The opinion of the court was delivered by: Richard J. Holwell, District Judge:
MEMORANDUM OPINION AND ORDER
Lead Plaintiff State Universities Retirement System of Illinois ("plaintiff") brings this suit pursuant to Sections 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Plaintiff alleges that General Electric ("GE") failed to disclose information regarding GE's health and the health of GE Capital, its wholly owned subsidiary, from September 25, 2008 to March 19, 2009 ("the Class Period"), at the height of the recent financial crisis. Plaintiff argues that GE's Chief Executive Officer ("CEO"), Jeffrey Immelt ("Immelt"), and Chief Financial Officer ("CFO"), Keith Sherin ("Sherin"), made materially misleading statements during the Class Period and in connection with GE's October 7, 2008 stock offering ("the October Offering"). According to plaintiff, during a time when the financial markets were crumbling and companies across the United States were scrambling to disclose their holdings in subprime loans, GE withheld information regarding its substantial holdings in subprime and non-investment grade loans and touted GE as safe in comparison to its competitors, despite the fact that GE was also feeling the impact of the financial crisis. Plaintiff also alleges that GE Capital's CEO Michael Neal ("Neal"), CFO Jeffery Bornstein ("Bornstein"), and Chief Operating Officer ("COO") William Cary ("Cary") made materially misleading statements regarding GE and GE Capital's financial health. In addition, plaintiff brings suit against the various companies that underwrote the October Offering ("the underwriter defendants").
Defendants now move to dismiss the Second Amended Class Action Complaint ("SAC") pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons stated below, defendants' motion to dismiss is granted in part and denied in part.
The following allegations are drawn from the SAC. They are assumed to be true for the purposes of this motion. Despite the fact that the exposition of the facts below is quite lengthy, it is impossible to summarize all of plaintiff's factual allegations in narrative form, and some factual allegations will be discussed as relevant in the discussion section.
GE is one of the largest corporations in America. GE Capital, a wholly owned subsidiary of GE, is a financial services company. Broadly speaking, plaintiff alleges that GE concealed information about its financial health from the investing public in the wake of the economic collapse beginning in September 2008. Plaintiff claims that GE concealed: its difficulty issuing commercial paper; the quality of many of its investments; the fact that many of its assets were overvalued; its inability to pay the full dividend promised; the fact that business at GE Capital was drying up; and the precariousness of its AAA rating. In October 2008, GE announced an offering of stock, allegedly to shore up the company at a time when the company was severely imperiled. According to plaintiff, GE failed to disclose the foregoing financial information and made material misstatements that concealed this information both in the materials for the October 2008 offering (the "Offering Documents" or "Offering Materials") and on an ongoing basis throughout the Class Period. The financial conditions GE allegedly concealed are as follows:
First, GE was allegedly having great difficulty issuing commercial paper around September 2008. Immelt had private conversations with Treasury Secretary Henry Paulson regarding GE's ability to issue commercial paper that contradicted the rosy picture of GE's commercial paper program that Immelt presented to the public. Plaintiff draws its description of these telephone conversations from Paulson's book, On the Brink. According to Paulson, Immelt called him on September 8, 2008, and again on September 14, 2008, and informed him that GE "was finding it very difficult to sell its commercial paper for any term longer than overnight." (SAC ¶ 10A-B.) Paulson concluded based on these conversations that GE was having difficulty funding itself. (Id.) Paulson also reported that Immelt called him on October 13, 2008, to lobby him to allow GE to participate in the Temporary Loan Guarantee Program ("TLGP"). (Id., ¶ 10d.) The initial plan for the TLGP was that it would guarantee the short-term unsecured loans of banks. (Id.) Immelt expressed his concern to Paulson that the program as it was then conceived would place GE at a competitive disadvantage to the banks because investors would prefer to lend money to entities whose loans were guaranteed by the government. (Id.) In response to this conversation, Paulson worked to alter the terms of the TLGP so that GE Capital could also participate, and the FDIC eventually changed the program to incorporate this change. (Id.)
The plaintiff alleges that GE's problems rolling out commercial paper continued through the fall of 2008. According to one of plaintiff's confidential witnesses ("CW"), CW 6, the commercial paper markets were "frozen" as of September 25, 2008. (Id., ¶ 138b.) In addition, GE eventually participated in another government program, the Commercial Paper Funding Facility ("CPFF"). (Id., ¶10g.) Plaintiff argues that if GE had been able to purchase commercial paper easily on the open market, it would have had no need to participate in the CPFF program.
Second, GE disclosed on March 19, 2009, that GE Capital's portfolio contained a number of lower quality investments. Specifically, GE revealed that "approximately 42% of GE Capital's $183 billion in total consumer loans were made to non-prime borrowers" (id., ¶ 299) and high percentages of its commercial loans were made to companies with junk level credit ratings (id., ¶ 302). Plaintiff argues that GE Capital's portfolio was shaky throughout the Class Period and that GE had an obligation to disclose this information well before the actual date of disclosure.
Third, plaintiff alleges that both in the run up to and in the wake of the financial crisis, GE Capital experienced a drop-off in business. Plaintiff has gathered the accounts of various confidential witnesses from different parts of GE Capital in support of this allegation. CWs 8, 12, and 14 describe how GE Capital was having difficulty making new deals in the fall of 2008, stating that business fell off dramatically. (Id., ¶ 73.) CWs 9 and 11 also state that GE Capital's financial problems were already brewing earlier in the year. (Id.)
Fourth, plaintiff alleges that GE did not disclose that its AAA rating was imperiled. According to a January 2009 research note by UBS Investment Research, both Moody's and Standard & Poor's stated that GE's ability to meet its projected earnings of $5 billion for 2009 weighed heavily in their determination of whether GE would retain its AAA rating. (Id., ¶ 414.) Plaintiff argues that GE should have known that its earnings projections were unrealistic, so these reports should have made GE aware that it was likely to lose its rating. For much the same reason, plaintiff alleges that GE made material misstatements when it "guaranteed" payment of the company's 2009 dividend. (Id., ¶ 220.)
Towards the end of the Class Period, GE revealed that it was experiencing financial strain. On February 27, 2009, GE announced that it would be forced to cut its dividend significantly. (Id., ¶ 279.) Whereas it had planned on issuing a $.31 quarterly dividend per outstanding share of common stock for 2009, Immelt announced that GE would be cutting its dividend to $.10 per share. (Id.) On March 12, 2009, GE lost its AAA rating. (Id., ¶ 293.) And on March 19, 2009, GE disclosed to the world that its portfolio contained a number of lower quality loans and corporate bonds. (Id., ¶¶ 299-304.) Throughout its complaint, plaintiff alleges that GE should have disclosed the dangers it faced sooner.
False Statements in the October Offering Prospectus
On October 1, 2008, Immelt announced that GE would be offering at least $12 billion of common stock to the public and selling an additional $3 billion of preferred stock to Berkshire Hathaway, Inc. (SAC, ¶ 77.) On October 2, 2008, GE filed a prospectus for the October Offering. (Id., ¶ 81.) The issuance was conducted pursuant a shelf registration statement, a registration statement that GE keeps on file with the SEC to expedite the issuance of additional securities. (Id.) GE filed a supplement to this registration statement on October 2, 2008. (Id.)
In addition, the Offering Materials include a number of documents that the supplement incorporated by reference. (Id., ¶ 82.) Plaintiff alleges that these materials contained a number of material omissions and misstatements.
In the Offering Materials, GE stated that it had $695 billion in assets. (Id., ¶ 85.) According to plaintiff, this number was inflated. (Id.) Plaintiff identified through its own investigation several former GE employees who indicated that GE regularly failed to write down troubled assets to their true market value. (Id., ¶ 86.) These individuals, identified as confidential witnesses 1, 13, and 15, stated that GE would recategorize assets from "available for sale," meaning the assets were being held for the short-term and needed to be marked to market regularly, to "held to maturity," which did not. (Id., ¶¶ 86-94.) This shifting of assets was in violation of Generally Accepted Accounting Principles ("GAAP"). (Id.) Because the assets were not regularly marked to market as they should have been, GE was listing them at higher values than they should have been listed, overstating the value of its assets in the process. Furthermore, before recategorizing assets as held-to-maturity, GAAP required that GE mark the assets to market. GE allegedly did not comply with this requirement.
Plaintiff also alleges that GE had insufficient loan loss reserves and that the amounts GE was holding in reserve were incorporated into the Offering Materials. Whereas the average reserve among what plaintiff characterizes as "comparable companies" was 2.36% of outstanding loans, GE Capital's reserves were only 1.43%. (Id., ¶ 105.) Plaintiff alleges that these loan loss reserves were insufficient because GE Capital had a number of risky loans on its books. (Id., ¶ 109.)
Plaintiff claims that GE likewise failed to disclose crucial financial information in its Offering Materials. For example, GE did not disclose the high percentage of loans that were of poor quality. (Id., ¶ 95.) On March 19, 2009, GE disclosed that 42% of GE Capital's $183 billion of consumer loans were to sub-prime borrowers and that a high percentage of its corporate debt was non-investment grade or "junk" status. (Id., ¶¶ 95-99.) Also, several of plaintiff's confidential witnesses detail that business at GE Capital was "drying up" during this period, and GE did not disclose this information to the public. (Id., ¶¶ 112-13.) Given these financial difficulties, GE should have, but did not disclose that it was in imminent danger of a ratings downgrade and was going to have difficulty paying out its quarterly dividends for the year 2009. (Id., ¶¶ 114-15.)
Plaintiff also alleges that GE concealed its true reasons for making an offering by stating the offering "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." (Id., ¶ 116; see also id. ¶ 121.) Plaintiff alleges that this statement was misleading because GE was making the offering to shore up its financial viability.
GE made several statements regarding its AAA rating that plaintiff alleges are materially misleading. Most of these statements fell into two categories. In one group of statements, GE described its "commitment to its AAA rating." (Id., ¶¶ 117, 124.) In the other, GE described its AAA rating as a marker of quality. (See id. ¶ 128 ("We run the company for the long term and are taking the actions expected from a Triple-A-rated company."); id., ¶ 136 ("GE, GECS and GE Capital have distinct business characteristics that the major debt rating agencies evaluate both quantitatively and qualitatively.")). Finally, GE indicated in its Offering Documents that "Moody's Investor Services commented that our revised operational and financial strategies for GE Capital 'are supportive of' our and GE Capital's 'AAA' long-term and 'Prime-1' short-term ratings with a stable outlook." (Id., ¶ 120.)
GE attempted to reassure investors about its access to the commercial paper markets in its Offering Materials. It stated in its preliminary prospectus of October 1, 2008 that "GE Capital has continued to issue commercial paper." (Id., ¶ 117a.) It stated in a September 25, 2008 Form 8-K that "demand remains strong" for GE Capital's commercial paper. (Id., ¶ 125.) And it stated in FY 2005, 2006, and 2007 Form 10-K's and in its FY 2004 Form 10-K/A (which were incorporated by reference into the Offering Materials) that "[a] large portion of GE Capital's borrowings . . . was issued in active commercial paper markets that we believe will continue to be a reliable source of short-term financing." (Id., ¶ 138a (ellipsis in complaint).)
GE indicated to investors that it was planning on issuing a dividend of $1.24 per share for the course of 2009. (Id., ¶ 126 ("Board approves plan to maintain $.31 per share quarterly dividend, totally $1.24 per share annually, through 2009.").) GE further stated that "[b]ased on past performance and current expectations, in combination with the financial flexibility that comes with a strong balance sheet and the highest credit ratings, we believe that we are in a sound position to grow dividends . . . ." (Id., ¶ 135.) Plaintiff alleges these statements were false.
Plaintiff also takes issue with a GE's characterization of its economic health. GE claimed in its 10-Q for the second quarter of 2008 that GE Capital's "investment securities comprise mainly investment-grade debt securities." (Id., ¶ 130; see also id., ¶ 137.) GE also stated it had "performed well during the recent market volatility" and would "continue to run GE Capital to be safe and secure, while earning high margins on conservatively underwritten business." (Id., ¶ 127.) In 2007, GE described itself as having "disciplined risk management" and "continued strong credit quality." (Id., ¶ 133.) Plaintiff argues that all of these statements and omissions constituted material misstatements.
Alleged Exchange Act Violations
Plaintiff alleges that GE continued to make much the same types of misstatements throughout the Class Period, which runs from September 25, 2008, until March 19, 2008. During this time period, plaintiff alleges that GE made misleading statements or omissions regarding the following: its ability to fund itself through commercial paper, the status of its AAA rating, the quality of its loan portfolio, its ability to maintain its dividend, and the projected profits for GE Capital in 2009. Plaintiff also alleges that GE violated GAAP by improperly re-characterizing its assets from short-term to long-term and by maintaining inadequate loan loss reserves.
The Class Period begins several weeks after Immelt's alleged conversations with Paulson regarding GE's difficulties in obtaining commercial paper. Plaintiff alleges that GE's difficulties continued at least through the beginning of the Class Period, relying upon the statement of CW 6, who reports that commercial paper markets were "frozen" as of September 25, 2008. (Id., ¶ 138(b).) Publicly, GE stated that it was not having difficulty issuing commercial paper. These allegedly false statements began on the first day of the Class Period, September 25, 2008. During a conference call to discuss GE's Q3 2008 earnings release, Immelt stated,
We have great CP [Commercial Paper] programs. We go direct to investors, so we're not going through brokers. We run the program in 11 currencies. About two-thirds of the CP business is in the U.S., the rest is global; it's spread across many countries. We have no issues funding ourselves. Even in the last 10 days where you've had some significant disruptive days, we continue to see a flight in quality.
(Id., ¶ 171a.) Similarly, Sherin stated, "We've got a commercial paper program that's broad and deep. . . . And if you look at our 61-day maturities, you really don't have any near term pressure of any magnitude." (Id., ¶ 171b).
Soon thereafter, on October 8, 2008, Immelt appeared on Jim Cramer's CNBC television program to discuss commercial paper. (Id., ¶ 183a.) According to plaintiff, "Immelt touted GE's AAA credit rating as putting GE 'first in line' as a borrower." (Id.) The same day, GE issued a Form 8-K updating a prior filing and stating that GE Capital relied upon "active unsecured commercial paper markets that we believe will continue to be a reliable source of short-term financing." (Id., ¶ 183b.)
Two days later, on October 10, 2008, GE hosted a conference call to discuss the Company's Q3 2008 earnings. Immelt informed investors, "We've had no problems with our own CP . . . ." (Id., ¶ 187a.) Sherin stated, "[W]e've got a great broad CP market. We haven't had any trouble funding ourselves. . . . We continue to fund ourselves at very low rates without any issues . . . ." (Id., ¶ 193c.) He also went on to downplay GE's reasons for participating in government-backed commercial paper programs: "We don't plan on using any of those, but if we were to do it in order I would say that the Fed facility is a great liquidity facility for our customers." (Id.) Immelt added that, "even with all of this volatility, we have never had issues in the CP market rolling our paper." (Id., ¶ 193d.)
On October 20, 2008, the CPFF began taking applications to use its facility. On October 24, 2008, GE, through spokesman Russell Wilkerson, stated that it would "test" using the facility as an expression of support for the Fed's program. (Id., ¶ 196a.) GE made similar statements in a October 24, 2008 Web-based publication. It stated, "We believe having access to the CPFF and demonstrating that it works well will encourage investors to buy more term commercial paper." (Id., ¶ 196c.) The publications went on to disclose:
Despite difficult conditions in the commercial paper market during the last five weeks, we have met our CP funding needs every day, including issuing term paper, and our pricing has been very close to historical spreads. However, investors who are concerned about their own ability to access liquidity have shortened their investment horizon and that has resulted in our weighted average maturity shortening. We believe the CPFF . . . facilit[y] will provide investors with confidence to purchase more longer-term CP again.
(Id., ¶ 196e.) Later, on October 27, 2008, GE made a similar statement, saying, "We plan to use the facility primarily to support our commercial paper investors who need liquidity and to manage our maturity profile." (Id., ¶ 198a.) Plaintiff alleges that these statements were misleading because they failed to disclose that using the CPFF was, in fact, a necessity for GE to continue to sell its commercial paper. (Id., ¶ 196g.)
At the beginning of the Class Period, GE had the distinction of being one of the few AAA-rated industrial companies in the United States. GE regularly reminded investors of this fact in its press briefings. GE repeatedly spoke of its "commitment to its Triple-A credit rating." (Id., ¶¶ 167, 168, 205, 234; see also id., ¶¶ 175, 178, 183a.) It told investors that its AAA rating gave it a competitive advantage over other companies because, for example, the AAA rating lowered GE's borrowing costs. (Id., ¶¶ 170, 175, 223.) It also made repeated statements to investors along the lines of how it "ran GE to be a AAA company." (Id., ¶¶ 168, 175, 191, 193, 205, 227, 232, 240, 245, 249.)
At several points, GE was asked to comment on the likelihood that it would be able to maintain its AAA rating as the economic crisis wore on. On December 16, 2008, during GE's annual outlook meeting, Immelt responded to one such question by saying, "I frequently get the question, what do you favor more the AAA or the dividend? I always give the answer both. I always say the way we allocate capital is to make sure we've got plenty of capital to do both." (Id., ¶ 226.) Similarly, on January 23, 2009, Immelt appeared on CNBC and answered another question regarding GE's ability to maintain both its rating and its dividend. (Id., ¶ 248.) He responded, "I hate the fact that there's so much speculation around the dividend and AAA. I wish my words could end the speculation. The facts of what we've done here, I think, should let investors know we've got the cash, and we've got the operating model that's going to secure the dividend in this environment." (Id., ¶ 248.) Plaintiff alleges that these and other statements touting GE's AAA credit rating were false and misleading in light of the continuing deterioration of GE Capital's business. (Id., ¶ 181.)
In early 2009, signs began to surface that GE would not be able to maintain its AAA credit rating. During January of 2009, a UBS Investment Research report disclosed that both Moody's and S&P had cited GE's ability to meet its earnings guidance of $5 billion as being crucial to its being able to maintain its AAA rating. (Id., ¶ 292.) On January 27, 2009, GE informed the public in a press release that Moody's had stated that it had placed GE and GE Capital's long-term AAA ratings on review for possible downgrade. (Id., ¶ 253.) It reassured investors, "Our objective is to maintain our Triple-A rating but we do not anticipate any major operational impacts should that change." (Id.) On February 5, 2009, Immelt told Bloomburg that "GE had the earnings power and cash to justify the payout [of its dividend] and its highest-possible AAA credit ratings, now under review." (Id., ¶ 260.) On February 10, 2009, Sherin spoke at a Barclay's conference and stated, "[W]e are running the Company like a AAA and we are going to continue to be conservative and focus on being safe and secure . . . ." (Id., ¶ 269.) And on March 2, 2009, GE released a letter to shareholders signed by Immelt and dated February 6, 2009. Immelt stated, "[W]e will continue to run the Company with the disciplines of a 'Triple A,' including adequate capital, low leverage, solid earnings, and conservative funding." (Id.)
On March 12, 2009, GE issued a press release stating that S&P had downgraded its rating from AAA to AA. (Id., ¶ 293.)
C.Statements about the Quality of GE Capital's Portfolio
At the beginning of the Class Period, GE Capital accounted for a significant portion of GE's business. The economic crisis hit financial institutions especially hard, and GE made numerous statements regarding GE Capital's financial health and more specifically about the quality of GE's investments.
On September 25, 2008, GE released its Q3 2008 earnings. That same day, Immelt stated in a press release: "While the financial services markets remain challenging and require us to adapt quickly to the rapidly changing environment, we will continue to run GE Capital to be safe and secure, while earning high margins on conservatively underwritten business." (Id., ¶ 168.) GE also hosted a conference call that day. On the call, Immelt stated,
Our GE Capital and Financial Service business model remains strong. We've got great cost base. We're a senior secured and diversified lender. We're match funded. We've never been a trader or market maker. . . . We expect to see higher losses in loss provisions and lower gains as the economy evolves.
(Id., ¶ 169.) Sherin stated during the same conference call that its AAA rating gave it an advantage in the lending market, specifically, "[Y]ou can enter into investments at low risk levels, low loan-to-values, and senior secured positions at high returns." (Id., ¶ 170.)
Sherin made more specific statements during the same conference call regarding the quality of GE Capital's portfolio. He stated, "We've got a great portfolio; our measurements and delinquencies and asset quality are all strong." (Id., ¶ 171.) He further stated, "We have a fantastic real estate portfolio. It's very high quality. The delinquencies on the book are .27% of assets, so it's performing very well." (Id., ¶ 172.)
On October 10, 2008, GE issued a further Q3 earnings release. In that release, Immelt stated, "We have taken a number of steps to protect investors from the downside risk in financial services. . . . The Company is well positioned to perform in a very difficult environment, and our Board has approved a plan to sustain the GE dividend through 2009." (Id., ¶ 184.) GE also hosted a conference call that same day. During the conference call, Sherin described GE Capital's real estate business as "strong" and "driven by the investments we've been making in senior secured debt at high returns." (Id., ¶ 186.) He also stated that GE Capital's portfolio "remains robust," continuing, "We've got a great portfolio. We've stuck to our risk management, but we are going to see a credit cycle here. We're going to see higher delinquencies, we're already seeing those. As we have higher delinquencies we're going to put up more loss provisions." (Id., ¶ 187.)
On December 2, 2008, GE issued a press release to announce an "updated strategic framework" for GE. Sherin stated in the press release:
We are operating in an extremely difficult environment, but we are outperforming our peers and we have strong franchises to build upon for long-term growth. We are a mid-market finance company differentiated by an originate-to-hold approach, product and geographic diversification, deep experience in risk assessment and collateral management, and senior secured positions for many of our receivables. (Id., ¶ 205.)
The same day, GE held a financial services investor meeting. During the meeting, Cary, GE Capital's Chief Operating Officer, stated, "Lastly, while we think we've planned prudently, we have a funding hedge of about $10 billion in our back pocket to manage any disruptions we might see in the marketplace. We feel pretty good about our plans around both collections and our forecast for new volume." (Id., ¶ 213.)
During the same meeting, Immelt stated, "I just want to do a deep dive on real estate debt portfolio. The left-hand side of the chart basically talks about the way we've structured the debt, low loan to value, high structured debt financing, well underwritten, great spread of risk. Through these cycles, we never lost any of our risk disciplines, any of our underwriting disciplines." (Id., ¶ 224.)
On December 16, 2008, GE issued a press release in which Immelt stated, "Our financial services business, while slowed by the current financial crisis, are strong, global, middle market franchises with a conservative originate-to-hold model backed by senior secured collateral." (Id., ¶ 229.)
According to plaintiff, the foregoing and related "rosy assessments" masked the fact that "GE Capital was in dire financial straits in terms of not generating "new business and revenues" and was "significantly exposed to substantial losses related to risky assets in its loan portfolio . . . ." (Id., ¶¶ 180, 181, 196.)
Negative information began to emerge regarding the quality of GE Capital's portfolio as the Class Period came to a close. On March 5, 2009, Sherin appeared on CNBC's television program, "Squawk Box," and allegedly admitted that the fair value of 98% of GE Capital's assets was unknown to investors. (Id., ¶ 287.) On March 19, 2009, GE held a six-hour long investment meeting to discuss the financial condition of GE Capital. (Id., ¶ 294.) The company disclosed that 42% of GE Capital's consumer loans were made to subprime borrowers, including 74% of GE Capital's U.K. mortgages, the largest portion of GE Capital's loan portfolio. (Id., ¶ 299.) In addition, with respect to GE Capital's $230 billion commercial lending and leasing portfolio, in plaintiff's words,
(a) 81% of the $55 billion in GE Capital equipment loans in the Americas were made to borrowers with non-investment grade, or "junk" credit ratings. 40% of all of GE Capital's equipment loans were made to borrowers rated B or lower;
(b) 93% of the $38 billion in GE Capital's leveraged loans were made to borrowers with non-investment grade, or "junk" credit ratings. 76% leveraged loans were made to borrowers that were rated below B, and 28% of these ...