Case 2:06-md-01749-GER Document 13 Filed 08/15/2006 Page 1 of 191 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION MDL No. 1749 IN RE GENERAL MOTORS CORP. Master Case No. 06-md-1749 SECURITIES LITIGATION Hon. Gerald E. Rosen This Document Relates to: 2:06-cv-12258-GER _______________________________________/ 2:06-cv-12259-GER JURY TRIAL DEMANDED THIRD AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS LABATON SUCHAROW & RUDOFF LLP 100 Park Avenue New York, NY 10017 Tel: 212 907-0700 Fax: 212 818-0477 MURRAY, FRANK & SAILER LLP 275 Madison Avenue New York, NY 10016 Tel: 212 682-1818 Fax: 212 682-1892 Case 2:06-md-01749-GER Document 13 Filed 08/15/2006 Page 2 of 191 TABLE OF CONTENTS I. SUMMARY OF CLAIMS ..................................................................................................................1 A. PLAINTIFFS’ CLAIMS UNDER THE SECURITIES ACT ............................................2 B. PLAINTIFFS’ CLAIMS UNDER THE EXCHANGE ACT............................................5 II. JURISDICTION AND VENUE......................................................................................................5 III. PARTIES...............................................................................................................................................6 A. LEAD PLAINTIFF ...................................................................................................................6 B. ADDITIONAL NAMED PLAINTIFFS ..............................................................................7 C. CORPORATE DEFENDANTS.............................................................................................8 D. OFFICER DEFENDANTS.....................................................................................................9 E. AUDIT COMMITTEE DEFENDANTS .............................................................................9 F. AUDITOR DEFENDANT ...................................................................................................10 G. PLAINTIFF’S CONFIDENTIAL SOURCES ...................................................................10 IV. CLASS ACTION ALLEGATIONS ..............................................................................................12 V. SUBSTANTIVE ALLEGATIONS................................................................................................14 A. GM IMPROPERLY ACCOUNTED FOR SUPPLIER CREDITS...................................................................................................................................14 1. GM Recognized Supplier Credits as Income Prematurely ........................................14 2. GM’s Restatement is an Admission that its Original Financial Statements Were Materially Untrue..............................................................17 B. GM IMPROPERLY ACCOUNTED FOR THE DELPHI LEGACY GUARANTEE ......................................................................................................18 1. The Delphi Legacy Guarantee .......................................................................................18 2. GAAP Rules Regarding Accounting for Contingent Liabilities............................................................................................................................22 3. GM’s Improper Accounting...........................................................................................23 (a) GM’s Omission to Properly Disclose the Delphi Legacy Guarantee, its Nature and Size, was a Violation of FAS 5 ¶ 12. ........................................................................................23 - i - Case 2:06-md-01749-GER Document 13 Filed 08/15/2006 Page 3 of 191 (b) GM’s Omission to Properly Disclose the Delphi Legacy Guarantee, its Nature and Size, was Also A Violation of FAS 5 ¶ 10. ........................................................................................26 (i) Delphi’s Four Business Problems ...............................................................27 (ii) Delphi’s Condition Deteriorates and GM’s Liability Under the Delphi Legacy Guarantee Becomes a Reasonable Possibility ...............................................................30 (c) GM’s Delay in Accruing a Charge of at Least $5.5 Billion to Income, for its Contingent Liability Under The Delphi Legacy Guarantee, Was a Violation of FAS 5 ¶ 8..................................................................................................................33 C. GM OVERSTATED NET OPERATING CASH FLOWS.............................................37 1. Cash Flow Accounting....................................................................................................37 (a) Importance and Composition of Cash Flow Statements................................................................................................................37 (b) Key Importance to Investors of Operating Cash Flow ....................................39 2. Materially Untrue Statements Concerning Dealer- Financing Cash Flow.......................................................................................................40 (a) Overstatement of Net Cash Flow From Operating Activities...................................................................................................................40 (b) Materially Untrue Statements Regarding Cash Flows Between GM’s Two Divisions..............................................................................45 3. Materially Untrue Statements Regarding Cash Flows Relating To the Purchase or Sale of Mortgage Loans by a GMAC Subsidiary............................................................................................................46 (a) GM’s Disclosure that its Reported Cash Flows as Reclassified In the 2004 10-K were Still Misclassified.......................................46 (b) GM’s Admission that it had Violated GAAP Regarding Reported Cash Flows Relating to the Purchase or Sale of Mortgage Loans....................................................................47 D. GM IMPROPERLY ACCOUNTED FOR TWO TRANSACTIONS WITH DELPHI APPORTIONING THE COST OF PAST RECALLS...................................................................................................52 1. Background.......................................................................................................................52 - ii - Case 2:06-md-01749-GER Document 13 Filed 08/15/2006 Page 4 of 191 2. GM’s Erroneous Accounting for the $237 Million Payment Received from Delphi.....................................................................................53 (a) The Payment, Which Was Included in GM’s Reported Income, Was a Non-Recurring Transaction......................................53 (b) The Payment was Material.....................................................................................54 (c) GM Violated GAAP by Failing to Report the $237 Million Payment as a Separate Component of Income.....................................54 (d) GM Violated Reg. S-K by Failing to Explain the Relation of the $237 Million Payment to Future Trends.......................................................................................................................55 (e) GM’s Failure to Treat the $237 Million Payment as a “Special Item” When Calculating Pro Forma Income And Earnings Rendered the 2000, 2001 and 2002 10-K’s Materially Untrue........................................................................................56 3. GM’s Untruthful Accounting for The $85 Million Credit Given to Delphi ...............................................................................................................57 (a) Background..............................................................................................................57 (b) GM Failed to Report the Effect On Income of Giving the Credit.....................................................................................................58 (c) GM Has Admitted That Its Accounting Violated GAAP .......................................................................................................................59 (d) Even if GM’s Giving the Credit to Delphi had Been a Correction of its Prior Accounting for the Spinoff, Rather than Being an Event Subsequent to the Spinoff, GM’s Accounting for the Credit Still Would Have Violated GAAP.............................................................................................60 (e) The Credit Given to Delphi Was Material ..........................................................61 E. GM FAILED TO TIMELY WRITE DOWN ITS INVESTMENT IN FUJI........................................................................................................61 1. Background.......................................................................................................................61 2. GAAP Requirements of the Equity Method of Accounting For Investments ...............................................................................................................62 3. GM’s Use of the “Equity Method” Regarding its Investment in Fuji............................................................................................................63 - iii - Case 2:06-md-01749-GER Document 13 Filed 08/15/2006 Page 5 of 191 4. Fuji’s Revision of its Business Plan ...............................................................................63 5. GM’s Materially Untrue Statements..............................................................................63