Thursday, January 22, 2009
The SEC filed settled charges against General Motors Corporation (GM) relating to its disclosures concerning two pension accounting estimates and its projected cash contributions to its pension plans, as well as errors in its accounting for derivatives and various other transactions. According to the SEC's complaint, filed in federal court in the District of Columbia, GM violated the issuer reporting, books-and-records, and internal controls provisions of the federal securities laws.
With regard to GM's pension plans, the complaint alleges that GM made material misstatements or omissions in its 2002 Form 10-K concerning the disclosure of two critical pension accounting estimates - its pension discount rate for 2002 and its expected return on pension assets for 2003.
According to the complaint, GM had stated publicly in an August 2002 pension conference call with analysts that it used a duration matched approach to select its discount rate, but failed to disclose in its 2002 Form 10-K that its use of a 6.75% discount rate was developed from a non-duration matched approach, which was materially higher than the rate developed from a duration matched model. In addition, the complaint alleges that with respect to the discount rate, GM maintained inadequate internal controls to provide reasonable assurance that transactions would be recorded as necessary to permit preparation of financial statements in compliance with generally accepted accounting principles, including a process for reviewing and adopting discount rate recommendations to provide reasonable assurance that the recommendation was developed in a reasoned and unbiased manner.
The complaint further alleges that since at least the mid-1980s, GM's expected return assumption had never been higher than its most recent 10 year average return. In its 2001 Form 10-K and during the August 2002 pension call, GM referred to its rolling 10 year historical average return of 10% or better as support for the reasonableness of its 10% expected return assumption. In its 2002 Form 10-K, GM did not state that its most recent 10 year average return was below its new assumption set at year-end. According to the complaint, if GM had used an expected return consistent with its 10 year historical average, it would have reduced its 2003 pre-tax earnings by $680 million.
The complaint also alleges that in that same 2002 Form 10-K and in three 10-Q filings, GM failed to disclose material information about the timing and amount of its projected cash contributions to its pension plans to avoid variable rate premiums to the Pension Benefit Guaranty Corporation (PBGC) and the impact such contributions might have on its liquidity and capital resources.
With regard to GM's other transactions, the SEC's complaint alleges that GM made material misstatements that included improperly accounting for a $97 million transaction involving the sale and repurchase of precious metals inventory in its 2000 Form 10-K; prematurely recognizing in its 2001 Form 10-K and Q3 2001 Form 10-Q a $100 million signing bonus it received for entering into a railroad shipping contract; and improperly accounting for two types of derivatives contracts - a Canadian dollar mirror hedge strategy and "normal purchase normal sale" arrangements of commodities - in its 2004 Form10-K. The complaint also alleges that GM maintained inadequate internal controls in these areas and maintained inaccurate books and records in connection with these transactions.
GM simultaneously settled the charges, without admitting or denying the allegations, by consenting to the entry of a final judgment permanently enjoining it from violating Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder. The settlement is subject to court approval.