General ElectricÂ® Capital, a division of General Electric, uses long- term debt extensively. In early 2002, GE Capital issued $11 billion in long-term debt to investors, and then within days filed legal documents to prepare for another $50 billion long-term debt issue. As a result of the $50 billion filing, the price of the initial $11 billion offering declined (due to higher risk of more debt).
Bill Gross, a manager of a bond investment fund, â€œdenounced a â€˜lack in candorâ€™ related to GEâ€™s recent debt deal.â€ He said, â€œit was the most recent and most egregious example of how bondholders are mistreated.â€ Gross argued that GE was not forthright when GE Capital recently issued $11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as $50 billion in additional debt, warrants, preferred stock, guarantees, letters of credit, and promissory notes at some future date.â€
In your opinion, did GE Capital act unethically by selling $11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another $50 billion debt offering? Please explain why the action is unethical and if the action is illegal as well.
Source: Alban, J. (2002, March 25). Gross shakes the bond market; GE calms it, a bit. Barronâ€™s.