Scott v. General Motors Co.: Dismissing Retrospective Pleading Under Section 11 of the Securities Act of 1933

In Scott v. General Motors Co., No. 12CV5124–LTS–JLC, 2014 BL 245298, (S.D.N.Y. Sept. 4, 2014), the United States District Court for the Southern District of New York granted defendants’ motion to dismiss plaintiffs’ amended class action complaint against General Motors Company (“GM”). The court found GM’s Shareholders’ (“Plaintiffs”) failed to plead facts that, if found to be true, would establish a material misstatement or omission in GM’s Registration Statement as required under Section11 of the Securities Act of 1933 (“Securities Act”).

In June 2009, General Motors Corporation, GM’s predecessor, filed for bankruptcy.  When GM emerged from the bankruptcy as a new entity, it began preparations for a public offering. GM filed monthly inventory levels in a Form 8-K filed with the Securities and Exchange Commission (“SEC”). In November 2010, GM filed a final amended Registration Statement for its IPO. In its Registration Statement, GM affirmatively expressed its goal to increase profitability through a strengthened product portfolio and through active management of production levels by monitoring dealer inventory levels. The Registration Statement provided information about facility shut downs to reduce dealer inventory and strategies to strengthen the brand’s reputation and sales. During the IPO, 470 million shares GM common stock and 87 million shares of Series B preferred stock were sold, raising roughly $20 billion in proceeds.

On June 29, 2012, Plaintiffs filed a complaint alleging GM, the individual members of GM's board of directors, and the eleven underwriters of GM’s IPO violated Sections 11 and 15 of the Securities Act. Plaintiffs’ alleged that GM disclosed that it would reduce inventory levels while in fact the company was “purposefully increasing inventory” through channel stuffing, a practice whereby dealers were sold excess inventory so that the manufacturer could report increased revenues. The approach affected future sales. See Id. (“Because the vehicles "stuffed" into a dealership do not increase the demand for a company's vehicles, the company may recognize less revenue during future periods as a result of the increased dealer inventory that must be sold before new revenue is recognized.”).   

Section 11 allows shareholders to recover for material misstatements or omissions in an effective registration statement. Shareholders must, therefore, sufficiently allege the materiality of the statement. Additionally, to be successful under Section 11, a plaintiff must "’at a minimum, plead facts to demonstrate that allegedly omitted facts both existed, and were known or knowable, at the time of the offering.’"

The court found that Plaintiffs failed to plead facts that, even if found true, were sufficient to demonstrate  material misstatements. Some of the alleged misstatements were treated as “puffery.” See Id. (distinguishing cases that involved “existing facts” and therefore were “in a wholly different category from GM's forward-looking, aspirational statements regarding inventory management.”). In other cases, statements were not considered false because the public was aware of the concerns alleged to have been omitted. See Id. (“Any excess of inventory was therefore a matter of public record. GM's public filings preceding the IPO demonstrate that these sales and inventory figures were public information at the time the Registration Statement became effective.”). 

With respect to the assertion that “channel stuffing” constituted a negative trend subject to disclosure under Item 303 of Regulation S-K (“Regulation S-K”), the court acknowledged that the provision required the disclosure of “trends.” Companies, however, were not required to disclose negative trends in “’most unflattering light possible.’"  Having sufficiently disclosed the negative trend, GM did not make a misstatement by failing to “characterize events in the most negative way possible.”

For the above reasons, the United States District Court for the Southern District of New York granted GM’s motion, dismissing Plaintiffs’ complaint with prejudice. 

The primary materials for this case may be found on the DU Corporate Governance website.