The opinion of the court was delivered by: Denise Cote, District Judge
Defendants move for partial reconsideration of a January 12, 2012 Memorandum Opinion and Order (the "January Opinion") granting in part defendants' motions to dismiss the Second Consolidated Class Action Complaint (the "SAC"), and for judgment on the pleadings pursuant to Rule 12(c), Fed. R. Civ. P. All defendants have submitted a motion for partial reconsideration and judgment on the pleadings with respect to claims brought pursuant to the Securities Act of 1933 (the "Securities Act Motion"). Defendants General Electric Company ("GE") and Keith Sherin ("Sherin") have submitted a motion for partial reconsideration and for judgment on the pleadings with respect to claims brought pursuant to the Securities Exchange Act of 1934 (the "Exchange Act Motion"). For the following reasons, the Securities Act Motion is granted and the Exchange Act Motion is denied.
The Securities Act Motion and the Exchange Act Motion (together, the "Joint Motions") involve the defendants' statements on three separate topics: GE's ability to fund itself through issuing commercial paper, GE's reclassification of assets in violation of Generally Accepted Accounting Principles ("GAAP"), and the quality of the loan portfolio of GE Capital, GE's financial services unit. Although a general familiarity with the facts in this matter is presumed, a brief synopsis of facts relevant to these three topics is offered as a convenience. These facts are taken from the SAC unless otherwise noted, and are taken to be true for purposes of this motion. LaFaro v. New York Cardiothoracic Group, PLLC, 570 F.3d 471, 475 (2d Cir. 2009).
I. Commercial Paper Following the collapse of Lehman Brothers in September 2008, the global commercial paper market declined precipitously. GE, which was mostly financed by 30-day commercial paper, experienced difficulties funding its operations.
On September 8, 2008 defendant Jeffrey Immelt ("Immelt"), CEO of GE, spoke on the telephone with former Secretary of the Treasury Henry M. Paulson ("Paulson"). Immelt told Paulson that GE was having trouble selling its commercial paper. On September 15, Immelt traveled to Washington, D.C. and spoke further with Paulson, detailing GE's financial difficulties and in particular its problems funding itself with commercial paper.
On October 1, GE commenced a $12 billion secondary public stock
offering (the "Offering"). The Offering was conducted pursuant to a
shelf registration statement filed on December 5, 2005, a preliminary
prospectus filed on October 1, 2008, and a prospectus supplement Form
424B2 filed and dated October 2, 2008 (collectively, the
"Prospectus"). The offering documents for this stock (the "Offering
Documents") included a number of
statements related to GE's ability to issue commercial paper.
According to the SAC, such statements included the following:
A statement in GE's Form 10-K/A for Fiscal Year 2004 and its Forms 10-K for Fiscal Years 2005, 2006 and 2007 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."
A statement in GE's Form 10-K/A for Fiscal Year 2004 and
Form 10-K for FY 2005 that, "GE Capital is the most widely held name in global commercial paper markets. We believe that alternative sources of liquidity are sufficient to permit an orderly transition from commercial paper in the unlikely event of impaired access to those markets." A press release accompanying GE's September 25, 2008 Form
8-K stating that "demand remains strong for GE Capital's commercial paper debt," and that "GE's funding position is strong and GE has performed well during the recent market volatility." A statement by Immelt in GE's October 1, 2008 Free Writing
Prospectus, which announced the Offering, that "in the recent market volatility, we continue to successfully meet our commercial paper needs."
Statements in the Preliminary Prospectus filed on October
1, 2008 that "GE Capital has continued to issue commercial paper," and that "there can be no assurance that [commercial paper] markets will continue to be a reliable source of short-term financing for GE Capital."
The SAC claims that in light of GE's difficulty issuing commercial paper, these statements were materially false and misleading pursuant to the Securities Act.
The SAC further alleges that events after the Offering support a finding that the above statements were materially false and misleading. On October 7, 2008, the Federal Reserve announced that it was creating a Commercial Paper Funding Facility ("CPFF") that would purchase commercial paper as a liquidity backstop to U.S. issuers of commercial paper. Registration for CPFF started on October 20, and GE signed up for it that very day. The facility became operational on October 27, and GE Capital became one of its largest users.
On October 14, the Federal Deposit Insurance Corporation ("FDIC") announced its plan to create a Temporary Liquidity Guarantee Program ("TLGP"), which would guarantee debt issued by eligible banking institutions. Initially, GE did not qualify for TLGP but, on October 13 and 16, Immelt secretly lobbied Paulson to broaden TGLP eligibility so as to permit GE Capital's participation. As a result of these efforts, the rules for TGLP eligibility were changed on October 23; GE Capital was accepted into the program on November 12. By the end of 2008, GE had reportedly raised approximately $35 billion using TLGP guaranteed debt.
II. Reclassification of Assets
The Offering Documents state that GE Capital had $695.8 billion in assets. The SAC alleges, however, that GE accounted for assets in a manner that violated GAAP and that the Offering Documents therefore misstated the value of GE's assets in violation of the Securities Act.
Prior to the Offering, GE reclassified and transferred certain impaired assets from "available to sale" to "held to maturity" positions without marking these assets to their reduced current market value. GE thus avoided reporting losses on these assets as required by GAAP.
The SAC describes with specificity how GE improperly reclassified troubled assets within certain departments at GE Capital. These departments dealt primarily with commercial mortgage-backed securities, commercial real estate debt originating in the United States, and equity transactions originating in Asia.
On March 5, 2009, GE disclosed that 98% of its assets were held at inflated historical values. On June 25, 2009, Immelt appeared as a guest on the Charlie Rose show, a PBS television interview program. During the interview, Immelt said that GE Capital might not have been worth its stated value prior to the financial crisis.
III. Statements by Sherin
During the Class Period, which ran from September 25, 2008 until March 19, 2009, GE had over $220 billion in subprime consumer and "junk" grade commercial credit in its loan portfolio. This represented approximately one-third of GE's total assets. This fact was not disclosed until the end of the class period.
The SAC alleges that Sherin, who was GE's Chief Financial Officer, made the following false and misleading statements and omissions about the quality of GE Capital's loan portfolio during the class period:
During a September 25, 2008 conference call, Sherin stated,
"We've got a great portfolio; our measurement and delinquencies and asset quality are all very strong." He also stated, "We have a fantastic real estate portfolio. It's very high quality. The delinquencies on the book are
0.27% of assets, so it's performing well." During an analyst conference call on October 10, 2008,
Sherin noted that "the portfolio quality remains strong." He stated that GE Capital's real estate business had more than $89 billion in assets "driven by the investments we've been making in senior secured debt at high returns," and "we've capped off our real estate business just based on size today and we're continuing to ...