J & R Marketing v. General Motors Corp ( 2008 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 08a0439a.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
Plaintiffs-Appellants, -
J&R MARKETING, SEP, et al.,
-
-
-
No. 07-1411
v.
,
>
GENERAL MOTORS CORP., et al., -
Defendants-Appellees. -
N
Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 06-10201—Nancy G. Edmunds, District Judge.
Argued: February 7, 2008
Decided and Filed: December 5, 2008
Before: KENNEDY, MARTIN, COLE, Circuit Judges.
_________________
COUNSEL
ARGUED: Jacob A. Goldberg, FARUQI & FARUQI, Huntington Valley, Pennsylvania, for
Appellants. Robert J. Kopecky, KIRKLAND & ELLIS, Chicago, Illinois, for Appellees.
ON BRIEF: Jacob A. Goldberg, FARUQI & FARUQI, Huntington Valley, Pennsylvania, Jamie
R. Mogil, FARUQI & FARUQI, New York, New York, Stephen F. Wasinger, Royal Oak, Michigan,
for Appellants. Robert J. Kopecky, Timothy A. Duffy, KIRKLAND & ELLIS, Chicago, Illinois,
Dennis M. Barnes, BARRIS, SOTT, DENN & DRIKER, Detroit, Michigan, for Appellees.
________________________________
SECOND AMENDED OPINION
________________________________
KENNEDY, Circuit Judge. Plaintiffs, purchasers of bonds registered by GMAC in
September 2003, brought suit under Sections 11 and 12(a)(2) of the Securities Act of 1933 against
GMAC and its control persons, including General Motors, which at the time wholly-owned GMAC.
Plaintiffs alleged that GMAC had breached its disclosure obligations as well as made material
misstatements in its registration statements and prospectuses for multiple offerings of bonds
registered in 2003 and 2004. The defendants moved to dismiss the plaintiffs’ complaint for failure
to state a claim. The district court granted the defendants’ motion. It found that plaintiffs lacked
statutory standing to bring claims regarding offerings other than the one in which they had
purchased. The district court also found that the plaintiffs had no claim regarding a duty to disclose
because Item 303, the regulatory authority relied on by plaintiffs, did not give rise to a duty to
disclose the information the plaintiffs sought because the information was not “firm specific” to
1
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 2
GMAC. Additionally, the district court found that there was no material omission because the
affirmative statements made by GMAC were not rendered misleading by the absence of the
information cited by plaintiffs. Lastly, the district court held that most of GMAC’s statements were
not false, and the ones that were arguably false were not material to bond investors. We find that
the named plaintiffs’ own claims are without merit because the offering materials did not have
material omissions because (1) Item 303 only imposes a duty to make forward-looking projections
regarding known information, and plaintiffs pleaded only that the information was “knowable”; and
(2) GMAC’s affirmative statements were not rendered misleading by the absence of the information
described by plaintiffs. We also find that the offering materials for the offering in which plaintiffs’
purchased did not include material misstatements, because the affirmative statements made by
GMAC were in fact true. Since the named plaintiffs’ individual claims cannot succeed on the
merits, we AFFIRM the judgment of the district court dismissing plaintiffs’ complaint.
BACKGROUND
General Motors Acceptance Corporation (GMAC) is a financial services corporation whose
largest source of revenue comes from providing financing for those who purchase vehicles from
General Motors (GM), GMAC’s parent corporation. GMAC’s profit is derived from borrowing
money at a certain interest rate, and then lending money at a higher interest rate; its earnings are
derived from this interest-rate spread. GMAC’s credit rating, then, is important to its profit margin
because the higher its credit rating, the larger the interest rate spread and the greater GMAC’s profit.
One source from which GMAC borrowed was the general public. GMAC would publicly
offer debt securities such as those purchased by plaintiffs. 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.
GMAC typically calculated the coupon rate it offered on its debt securities based on its credit
rating. Credit ratings are determined by credit rating agencies. These private agencies form
opinions regarding an issuer's risk of default. The risk of default is tied to the financial condition
of a company, with particular focus on the company’s equity cushion. This means that the more a
company’s assets exceed its debts and liabilities, the less the company’s risk of default (i.e. the safer
the investment). Due to the market’s faith in the credit agencies, an issuer must typically offer
higher rates of interest when it has received a lower credit rating.
The plaintiffs in this case are investors who purchased Second SmartNotes, which were
bonds registered by GMAC in September 2003. The plaintiffs also seek to represent a class of all
investors who purchased bonds registered by GMAC in 2003 and 2004 and sold between July 21,
2003 and November 9, 2005. They allege that GMAC’s conduct similarly injured all members of
the purported class.
The plaintiffs allege that GMAC’s offering materials filed between 2003 and 2004 suffered
from material omissions and misstatements in violation of Section 11 and Section 12(a)(2) of the
Securities Act of 1933. They contend that while GMAC disclosed that its performance and credit
rating were closely related to GM’s performance and credit rating, GMAC failed to disclose or
misstated material information regarding GM’s performance and credit rating, which, if disclosed,
would have adversely affected GMAC’s credit rating. Specifically, they claim that GMAC should
have disclosed that GM overstated its cash flow for fiscal years 2002 and 2003, the extent of GM’s
pension liability for Delphi, and that GM’s net income had been inflated by an improper accounting
for supplier rebates. Additionally, plaintiffs claim that by failing to disclose this information,
GMAC’s credit rating and the coupon rate it offered on its bonds were rendered false and
misleading. The plaintiffs further assert that this information was required to be contained within
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 3
the registration statements for the bonds by Regulation S-K. Lastly, plaintiffs aver that GMAC
materially misstated its financial results in 2004. Plaintiffs state in their complaint, however, that
they do not allege fraud on the part of any defendant.
Plaintiffs claim that these material omissions and misstatements injured the purported class.
Specifically, plaintiffs allege that, had they known this information about GM, they would have not
purchased GMAC’s debt securities because GMAC was offering too low of a coupon rate. The
plaintiffs claim that if they were aware of the undisclosed financial risks faced by GM, they would
have demanded a higher interest rate for their investment in GMAC, and therefore they accepted a
risk they otherwise would not have, absent a higher interest rate.
When this questioned information was disclosed to the public, the plaintiffs allege that both
GM’s and GMAC’s credit rating fell. Both credit ratings were reduced to below investment grade
in light of the previously undisclosed information. Id. This reduction in credit rating in turn reduced
the secondary market value of the debt securities plaintiffs had purchased.
The defendants moved for dismissal of the plaintiffs’ complaint under Federal Rule of Civil
Procedure 12(b)(6). They contended that the plaintiffs did not have standing to bring any claims,
on behalf of a purported class or otherwise, relating to offerings in which the plaintiffs had not
purchased bonds. Furthermore, they asserted that the offering materials for the Second SmartNotes
offering, the offerings from which the plaintiffs had purchased their bonds, did not suffer from
material omissions or misstatements, and therefore plaintiffs have failed to state a claim on which
relief could be granted.
The district court agreed with the defendants and granted the motion to dismiss the plaintiffs’
complaint. First, the district court held that, despite the purported class action, the plaintiffs failed
to establish statutory standing to bring claims regarding offerings in which they had not purchased.
The district court then went on to hold that GMAC owed no duty to disclose information about GM
because an issuer only has to disclose information about itself, not its parent corporation. The court
further held that GMAC’s affirmative representations were not rendered misleading by the absence
of the information plaintiffs desired because those representations referred to general ties between
GMAC and GM, and the statements did not incorporate or in any way warrant the accuracy of GM’s
publicly disclosed information. Lastly, the district court held that while GMAC did restate its
disclosed financial results for fiscal year 2004, that restatement was immaterial as a matter of law.
The plaintiffs now appeal that judgment.
ANALYSIS
Plaintiffs argue on appeal that the district court erred in granting the defendants’ motion to
dismiss. First, plaintiffs argue that they have statutory standing to bring the claims belonging to the
alleged class, including all purchasers of bonds GMAC registered in 2003 and 2004. Second,
plaintiffs allege that the district court was incorrect in concluding that they had failed to state a claim
for relief. They assert that GMAC failed to disclose certain information that it was required to
disclose about GM either because it had a duty to disclose that information or because that
information was required so as to not render other statements GMAC had made misleading, thereby
violating § 11 and § 12(a)(2) of the Securities Act of 1933. See 15 U.S.C. §§ 77k(a), 77l(a) (2006).
Additionally, they assert that GMAC also violated the Securities Act by misstating material
information in both the registration statement and the prospectus. Lastly, plaintiffs assert that the
control persons of GMAC, namely General Motors, should be held liable under § 15 of the
Securities Act of 1933. See 15 U.S.C. § 77o (2006).
We conduct de novo review of a district court’s decision to dismiss a complaint for failure
to state a claim under Federal Rule of Civil Procedure 12(b)(6). Campbell v. PMI Food Equip.
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 4
Group, Inc., 509 F.3d 776, 780 (6th Cir. 2007). When conducting such review, we generally accept
the factual allegations contained in the plaintiffs’ complaint as long they rise above the level of
speculation. “We need not, however, accept as true legal conclusions or unwarranted factual
inferences.” Id. at 780-81. We can also affirm on grounds other than those accepted by the district
court. Miller v. Champion Enters., Inc., 346 F.3d 660, 671 (6th Cir. 2003).
I. Statutory Standing
Sections 11 and 12(a)(2) create causes of action founded on misleading statements,
misstatements, or omissions in a registration statement or a prospectus, respectively. 15 U.S.C.
§ 77k(a), (a)(2) (2006). Because both causes of action are tied to an offering document or oral
communication, only those who acquired securities in the offering to which the document or oral
communication pertains have standing to sue. Id. Based on this rationale, the district court found
that the named plaintiffs in this case lacked statutory standing to sue regarding ten of the named
offerings, because the named plaintiffs had purchased bonds only in the Second SmartNotes
offering.
While we have grave concerns about such an analysis, we need not reach the question
regarding the named plaintiffs’ standing to represent the alleged class. If it is found, prior to class
certification, that the named plaintiffs’ individual claims are without merit, then dismissal is proper.
See, e.g., Sprague v. General Motors Corp., 133 F.3d 388, 397 (6th Cir. 1998); Shipp v. Memphis
Area Office, 581 F.2d 1167, 1171-73 (6th Cir. 1978); see also Kim v. Commandant, 772 F.2d 521,
524 (9th Cir. 1985) (per curiam). Because we find below that plaintiffs’ claims are meritless, we
need not address whether they would have had standing to represent the purported class.
II. Alleged Violations of § 11 and § 12(a)(2) of the Securities Act of 1933
Plaintiffs allege that defendants violated § 11 and § 12(a)(2) of the Securities Act by omitting
material facts they had a duty to disclose and by misstating material facts. Section 11 imposes a
duty of disclosure for an issuer’s registration statement. It holds liable any issuer who fails to
disclose “a material fact required to be stated therein.” 15 U.S.C. § 77k(a). Sections 11 and 12 both
impose a duty to disclose additional facts when a statement of material fact made by the issuer is
misleading, and they both impose liability for failing to fulfill that duty of disclosure as well as for
misstating a material fact. Id.; 15 U.S.C. § 77l(a)(2).
A. Violation by Omission
Plaintiffs allege that defendants violated the Securities Act by omitting information it was
required to include in the registration statement. See 15 U.S.C. § 77k(a). There are two accepted
methods of determining whether a duty exists for the offeror to disclose certain information in the
context of a public offering. First, an offeror is duty-bound to disclose all material information
required to be disclosed by statute. City of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399
F.3d 651, 669 (6th Cir. 2005); see also 15 U.S.C. § 77k (stating that a person is liable when a
registration statement omits a material fact “required to be stated therein”). Second, an offeror has
a duty to disclose any additional information required to make another statement, whether required
or voluntarily made, not misleading. Rubin v. Schottenstein, 143 F.3d 263, 268 (6th Cir. 1998) (en
banc). The plaintiffs additionally urge that insider trading analysis should give rise to a third
circumstance under which a company making a public offering has a duty to disclose. Cf. City of
Monroe Employees Ret. Sys., 399 F.3d at 669. We analyze each in turn.
1. Statutorily-Mandated Disclosure
Plaintiffs allege that GMAC was required to disclose that GM had overstated its cash flows
for fiscal years 2002 and 2003, that GM had a multi-billion dollar pension liability for Delphi, and
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 5
that GM had incorrectly accounted for supplier rebates, which inflated GM’s net income in quarters
to which the supplier rebates were not attributable. Plaintiffs allege that this information falls under
Regulation S-K, Item 303’s disclosure requirements. See 17 C.F.R. § 229.303(a) (2006).
Specifically, plaintiffs cite Item 303’s demands that the registrant (1) “provide such other
information that the registrant believes to be necessary to an understanding of its financial condition,
changes in financial condition and results of operations,” § 229.303(a); (2) include “other statistical
data the registrant believes will enhance a reader’s understanding of its financial condition,” id. at
Instruction 1; and (3) “[i]dentify any known trends or any known demands, commitments, events
or uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity
increasing or decreasing in any material way,” § 229.303(a)(1).
Neither of the first two citations to § 229.303(a) provide support for plaintiffs assertions in
this case. The language and context of the first two requirements cited make clear that they only
require the registrant to provide information regarding the results that have already occurred. See,
e.g., 17 C.F.R. § 229.303(a), Instruction 1 (“Generally, the discussion shall cover the three[-]year
period covered by the financial statements . . . .”). Plaintiffs do not allege that the undisclosed
information had an effect on GMAC’s current, reported “financial condition,” etc. Plaintiffs are
instead claiming that this information, when disclosed, would impact GMAC’s condition, and that
GMAC had a duty to disclose that information because it would have a future effect.
Section 229.303(a)(1)’s mandate imposes a forward-looking duty, but we do not think it
extends as broadly as plaintiffs contend. The section requires GMAC to “[i]dentify any known
trends or any known demands, commitments, events or uncertainties that will result in or that are
reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material way.”
“Liquidity” is defined as “the ability of an enterprise to generate adequate amounts of cash to meet
the enterprise’s needs for cash.” § 229.303(a), Instruction 5.
The problem for the plaintiffs is that they do not contend that GMAC had any knowledge
about the information at GM.1 Instead, they specifically only contend that the information was
“knowable” to GMAC. See, e.g., Pls.’ Reply Br. at 10 (citing paragraph 22 of the complaint, which
lists directors of GMAC and the positions some of them had in GM, for support that the plaintiffs
pleaded that it was knowable, rather than known, information). “Knowable,” then, extends the duty
to disclose information to include a duty to first investigate and then disclose. This, however,
directly contradicts the text of Item 303, which only requires disclosure of “known trends or any
known 2demands, commitments, events or uncertainties . . . .” 17 C.F.R. § 229.303(a)(1), (2)(ii),
(3)(ii).
1
As an aside, there is also some suggestion in plaintiffs’ complaint that a reduction in GMAC’s credit rating
would not materially harm GMAC’s liquidity. For instance, GMAC indicated that even if its credit rating was degraded,
it would be able to “adjust [its] funding and business strateg[ies] as necessary to meet GMAC’s liquidity requirements,”
even though obtaining funding would cost more. See J.A. at 128-29 (Compl. ¶¶ 61-62). Additionally, in 2005, Moody’s
indicated that GMAC continued to have “ ‘intrinsic credit strengths, including its resilient earnings and strong
liquidity.’ ” J.A. at 146 (Compl. ¶ 101).
2
Defendants make an additional argument, which the district court accepted, namely that GMAC would never
have a duty to disclose this information because it is not “firm-specific.” Defs.’ Br. at 20-24; J.A. at 175 (Mem. Op. at
13 n.15). They draw this requirement from Wieglos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989). They
contend that Wieglos’s conception of “firm-specific” information only encompasses information that emanates from
within the company. This would mean, therefore, that even if GMAC had known about the problems at GM, and even
if GMAC was certain of the negative effect the disclosure of those problems would have on its liquidity, GMAC still
would not have to disclose that information. First, we note that the Seventh Circuit was discussing an issuer’s duty to
disclose under Item 103, rather than Item 303. Wieglos, 892 F.2d at 516. Regardless, we need not address Wieglos nor
the concept of “firm-specific” information because we find that, absent a contention that GMAC knew of this
information, there was no duty to disclose under Item 303.
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 6
Plaintiffs attempt, but fail, to overcome the plain text of Item 303 by pointing to the fact that
Section 11 does not require scienter. Section 11, however, only imposes strict liability on those who
fail to include information “required to be stated” in the registration statement. 15 U.S.C. § 77k(a).
Some of the duties of disclosures, the breaches of which Section 11 makes actionable, do require
knowledge. This includes Item 303, which only imposes a duty to make forward-looking projections
regarding information known to the registrant. 17 C.F.R. § 229.303(a)(1), (2)(ii), (3)(ii). Section
11 does not amend Item 303’s requirement of knowledge. Instead, Section 11 does not impose a
further requirement of knowledge, as a fraud action would. If it did, the plaintiff would have to
prove that (1) defendant knew of an event that was reasonably likely to impact its liquidity (thereby
having a duty to disclose under Item 303); and that (2) defendant knowingly failed to disclose this
information when preparing its registration statement (thereby violating a version of Section 11 that
had a knowledge requirement). Defendants therefore would presumably be able to defend such an
action by claiming that while it was aware of the information at one time (thereby giving rise to the
Item 303 duty), it had forgotten the information when preparing the registration statement (thereby
immunizing it from liability under Section 11). While Section 11 does not require any additional
knowledge, that does not change the fact that the duty of disclosure arising from Item 303 does
require knowledge.
2. Disclosure Required to Render Statements Not Misleading
Plaintiffs allege that GMAC disclosed information that misled investors into believing
something untrue because GMAC did not also disclose other, contextual information. Specifically,
plaintiffs claim that GMAC’s disclosed credit rating and the coupon rate on its bonds were
materially misleading, that GMAC’s disclosed “inextricable links” with GM were materially
misleading, and that GMAC’s statements that GM had “overall improvement” and that the “outlook
for GM improved” were materially misleading.
a. GMAC’s Credit Rating and Coupon Rate
GMAC’s disclosed credit rating and coupon rate on its bonds were not materially misleading.
The plaintiffs assert that when GMAC disclosed the credit rating it was assigned by credit ratings
agencies, it was warranting that the rating was an accurate reflection of its risk of default.
Additionally, the plaintiffs contend that when GMAC attached a coupon rate to its bonds, it was
warranting that this was the correct market rate of interest for GMAC to pay given GMAC’s risk
of default. Neither of these assertions are valid.
GMAC did not warrant its credit rating, and therefore cannot be held to have misled
investors when disclosing it. A person “misleads” another when he says something and the
communication can also be fairly understood to mean something materially different than what the
speaker states. When GMAC disclosed its credit rating, it generally said something along the lines
of, “Standard & Poor’s has [upgraded/downgraded] our credit rating to [X] because it was concerned
about [Y].” The question, then, is whether, by disclosing its credit rating, GMAC was implying that
the credit rating agency’s opinion regarding GMAC’s risk of default was accurate and should be
relied upon.
GMAC’s disclosure of its credit rating was merely a true statement of historical fact. Credit
ratings are unique. Investors consider credit rating agencies’ opinions important, and investors want
to know those opinions, regardless of whether the company agrees or disagrees with the agencies’
opinions. See, e.g., Frank Partnoy, The Siskel and Ebert of Financial Markets?: Two Thumbs Down
for the Credit Rating Agencies, 77 WASH. U. L.Q. 619, 621-22 (1999); see also Frank Partnoy, How
and Why Credit Rating Agencies Are Not Like Other Gatekeepers, in FINANCIAL GATEKEEPERS 59,
59-61 (Yasuyuki Fuchita & Robert E. Litan, eds., 2006) [hereinafter FINANCIAL GATEKEEPERS]
(referring to credit rating agencies as “financial market gatekeepers” and describing how investors
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 7
consider credit ratings important and rely on them as independently valuable); Justin Pettit,
Comment by Justin Pettit, in FINANCIAL GATEKEEPERS 100, 100-01 (similar). The investors do not
allege that GMAC lied to or misled the credit rating agencies, and there is no allegation in the
complaint that would support such an assertion.3 The opinions, then, were arrived at through the
agencies’ usual4 methods, and all information they requested from GMAC to formulate their opinion
was provided. Their opinions, therefore, were accurate according to the agencies’ methods for
determining risk of default.5 Because investors assigned independent meaning to the credit rating
assigned by the agencies, they would not assume, absent any language to the contrary, that GMAC
was in any way warranting the accuracy of the rating. See, e.g., In re Detre’s Estate, 117 A. 54, 56
(Pa. 1922) (holding that a trustee had not breached his fiduciary duty by investing in certain railroad
bonds partly because Moody’s had given the bonds a “very high” credit rating); accord In re
Winburn’s Will, 249 N.Y.S. 758, 762-63 (N.Y. Sur. Ct. 1931) (finding certain securities to be
“seasoned” rather than “speculative” due to the credit rating they had received from Moody’s).
Neither would the investors assume that, without saying so, GMAC was agreeing or disagreeing
with the credit rating agencies’ reasons for upgrading or downgrading GMAC’s credit rating.
GMAC’s disclosure of its credit rating, therefore, was not materially misleading.
The coupon rate on the bond was not misleading for similar reasons. The coupon rate was
in fact true–it accurately stated the amount of interest that GMAC would be paying on the bonds.
GMAC never went further and stated that the coupon rate was the fairest rate of interest for it to pay
investors or that it somehow reflected GMAC’s entire risk of default. A reasonable investor reads
the coupon rate and takes from it that GMAC was willing to pay a certain rate of interest on its
bonds. A reasonable investor would then investigate whether or not she or he was willing to accept
that rate of interest for the investment, not assume, absent a statement to the contrary, that GMAC
had incorporated all material information into its determination of the coupon rate and rely solely
on that. The coupon rate, therefore, was not materially misleading.
b. GMAC’s “inextricable links” with GM
GMAC’s statement regarding its “inextricable links” with GM was similarly not materially
misleading. The plaintiffs’ main error in believing the statement misleading is their misconception
of the law as imposing a broader duty of disclosure than it actually does. The plaintiffs believe that
if GMAC says “ ‘anything’ about [a topic] or [] discusse[s] the ‘subject,’ ” that GMAC then must
disclose all “material, non-public, adverse information” about that general topic or subject. Pls.’ Br.
at 20-22. For instance, plaintiffs claim that when GMAC raised the issue of GM’s performance
3
As noted previously, plaintiffs specifically assert that they “do not intend to allege, and have not alleged, fraud
on the part of any Defendant.”
4
Plaintiffs seem to argue in their brief that because GMAC disclosed its credit rating, it is warranting that all
information necessary to assess that rating is disclosed. Plaintiffs have no support for this assertion because they do not
point to regulations requiring such disclosure, nor do they point to a statement made by GMAC that it had in fact made
such disclosure. There is, in fact, regulatory authority that indicates credit ratings agencies' can have material, nonpublic
information about a corporation when formulating a credit rating. Regulation F-D prohibits a corporation from making
selective disclosures of nonpublic, material information by requiring public disclosure once the private disclosure has
been made. 17 C.F.R. § 243.100(a) (2006). The regulation provides an exception to mandated public disclosure,
however, when the nonpublic, material information is provided to credit ratings agencies. See 17 C.F.R.
§ 243.100(b)(2)(iii).
5
Plaintiffs do allege that GMAC kept its rating artificially high by failing to disclose certain information about
GM. This would mean that GMAC purposely lied to or misled the credit ratings agencies (i.e. doctored documents or
did not provide all the information the agencies requested). Such a scenario would amount to fraud on the part of
GMAC, because while it was accurately reporting the credit rating it was assigned, that credit rating was fraudulently
obtained. Plaintiffs, however, disavow any intention to plead fraud.
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 8
being important to GMAC, GMAC was then required to disclose all “material, non-public, adverse”
information it knew about GM. This is surely not the law.
A company has to disclose additional information only when what it has disclosed would
be rendered misleading without that additional information. See 15 U.S.C. §§ 77k(a), 77l(a)(2).
GMAC’s statement that it has “inextricable links” with GM is not misleading. The plaintiffs have
not even alleged what other, untrue fact investors were misled into believing by that statement. This
is probably because the statement does not lead any reasonable investor into believing anything
about GM’s condition. GMAC was not in any way stating that GM was doing well, that GM’s
disclosures were all completely accurate, or anything else. GMAC was merely making a true
statement regarding its ties with GM, its parent company.
The plaintiffs’ expansive notion of the law comes from selective quotations from one of our
prior cases and two cases from other circuits. They quote Helwig v. Vencor, 251 F.3d 540, 561 (6th
Cir. 2001) (quoting Rubin v. Schottenstein, 143 F.3d 263, 268 (6th Cir. 1998) (en banc)), for the
proposition that an issuer must “ ‘provide complete and non-misleading information with respect
to subjects on which he undertakes to speak.’ ” While reference to “subjects” might support the
plaintiffs’ contentions, further reading of the case clearly disavows them. The defendant in Helwig
had publicly disclosed its alleged inability to determine the impact a bill pending in Congress would
have on its performance, and had also disclosed projections regarding its future earnings. 251 F.3d
at 545-46. In fact, however, the defendant had completed an internal assessment of the bill and had
concluded that it would have a grave impact on future earnings. Id. The defendant, therefore, had
either misstated the facts, or it had misled investors because, while it may have meant that no
definitive or accurate conclusions can be drawn, it implied that it cannot assess the potential impact
of the pending legislation in any way at that point in time. Id. at 561-62.
The difference between Helwig and our case is clear. The statement there misled investors
into believing something that was in fact not true. Here there is no allegation regarding what
falsehood the investors were misled into believing from GMAC’s statement, nor is there any rational
way an investor can draw a false conclusion based on GMAC’s simple assertion that it has
“inextricable links” to GM. This distinction is also clear, despite selective quotations that may
imply the contrary, when looking at Rubinstein v. Collins, 20 F.3d 160 (5th Cir. 1994) and In re
Time Warner, Inc. Sec. Litig., 9 F.3d 259 (2d Cir. 1993). Under this case law, GMAC’s statement
regarding “inextricable links” was not misleading.
c. GMAC’s Statements Regarding GM’s Performance
Plaintiffs also allege that GMAC included materially misleading statements in its 2003 10-K, which
was filed in early 2004. The specific statement at issue is as follows:
[GMAC], beginning in the third quarter of 2003, has benefited from a significant
reduction in unsecured borrowing spreads consistent with the overall improvement
in the capital markets and GM as an issuer, in particular. The outlook for GM
improved partially due to the significant progress made in funding GM’s pension and
postretirement obligations.
This statement was at best misleading, according to plaintiffs, because GM had in fact guaranteed
Delphi’s pension liability through 2007, which could have amounted to billions of dollars and
because GM was improperly recognizing supplier credits as income earlier than it should have been,
thereby inflating its cash flows. 6 GMAC’s statement that it had “benefited from a significant
6
We note that the district court concluded this statement was non-actionable because it found no duty
pertaining to subsidiaries regarding statements about a parent corporation. The district court, however, was more focused
on liability for omissions, rather than liability for misleading statements or misstatements. When an issuer undertakes
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 9
reduction in unsecured borrowing spreads” because of the overall improvement of GM referred to
the fact that market prices of securities in general, and GM’s securities in particular, rose in the third
quarter of 2003. Similarly, the statement about the “outlook” for GM reflected the views of ratings
agencies and analysts in 2003.
These statements, however, are immaterial as a matter of law when read in context of the
entire 2003 10-K. Materiality is determined by analyzing the statement at issue in the context of the
entire document. Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002) (“The
touchstone of the inquiry is not whether isolated statements within a document were true, but
whether defendants’ representations or omissions, considered together and in context, would affect
the total mix of information and thereby mislead a reasonable investor regarding the nature of the
securities offered.”). In the same 2003 10-K, GMAC disclosed that its “unsecured credit spreads”
were near historic highs during the first two quarters of 2003 “due to weakness in the automotive
sector of the corporate debt markets as well as specific concerns regarding the financial outlook of
GM.” Viewing these statements together, no reasonable investor could have been misled into
believing that GMAC was representing that GM’s financial health was anything more than tenuous.
Moreover, GMAC’s statement is a very vague, generally optimistic statement, which also
renders it immaterial as a matter of law. First, there is no doubt that the topic was important.
GMAC had previously reported that its credit rating suffered because of concerns regarding GM’s
ability to fund GM’s pension obligations. GMAC was now reporting that GM had made “significant
progress” in funding those obligations.
The importance of the topic of the representation does not, however, automatically make it
material. In City of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651 (6th Cir. 2005),
the Court confronted different statements about the same topic, namely product quality. Compare
399 F.3d at 6701-71, with id. at 674. The Court found that, while the topic was important,
materiality hinges on what particularly was represented. If the representations were just loosely
optimistic and “lacked a standard against which a reasonable investor could expect
the[ representations] to be pegged[, then they] are too squishy, too untethered to anything
measurable,” to be considered material. Id. at 670-71. When the representations are more concrete,
such as references to “objective data,” then those representations may be material. Id. at 674.
The statement at issue in this case was too vague and immeasurable to consider material.
The plaintiffs do not contend that GM had in fact made no progress funding its pension obligations.
The plaintiffs only contend that because GM had guaranteed Delphi’s potentially large pension
liability for a certain period of time, the pension funding progress could not be called “significant.”
The plaintiffs then allege that because the progress was not in fact “significant,” GMAC incorrectly
misrepresented that GM’s outlook had “improved.” It is impossible, however, to measure whether
the progress was in fact “significant.” In the end, any progress could be called significant given the
large pension liability GM faced, and investors understand that management is generally optimistic.
A representation that progress was “significant” is the same as a representation that a company’s
products are “the best,” which is considered immaterial as a matter of law. Id. at 670-71. GMAC
only made “vague assertions of the condition of [GM] on which no reasonable investor would rely.”
See Taubenfeld v. Hotels.com, 383 F. Supp. 2d 587, 593 (N.D. Tex. 2004).
3. Disclosure Required by Insider Trading Case Law
Plaintiffs urge us to impose upon issuers the same duty faced by those who engage in insider
trading. When an insider trades in his company’s stock, he has a duty to disclose any nonpublic,
to speak on any subject, even its parent company, Sections 11 and 12 impose strict liability for material statements that
are in fact misleading or false. See, e.g., Krim v. pcOrder.com, Inc., 402 F.3d 489, 496 (5th Cir. 2005); Davis v. Avco
Fin. Servs., Inc., 739 F.2d 1057, 1064 n.2 (6th Cir. 1984).
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 10
material information he knows about the company before trading. See Chiarella v. United States,
445 U.S. 222, 227-29 (1980). Plaintiffs claim that we are faced with a similar scenario, where a
“person,” in this case GMAC, has far superior knowledge and is taking advantage of an uninformed
investor.
We reject plaintiffs invitation to create such a duty on issuers for three reasons. First, the
law makes clear what is required. Section 11 and Section 12 impose liability only on those who
mislead or misstate in the statements they choose to make. See 15 U.S.C. §§ 77k(a), 77l(a)(2). The
only duty to speak absent pure silence comes from Section 11, which imposes liability for an issuer’s
failure to include information “required to be stated” in its registration statement. See 15 U.S.C.
§ 77k(a). Plaintiffs have failed to point us to any regulation or statute requiring GMAC to include
all nonpublic, material information in its registration statement.
Second, plaintiffs only case regarding insider trading duties applying to issuers does not hold
what plaintiffs request we hold. Shaw v. Digital Equip. Corp., 82 F.3d 1994 (1st Cir. 1996) did say
that it was “helpful to conceptualize . . . the corporate issuer[] as an individual insider transacting
in the company’s securities, and to examine the disclosure obligations that would then arise.” 82
F.3d at 1203. Despite such helpfulness, however, the First Circuit went on to do what we have done
above: look to the statutes and regulations detailing what must be included in a registration
statement and determine whether the information plaintiffs claim should have been included falls
under those rules. See id. at 1207 (“We ask, then, whether there was a duty to disclose such
information in the registration statement and prospectus under the rubric of ‘material changes’ under
Item 11(a) of Form S-3.”).
Third, we have previously rejected such a wide-ranging duty. We have said, “ ‘[t]here is no
general duty on the part of a company to provide the public with all material information.’ ” City
of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 669 (6th Cir. 2005) (quoting In
re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1432 (3d Cir. 1997)). Indeed, there needs
to be “healthy limits” on the duty to disclose. Id. Those “healthy limits” are determined by
Congress and the SEC. We are not authorized to impose a wide-ranging duty to disclose anything
that a person can allege was nonpublic, material information. Pursuant to the above analysis,
therefore, plaintiffs have no remaining claims for material omissions.
B. Violation by Misstatements
The plaintiffs also claim that the defendants violated the Securities Act by misstating
information in its registration statements and its prospectuses. See 15 U.S.C. §§ 77k(a), 77l(a)(2).
A statement is a “misstatement” when it asserts something that is in fact untrue. Id. The plaintiffs
are ambiguous in their complaint regarding whether a particular statement is either untrue or merely
misleading. As best we can determine, the plaintiffs claim that the defendants made the following
untrue statements: (1) GMAC misstated GM’s performance in its offering documents; (2) GMAC
misstated facts regarding GM’s performance in its 2003 10-K, which was filed in January 2004; and
(3) GMAC misstated its financial results in its 10-Qs for the quarters ending March 31, June 30,
September 30, and December 31, 2004 as well as in an 8-K filed on January 19, 2004. While the
district court found these statements immaterial as a matter of law, we affirm on different grounds.
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 11
1. GMAC’s Statements in its Offering Documents
Plaintiffs do not have a claim regarding GMAC’s alleged misstating of GM’s performance
in GMAC’s 2003 offering documents. The plaintiffs argue that by disclosing the links between GM
and GMAC, GMAC was in fact “incorporating all public information about GM.” Because
plaintiffs allege that some of the public information about GM at the time was in fact untrue, this
incorporation would mean that GMAC had made misstatements in its offering documents. Such an
allegation, however, is unfounded. Nowhere did GMAC assert that it was incorporating or vouching
for GM’s publicly disclosed status. GMAC never said that it was doing so, and it seems hard to
believe that GMAC could be found to have done so merely by “affix[ing] a coupon rate to its debt
securities.” Id. The coupon rate only disclosed what in fact was true, which was that GMAC would
pay a certain amount of interest on a particular bond.
Plaintiffs continually attempt to turn what are minimal, true statements into an incorporation
of all sorts of information or at least say that those statements should have incorporated all that
information. The problem, however, is that securities laws are clear. They mandate disclosure of
certain things in the registration statement, 15 U.S.C. § 77k(a), and then they allow the company to
remain silent regarding other matters if it so chooses. If it in fact chooses to speak, then it must
make sure that what it says does not mislead investors into believing something that is untrue. 15
U.S.C. §§ 77k(a), 77l(a)(2). Plaintiffs cannot, however, turn the silence that the securities laws
permit into liability. See Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988); see also Mayer v.
Mylod, 988 F.2d 635, 639 (6th Cir. 1993).
2. GMAC’s Statements in the 2003 10-K
As analyzed in Section II.A.2.c above, the plaintiffs have no claim regarding the immaterial,
optimistic statements in GMAC’s 2003 10-K.
3. GMAC’s Statements in the 2004 10-Qs
Plaintiffs had asserted in their complaint that the financial results in GMAC’s first three 10-
Qs for 2004 were materially misstated. The district court disagreed with plaintiffs, finding that the
misstatements in the 10-Qs were immaterial as a matter of law. On appeal, the plaintiffs initially
renewed their argument that the misstatements in the 2004 10-Qs were material. In our first opinion
in this case, we declined to address any claims regarding documents filed in 2004, namely the 2003
10-K and the 2004 10-Qs, because the plaintiffs’ offering was in 2003. The plaintiffs then moved
for rehearing partially based upon the fact that the offering documents in 2003 had, as permitted by
the laws and regulations applicable to the sort of offering in this case, automatically incorporated
any documents filed later with the SEC. The plaintiffs’ only argument, however, was that because
the offering documents had incorporated later-filed documents, the panel had to address the
statement in the 2003 10-K. (“The Panel avoid[ed] addressing whether defendants’ statement that
GM’s financial outlook was improving was actionable. . . . That statement was incorporated by
reference [] into all of the Offering Materials issued after GMAC filed its 2003 10-K with the SEC,
including all the prospectus supplements and pricing supplements defendants issued and filed during
the Class Period.”). By failing to ask for reconsideration of the 2004 10-Qs, the plaintiffs have
waived any argument regarding those 10-Qs.
No. 07-1411 J&R Marketing, et al. v. General Motors Corp., et al. Page 12
III. Control Person Liability
Plaintiffs also asserted control person liability against General Motors and other individual
defendants under § 15 of the Securities Act of 1933. Section 15, however, grounds liability of
control persons on the corporation being found liable under Section 11 or 12. See 15 U.S.C. § 77o.
Because plaintiffs’ Section 11 and 12 claims against the corporation are without merit, their claim
for control person liability is also dismissed.
CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s judgment dismissing the
plaintiffs’ complaint.