Securities Class Action Claims Meritless because GMAC’s Representations Concerning Its Bonds were not False or Misleading and GMAC was not Required to Learn and Disclose Information Concerning the Financials of its Parent Company GM Sixth Circuit Holds
Plaintiffs, as purchasers of bonds registered by GMAC, filed a class action against GMAC, GM and others alleging violations of federal securities laws; specifically, the class action complaint advanced claims under Sections 11 and 12(a)(2) of the Securities Act of 1933, and that GMAC failed to disclose required information and made material misstatements in its registration statements and prospectuses for various bond offerings. J & R Marketing, SEP v. General Motors Corp., 549 F.3d 384, 387 (6th Cir. 2008). According to the allegations underlying the class action, GMAC’s offering materials filed violated Sections 11 and 12(a)(2) of the Securities Act of 1933 because they contained “material omissions and misstatements” by failing to disclose GM’s (in addition to GMAC’s) performance and credit rating, even though matters adversely affecting GM could also adversely affect GMAC’s credit rating. Id., at 388. The class action also alleged that GMAC materially misstated its 2004 financial results, id. Defense attorneys moved to dismiss the class action for failure to state a claim; the district court granted the motion and dismissed the class action, finding that plaintiffs lacked standing to prosecute class action claims on behalf of purchasers of bonds which plaintiffs themselves had not purchased. Id., at 387. Additionally, the district court held that the non-disclosure claim failed because defendants were not required to disclose the information at issue, and because GMAC’s statements were not misleading and were not false, id. Accordingly, the district court dismissed the class action complaint. Id. The Sixth Circuit affirmed because it found “that the named plaintiffs’ own claims are without merit,” id.
Briefly, GMAC borrowed money from several sources, including the general public through publicly offer debt securities. J & R Marketing, at 387. “The debt securities had a coupon rate, which is the rate of interest GMAC would pay, as well as a yield, which was the payments GMAC would make over the life of the security not including the return of the principal. At the time the last interest payment was due, GMAC would return the principal to the investor.” Id., at 387-88. The class action plaintiffs had purchased “Second SmartNotes,” which were bonds registered by GMAC in September 2003, but the class action sought to define a class of all investors who purchased GMAC bonds sold from July 2003 through November 2005 “alleg[ing] that GMAC’s conduct similarly injured all members of the purported class.” Id., at 388. According to plaintiffs, once GM’s financial risks became known, its credit rating fell, as did GMAC’s credit rating, id. Defense attorneys argued that the named plaintiffs lacked standing to prosecute the class action as to any bonds other than those purchased by them, and that the offering materials concerning the Second SmartNotes did not contain material omissions or misstatements. Id., at 388-89. The district court granted the motion and dismissed the class action, id., at 389. The Sixth Circuit affirmed, but it did not address the standing issue because it found that plaintiffs’ class action claims lacked merit. Id., at 389-90.
The Sixth Circuit first held that federal regulations did not require GMAC to disclose problems with GM’s registration statement simply because it could have learned of the alleged problems. Section 11 of the Act “imposes a duty of disclosure for an issuer’s registration statement” and “holds liable any issuer who fails to disclose ‘a material fact required to be stated therein.’” J & R Marketing, at 390 (quoting 15 U.S.C. § 77k(a)). The class action alleged that GMAC omitted material information from the registration statement: first, that GM had overstated its 2002 and 2003 cash flow numbers, and second, “that GM had a multi-billion dollar pension liability for Delphi, and that GM had incorrectly accounted for supplier rebates, which inflated GM’s net income in quarters to which the supplier rebates were not attributable.” Id., at 390.
The Circuit Court disagreed because the class action did not allege that the allegedly omitted information presently affected GMAC’s financial condition, but rather that “when disclosed, would impact GMAC’s condition, and that GMAC had a duty to disclose that information because it would have a future effect.” J & R Marketing, at 391. Moreover, plaintiffs did not allege GMAC knew the information about GM that it purportedly failed to disclose, id. To the contrary, plaintiffs specifically argued that it was “knowable” to GMAC; but that argument “extends the duty to disclose information to include a duty to first investigate and then disclose.” Id.
The Sixth Circuit held further that GMAC’s disclosure of its credit rating was not materially misleading. See id., at 392-93. In part, the Circuit Court explained that “GMAC did not warrant its credit rating, and therefore cannot be held to have misled investors when disclosing it.” Id., at 392. On the contrary, “GMAC’s disclosure of its credit rating was merely a true statement of historical fact.” Id., at 393. And for the same reasons, the coupon rate on GMAC’s bond was not misleading but simply a true statement of the amount of interest GMAC would pay on the bonds, id., at 394. Nor was GMAC’s statement that it had “inextricable links” with GM misleading, id., at 394-95. Indeed, “the statement does not lead any reasonable investor into believing anything about GM’s condition” – it was “merely making a true statement regarding its ties with GM, its parent company.” Id., at 394. And finally, GMAC did not make any misrepresentations concerning GM’s financial performance, and the Court’s analysis may be found at page 395 through 398. Accordingly, it affirmed the district court’s dismissal of the class action complaint. Id., at 398.