SAN FRANCISCO (CN) --- Major investors must meet a higher evidentiary standard to hold Volkswagen liable for securities fraud claims related to an emissions cheating scandal that cost the automaker billions in losses, a divided Ninth Circuit panel ruled Friday.
A retirement fund for Puerto Rico’s government employees serves as lead plaintiff in a class action claiming Volkswagen misled institutional investors when they purchased $8.3 billion in bonds between May 2014 and May 2015.
In a May 2014 offering memo, Volksagen touted its commitment to developing emissions-reducing technology and its need to comply with environmental laws, but it failed to mention that it had installed emissions test cheating devices in 11 million diesel vehicles worldwide.
The emissions cheating software enabled cars to trick regulators by spewing less pollution during compliance tests than while on the road. About 600,000 of the tainted vehicles were sold in the United States.
When the scandal went public in September 2015, the German automaker’s bond prices plummeted and institutional investors like the retirement fund for Puerto Rico government employees lost money. Then they sued Volkswagen for securities fraud.
Volkswagen moved for summary judgment in the case, arguing the bondholders failed to prove they relied on alleged misrepresentations in a May 2014 offering memo when they purchased bonds. U.S. District Judge Charles Breyer denied that motion in September 2019. He found that because the bondholders primarily alleged omissions rather than misrepresentations, they qualified for a presumption that they would have relied on the the missing information.
On Friday, the majority of a three-judge Ninth Circuit panel disagreed and reversed Breyer’s decision. The majority held that prior Ninth Circuit rulings establish that presumed reliance is only available in “pure omissions” cases and not “mixed” cases that allege both misrepresentations and omissions.
The standard comes from a 1972 Supreme Court case, Affiliated Ute Citizens of Utah, which held that because it is impossible to prove one would have relied on undisclosed information, reliance should be presumed in such cases.
The majority cited numerous statements from Volkswagen’s May 2014 offering memo cited in the bondholders’ complaint, including that Volkswagen was focused on offering “environmentally friendly” vehicles. The complaint also stated that the investors relied on those statements when they purchased bonds.
Writing for the majority, U.S. Circuit Judge Milan Smith Jr., a George W. Bush appointee, held that a defendant’s concealment of the truth does not automatically transform their false statements into implied omissions.
“The Affiliate Ute presumption of reliance does not apply because plaintiff can prove reliance through ordinary means by demonstrating a connection between the alleged misstatements and its injury,” Smith wrote. “Otherwise, the exception would swallow the rule.”
U.S. Court of International Trade Judge Jane Restani, a Ronald Reagan appointee sitting on the panel by designation, joined Smith in the majority.
In a dissenting opinion, Senior U.S. Circuit Judge J. Clifford Wallace, a Richard Nixon appointee, argued that the majority misinterpreted prior court decisions to conclude that presumed reliance can never be applied in a case alleging omissions and misrepresentations.
“As I see it, the plaintiff has alleged primarily an omissions case predicated on Volkswagen’s material omission because the omission rendered those affirmative misstatements misleading,” Wallace wrote.
The majority vacated Breyer’s denial of Volkswagen’s motion for summary judgment and ordered him to reconsider the motion in light of its holding that presumed reliance does not apply.
In an emailed statement, Volkswagen attorney Robert Giuffra Jr. of Sullivan & Cromwell LLP called the Ninth Circuit ruling an important decision that clarifies the scope of presumed reliance in an appeals court circuit that is home to many of the nation’s leading tech companies.
“Plaintiffs were trying to turn Affiliated Ute into an open-ended presumption that would apply in every case, since every misrepresentation case can be categorized as involving omissions,” Giuffra said.
Bondholders’ attorney Mitchell Twersky of Abraham, Fruchter & Twersky LLP said he believes his clients have adequate grounds to challenge the panel’s split decision.
“The majority opinion appears to have overlooked a material point of fact regarding the District Court’s previous order narrowing the scope of the case to only alleged omissions, and the majority opinion seems to contradict previous Ninth Circuit decisions,” Twersky said.
When asked if the bondholders will seek an en banc rehearing, Twerskey’s co-counsel Ian Berg said the team is “considering all of our options.”
In 2018, Volkswagen agreed to pay $48 million to settle a separate securities class action brought by purchasers of American Depositary Receipts, or ADRs --- certificates of shares in a foreign company --- for Volkswagen.
The German automaker pleaded guilty in March 2017 to conspiracy and obstruction of justice and agreed to pay $4.3 billion in criminal and civil penalties. Volkswagen also struck settlements with U.S. car owners, regulators and dealerships totaling more than $17 billion to resolve claims related to the emissions cheating scandal.
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