Sjunde Ap-Fonden v. Gen. Elec. Co.

• Decision Date: 29 August 2019
• Docket Number: 17-CV-8457 (JMF)
• Citation: 417 F.Supp.3d 379
• Parties: SJUNDE AP-FONDEN and the Cleveland Bakers and Teamsters Pension Fund, individually and on behalf of all others similarly situated, Plaintiffs, v. GENERAL ELECTRIC COMPANY, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

417 F.Supp.3d 379

SJUNDE AP-FONDEN and the Cleveland Bakers and Teamsters Pension Fund, individually and on behalf of all others similarly situated, Plaintiffs,

v.GENERAL ELECTRIC COMPANY, et al., Defendants.

17-CV-8457 (JMF)

United States District Court, S.D. New York.

Signed August 29, 2019

Christopher J. Keller, Francis Paul McConville, Labaton & Sucharow LLP, New York, NY, Daniel Lawrence Berger, Caitlin M. Moyna, Grant & Eisenhofer P.A., New York, NY, Sharan Nirmul, Kessler Topaz Meltzer & Check, LLP, Radnor, PA, for Plaintiffs.

Blake Thomas Denton, Miles Norman Ruthberg, Latham & Watkins LLP, New York, NY, Sarah Ann Tomkowiak, Latham & Watkins LLP, Washington, DC, Sean M. Berkowitz, Latham & Watkins LLP, Chicago, IL, William J. Trach, Latham & Watkins LLP, Boston, MA, for Defendants.

OPINION AND ORDER

JESSE M. FURMAN, United States District Judge:

In this putative class action, Lead Plaintiff Sjunde AP-Fonden and Plaintiff the Cleveland Bakers and Teamsters Pension Fund (together, "Plaintiffs"), two pension funds, bring claims against General Electric Company ("GE") and six current or former GE executives (the "Individual Defendants" and, together with GE, "Defendants"). Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. Defendants now move, pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, to dismiss Plaintiffs' claims. For the reasons that follow, the motion is granted in part and denied in part.

BACKGROUND

GE is an industrial conglomerate founded in 1892 with a diverse portfolio of business lines including medical technology, aviation, oil and gas, power generation, and financial services. Fourth Amended Complaint, ECF No. 179 ("FAC" or "Complaint") ¶¶ 44, 61.¹ At all times relevant to this case, the Individual Defendants served in executive roles at GE and GE Capital, GE's financial services arm. Id. ¶ 4. Specifically, Jeffrey R. Immelt served as GE's Chief Executive Officer from September 2001 to July 2017 and as Chairman of the Board from September 2001 to October 2017; Jeffrey S. Bornstein served as GE's Senior Vice President and Chief Financial Officer from July 2013 to October 2017; Jamie Miller took over from Bornstein as CFO on November 1, 2017, and had previously served as GE's Chief Accounting Officer, among other roles; Keith S. Sherin was GE Capital's Chief Executive Officer and Chairman from July 2013 to September 2016; Jan R. Hauser was GE's "Vice President-Controller" and Chief Accounting Officer starting in April 2013; and Richard A. Laxer served as President and Chief Executive Officer of GE Capital from September 2016 to March 2018. Id. ¶¶ 45-50.

Historically, GE has paid investors "a meaningful and consistent quarterly dividend" — so consistent, in fact, that until recently, GE had cut its dividend only once since the Great Depression, in the midst of the 2008 subprime mortgage crisis. Id. ¶ 5. In the fall of 2017, however, GE revealed that it was cutting its quarterly dividend in half following severe cash flow issues in the Industrials group, which includes GE's power division ("GE Power"). Id. ¶¶ 19, 31-32, 456. Exacerbating matters, just two months later, GE announced that it needed to increase reserves for its insurance portfolio by $8.9 billion, resulting in a $6.2 billion charge to earnings. Id. ¶ 33. Plaintiffs' fraud allegations center on statements (or omissions) relating to these two business lines — insurance and power — made between February 27, 2013 and January 23, 2018 (the "Class Period"). Id. ¶ 510. In particular, as detailed below, Plaintiffs allege numerous misrepresentations about (1) the risk and quality of GE's long-term care insurance portfolio and (2) its accounting and revenue recognition for certain long-term service agreements in its power division.

A. Long-Term Care Insurance Portfolio

Plaintiffs' first battery of claims concerns GE's long-term care ("LTC") insurance portfolio. LTC insurance protects an insured from "the high cost of home care, assisted living care, adult day care, respite care, hospice care, nursing home care, and other specialized skilled facility care required when an individual becomes unable to perform the basic activities of daily living." Id. ¶ 84. Premiums for LTC policies are calculated based on assumptions regarding mortality rates (how long insureds will live), lapse rates (how many insureds will let their policies lapse), morbidity rates (how many insureds will end up making claims on their LTC policies), and interest rates (how much interest will be earned on insurance reserves). Id. ¶ 85. Under Generally Accepted Accounting Principles ("GAAP"), the assumptions underlying an insurance policy are "locked in" unless an insurer determines it has a "deficiency" — that is, when anticipated premiums and current reserves are insufficient to cover expected benefit payments and expenses. Id. ¶¶ 168, 215. Insurers are required by GAAP and applicable statutes to perform deficiency tests each year to ensure that reserves are adequate and that the original assumptions underlying a block of policies do not need to be revised. Id. ¶¶ 169-70, 215. To reduce risk exposure, primary LTC insurers typically enter into reinsurance agreements in which they cede some of the risk of their portfolios to the reinsurer. Id. ¶ 86.

In the 1990s and early 2000s, GE Capital wrote and reinsured LTC policies, capturing 20% of the market by 2001. Id. ¶ 7. In the mid-2000s, however, GE decided to exit the insurance business. Id. ¶¶ 7-8, 99-104. In 2004, it spun off the majority of its LTC insurance portfolio to a newly formed company, Genworth. Id. ¶¶ 8, 91. Two years later, GE "substantially completed" its exit from the insurance business by selling most of its remaining insurance operations to Swiss Re. Id. ¶¶ 8, 105. In each of those deals, however, GE agreed to reinsure portions of the LTC insurance blocks it was transferring. Id. ¶¶ 92-98, 107. So while it had, on the surface, transferred much of its insurance portfolio to other companies, and it was no longer writing new LTC policies, GE retained significant exposure to the LTC insurance market through the policies it had reinsured. Id. ¶¶ 8, 95.² In fact, the LTC policies reinsured in the Genworth spin-off were the "worst" and "riskiest" ones — so undesirable that the Genworth initial public offering could have "run into obstacles" had GE not agreed to "backstop" them. Id. ¶¶ 95-97. Following those deals, GE executives told investors that GE Capital had "sold all the insurance businesses," resulting in a safer, "more focused" portfolio. Id. ¶¶ 108-11 (emphasis omitted).

Around the same time, other LTC insurers began to suffer heavy losses in their LTC portfolios. These losses flowed from systemic mispricing of LTC premiums: When issuing the policies, insurers had overestimated policy lapse rates and interest rates, while underestimating how many policyholders would submit claims and how long claimants would require benefits. Id. ¶¶ 87-90, 115. Consequently, insurers had both set premiums too low and reserved too little money to cover future claims. To mitigate this problem, between approximately 2009 and 2017, LTC insurers sought thousands of premium rate increases from state insurance regulators, and several large insurers, including Genworth, recorded large "reserve charges" to their earnings — hundreds of millions of dollars apiece — to shore up their LTC reserves. Id. ¶¶ 115-16. Between the early 2000s and 2016, the underlying problems in the LTC market — which were "common" and "well-known" — had driven the number of insurers still issuing new LTC policies down from over one hundred to fewer than a dozen. Id. ¶¶ 113-15 (emphasis omitted).

During this same period, GE continued to tout its successful exit from the insurance business and the quality and safety of GE Capital's remaining portfolio. Id. ¶¶ 131-45. At the same time, it said little about its LTC portfolio in particular. It did, however, change the way it reported its insurance liabilities in annual regulatory filings. Before 2012, GE's yearly Form 10-K filings provided an "insurance liabilities" figure that included its LTC liabilities. Id. ¶ 120. By contrast, starting with its Form 10-K for 2012, GE omitted LTC liabilities from the calculation. Id. ¶ 122; ECF No. 173-7 ("2012 10-K"), at 3.³ Instead, it pointed readers to a "Note" sixty-seven pages later that ostensibly revealed the entirety of its insurance liabilities. See 2012 10-K at 3. As the 2012 Form 10-K stated, those liabilities "comprise[d] mainly obligations to annuitants and policyholders in our run-off insurance operations." Id. at 10. The relevant disclosures in GE's Form 10-Ks for 2013, 2014, 2015, and 2016 were substantially similar. See ECF Nos. 173-8, at 3, 10; 173-9, at 3, 9; 173-10, at 4, 10; 173-11, at 6, 15; FAC ¶ 123.

In July 2016, GE reported that GE Capital's earnings in its "vertical business" were down 15% from the previous year due to "lower gains and higher insurance reserve provisions resulting from updates to our models on our runoff long-term care book." FAC ¶ 146 (emphasis omitted). Then-CFO Jeffrey Bornstein assured investors that "portfolio quality remain[ed] stable." Id. ¶ 146 (emphasis omitted). The following spring, in response to analyst questions about why GE did not simply sell off its remaining LTC exposure (following GE's announcement that it had increased reserves by $100 million), Bornstein pointed to the "low interest rate environment" and described interest rates as "a fundamental challenge." Id. ¶¶ 147-48. Echoing that, the CEO of GE Capital, Richard Laxer, said it would not be "attractive" to sell "given the interest rate environment." Id. ¶ 149. In July 2017, prompted by "adverse claim experience in a portion of [its] long-term care portfolio," GE announced that it would reassess the...