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J&R Marketing, SEP v. General Motors Corp.

December 5, 2008

J&R MARKETING, SEP, ET AL., PLAINTIFFS-APPELLANTS,
v.
GENERAL MOTORS CORP., ET AL., DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 06-10201-Nancy G. Edmunds, District Judge.

The opinion of the court was delivered by: Kennedy, Circuit Judge.

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206

Argued: February 7, 2008

Before: KENNEDY, MARTIN, COLE, Circuit Judges.

SECOND AMENDED OPINION

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 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 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. 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. ยง 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 ...


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