Touchstone Strategic Trust v. General Electric Company

Background

Touchstone Strategic Trust, Touchstone Variable Series Trust, the Western and Southern Life Insurance Company, Western-Southern Life Assurance Company, Western & Southern Financial Group, Inc., and Integrity Life Insurance Company sued General Electric Company (GE) and former executives Jeffrey R. Immelt, Jeffrey S. Bornstein, Jamie S. Miller, and Keith S. Sherin. The plaintiffs asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, as well as claims under the Ohio Securities Act and for common-law fraud.

The claims concerned three subjects: GE Power’s long-term service agreements and its use of cost adjustments, factoring, or deferred monetization; GE’s long-term-care insurance reserves; and GE’s November 2015 acquisition of Alstom’s Thermal, Renewables and Grid businesses. The plaintiffs had opted out of related putative class actions and relied in part on allegations from confidential witnesses in another complaint, an SEC settlement order, investigative reporting, and a book.

Ruling on the Sources Used

The court held that the plaintiffs could not rely on confidential-witness statements copied from another complaint when their own counsel had not interviewed those witnesses or independently investigated the statements. The court also gave limited weight to the SEC order. It treated statements taken from that order as generally being allegations based on information and belief and noted that GE neither admitted nor denied the SEC’s allegations. Investigative reporting was not inherently improper, but the court said it could be credited only when the allegations were sufficiently particular and detailed to indicate reliability.

LTSA-Related Claims

The court dismissed the claims concerning GE’s long-term service agreements. The plaintiffs alleged that GE executives manipulated revenue estimates and used factoring to create the appearance of growth and meet cash-flow targets. The court found that GE had disclosed that it regularly revised estimates, including because of cost changes, and had disclosed the resulting effect on earnings. The plaintiffs did not explain how those disclosures were inaccurate or misleading.

The court also rejected claims based on factoring and deferred monetization. Allegations copied from the SEC order could not supply the required proof of fraudulent intent, and the plaintiffs’ own allegations were insufficient to plead fraud with the required particularity.

Long-Term-Care Insurance Claims

The court dismissed the claims concerning GE’s long-term-care insurance portfolio and reserves. The challenged statements were opinions, so the plaintiffs needed to allege facts showing that the speakers did not believe the statements, that supporting facts were false, or that omitted information made the opinions misleading.

The court found that the SEC order did not show that GE or the individual defendants knew about the alleged changes to reserve assumptions or the use of a “roll-forward” method. The plaintiffs also did not provide a factual basis for attributing that knowledge to the defendants. Their allegations concerning internal controls likewise did not establish that Immelt or Bornstein knew, when they certified the controls, that the controls were allegedly deficient.

Alstom-Related Claims

The court dismissed the securities-fraud claims concerning GE’s valuation of the Alstom assets. Valuations of goodwill and fair market value are opinions rather than objective facts. The plaintiffs therefore had to plead that the speakers did not hold the opinions they expressed, relied on false supporting facts, or omitted information that made the opinions misleading.

The court stated that it was doubtful that the valuation statements were actionable because the plaintiffs’ theory rested on disagreement with GE’s accounting judgment. The court also held that the plaintiffs failed to plead scienter, meaning the required fraudulent intent or recklessness. The alleged motives—such as wanting GE to appear successful and wanting Immelt to distinguish himself from his predecessor—were not sufficient. Statements that some GE personnel viewed the price or transaction negatively did not show that the defendants shared those views, knew about them, or acted with fraudulent intent. The court concluded that the more compelling explanation was that the defendants, even if imprudent, believed the transaction was in GE’s best interests.

Other Claims

Because the plaintiffs failed to establish a primary securities-law violation, their Section 20(a) control-person claims against Immelt and Bornstein also failed. The court dismissed the scheme-liability claim because the complaint alleged misstatements and omissions rather than separate inherently deceptive conduct. The court relied on Second Circuit precedent holding that misstatements and omissions cannot be the sole basis for a private scheme-liability claim.

The court declined to continue exercising federal supplemental jurisdiction over the common-law fraud and Ohio Securities Act claims after dismissing the federal claims. It dismissed those state-law claims without prejudice to refiling them in state court.

Disposition

The court granted the defendants’ motion to dismiss. It declined to grant leave to amend because the plaintiffs had already received two opportunities to amend, had been warned that they would not receive another opportunity to address the dismissal issues, did not request another amendment, and did not identify facts that would cure the deficiencies. The clerk was directed to terminate the motion and close the case.