SAN FRANCISCO (CN) — Volkswagen must face claims that it misled investors about its liability for installing emissions cheating software in some 11 million vehicles worldwide, but only for statements issued after May 2014, a federal judge ruled Wednesday.
As he indicated at a Tuesday hearing, U.S. District Judge Charles Breyer found a class of U.S. investors lack evidence to show Volkswagen knew as early as November 2010 that it could face billions of dollars in fines for skirting environmental laws.
Shareholders based those claims in part on documents that show California regulators questioned Volkswagen in 2008 about its diesel emissions and threatened it with fines. But the only evidence those documents exist comes from a 2015 German news report.
Breyer found the uncorroborated news article insufficient to establish liability, and that even if the report were true, it lacked context to show whether Volkswagen was put on notice about the likelihood of paying fines.
“That VW AG may have deliberately employed an illegal defeat device does not mean the company knew with reasonable certainty that it was going to get caught,” Breyer wrote in his 18-page ruling.
However, Breyer found that the company was put on notice in May 2014 when its then-CEO Martin Winterkorn was told of an independent study conducted at West Virginia University. That study, commissioned by the International Council on Clean Transportation, found Volkswagen's “clean diesel” vehicles spewed up to 40 times more nitrogen oxide on the road than allowed by federal law.
Volkswagen also knew it could face EPA fines of $37,500 per vehicle for nearly 600,000 cars it sold in the United States, and additional fines of $5,500 per car in California, making it liable for $21.5 billion to $25.8 billion in losses, according to the shareholders’ complaint.
“Together, these allegations support a strong inference that, by the end of May 2014, Winterkorn — and thus VW AG — knew of the financial consequences Volkswagen could face if the fraud was discovered, and knew that losses related to the fraud were probable,” Breyer wrote.
Turning to liability for Volkswagen’s senior executives, Breyer dismissed securities fraud claims against Volkswagen’s former board member and senior manager Herbert Diess. He found Diess did not mislead investors when he announced a charge of 6.7 billion Euros to help cover the cost of fallout from the scandal.
Though Volkswagen has paid more than $20 billion in fines and settlements so far, Diess acknowledged in a 2015 financial report that 6.7 billion Euros was an “initial charge” and that additional legal risks existed.
But Breyer refused to dismiss claims against Winterkorn and former Volkswagen of America CEO Michael Horn. He found both executives exercised control over the companies and were aware of likely penalties but continued to downplay the consequences in public statements.
“Horn was not only CEO of VWGoA (and head of VWoA brand), but was also centrally involved in communications with regulators about the affected vehicles supports that he exercised 'day-to-day oversight' over transactions that contributed to the ultimate fraud," Breyer wrote.
Volkswagen, Winterkorn and Horn must face claims of securities fraud for the time period of May 2014 to January 2016.
Breyer dismissed all other claims without leave to amend.
Breyer in January refused to relinquish jurisdiction over the U.S. shareholder class action to a German court.
The Environmental Protection Agency revealed to the public on Sept. 18, 2015 that Volkswagen used illegal defeat devices to mask nitrogen oxide pollution during emissions tests.
Volkswagen pleaded guilty in March to conspiracy and obstruction of justice, and agreed to pay $4.3 billion in criminal and civil penalties. It also has struck three settlements with U.S. car owners, regulators, and dealerships, totaling more than $17 billion.
Volkswagen spokesman Pietro Zollino did not respond to an email seeking comment Wednesday afternoon.Follow @NicholasIovino
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