A General Electric gas turbine is transported through the Port of Charleston. Photo: Shutterstock

A Manhattan federal judge has dismissed an investor class action that targeted General Electric Co. for allegedly concealing a major defect with its newest line of power plant turbines and taking a "mammoth" $22 billion write-off, which sparked civil and criminal investigations of the multinational conglomerate.

The May 8 ruling came as a win for GE and its Latham & Watkins attorneys, who had defended shareholder claims that the alleged missteps amounted to securities-fraud violations under the Private Securities Litigation Reform Act.

Lead plaintiff Teachers' Retirement System of Oklahoma said last year in a 111-page complaint that GE discovered an oxidation issue in 2017 that caused its turbine blades to corrode and break. At the time, GE told its customers that it planned to inspect the blades and either add a protective coating or replace the blades altogether.

But according to the complaint, GE continued to tout the reliability of its turbines for another year, before Reuters reported in December 2018 that utilities were shutting down about one-third of the company's next-generation HA turbine fleet for repairs. According to the article, GE also set aside $480 million to fix three different turbine models.

To make matters worse, that October GE had been forced to take a $22 billion goodwill stemming from its $10 billion acquisition of French manufacturing company Alstom S.A., an unprecedented move which sent GE's stock tumbling nearly 9% and led the federal government to open probes of the company.

The filing alleged that $17 billion in goodwill that GE recorded from the Alstom deal was excessive and did not account for a substantial downturn in the power-generation market at the time. GE, the lawsuit said, should have identified the discrepancies and adjusted its goodwill balance sooner, but instead continued to provide misleading valuations based on accounting that did not comply with Generally Accepted Accounting Principals.

According to the complaint, GE's market capitalization declined by about $90 billion during the alleged class period, which stretched from December 2017 to December 2018.

In both instances, the plaintiffs said, GE had knowingly made false and misleading representations to its investors in violation of the PSLRA. However, U.S. District Judge Denise L. Cote of the Southern District of New York ruled last week that none of the claims met federal pleading standards for material misrepresentations or scienter.

With regard to the turbine disclosures, Cote said that many of the statements the plaintiffs cited were too general to form the basis of a securities-fraud lawsuit. Others, she said, were either statements of opinion or "glossy statements of praise" that could not be interpreted by investors as hard assertions of fact.

Cote also noted that GE "made a number of statements" regarding the problem, and worked to implement a solution after it came to light in September 2018, a finding she said cut against plaintiffs' accusations of scienter.

"Here, the non-culpable inference offered by the defendants is decidedly more plausible," Cote wrote in the 43-page opinion.

"GE had identified the oxidation problem and what it believed to be a solution for that problem," she said. "It was rolling out replacement blades, a solution it believed would be sufficient to avert a material impact on the company's financial condition. Indeed, the SAC makes no particularized scienter allegations supporting the duty to disclose."

On the subject of GE's flawed accounting, Cote said the company's alleged recklessness did not constitute any "extreme departure" from the standards of ordinary care, and the complaint did not allege that GE's directors had benefited personally from the alleged fraud, deliberately engaged in illegal behavior or failed to check any information they had a duty to monitor.

"The assessment of goodwill was a judgment based on other judgments and projections," she said. "The failures, as described in the [complaint], were at worst failures in judgment. They do not constitute conscious recklessness."

Attorneys for Boston-headquartered GE declined to comment Monday, and a lawyer for the plaintiffs did not immediately respond to a request for comment.

GE was represented by Latham partners Sean Berkowitz, William Trach, Sarah Tomkowiak and Blake Denton and of counsel Miles Ruthberg.

The plaintiffs were represented by Laura Posner and Joel Laitman of Cohen Milstein Sellers & Toll in New York and Steven Toll, Julie Goldsmith Reiser, Molly Bowen and Eric Berelovich from the firm's Washington, D.C., office.

The case was captioned In re General Electric Securities Litigation.

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