GM, Auditor to Pay $303 Million to Settle Shareholder Suits

General Motors and its auditor have agreed to pay $303 million to settle shareholder charges that for seven years GM's officers and directors used accounting tricks and misinformation to hide the auto giant's declining fiscal health from investors.

The tentative settlement was brokered by a mediator appointed by the U.S. District Court for the Eastern District of Michigan, where numerous shareholder securities fraud and breach-of-duty lawsuits were consolidated into a multidistrict litigation.

The suits said investors lost billions of dollars because GM's officers and directors repeatedly inflated the company's stock value with improper accounting practices and misleading fiscal statements beginning in 2000 and that auditor Deloitte & Touche failed to raise a red flag on the fraud.

Though none of the defendants admitted any wrongdoing, GM said in a regulatory filing that it added a charge of $277 million in the second fiscal quarter to cover its part of the settlement. Deloitte will pay an additional $26 million, and GM said it believes its insurers will reimburse at least part of its payment.

Attorney Jay Eisenhofer, a partner at Grant & Eisenhofer, the co-lead plaintiff firm with Labaton Sucharow & Rudoff, hailed the recovery as one of the largest for shareholders in 2008.

"This is an extraordinary outcome for GM investors," Eisenhofer said in an e-mail. "To secure this level of recovery from General Motors in the current environment for the company is very telling, and we are extremely pleased ... with the outcome of this case for the shareholders."

Lead plaintiffs Deka Investment and Deka International, Luxembourg-based investment funds managed by Germany's DekaBank, were among investors who filed suits in various state and federal courts in 2006, allegedly after discovering a pattern of unacceptable accounting practices and misleading statements by GM officials dating back to 2000.

They claimed that the GM officers and directors breached their fiduciary duties and violated federal securities laws by hiding fiscal obligations, overstating assets and revenue, and masking financial problems.

The plaintiffs also said GM failed to properly account for two large transactions involving Delphi Corp., a parts supplier it spun off as a separate company.

In this case the plaintiffs said GM should have labeled a $237 million payment involving retired workers' benefits as a one-time occurrence but instead treated it as recurring revenue.

Delphi filed for bankruptcy in 2005 and was the target of shareholder suits alleging accounting irregularities and sham transactions with GM.

They further charged that the company:

• Overstated cash flow;
• Understated the benefit obligations owed to Delphi's workers when the company went bankrupt;
• Understated how much money it would be required to pay for product recalls;
• Failed to account for the cost of bad investments; and
• Issued statements company officials knew were false and misleading.

The suits claimed that Deloitte rubber-stamped fiscal statements even though it knew they were false and did not conform to generally accepted accounting principles.

Those suits eventually were consolidated into a multidistrict litigation under U.S. District Judge Gerald Rosen.

After the plaintiffs filed their third amended complaint and the defendants moved to dismiss it, Judge Rosen called in a retired judge to mediate a settlement.

At press time no documents relating to the proposed settlement had been filed.

The deal awaits Judge Rosen's approval.

To comment, ask questions or contribute articles, contact West.Andrews.Editor@ThomsonReuters.com.

The plaintiffs are represented by James Sabella of Grant & Eisenhofer in Wilmington, Del., and Jonathan Plasse, Eric Belfi and Richard Joffe of Labaton Sucharow & Rudoff in New York.The defendants are represented by Linton Childs of Sidley Austin in Chicago and Stephen Radin of Weil Gotshal & Manges in New York.