The Consolidated Complaints
When I posted the three items mentioned above in March and April 2018, several related lawsuits already had been consolidated, and I anticipated the filing of a consolidated complaint. In the complimentary package offered in No. 257, I included the original 33-page complaint in one of the cases. When I posted No. 261, I was not aware that, on March 20, the plaintiffs had filed a 289-page amended consolidated complaint. On April 10 they filed a 284-page second amended consolidated complaint. On July 25 they filed a 191-page third amended consolidated complaint. On October 17 they filed a 190-page fourth amended consolidated complaint. Also, in the complimentary package offered at the end of this post, I am including, from the fourth amended consolidated complaint, introductory material, a discussion of GE's alleged LTC insurance fraud, and concluding material.
Nature of the Complaint
The nature of the fourth amended consolidated complaint is described in its first two paragraphs. Here are those paragraphs, which I have edited lightly:
Court-appointed Lead Plaintiff Sjunde-AP Fonden, along with additional plaintiff The Cleveland Bakers and Teamsters Pension Fund, by and through their undersigned counsel, bring this federal securities class action on behalf of themselves and a Class consisting of all persons and entities that purchased or otherwise acquired the common stock of General Electric Company ("GE") from February 27, 2013, through January 23, 2018, inclusive. Plaintiffs assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder, including United States Securities and Exchange Commission ("SEC") Rule 10b-5, against Defendants GE, Jeffrey R. Immelt, Jeffrey S. Bornstein, Jamie S. Miller, Keith S. Sherin, Jan R. Hauser, and Richard A. Laxer.
As set forth herein, Plaintiffs and members of the Class purchased GE common stock at artificially inflated prices created and/or maintained by Defendants' materially false or misleading statements and omissions throughout the Class Period. When the truth concerning the Company was belatedly revealed to the market, Plaintiffs and Class members suffered massive monetary damages. Except as to allegations specifically pertaining to Plaintiffs, all allegations herein are based upon the investigation undertaken by Plaintiffs' counsel, which included, but was not limited to, the review and analysis of: public filings made by GE with the SEC; press releases and other public statements issued by Defendants; research reports purchased from securities and financial analysts; media and news reports related to GE; transcripts of GE's earnings and other investor conference calls; publicly available presentations, press releases, and interviews by GE and its employees; economic analyses of the movement and pricing of GE publicly traded common stock; consultations with relevant consultants and experts; media reports and other publicly available information concerning Defendants; and interviews of former employees of GE, several of whom, on information and belief, are known to GE and have been provided counsel by GE. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery.
The Alleged LTC Insurance Fraud
A section of the fourth amended consolidated complaint is devoted to a discussion of GE's alleged LTC insurance fraud. The "overview" subsection of that discussion includes this paragraph:
In the years prior to the start of the Class Period, LTC insurers began to learn that the major pricing assumptions that fueled the expansion of the LTC market in the 1970s and 1980s were woefully inaccurate. Specifically, insurers had greatly overestimated lapse rates and interest rates, and had dramatically underestimated the number of policyholders that would file claims and the length of time such claimants would require benefits.
The discussion includes a description of GE's spin-off of some LTC insurance business through the Genworth IPO in 2004. The discussion points out that GE retained the insurance and reinsurance operations of GE Insurance Solutions and its subsidiary, Employers Reassurance Corporation (ERAC). It also points out that ERAC reinsured LTC policies originally issued by Allianz, American United, Berkshire Life, Jackson National Life, John Alden, Lincoln Benefit Life, Massachusetts Mutual, State Life, Transamerica, and others. Also, Union Fidelity Life Insurance Company (UFLIC), another GE subsidiary, reinsured LTC policies originally issued by Travelers and reinsured by Genworth.
Prominent in the discussion are the views of several former GE employees (FE-1, FE-2, and so forth, and "defined using masculine pronouns to protect their anonymity.") The thrust of the comments by the former employees is that GE was aware of the LTC problems long before the public disclosure in January 2018.
The fourth amended consolidated complaint notes that "FE-6 has been removed from the complaint at his request." Here are some comments attributed to FE-6 in the second amended consolidated complaint:
FE-6 was an executive at GE Capital from 2014-2015. According to FE-6, an audit team conducted a simple audit on GE Capital's insurance business during his tenure (in 2014-2015) and the audit team had a risk based audit plan going into 2016. According to FE-6, there were quarterly conference calls led by Ronald Peters and the ERAC executive team with individuals from GE Capital's risk team. FE-6 said that during those quarterly calls ERAC would discuss the review process which included discussion of assumptions such as mortality and morbidity.
According to FE-6, the audit team began with a simple audit of ERAC to get people exposed to doing audits of that business. This was likely in the first four months of 2015. According to FE-6, concerns about assumptions, loss recognition testing, and model validation were not covered in that audit; they "came later" when KPMG delved more into those areas. According to FE-6, audit plans for the 2015 simple audit and the planned deeper dive into ERAC's assumptions, model validation, and other risk factors were submitted to Joseph Pizzuto, GE Capital's Chief Audit Executive, and ultimately, GE's Audit Committee which had the final approval authority for the audit plans.
FE-6 stated that the internal consensus amongst senior management, especially Dan Janki ("Janki"), Treasurer of GE, was that there was risk related to the legacy LTC portfolios. FE-6 explained that policies in the legacy LTC blocks were not being written any longer because of how risky they were.
FE-6 advised that GE held onto certain LTC policies that did not get spun off with Genworth because GE "refused to sell them at such a huge discount." FE-6 recalled that Janki had said that "his one big mistake was not selling off all the insurance policies and taking the hit at that time."
The Motion to Dismiss
On September 12 the defendants filed a motion to dismiss the third amended consolidated complaint and a 43-page memorandum of law in support of the motion. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post.
On October 12 the plaintiffs filed a 63-page memorandum of law in opposition to the motion to dismiss the third amended consolidated complaint. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post. On the same day, Judge Furman ordered the plaintiffs to file a fourth amended consolidated complaint removing the allegations attributed to FE-6.
On October 17 the plaintiffs filed the fourth amended consolidated complaint. On October 29 the defendants filed a 20-page memorandum of law in support of the motion to dismiss the third and fourth amended consolidated complaints. The table of contents in the memorandum of law is in the complimentary package offered at the end of this post. As of December 5 Judge Furman has not acted on the motion to dismiss the third and fourth amended consolidated complaints.
The Counts and the Prayer for Relief
The fourth amended consolidated complaint includes two counts: violation of Section 10(b) of the Exchange Act and Rule 10b-5 against all the defendants, and violation of Section 20(a) of the Exchange Act against the individual defendants. The plaintiffs seek compensatory damages against all the defendants, jointly and severally, for all damages sustained as a result of the defendants' wrongdoing, including interest; extraordinary, equitable, and/or injunctive relief, including, but not limited to, rescission; plaintiffs' costs and expenses, including reasonable counsel and expert fees; and such other relief as may be just and proper.
General Observations
When GE dropped its $15 billion bombshell on January 16, 2018, I thought the company had simply overlooked the unfolding disaster in its legacy LTC insurance business. However, the plaintiffs' amended consolidated complaints, including the views of former employees as described in those complaints, make it appear that company officials had been aware of the problem for years, and had failed to disclose it. In short, I think the amended consolidated complaints are a powerful indictment of GE's failure to keep shareholders and prospective shareholders informed of the company's legacy problem relating to its LTC insurance business.
It remains to be seen whether the fourth amended complaint will survive—in whole or in part—the defendants' motion to dismiss. I plan to follow the case and report major developments.
Available Material
I am offering a 95-page complimentary package consisting of introductory material in the fourth amended consolidated complaint (26 pages), material in that complaint describing GE's alleged LTC insurance fraud (50 pages), concluding material in that complaint (12 pages), and the tables of contents in three legal memoranda (7 pages). Email jmbelth@gmail.com and ask for the December 2018 package relating to GE's LTC insurance.