Opinion ID: 729940
Heading Depth: 2
Heading Rank: 2

Heading: GE's Alleged Misrepresentations of its Financial Controls

Text: 38 The plaintiffs next argue that the district court erred in dismissing their complaint without properly addressing their claim that GE fraudulently misrepresented the efficacy of its financial controls and auditing systems. This contention is without merit. 39 In claiming that GE misrepresented its financial controls, plaintiffs challenge statements that appeared in GE's 1993 Annual Report. These statements were as follows: 40 The financial data in this report, including the audited financial statements, have been prepared by management using the best available information and applying judgment. Accounting principles used in preparing the financial statements are those that are generally accepted in the United States. 41 Management believes that a sound, dynamic system of internal financial controls that balances benefits and costs provides the best safeguard for Company assets. Professional financial managers are responsible for implementing and overseeing the financial control system, reporting on management's stewardship of the assets entrusted to it by share owners and maintaining accurate records. 42 .... 43 The Audit Committee of the Board (consisting solely of Directors from outside GE) maintains an ongoing appraisal--on behalf of share owners--of the activities and independence of the Company's independent auditors, the activities of its internal audit staff, financial reporting process, internal financial controls and compliance with key Company policies. 44 (JA 79). Plaintiffs contend that these statements were fraudulent misstatements because, in fact, GE's design, implementation and operation of its financial control systems, including its internal auditing process and financial reporting procedures, was inadequate, most notably in that those systems failed to assure that immediate action was taken in response to the repeated red flags warning of financial irregularities at Kidder. 45 Regardless of the accuracy of these allegations, in order to state a securities fraud claim, plaintiffs must successfully allege the requisite scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668 (1976). GE has failed to allege the requisite scienter with regard to its claim that GE misrepresented the efficacy of its financial controls. Accordingly, the district court properly dismissed this claim.