UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF...

Case 1:08-cv-08484-RJS Document 39 Filed 09/29/10 of 13

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

No. 08 Civ. 8484 (RJS)

DALE WATERS, ET AL.,

Plaintiffs,

VERSUS

GENERAL ELECTRIC COMPANY, ET AL.,

Defendants.

MEMORANDUM AND ORDERSeptember 29, 2010

RICHARD J. SULLIVAN, District Judge:

following reasons, Defendants’ motion isgranted.

Lead Plaintiffs bring this putative classaction lawsuit against Defendants General I. BACKGROUND

Electric Company (“GE”), a New Yorkcorporation; Jeffrey R. Immelt, GE’s chief A. Factsexecutive officer; and Keith S. Sherin, GE’schief financial officer. Plaintiffs allege that, The following facts are taken from thefrom September 25, 2008 through October third amended class action complaint1, 2008, they purchased shares of GE (“TAC”), the written instruments attachedcommon stock at inflated prices. Plaintiffs thereto, statements or documentsbring this action to seek damages under incorporated by reference, and publicsections 10(b) and 20(a) of the Securities disclosure documents filed with theExchange Act of 1934 (the “Exchange Act”) Securities and Exchange Commission (theand Rule 10b-5 promulgated thereunder. “SEC”). See ATSI Commc’ns, Inc. v. Shaar

Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).Before the Court is Defendants’ motion

to dismiss pursuant to Rule 12(b)(6) of theFederal Rules of Civil Procedure. For the


1. September 2008 ¶ 39). The same day, the share price ofWachovia, the fourth largest American

In September 2008, many of Wall bank, dropped by 21%, and the share price

Street’s titans — Fannie Mae, Freddie Mac, of GE dropped by 8%. (Id. ¶¶ 40, 41.) On

American International Group (“AIG”), September 17, 2008, the United States

Washington Mutual, Merrill Lynch, General government invested $85 billion in the

Motors, and Chrysler — were in grave world’s largest financial institution, AIG, in

financial distress. (TAC ¶¶ 30-34.) On return for an 80% stake. (Id. ¶ 43.) GE’s

September 7, the United States government stock price dropped 6.7% on that day. (Id. ¶

assumed control over Fannie Mae and 44.) On September 18, Reuters reported that

Freddie Mac, the country’s two federally it would “be surprised if GE did not take

funded mortgage banks. (Id. ¶ 29.) The proactive steps” toward de-leveraging the

Office of Thrift Supervision eventually balance sheet of GE Capital, the finance arm

closed Washington Mutual, and, after a of GE. (Id. ¶ 45.) Morgan Stanley and

bidding process, JPMorgan Chase acquired Goldman Sachs also applied to become

it. (Id. ¶ 31.) On September 12, General federally chartered bank holding companies

Motors and Chrysler started lobbying to in order to ensure “access to permanent

receive $25 billion in government loans in liquidity and funding.” (Id. ¶ 46.) On

order to avoid imminent bankruptcy. (Id. ¶ September 19, the United States Treasury

32.) The same week, the share value of announced a $700 billion bailout of the

Merrill Lynch, the world’s largest stock banking and financial industries. (Id. ¶ 51.)

brokerage firm, dropped more than 35%. Also on September 19, Washington Mutual

(Id. ¶ 34.) On September 14, Bank of put itself up for sale, and the SEC instituted

America agreed to buy Merrill Lynch for an emergency ban on short selling theapproximately $44 billion. (Id.) securities of 799 companies, including GE.

(Id. ¶¶ 52-53.) This short selling ban was

“[B]ecause of extraordinary market “an extraordinary measure . . . , thus

conditions,” GE, whose stock is publicly demonstrating the severe downward

traded on the New York Stock Exchange pressure on securities prices and the risk of

(the “NYSE”) and which “operates as a widespread financial panic.” (Id. ¶ 53.) On

technology, media, and financial services September 19, GE’s stock price closed 8.6%

company worldwide,” issued a public lower than its opening price on that day.

statement on September 14, 2008. (Id. ¶¶ (Id. ¶ 54.) From September 21 to September

19, 35.) GE attempted to reassure investors 23, widespread upheaval on Wall Street

of its liquidity and that its “commercial continued. (Id. ¶¶ 55-61.) On September

paper programs, which total $90-$95 billion, 23, GE’s stock price closed down 4.6% from

remain robust.” (Id. ¶ 35.) GE also clarified the prior day’s trading. (Id. ¶ 62.) On the

that, “[a]s stated in previous investor next day, Bloomberg reported of fear that

meetings, we are not raising external capital Wall Street giants would “have to go out andand have no need to.” (Id.) raise equity.” (Id. ¶ 63.)

In the days following the 2. Behind the Scenes:

announcement, GE’s share price dropped as September 2008Wall Street felt one shock after another.

(Id. ¶¶ 40, 44.) On September 15, Lehman As described by former United States

Brothers filed Chapter 11 bankruptcy, the Treasury Secretary Henry Paulson in his

largest bankruptcy in American history. ( Id. book, On the Brink: Inside the Race to Stop

2


the Collapse of the Global Financial System, 65, 134.) The call began with Immelt’sDefendant Immelt had two private statement that “[i]n light of theconversations with Secretary Paulson during unprecedented market volatility, we thoughtthe first half of September 2008. (Id. ¶¶ 9, it was important to give our investors an36-37.) On September 8, Immelt told update on what we’re seeing and theSecretary Paulson that GE “was having proactive steps we’re taking to keep theproblems selling commercial paper.” (Id. ¶ company safe.” (Id. ¶ 70.) Immelt then36.) Secretary Paulson described himself as reassured investors that GE was performing“stunned” by this news. (Id.) He further well and remained “financially strong.”explained that the (Id.) He also reassured investors that both

GE’s cost of capital and funding riskmarket had been in distress since the “remained low.” (Id. ¶ 73.)onset of the credit crisis in August2007. The worst of that had Sherin then addressed investors andinvolved the asset-backed reiterated that market conditions werecommercial paper market, which unprecedented but that GE continued tosupported all those off-balance-sheet perform well. (Id. ¶ 74.) He madespecial investment vehicles filled assurances that GE’s ability to issuewith toxic collateralized debt commercial paper was not in jeopardy andobligations that banks cooked up. that GE had the ability to weather the stormI’d never expected to hear those without additional financing. (Id.) Goingtroubles spreading like this to the forward, he said, GE would lower itscorporate world, certainly not to GE. amount of debt held in commercial paper.

(Id.) Thus, GE revised its fiscal plan:(Id.) “Previously we’ve communicated that we

completed $70 billion of long-term debt outImmelt spoke with Secretary Paulson of our total-year plan of around $80, and

again on September 15, the day after GE’s now we’re saying we’re done for the year.September 14 public statement. (Id. ¶ 37.) We may be opportunistic, but we don’t needSecretary Paulson stated that Immelt to do any more long-term debt this year.”repeated that “GE was finding it very (Id.) Immelt concluded his prepareddifficult to sell its commercial paper for any remarks by reassuring investors that GE’sterm longer than overnight.” (Id.) Secretary Triple A rating was “a key priority for GE.”Paulson described himself as “startl[ed]” (Id. ¶ 81.)that “the single-biggest issuer in this $1.8trillion market was having trouble with its Immelt and Sherin then commenced afunding.” (Id.) He claimed to have told question and answer session with analysts.Immelt, “we have got to put out this fire.” (Id. ¶ 82.) Jeffrey Sprague, an analyst with(Id.) Citigroup, asked Immelt whether “the idea

of any new equity [is] still off the table.”3. The September 25, 2008 (Id. ¶ 83.) Immelt replied,

Conference Call and Its Aftermath[W]e just don’t see it right now.

Before the NYSE opened for trading on Again, we feel very secure aboutSeptember 25, 2008, Immelt and Sherin held how the funding looks and thean unscheduled conference call in order to strength of the company and thelower GE’s earnings estimates. (Id. ¶¶ 21, strength of the balance sheet. Cash

3


flows are great. The liquidity profile totaling $1.24 per share annually, throughhas been strong; it’s now stronger. the end of 2009.” (Id.)Leverage is better. And so we reallybelieve in our business model and Following the conference call, Immeltfeel kind of secure that we’re well- appeared on CNBC and reiteratedpositioned here. statements made during the conference call.

(Id. ¶ 92.) He also stated that “the reason(Id.) Deane Dray, a Goldman Sachs why we are AAA is because we woke up on

analyst, responded, “Great. And then just to Wednesday morning, Thursday morning,clarify on the funding outlook near term. Friday morning, rolled our [commercialThat was clear that you don’t need any paper] with no trouble, got good pricingfurther funding in 2008 . . . . How about the relative to Libor and that’s why you’reidea of pre-funding some of the obligations AAA.” (Id.) Immelt continued, “[w]e’vein 2009, and how aggressive might you be got immense liquidity . . . . [W]e’ve gotover the near term?” (Id. ¶ 84.) Sherin great liquidity inside the company and insidereplied, “I think right now what we’ve GE Capital.” (Id. ¶ 93.)planned on for 2008 is that we do not needto do any long-term debt based on what we GE’s stock price rose by almost 5% onhave here, and I think that’s a prudent way September 25, 2008. (Id. ¶ 88.) Accordingto think about it because of some of the to Plaintiffs, the conference call and presschoppiness in the debt markets.” (Id.) John release resulted in analysts updating theirInch, a Merrill Lynch analyst, then asked earnings models for GE but not adjusting forSherin about GE’s ability to fund its any possible increase in outstanding shares.commercial paper debt. (Id. ¶ 86.) Sherin (Id. ¶ 91.) Thus, the increase in stock pricereplied that GE’s commercial paper program after the September 25 call occurred evenis “broad and deep . . . . And if you look at after “GE had warned investors that it wouldour 61-day maturities, you really don’t have not meet its prior earnings guidance for theany near term pressure of any magnitude.” [third] quarter and the full fiscal year.” ( Id.(Id.) Sherin then continued to explain why ¶ 95.) Plaintiffs explain that such anGE was not concerned with funding its increase was “notable” and that ordinarily ancommercial paper debt. (Id.) announcement lowering earnings guidance

would cause “a substantial share priceIn conjunction with the conference call drop.” (Id.) A UB S analyst report opined

and on the same day, GE issued a press that “investors were reassured by GE’srelease lowering its earning guidance and commitment to maintaining its dividend . . .stating that it was taking steps “to strengthen and comments on funding/liquidity.” (Id. ¶its already strong capital and liquidity 97.)position.” (Id. ¶ 66.) Included in the pressrelease were statements that GE would In the days after the conference call, theincrease capital in GE Capital but would not Dow Jones Industrial Average continued toraise any additional long-term debt, that it fall. On September 26, governmentwould reduce GE Capital’s commercial regulators seized Washington Mutual andpaper to 10-15% of GE Capital’s total debt, sold it to JPMorgan Chase in the biggestand that the Board of Directors “had United States bank failure in history. ( Id. ¶approved management’s plan to maintain 98.) On the same day, The New York TimesGE’s quarterly dividend of $0.31 per share, reported that Citibank was in preliminary

merger talks with Wachovia. (Id. ¶ 100.)

4


On Monday, September 29, the United preliminary prospectus filed with the SECStates stock market dropped in value upon stated:the news that Congress could not reach anagreement on a bank bailout plan. (Id. ¶ [i]n light of continuing volatility101.) GE’s stock price closed 8.5% lower and developments in the financialthan it opened on that day. (Id.) On markets since September 25,Tuesday, the market rebounded based upon including uncertainty as to if,news that Congress would soon reach an when and in what form the U.S.agreement on a bank rescue package. (Id. ¶ government’s proposed102.) GE’s share price rose higher than the Emergency Economicbroader market indexes and closed with a Stabilization Act of 2008 . . . will10.4% gain. (Id.) be enacted, we are seeking

through this offering to4. The October 1, 2008 Announcement accelerate our plan to enhance

and Its Aftermath our capital base and liquidityposition.

In the early afternoon of October 1,2008, GE announced that it planned to offer (TAC ¶ 139.) In addition, Immelt issued aat least $12 billion of common stock to the statement that the offering enhanced GE’spublic and $3 billion of preferred stock to flexibility and allowed it “to play offense inBerkshire Hathaway in a shelf offering. 1this market should conditions allow.” (Id. ¶(Id. ¶¶ 106-07.) At the time of the October 109.) He emphasized GE’s commitment to1 announcement, shareholders received no its stock’s Triple A rating and stated that “inpricing information with respect to the the recent market volatility, we continue tocommon stock offering. 2 (Id. ¶ 107.) successfully meet our commercial paperInvestors, however, were told that the stock needs.” (Id.) Robert Wilkerson, GE’soffered to Berkshire Hathaway would be spokesman, justified the offering takingpriced at $22.25 per share. (Defs.’ Mem. at place so soon after the September 2510 (citing GE’s October 1 press release).) conference call:

Also on October 1, GE offered several [s]ince then, the failure ofexplanations for the offering. Its Washington Mutual Inc., the sale

of Wachovia Corp. to CitigroupInc., and the failure of Congress

1 Because the offering was a shelf offering, “the to pass an economic-rescue

October 1, 2008 prospectus [filed with the SEC] was package changed conditions

actually a preliminary prospectus supplemental to a enough for GE to look outsideprospectus dated December 5, 2005. The $12 billion . . . . Since we updated investorsstock offering was issued pursuant to an ‘automatic last Thursday, a lot has changedshelf-registration’ which . . . permitted GE to file a in the world . . . . Thesupplementary prospectus and sell the stock without announcement today addressesobtaining further approval from the SEC.” (Id. ¶139n.8.) changes in the current

environment.2 “The reason an issuer sells stock in a rapidlyexecuted shelf-offering is to announce the offering (Id. ¶ 137.)and price it in a single day to avoid market pricevolatility (i.e., having the market fall out from underthe issuer).” (Id. ¶ 165.)

5


By the time the market closed on (Id.)October 1, GE’s stock price rose to $24.50from $23.63. 3 (Defs.’ Mem. at 10 (citing an On October 10, GE held anotherOctober 1, 2008 Bloomberg report).) Before conference call with investors. (Id. ¶ 130.)the market opened on the next day, GE During this call, Immelt and Sherin againannounced that the pricing of its $12 billion explained the decision to offer stock for saleof common stock would be $22.25 per on October 1. They emphasized GE’sshare, the same price as the preferred stock commitment to protecting its Triple Aoffered to Berkshire Hathaway and status, and its goal of reducing leverage andannounced on the prior day. (TAC ¶ 112.) risk in the volatile market. (Id.) ImmeltThe announced pricing was nearly 10% continued,lower than the previous trading day’sclosing price of $24.50. (Id. ¶ 112.) As a [w]e accelerated our liquidityresult of this news, GE’s stock price closed plan and we have clear protectionat $22.15 per share on October 2 after now if the [commercial paper]opening at $22.83 per share — a 9.6% market remains under duressdecrease since the end of trading on the prior . . . . We’ve had no problemsday. (Id. ¶¶ 114-15.) with our own [commercial paper]

but I think we have just takenSome commentators reacted negatively this issue off the table for

to GE’s October 2 announcement. (Id. ¶¶ investors. The $15 billion equity127-29.) For example, in an October 2 offering gave us more cash andresearch report entitled “Raising Capital and now the back up lines plus cashEyebrows,” Credit Suisse described GE’s are greater than [commercialstock offering as coming “on the heels of paper].saying on 9/25 when asked about new equitythat ‘we just don’t see it right now.’” (Id. ¶ (Id.) Later in the call, he reiterated, “we127.) The report continued: have never had issues in the [commercial

paper] market rolling our paper.” (Id.) Hethings in the financial markets did not, however, ignore the presence of riskhave eroded since GE last spoke in the commercial paper market. Forpublicly . . . . However, example, he said, “[in] this volatile. . . [c]redibility concerns economic time we’ve done a good job ofcontinue to mount as [the] protecting the company and risk reducingcompany’s public commentary the company.” (Id.)surrounding funding and outlookseems to be negated by its Sherin echoed these remarks: “debtactions in the marketplace. markets have been volatile but we are stillWhen a Triple-A rated company funding ourselves without any issues.” (Id.)needs to raise capital at this cost, He further explained,we believe it’s an extraordinarilynegative event for both the [w]e do have more protection[company] and the market. today if the [commercial paper]

market remains under stress . . . .3 When GE halted trading before the announcement We had a liquidity plan that saidof the stock offering, GE’s stock price was at $23.63per share. (Defs.’ Mem. at 10 (citing a October 1,

we were going to get our bank

2008 Bloomberg report).) lines plus our cash equal to our

6


[commercial paper] by the end of December 11, 2009; and their TAC onthe year. After our earnings call March 15, 2010.last week, . . . we said that maynot be fast enough and we went Defendants initially moved to dismissright to work on well how do you the first amended complaint on April 20,accelerate that and that’s why we 2009. Before deciding that motion,did the equity offering and we’ve however, the Court granted Plaintiffs leaveaccelerated. Today our bank to amend their complaint a second time.lines plus our committed cash are Accordingly, on November 30, 2009, thegreater than our [commercial Court denied Defendants’ motion with leavepaper] and that’s a great place to to renewal after Plaintiffs filed their secondbe. amended complaint.

(Id.) Sherin elaborated, “I think in a Defendants filed the motion to dismisswholesale funding model you want to now before the Court on January 15, 2010.change your reliance on those commercial Plaintiffs filed opposition papers onpaper markets and we’re doing that.” ( Id.) February 12, 2010, and Defendants filed

reply papers on April 14, 2010.4

5. Behind the Scenes:October 2008 II. LEGAL STANDARDS

According to Secretary Paulson, he had A. Motion to Dismisstwo additional conversations with Immelt inOctober 2008. (Id. ¶¶ 131-32.) Three days In deciding a motion to dismiss underafter the October 10 conference call, Immelt Rule 12(b)(6), this Court must accept alltold Secretary Paulson, “I just have to tell well-pleaded allegations contained in theyou, I’m worried about my company and our complaint as true, and it must draw allability to roll over paper in the face of this.” reasonable inferences in favor of the(Id. ¶ 131.) Immelt and Secretary Paulson plaintiff. See Bell Atl. Corp. v. Twombly,spoke again on October 16: “Jeff Immelt 550 U.S. 544, 555-56 (2007). A plaintiffhad come to my office on the 16th to make need not include “heightened fact pleadingthe case that the FDIC should guarantee GE of specifics” to survive a Rule 12(b)(6)Capital’s debt issues. He believed our new motion, id. at 570, but the “[f]actualprograms put GE at a huge disadvantage, allegations must be enough to raise a right tomaking it difficult for the company to fund relief above the speculative level, on theitself.” (Id. ¶ 132.) Secretary Paulson said assumption that all of the allegations in theImmelt told him, during that meeting, “We complaint are true.” Id. at 555 (citationare the ones out there making the loans that omitted). Therefore, this standard “demandsbanks aren’t, and we need help.” (Id.) more than an unadorned, the-defendant-

unlawfully-harmed-me accusation.”B. Procedural History Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949

(2009).Since filing their complaint in this

action on October 3, 2008, Plaintiffs haveamended it three times. Plaintiffs filed their

4 Defendants received additional time to file reply

first amended complaint on February 20, papers because Plaintiffs requested and were grantedleave to file the TAC during the course of briefing

2009; their second amended complaint on Defendants’ motion.

7


Ultimately, a plaintiff must allege 171 (2d Cir. 2004)). Thus, in order to

“enough facts to state a claim to relief that is satisfy Rule 9(b), the plaintiff must: “(1)

plausible on its face.” Twombly, 550 U.S. at specify the statements that the plaintiff

570. “A claim has facial plausibility when contends were fraudulent, (2) identify the

the plaintiff pleads factual content that speaker, (3) state where and when the

allows the court to draw the reasonable statements were made, and (4) explain why

inference that the defendant is liable for the the statements were fraudulent.” Rombach,misconduct alleged.” Iqbal, 129 S. Ct. at 355 F.3d at 170 (internal quotation marks

1949. By contrast, “[a] pleading that offers and citation omitted). “Allegations that are

‘labels and conclusions’ or ‘a formulaic conclusory or unsupported by factual

recitation of the elements of a cause of assertions are insufficient.” ATSIaction will not do.’ Nor does a complaint Commc’ns, 493 F.3d at 99.

suffice if it tenders ‘naked assertion[s]’

devoid of ‘further factual enhancement.’” 2. PSLRAId. (quoting Twombly, 550 U.S. at 555)

(citations omitted). If a plaintiff “ha[s] not In the context of securities fraud

nudged [its] claims across the line from allegations, the PSLRA has expanded on

conceivable to plausible, [its] complaint Rule 9(b)’s pleading requirements. See 15

must be dismissed.” Twombly, 550 U.S. at U.S.C. § 78u-4(b). “The statute insists that570. securities fraud complaints ‘specify’ each

misleading statement; that they set forth theB. Securities Fraud facts ‘on which [a] belief’ that a statement is

misleading was ‘formed’; and that they

“Securities fraud claims are subject to ‘state with particularity facts giving rise to a

heightened pleading requirements that the strong inference that the defendant acted

plaintiff must meet to survive a motion to with the required state of mind.’” Duradismiss.” ATSI Commc’ns, 493 F.3d at 99. Pharm., Inc. v. Broudo, 544 U.S. 336, 345

The heightened pleading requirements are (2005) (quoting 15 U.S.C. §§ 78u-4(b)(1),

set forth in Rule 9(b) of the Federal Rules of (2)). “Therefore, ‘[w]hile we normally draw

Civil Procedure and the Private Securities reasonable inferences in the non-movant’s

Litigation Reform Act (the “PSLRA”), 15 favor on a motion to dismiss,’ the PSLRAU.S.C. § 78u-4(b). ‘establishes a more stringent rule for

inferences involving scienter’ because the1. Rule 9(b) PSLRA requires particular allegations

giving rise to a strong inference of scienter.”

While the rules of pleading in federal ECA & Local 134 IBEW Joint Pension Trustcourt usually require only “a short and plain of Chi. v. JP Morgan Chase Co., 553 F.3d

statement” of the plaintiff’s claim for relief, 187, 196 (2d Cir. 2009) (quoting TeamstersFed. R. Civ. P. 8, averments of fraud must Local 445 Freight Div. Pension Fund v.be “state[d] with particularity,” Fed. R. Civ. Dynex Capital Inc., 531 F.3d 190, 194 (2d

P. 9(b). See ATSI Commc’ns, 493 F.3d at Cir. 2008)) (alteration in original).99. “This pleading constraint serves toprovide a defendant with fair notice of aplaintiff’s claim, safeguard his reputationfrom improvident charges of wrongdoing,and protect him against strike suits.” Id.(citing Rombach v. Chang, 355 F.3d 164,

8


III. D ISCUSSION pleaded scienter. 5

A. Section 10(b) Claim

“Loss causation is the causal linkbetween the alleged misconduct and the

“Section 10(b) of the Exchange Act is economic harm ultimately suffered by the

designed to protect investors by serving as a plaintiff.” Lentell, 396 F.3d at 172 (internal

‘catchall provision’ which creates a cause of quotation marks omitted). The PSLRA

action for manipulative practices by codified this requirement: “In any private

defendants acting in bad faith.” In re action arising under this chapter, the

Openwave Sys. Sec. Litig., 528 F. Supp. 2d plaintiff shall have the burden of proving

236, 249 (S.D.N.Y. 2007) (citing Ernst & that the act or omission of the defendant

Ernst v. Hochfelder, 425 U.S. 185, 206 alleged to violate this chapter caused the

(1976)). The SEC implemented section loss for which the plaintiff seeks to recover

10(b) of the Exchange Act by promulgating damages.” 15 U.S.C. § 78u-4(b)(4). The

Rule 10b-5, 17 C.F.R. § 240.10b-5. In concept of loss causation is related to — yet

relevant part, Rule 10b-5 provides that it is distinct from — the tort-law doctrine of

unlawful “[t]o make any untrue statement of proximate cause. Lentell, 396 F.3d at 172-

a material fact or to omit to state a material 73. “[A] misstatement or omission is the

fact necessary in order to make the proximate cause of an investment loss if the

statements made, in the light of the risk that caused the loss was within the zone

circumstances under which they were made, of risk concealed by the misrepresentationsnot misleading.” 17 C.F.R. § 240.10b-5. and omissions alleged by a disappointed

investor.” Id. at 173 (internal quotation

In order to sustain a private cause of marks omitted). “Thus to establish loss

action for securities fraud under section causation, a plaintiff must allege . . . that the

10(b) and Rule 10b-5, a plaintiff must subject of the fraudulent statement oradequately plead: (1) a material omission was the cause of the actual loss

misrepresentation or omission by the suffered, i.e., that the misstatement or

defendant; (2) scienter; (3) a connection omission concealed something from the

between the misrepresentation or omission market that, when disclosed, negatively

and the purchase or sale of a security; (4) affected the value of the security.” Id.reliance upon the misrepresentation or (citations and quotation marks omitted).

omission; (5) economic loss; and (6) loss These principles necessitate that Plaintiffs’causation. See Heller v. Goldin “loss be foreseeable and that the loss be

Restructuring Fund, L.P., 590 F. Supp. 2d caused by the materialization of the

603, 613 (S.D.N.Y. 2008) (citing Stoneridge concealed risk.” Id.Inv. Partners, LLC v. Scientific-Atlanta,Inc., 552 U.S. 148, 157 (2008)).

In this action, Plaintiffs have failed toplead that their loss was caused by the

In this case, Defendants argue that materialization of the concealed risk. For

Plaintiffs have failed to plead scienter and the sake of argument, the Court assumes the

loss causation. Because the Court agrees sufficiency of Plaintiffs’ allegation thatthat Plaintiffs have failed to pleaded loss

causation adequately, the Court does not 5 For the same reason, the Court also does not reachconsider whether they have adequately the issue of whether Plaintiffs sufficiently pleaded

transaction causation, a concept “akin to reliance,”that Defendants do not contest. Lentell v. MerrillLynch & Co., 396 F.3d 161, 172 (2d Cir. 2005).

9


Defendants, during the September 25, 2008 The Second Circuit, however, hasconference call, concealed the risk of GE clarified that loss causation is properlyissuing new equity. (TAC ¶ 145.) That risk alleged when a “misstatement or omissionwas revealed on October 1, 2008 when GE concealed something from the market that,announced that it would be offering $15 when disclosed, negatively affected the valuebillion in new equity. (Id. ¶ 138.) In other of the security.” Lentell, 396 F.3d at 173words, after that announcement, investors (emphasis added). In this case, theknew that any prior representation “concealed something” was thesuggesting that GE did not need to issue new announcement of a $15 billion stockequity in the immediate future was false. offering by GE — in stark contrast to theAlthough the announcement did not include assurances of senior management on thethe pricing for the $12 billion in common September 25, 2008 conference call. (Seestock, it disseminated the fact of the Pls.’ Mem. at 33 (stating that theoffering, as well as the below-market pricing “misrepresented fact” was that “GE wouldof the $3 billion of preferred stock to not do an equity offering”).) However, afterBerkshire Hathaway. (Defs.’ Mem. at 10 the stock offering was “disclosed” on(citing GE’s October 1, 2008 press release).) October 1, 2008, the record is clear that thatGE announced that the Berkshire Hathaway the “value of the security” was positivelystrike price was $22.25 per share when GE affected that day. 6 The Court cannot find,stock had been trading at $23.63 per share. and Plaintiffs have not cited, a single section(Id.; Defs.’ Mem. at 10 (citing an October 1, 10b-5 case in which the plaintiff prevailed2008 Bloomberg report).) Despite this on a motion to dismiss when the stock pricerevelation, GE’s stock price closed at $24.50 increased after an announcement revealingper share on October 1, 2008. (Id.) In other an alleged fraud. Cf. Collier v. Aksys Ltd.,words, as Plaintiffs concede, GE’s stock No. 04 Civ. 1232 (MRK), 2005 WLprice increased after the announcement. 1949868, at *16 (D. Conn. Aug. 15, 2005)(Pls.’ Mem. at 33.) Quite simply, therefore, (ruling that, in a case where the stock pricewhen GE revealed the concealed risk on increased, “[bJased on the simplest and mostOctober 1, no loss ensued.

Before the market opened on the next 6 Even though Plaintiffs did not make this argument,the Court notes that the October 1 and October 2,

day, GE announced that the stock price for 2008 announcements did not each reveal thethe $12 billion in common stock would be allegedly fraudulently concealed statements in part.set at the same price — $22.25 per share — The case law is clear that “[fJor an event to qualify asas the strike price for the Berkshire a materialization of the risk, it need only disclose

Hathaway offering. (TAC ¶ 112.) part of the truth that was previously concealed by the

According to Plaintiffs, this announcement

fraud.” In re Vivendi Universal, S.A. Sec. Litig., 634F. Supp. 2d 352, 364 (S.D.N.Y. 2009) (emphasis

resulted in GE’s stock price falling from added); see also Dura, 544 U.S. at 342 (“But if, say,$24.50 at the market’s close on October 1 to the purchaser sells the shares quickly before the$22.15 at the market’s close on October 2. relevant truth begins to leak out, the

misrepresentation will not have led to any loss.”(Id. ¶ 115.) Plaintiffs, therefore, attempt to (emphasis added)). In this case, however,link the loss in GE’s stock value that Defendants disclosed the entire truth of the allegedlyoccurred on October 2, 2008 to GE’s fraudulently concealed statements on October 1.allegedly fraudulent concealment of the Because Plaintiffs do not allege that Defendantsstock offering on September 25. (Pls.’ fraudulently concealed the price of the stock offering,

Mem. at 33.)

the October 2 announcement did not “leak” any“relevant truth” out into the market. Dura, 544 U.S.at 342.

10


logical view of the facts alleged, [the October 1, the causal link has not been

plaintiff] has not (and apparently cannot) adequately alleged.plead loss causation.”); W. Palm Beach

Firefighters' Pension Fund v. StarTek, Inc., Plaintiffs argue that such an

No. 05 Civ. 1344 (WDM), 2008 WL understanding of the causal relationship

4838671, at *6 (D. Colo. Nov. 6, 2008) between the alleged fraud and the stock

(“No stock price drops occurred in the price “conflates Defendants’ ability on

aftermath of this disclosure; rather, the September 25 to foresee the ‘risk’ of a stock

initial response to the registration statement price decline resulting from the equity

drove stock prices up. Under the offering with investors’ ability to predict,

circumstances, I conclude that Plaintiff's and their appetite to gamble on, whether and

claims cannot rest on the facts relating to the to what extent the offering price would beloss of the Microsoft contract.”). discounted from the current market price.”

(Pls.’ Mem. at 33.) Again, under the

Plaintiffs offer two arguments for why assumption that Defendants fraudulently

the October 1 stock-price increase is concealed the fact of the equity offering on

immaterial. First, Plaintiffs assert that the September 25, the Court accepts that such a

October 2 stock-price decline was concealment risked the chance that GE’s

foreseeable. Second, Plaintiffs argue that, stock price could decline. Put another way,

absent the “Buffett Premium,” GE’s stock a reduced share price was a foreseeablewould have likely declined on October 1. consequence of the alleged fraud. The risk

The Court will address each argument in of the decline in stock price, however, neverturn. materialized, since GE’s stock price

increased after the October 1 announcement.

1. Forseeability versus Materialization of a In other words, after hearing the October 1Concealed Risk announcement, investors assessed whether a

stock price decrease would occur after the

With respect to Plaintiffs’ first loss- announcement of the pricing of the common

causation argument, they maintain that stock offering. From the moment trading re-

“Defendants can be held liable for simply opened after the October 1 announcement to

being aware of the risk of misleading the the moment before the October 2

market. If Defendants are aware that there announcement, GE investors could have

is a 50% chance of a price decline in the sold their stock. Investors who did not sell

offering, it is foreseeable and proximate — while possessing the knowledge that

cause is established.” (Pls.’ Opp’n at 33.) pricing on the $12 billion offering in

Plaintiffs are correct that the foreseeability common stock was yet to be revealed —

prong of the loss-causation analysis requires chose to gamble on the offering price. They

only that Defendants recognize that their made that decision after full disclosure of

fraudulent statements could result in the the information that had been allegedly

chance of a decline in stock price. fraudulently concealed on September 25,

Foreseeability, however, is not enough to 2008. (See, e.g., TAC ¶¶ 145, 161.)establish loss causation; Plaintiffs must also

allege that the loss was caused by the Again, Plaintiffs do not allege that

materialization of the concealed risk. See Defendants fraudulently concealed the price

Lentell, 396 F.3d at 173. As explained of the stock offering on September 25. (Seeabove, because the stock price increased on TAC ¶ 165.) In fact, within the section of

Plaintiffs’ brief arguing scienter, they ask

11


that “[t]he Court . . . find that Defendants call — caused the stock price to drop. Asconcede that news of the offering on October the complaint makes clear, it did not.1 . . . had a separate and distinct effect onthe market price than that caused by news of 2. The Buffett Premiumthe pricing for the offering on October 2.”(Pls.’ Opp’n at 19 n.15.) The Court makes Plaintiffs’ second loss causationsuch a finding and, because Plaintiffs do not argument is that “GE’s share price roseallege that Defendants concealed the pricing slightly, rather than declined immediately onfor the offering on September 25, this October 1 . . . because . . . [of the] Buffet[t]finding is fatal to Plaintiffs’ loss-causation ‘Premium.’” (Pls.’ Opp’n at 34.) Plaintiffsargument. define the Buffett Premium as “an increase

in value on the basis that [Warren]

Plaintiffs try to bypass this reasoning Buffet[t]’s investment in a companythrough another iteration of the same vouches for the company’s quality as anforeseeability argument. (See Pls.’ Opp’n at investment and makes the company more34.) This argument is rooted in the Second valuable.” 7 (TAC ¶ 110.) Plaintiffs explainCircuit’s explanation that “a misstatement or that the Buffett Premium “stabilized GE’somission is the proximate cause of an stock, which would have likely haveinvestment loss if the risk that caused the declined but for Buffet[t]’s endorsingloss was within the zone of risk concealed investment in GE.” (Pls.’ Opp’n at 34.) Forby the misrepresentations and omissions purposes of pleading loss causation, it isalleged by a disappointed investor.” Lentell, inconsequential whether, absent the Buffett396 F.3d at 173 (internal quotation marks Premium, GE’s stock price would haveomitted). Plaintiffs argue that the increased on October 1. The Supreme Court“discounted pricing was within the ‘zone of has made it clear that, for a plaintiff torisk’ of the offering, and it directly caused sufficiently plead loss causation, there mustGE’s stock -price to drop.” (Pls.’ Mem. at 34 be an actual loss. See Dura, 544 U.S. at 338(emphasis added).) The Court agrees that (“A private plaintiff who claims securitiesthe discounted pricing was within the zone fraud must prove that the defendant’s fraudof risk concealed by Defendants’ September caused an economic loss.”). The loss-25 statement; one risk among many of causation inquiry does not concern itselfconcealing the imminent stock offering was with why an actual, economic loss did notthat such an offering would take place at a occur. See id. at 346-47; Lentell, 396 F.3ddiscount. Again, this point goes to the at 173. Here, in short, an actual economicforeseeability of the below-market pricing, loss did not occur subsequent to the Octobernot the materialization of the risk. The 1 announcement. Whether the Buffettproblem with Plaintiffs’ argument is in the Premium is the reason why an actual losssecond half of their statement: “it directly did not occur is outside the scope of the losscaused GE’s stock-price to drop.” (Id.) The causation analysis.“it” seems to refer to the “discountedpricing,” but whether the discounted pricing However, “the Court hastens to noteannounced on October 2 caused the stock that by ruling that [Plaintiffs] failed to pleadprice to drop is irrelevant to the causation loss causation, the Court by no meansanalysis at hand. The relevant question iswhether the October 1 revelation of the 7 Warren Buffett is Berkshire Hathaway’s chairman

stock offering — the fact that was allegedly and chief executive officer. See, e.g., BerkshireHathaway, Quarterly Report (Form 10-Q) (June 30,

concealed during the September 25 analyst 2010).

12


intends to condone ... allegedly fraudulent The Clerk of Court is directed toactivities Defendants may have engaged in." terminate the motion located at Doc. No. 29,Collier, 2005 WL 1949868, at * 16. Rather, enter judgment, and close this case.Plaintiffs have simply failed to plead theloss causation requirement, as they are SO ORDERErequired to do pursuant to a statute enactedby Congress and interpreted by the SupremeCourt and the Second Circuit. See § 78u-4(b)(4); Dura, 544 U.S. at 346; Lentell, 396 HA • 9LLI - +F.3d 174. United States District Judge

B. Section 20(a) Claim Dated: September 29, 2010New York, New York

Because the Court has dismissedPlaintiffs' claims under section 10(b) of theExchange Act, the Court also grantsDefendants' motion to dismiss Plaintiffs' Plaintiffs are represented by Phillip C.section 20(a) claim. See In re Centerline Kim, Lawrence Matthew Rosen, andHoldings Co. Sec. Litig., No. 08 Civ. 505 Timothy William Brown of The Rosen Law(SAS), 2009 WL 86850, at *6 (S.D.N.Y. Firm, P.A., 350 5th Avenue, Suite 5508,Jan. 12, 2009). New York, NY 10118. Defendants are

represented by Greg A. Danilow and PaulIV. CONCLUSION Ivor Dutka of Weil, Gotshal & Manges LLP,

767 Fifth Avenue, Suite 3358-2, New York,"The securities statutes seek to maintain NY 10153.

public confidence in the marketplace" by"deterring fraud, in part, through theavailability of private securities fraudactions. But the statutes make these . . .actions available, not to provide investors USDS SDNY

with broad insurance against market losses, DOCUMENTbut to protect them against those economic ELFCTIRONICALLY FILEDlosses that misrepresentations actuallycause." Dura, 544 U.S. at 345 (internalquotation marks and citations omitted) DATLE FILED: I/Act `i o(emphasis added). To award judgment toPlaintiffs in this action would be akin toproviding "broad insurance against marketlosses."

Accordingly, Defendants' motion todismiss is GRANTED. In light of the factthat the TAC constitutes Plaintiffs' fourthattempt at pleading this matter, the dismissalis with prejudice.

13

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF...

Documents

Transcript of UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF...