There was a time, not that long ago, when class action securities lawsuits were mostly about accounting and financial disclosure-related issues. In more recent years, securities suits increasingly are about operational issues, in which unfortunate business developments are the basis of securities fraud allegations — a phenomenon that has been called “event-driven litigation.” In the latest example of this kind of litigation, a plaintiff shareholder has filed a securities class action lawsuit against General Motors alleging that the company, which sustained a product recall related to its vehicle airbags and suffered a significant setback in its driverless vehicle development efforts when one of its driverless vehicles struck a pedestrian, misled investors about vehicle safety issues. A copy of the plaintiff’s December 8, 2023, complaint can be found here.

Background

General Motors is, of course, an automobile manufacturer. Cruise LLC is GM’s majority-owned segment responsible for developing autonomous vehicle (AV) technology. According to the securities lawsuit complaint, since at least November 2020, GM’s vehicles have been subject to multiple recalls because of defective airbag components.

The complaint alleges that the company consistently downplayed product safety concerns related to the airbags. The complaint also alleges that in its periodic filings with the SEC, the company touted its AV development efforts, citing the driverless vehicle technology as “the most efficient way to unlock potential societal benefits of self-driving cars” and also citing the “potential of all-electric self-driving vehicles to help save lives.”

On October 3, 2023, news reports circulated that a driverless Cruise AV had struck and injured a pedestrian in the San Francisco area. The company’s share price declined about 3.3% on this news.

On October 5, 2023, the Wall Street Journal reported that at least 20 million GM vehicles had been built with defective airbag inflators of the type for which the National Highway Traffic Safety Administration had recommended for recall. The company’s share price declined 2.3% on this news.

On October 24, 2023, the California Department of Motor Vehicles announced the immediate suspension of Cruise’s driverless technology testing permits. The agency said that Cruise had “misrepresented information related to the safety of the autonomous technology of its vehicles.” The company’s share price declined 2.2% on this news.

Finally, on October 26, 2023, Cruise announced that it would pause all of its AV operations across the country. The company’s share price declined a further 4.6% on this news.

The Lawsuit

On December 8, 2023, a plaintiff shareholder filed a lawsuit in the Eastern District of Michigan against General Motors; Mary Barra, GM’s Board Chair and CEO; and Paul Jacobson, GM’s CFO. The complaint purports to be filed on behalf of investors who purchased GM securities between February 2, 2022, and October 26, 2023.

The complaint alleges that during the class period the defendants made false and/or misleading statements and/or failed to disclose that: “(i) GM downplayed concerns with its vehicles’ airbags and the need to record additional warranty accruals for related product recalls; (ii) GM overstated the extent and efficacy of its efforts to analyze defects in its vehicles’ airbag inflators; (iii) Cruise’s AV and/or AV technology were less safe and well-developed than Defendants had led investors, regulators, and the general public to believe; (iv) accordingly, regulatory approval and adoption of Cruise’s AV products were overstated; (v) all of the foregoing subjected GM to an increased risk of governmental and/or regulatory scrutiny and enforcement action, significant legal liabilities, product recalls, and reputational harm; and (vi) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

There is no doubt that the airbag and AV vehicle safety issues that developed in October are serious concerns. Both sets of issues represent serious product safety and consumer protection issues, that not only raise significant regulatory concerns but that also threaten significant physical harm to consumers and, in the case of the autonomous vehicles, the general public.

The securities class action complaint in effect contends that, in addition to consumers and bystanders, investors were also harmed by these developments. However, the share price decline at each stage in the series of disclosures on which the plaintiff relies was slight, at best, suggesting that the supposed misrepresentations were perhaps not as significant to investors as the complaint seeks to argue. Moreover, when the time comes for the court to assess the sufficiency of the plaintiff’s allegations, the court will struggle to find any allegations to suggest that the defendants acted with scienter.

The key facts at the core of this lawsuit are, in essence, that the company suffered setbacks in different parts of its operations. The setbacks are indeed serious. For me, at least, it seems plausible, indeed more probable than not, that the setbacks were unanticipated. It will be a tough sell to the court that the fact that these setbacks happened amounts to securities fraud, particularly given the relatively modest drop in the company’s share price when the setbacks came to light and given the paucity of allegations showing that the defendants acted with scienter.

For me, it is very difficult to read this complaint without thinking of Bloomberg columnist Matt Levine’s oft-quoted quip that we have gotten to the point that “everything everywhere is securities fraud.”  

The autonomous vehicle mishap is serious, perhaps even tragic. But it really does seem that what is involved in the AV accident is a vehicle malfunction, not securities fraud. Even the company’s ongoing difficulties with its airbags does seem to represent a manufacturing problem – but is it really securities fraud, too?

The phenomenon of event-driven litigation is not new; I have been writing about it on this site since at least 2017, and as I have noted in prior posts on this topic, there were significant event-driven lawsuits before that time as well. This new lawsuit is a reminder that the event-driven litigation phenomenon lives on. For those of us who have to try and figure out what are the things that can lead to securities litigation, all too often the answer seems to be – just about anything.