-term investment unless the mortgage banking enterprise has both the ability and the intent to hold the loan for the foreseeable future or until maturity…. SFAS 65 (emphasis added) (footnote omitted).
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these assets long term and was therefore not required to mark them to market. 115 Also, Plaintiff neglects to explain by how much GE’s allegedly improper reclassifications overstated the value of GE’s assets. See SAC ¶¶ 85-94, 181(g), 181(h), 358-64. 116
C. Failure to Disclose the “Concentrations of Credit Risk” (or “Risk Profile”) Within GECC’s Loan Portfolio
Plaintiff also erroneously claims that GE’s failure to disclose the precise makeup of
GECC’s lending portfolios violates the federal securities laws. See SAC ¶¶ 102, 162(c), 355.
But GE had no duty to disclose this information. Plaintiff has not cited any GAAP or SEC
guidance that requires GE to report the breakdown of GECC’s lending by credit quality.
Plaintiff refers to Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (“SFAS 107”) (Exh. 65), but SFAS 107 does not require this
disclosure. SAC ¶¶ 102, 355. 117 Nowhere in SFAS 107, or anywhere else, is there any requirement to provide disclosure at the level of granularity that the SAC demands. Thus,
Plaintiff merely attempts to allege fraud by hindsight by pointing to the comprehensive disclosures made by GE on March 19, 2009 – disclosures that were not required, but were voluntarily made by GE – thereby proving that no good deed goes unpunished.
115 See, e.g. , SAC ¶ 73 (CW12: alleging that “GE was not required to mark its assets to market and was in a general position to buy and hold real estate assets, [therefore] certain assets ‘held on the books versus real value could easily be a lot different’”; CW15: describing how a committee of senior management would decide when to move “equity investments to long term on the balance sheets”). 116 Plaintiff also contends that the allegedly improper “reclassification” of assets somehow rendered false and misleading the Exchange Act Defendants’ statements about GE Capital’s performance relative to its peers. See, e.g. , SAC ¶ 181(g). But because, as explained, Plaintiff fails to allege with particularity that GE improperly reclassified assets, this claim also fails. 117 Paragraph 15C of SFAS 107 provides that “[a]n entity is encouraged, but not required, to disclose quantitative information about the market risks of financial instruments that is consistent with the way it manages or adjusts those risks” (emphasis added).
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In sum, Plaintiff has failed to allege a GAAP violation with the particularity required by
Rule 9(b) and the PSLRA. 118
III. PLAINTIFF FAILS TO STATE A CLAIM UNDER SECTION 20(a) OF THE EXCHANGE ACT
Because Plaintiff has failed to state a claim for a primary violation under Section 10(b)
and Rule 10b-5, its control person claim under Section 20(a) fails. See In re AOL Time Warner,
Inc. Sec. Litig. , 503 F. Supp. 2d 666, 674 (S.D.N.Y. 2007). Plaintiff’s Section 20(a) claim also fails because Plaintiff has not successfully alleged that Messrs. Immelt and Sherin acted with scienter, and Plaintiff has thus failed to plead the requisite culpable participation. In re Livent
Inc. Sec. Litig. , 78 F. Supp. 2d 194, 222 (S.D.N.Y. 1999). 119 Accordingly, Plaintiff’s Section
20(a) claim fails. See Lapin v. Goldman Sachs Group, Inc. , 506 F. Supp. 2d at 246, 249
(S.D.N.Y. 2006).
IV. PLAINTIFF FAILS TO STATE A CLAIM UNDER SECTIONS 11 AND 12(a)(2) OF THE 1933 ACT
With respect to Plaintiff’s claims under the 1933 Act, the GE Defendants incorporate by
reference the arguments and statement of facts set forth in the Underwriter Defendants’
memorandum and make the following additional arguments.
A. Plaintiff’s Sections 11 And 12(a)(2) Claims Sound In Fraud
Rule 9(b) applies to Section 11 and 12(a)(2) claims sounding in fraud. See Rombach v.
Chang , 355 F.3d 164, 171 (2d Cir. 2004) (“[T]he heightened pleading standard of Rule 9(b)
118 Almost as an afterthought, Plaintiff alleges a series of “Additional Fundamental GAAP Violations.” See SAC ¶¶ 365-69. But these allegations lack any particularity and are nothing more than a recitation of various accounting principles with no attempt whatsoever to explain how Defendants allegedly violated those principles. 119 Because Plaintiff has not pleaded scienter with respect to any of the Exchange Act Defendants, Plaintiff cannot plead corporate scienter with respect to GE. See supra fn. 63.
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applies to Section 11 and Section 12(a)(2) claims insofar as the claims are premised on
allegations of fraud.”); accord Caiafa v. Sea Containers Ltd. , 331 F. App’x 14, 16 (2d Cir. May
19, 2009).
Plaintiff’s boilerplate disclaimer of “reliance upon allegations of fraud in connection with
the Securities Act claims,” e.g. , SAC ¶ 74, does not excuse Plaintiff from satisfying Rule 9(b).
Rombach , 355 F.3d at 172; In re Axis Capital Holdings Ltd. Sec. Litig. , 456 F. Supp. 2d 576,
598 (S.D.N.Y. 2006) (“Courts have repeatedly noted that the insertion of a simple disclaimer of fraud is insufficient . . . Plaintiffs cannot so facilely put the fraud genie back in the bottle.”)
(quotation omitted).
Here, Plaintiff’s allegations sound in fraud because the allegations underlying the 1933
Act and 1934 Act claims are almost identical. Compare , e.g. , SAC ¶ 138 (“GE concealed that the true value of GE Capital’s assets were well below what the Company was reporting” and
“GE avoided taking losses on assets by improperly shifting them to a ‘held for investment’ account”) (1933 Act claim) with SAC ¶ 162 (alleging that Exchange Act Defendants
“conceal[ed] the true present value of GE Capital’s assets” and “avoid[ed] taking write-downs on assets by moving troubled and/or non-performing assets into a ‘held for investment’ account”)
(1934 Act claim). 120 See Caiafa , 331 F. App’x at 16 (affirming dismissal of Securities Act claims for failure to meet the particularity requirements of Rule 9(b) because “plaintiffs’
120 Additionally, compare , e.g. , SAC ¶ 114 (“The Offering Materials stated that GE would maintain its quarterly $0.31 per share dividend, while concealing that GE did not have sufficient cash and revenues to achieve that goal”) (1933 Act claim) with SAC ¶ 162 (alleging that the Exchange Act Defendants “misl[ed] investors with respect to the Company’s ability to pay its authorized quarterly dividend in FY 2009”) (1934 Act claim), and SAC ¶ 115 (“The Offering Materials also repeatedly touted GE's AAA credit rating and its commitment to retaining that rating when, in fact, the AAA rating was in jeopardy of an imminent downgrade”) (1933 Act claim) with SAC ¶ 162 (claiming that the Exchange Act Defendants “conceal[ed] the fact that the Company’s AAA credit rating was in grave jeopardy”) (1934 Act claim).
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Section 11 claim relie[d] on the same factual allegations that served as a basis for their
Section 10(b) claim.”).
Rule 9(b) also applies to 1933 Act claims where, as here, Plaintiffs’ allegations are
“classically associated with fraud.” Rombach , 355 F.3d at 172. Classic allegations of fraud include: “that the Registration statement was ‘inaccurate and misleading;’ that it contained
‘untrue statements of material facts;’ and that ‘materially false and misleading written statements’ were issued.” Id. See also Coronel v. Quanta Capital Holdings, Ltd. , 2009 WL
174656, at *15 (S.D.N.Y. Jan. 26, 2009) (holding that 1933 Act allegations which “infer an
intent to defraud” are “subject to the heightened pleading requirements of Rule 9(b)”). The
SAC’s 1933 Act allegations plead an intent to defraud. SAC ¶ 115 (“by concealing the material
amount of subprime and other non-investment grade debt at GE Capital, Defendants misled investors as to its real ability . . . GE also falsely portrayed its financial strength and soundness.”)
(1933 Act allegation); SAC ¶ 122 (alleging that the GE Defendants engaged in “improper []”
conduct to “avoid [] taking losses”) (1933 Act allegation) (emphasis added throughout).
B. With Respect To Its 1933 Act Claims, Plaintiff Fails To Satisfy Rule 9(b)
In connection with its 1933 Act claims, Plaintiff expressly disclaims that the Securities
Act Defendants acted with scienter. SAC ¶ 141. Plaintiff’s 1933 Act claims thus fail to comply
with Rule 9(b).
Further, in its 1933 Act claims, Plaintiff uses the same deficient “laundry-list” pleading
technique that it used for its 1934 Act claims. See, e.g. , SAC ¶¶ 122, 129, 132, 138 (listing virtually identical reasons why each of the alleged misstatements were false or misleading, but not linking any of these “reasons” to specific statements). See supra Point I.B. And each of the proffered “reasons” why the Securities Act Defendants’ statements are allegedly false or
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misleading are conclusory and devoid of any well-pleaded factual allegations showing that the
Securities Act Defendants knew or had reason to know that the challenged statements were false
or misleading when made. See supra Point I.B. Plaintiff’s allegations are also readily controverted by GE’s public disclosures. For example, Plaintiff contends that “the value of GE
Capital’s assets was inflated and the true condition of these assets was not disclosed” because “as the Company later disclosed on March 5, 2009, only 2% of GE Capital’s assets were held at current market value.” SAC ¶ 85. But GE disclosed the percentage of GECC’s assets held at current value: the amount of GECC’s assets accounted for (i) at current fair market value and
(ii) at historical cost less allowances for impairment, is set forth in the notes to GE’s financial statements in the 2007 Form 10K (Feb. 20, 2008) (Exh. 66, at notes 12 and 26). 121
Further, Plaintiff fails to allege any facts showing that the reported value of GECC’s
assets was false at the time of the October Offering. Merely asserting that “GE concealed that
the true value of GE Capital’s assets were well below what the Company was reporting” (SAC
¶¶ 122, 129, 132, 138) fails under Rule 9(b). 122
121 Specifically, Note 12 shows the amount of GE Capital’s financing receivables as gross amounts and also as net amounts reflecting an allowance for loan loss rather than an “adjustment to FMV,” thereby demonstrating that all of the financing receivables are held at historical cost less allowances for impairment. Note 26 shows all financial instruments held by GE and GE Capital at the fair market value and notes their “carrying amount” on the books of the company – when assets are held at fair market value, these two amounts will be the same. 122 Ladmen Partners v. Globalstar, Inc. , 2008 WL 4449280, at *13, 16 (S.D.N.Y. Sept. 30, 2008) (dismissing Section 11 and 12(a)(2) claims because plaintiff failed to allege particularized facts showing that statements in the prospectus were false when made). Similarly, Plaintiff fails to plead facts supporting the contemporaneous falsity of the statements alleged in SAC ¶¶ 112-113. Vague statements that appear to describe the general economic climate, e.g. , “the credit markets fell apart after Lehman Brothers collapsed” (SAC ¶ 112), certainly do not “explain[] with adequate specificity how [the challenged statements] were actually false or misleading.” Rombach , 355 F.3d at 172.
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Ignoring the text of the Offering Materials, Plaintiff makes the throw-away claim that the
Offering Materials were misleading because they incorporated by reference GE’s 2007 Form 10-
K, which states that “[a] large portion of [GE Capital] borrowings . . . was issued in active unsecured commercial paper markets that we believe will continue to be a reliable source of short-term financing.” SAC ¶ 138a; General Electric Co., Annual Report (Form 10-K), at 55
(Feb. 20, 2008) (Exh. 66). 123 But Plaintiff has not alleged any facts showing that the Securities
Act Defendants did not continue to believe that CP would continue to be a reliable source of
short-term funding at the time of the October Offering. In addition, the Prospectus made clear
that, given the uncertain economic environment, “although GE Capital has continued to issue
commercial paper, there can be no assurance that such markets will continue to be a reliable
source of short-term financing for GE Capital.” Exh. 15 at S-3.
C. The Challenged Statements Are Protected under the PSLRA Safe Harbor and the Bespeaks Caution Doctrine
Even assuming Plaintiff’s allegations do not sound in fraud, Plaintiff still fails to state a
claim under the 1933 Act because the challenged statements are forward looking and therefore
protected by both prongs of the PSLRA safe harbor and the bespeaks caution doctrine. Under
the PSLRA safe harbor, forward-looking statements – such as the Securities Act Defendants’
statements challenged by Plaintiff relating to GE’s payment of future dividends, maintenance of
the AAA rating, earnings projections, future economic performance, and issuance of commercial
123 But the Offering Materials state that “documents we file later with the SEC [such as the prospectus supplement] will automatically update and supersede any information contained in documents filed earlier with the SEC [such as the 2007 10-K and 2004 10-K/A],” that “[i]f information in this prospectus supplement is inconsistent with the accompanying prospectus, [investors] should rely on the prospectus supplement” and that investors “should not assume” that statements in the earlier filings were “accurate as of any date other than” the date it was issued. Exh. 15 at S-ii.
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paper – cannot be the basis of a claim under the 1933 Act if the statements are (i) accompanied
by meaningful cautionary language or (ii) if the plaintiff fails to plead that the speaker made the
statements with actual knowledge that the statements were false or misleading. 15 U.S.C. §77z-
2(c)(1). Plaintiff’s 1933 Act claims fail under both prongs and the bespeaks caution doctrine.
Slayton v. Am. Express Co. , 604 F.3d 758, 162 (2d Cir. 2010) (affirming dismissal of complaint and holding that “the defendants’ allegedly misleading statement [was] protected by the actual knowledge prong of the safe harbor because the plaintiffs did not plead facts demonstrating that the statement was made with ‘actual knowledge’ . . . that the statement was false or misleading”)
(citation omitted). Indeed, Plaintiff expressly disclaims “allegations of knowing or reckless misconduct on the part of any Defendant” in connection with its 1933 Act claims. SAC ¶ 14.
V. PLAINTIFF FAILS TO STATE A CLAIM UNDER SECTION 15 OF THE 1933 ACT
Plaintiff has failed to state a claim under Section 15 because it has failed to allege a
primary violation under Sections 11 and 12. See , e.g. , ECA & Local 134 IBEW Joint Pension
Trust v. JP Morgan Chase Co. , 553 F.3d 187, 206-07 (2d Cir. 2009).
CONCLUSION
For all the foregoing reasons, Defendants General Electric Company, Jeffrey Immelt,
Keith Sherin, Michael Neal, Jeffrey S. Bornstein, William H. Cary, and the Director Defendants respectfully request that the Second Consolidated Class Action Complaint be dismissed in its entirety and with prejudice.
Dated: New York, New York June 30, 2010 Respectfully submitted,
/s Greg A. Danilow____ Greg A. Danilow
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Paul I. Dutka Ashish D. Gandhi Caroline Hickey Zalka Mark B. Rosen WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York 10153 (212) 310-8000
Attorneys for General Electric Company, Jeffrey Immelt, Keith Sherin, Michael Neal, Jeffrey S. Bornstein, William H. Cary and the Director Defendants
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