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Reading Judicial Opinions Critically: A Poll

by Professor Stefan Padfield on December 11, 2008

in Business,Stefan Padfield

The Sixth Circuit recently dismissed the case of J & R Marketing v. General Motors because, among other things, the court deemed challenged statements made by the defendant to be immaterial as a matter of law.  In connection with this opinion, I'd like you to consider the two pieces of text below and then take a quick poll.  (Yes, the text is a bit long.  But, if a blog isn't good for procrastination….)

The first piece of text is from the Sixth Circuit's opinion:

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….

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…. 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.

The second piece of text is from the actual 10-K (annual report) cited to in the opinion:

In the first half of 2003, the Company continued to experience a difficult funding environment caused by high funding requirements (due to continued growth in asset levels), negative credit rating agency activity, and general instability in the corporate bond markets. In particular, entering 2003, GMAC's unsecured credit spreads were near historical highs primarily due to weakness in the automotive sector of the corporate debt markets as well as specific concerns regarding the financial outlook of GM….

While GMAC's asset levels remain at record highs, the Company, beginning in the third quarter of 2003, has benefitted 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.

My poll question for you is: After reading the two excerpts above, do you agree with the Sixth Circuit that "no reasonable investor could have been misled into believing that GMAC was representing that GM's financial health was anything more than tenuous"?  Answer here.

P.S.–For some current Sixth Circuit "gossip", click here.

{ 1 comment }

DK December 12, 2008 at 11:44 am

I disagree with the Sixth Circuit's statement. While I am focusing on a non-legal issue, the order of the statements in the 10-K. The current order is effectively stating that "there are negative things, but the outlook is improving." By placing the "positive" analysis towards the end, it seems to convey a downplay of the prior negative assessment.

However, if the order were reversed, I think it would perhaps convey much greater caution; "The outlook is partially improving, but there are also a bunch of things to keep worrying about."

Of course, the "reasonable investor" shouldn't be swayed be such ordering and should be able to assess the 10-K as a whole. :P

GM "has benefitted from a significant reduction in unsecured borrowing spreads consistent with the overall improvement in the capital markets and GM as an issuer, in particular." This certainly seems to be downplaying the negative aspects quite well in representing the company's financial health.

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