SAN FRANCISCO (CN) – Volkswagen must fight class action claims it defrauded American investors due to its emissions cheating scandal in a U.S. court rather than in Germany, a federal judge ruled.
The German automaker had asked U.S. District Judge Charles Breyer to dismiss a shareholder class action seeking hundreds of millions of dollars for damage to its stock price following the emissions cheating scandal.
In a ruling issued Wednesday, Breyer rejected Volkswagen’s claims that because it sold a certain type of stock to American investors, it was exempt from U.S. securities laws.
The U.S. investors say Volkswagen’s failure to disclose its use of defeat devices and billions of dollars it faced in liability over the scandal artificially inflated its stock price from November 2010 to January 2016.
The company has lost an estimated $63 billion in market value since its use of emissions test-cheating software in some 11 million vehicles worldwide was revealed in September 2015.
In fending off the class action, Volkswagen argued the type of shares it sold in the United States – level 1 American Depository Receipts, or ADRs – are exempt from U.S. securities reporting requirements and subject only to German laws and standards.
But Breyer found the shares are subject to U.S. jurisdiction because they were sold through domestic transactions, and Volkswagen was required to make disclosures in English available on its website for American investors.
“Regardless of the level of the ADRs, Volkswagen took affirmative steps to make its securities available to investors here in the United States,” Breyer wrote in his 41-page ruling.
Breyer weighed a host of factors to test Volkswagen’s theory that the United States is an inconvenient forum and should be dismissed for forum non conveniens. Breyer found that although Germany would be an adequate alternative forum to litigate the claims, other factors did not weigh in favor of dismissal.
The judge also refused to dismiss claims against Volkswagen’s former top executives, including former Volkswagen CEO and board chairman Martin Winterkorn.
Breyer found allegations that Winterkorn knew of and concealed the scandal were sufficient to pursue claims that he defrauded American investors. The plaintiffs said Winterkorn was a micromanager heavily involved in details of the company’s operations, that he helped create the “Strategy 2018” which emphasized clean diesel vehicles, and that he was warned about the automaker’s illegal use of defeat devices as early as 2011.
The judge also denied a motion to dismiss claims that former Volkswagen board member and brand strategist Herbert Diess made false statements in a third-quarter report in 2015. The plaintiffs claimed Diess understated Volkswagen’s total liabilities and overstated its operating profits, assets and shareholder equity.
Michael Horn, former president and CEO of Volkswagen Group of America, must also face claims that he hid the scandal from American investors, Breyer ruled.
Horn reportedly received an email on May 15, 2014, warning him that clean-diesel vehicles did not meet U.S. emission standards and that the company could face fines from U.S. regulators.
Horn told Congress on Oct. 8, 2015, that he was informed of “possible emissions noncompliance” in May 2014.
Breyer tossed claims against Horn’s predecessor, former Volkswagen Group of America CEO Jonathan Browning, finding allegations that he was merely involved in the U.S. regulatory approval process were not strong enough to survive a motion to dismiss.
The judge also dismissed claims under Section 20(a) of the Securities Exchange Act against Diess and Horn, finding the plaintiffs failed to adequately show the two executives were “control persons” that wielded power over the firms in the same manner as Winterkorn.
Statements touting the company’s environmental friendliness and car stickers certifying vehicles as compliant with emission standards are fair game as evidence in the suit, Breyer said.
“The court cannot declare as a matter of law that a reasonable investor would not have considered the emissions stickers on Volkswagen vehicles to be material investing information,” Breyer wrote.
Court-appointed lead plaintiff Arkansas State Highway Employees’ Retirement System filed a 155-page securities class action against Volkswagen, its subsidiaries and chief executives in May last year.
The plaintiffs say the automaker’s deceit caused them to lose money when the price of Volkswagen ADRs dropped from $38.03 on Sept. 17, 2015, before the scandal was revealed, to $26.16 on Jan. 5, 2016.
Volkswagen struck two settlements last year totaling $15 billion over its use of defeat devices in some 580,000 diesel-engine vehicles sold in the United States.
In an emailed statement, Volkswagen spokeswoman Jeannine Ginivan called the claims of U.S. ADR purchasers “without merit” and said the company plans to demonstrate that as the case moves forward.