MANHATTAN (CN) - General Electric is still on the hook for charges that it misled investors during the 2008 financial crisis, a judge ruled in a federal class action.
Lead plaintiff State University Retirement System of Illinois claimed that General Electric hid its financial decline from investors in GE and its subsidiary GE Capital, from Sept. 25, 2008 to March 19, 2009, at the height of the financial crisis.
The class claims CEO Jeffrey Immelt and CFO Keith Sherin misled investors about GE's Oct. 7, 2008 stock offering.
Executives from GE Capital allegedly contributed to the deception, including CEO Michael Neal, CFO Jeffery Bornstein, and Chief Operating Officer William Cary.
These executives and "various companies that underwrote the October offering" are the defendants.
"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," U.S. District Judge Richard Holwell summarized in a 53-page Memorandum Opinion and Order.
In particular, GE was accused of concealing "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," according to the ruling.
The retirement fund culled evidence for the lawsuit from former Secretary of the Treasury Henry 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.' Paulson concluded based on these conversations that GE was having difficulty funding itself. 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'). The initial plan for the TLGP was that it would guarantee the short-term unsecured loans of banks. 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. 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," Judge Holwell wrote. (Citations to Second Amended Complaint omitted.)
The second amended complaint also drew upon confidential witnesses, one of whom testified that commercial paper markets were "frozen" as of Sept. 25, 2008.
GE finally disclosed that GE Capital's portfolio had lower quality investments in a March 19, 2009 statement that "approximately 42 percent of GE Capital's $183 billion in total consumer loans were made to non-prime borrowers," the judge wrote, citing the second amended complaint.
Holwell blasted Immelt for his "categorical" statements that investors could count on the company's financial health.
"Immelt's categorical statements that investors could 'count on' a dividend and that GE was having 'no difficulties' issuing commercial paper are not the sort of cautious statements one would expect of a CEO attempting to come to grips with the effects of the economic crisis on his company," Holwell wrote.
He added that the retirement fund plausibly argued that this misleading was intentional.
"Of course, a CEO is allowed to convince the public to invest in his company, but not at the expense of providing it with accurate information about the company's financial health," Holwell wrote. "Taking the factual allegations in the SAC as true, the inference that Immelt acted with scienter is at least as compelling as the inference that he did not."
Holwell added that GE could not be sued for every wide-eyed "puffery" it made about its financial health, and therefore dismissed a handful of claims.
"Certain types of statements are generally not materially misleading. 'Puffery' is one such type. Puffery is an optimistic statement that is so vague, broad, and non-specific that a reasonable investor would not rely on it, thereby rendering it immaterial as a matter of law," Holwell wrote.
However, he added: "Although the GE prospectus does contain some cautionary language regarding the possibility of write-downs within GE Capital's loan portfolio, this language is not particularly specific. The statements from which defendants quote describe how the faltering economy could hurt GE and how GE could lose money if borrowers defaulted. These statements do not disclose that GE allegedly had shifted its assets around on the books in order to avoid writing them down. As such, defendants did not provide adequate cautionary language regarding the valuation of GE's assets, and these statements survive a motion to dismiss." (Citation to defense exhibit omitted.)
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