Volkswagen Can’t Dodge Securities Class Action

SAN FRANCISCO (CN) – In the latest chapter of ongoing fallout over Volkswagen’s emissions cheating scandal, a federal judge on Friday refused to dismiss a class action accusing the German automaker of deceiving institutional investors.

U.S. District Judge Charles Breyer found bondholders adequately alleged that Volkswagen used misleading statements and omissions in a May 2014 offering memo to solicit investments from major investors.

The offering memo, which emphasized Volkswagen’s commitment to emissions-reducing technology and need to comply with government regulations, was used to sell $8.3 billion in bonds between May 2014 and May 2015.

A retirement fund for Puerto Rico’s government employees serves as lead plaintiff in the case.

“Volkswagen continues to believe that these claims are without merit, which we intend to make clear as this case proceeds,” Volkswagen Group of America spokesperson Mike Tolbert said in an email.

Breyer previously dismissed the class action with leave to amend in March, finding the investors failed to plead that they relied on allegedly misleading statements and omissions in the May 2014 offering memo.

The plaintiffs filed an amended complaint in April, stating that their investment advisers “reviewed and relied upon the information contained” in that memo.

Breyer rejected Volkswagen’s arguments that the complaint lacks specifics on who read the memo and where and when it was read.

The judge found it reasonable to conclude that the memo was read by an investment adviser before the bonds were purchased, and he found the place where it was read to be of “limited importance.”

Martin Winterkorn, former CEO of the German car manufacturer Volkswagen, faced off with an investigation committee of the German federal parliament in Berlin on Jan. 19, 2017. (AP Photo/Michael Sohn, file)

Breyer ruled that the allegations adequately support claims that investors “directly relied on the misrepresentations at issue.”

The judge also reversed his prior ruling and held that former Volkswagen of America CEO Michael Horn can be sued for securities violations as a control person of the company because he was allegedly alerted about emissions cheating on March 31, 2014, seven weeks before the offering memo was issued and bonds were sold.

Judge Breyer delayed ruling on whether the investors can invoke the principle of presumed reliance as established in the 1972 Supreme Court ruling, Affiliated Ute Citizens of Utah v. United States. If presumed reliance applies, the plaintiffs would not have to prove that they or their investment advisers read and relied on information in the May 2014 offering memo. Breyer said he would revisit that question at the class certification stage.

The judge also dismissed insider trading claims against Volkswagen executives without leave to amend, finding the executives had no duty to disclose nonpublic information to purchasers of corporate debt, as opposed to shareholders.

Last week, 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.

Volkswagen distributed more than 11 million diesel vehicles worldwide with emissions cheating software designed to spew less pollution during compliance tests than on the road. About 600,000 of those vehicles were sold in the U.S., emitting up to 40 times more pollution than allowed under U.S. law.

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 has 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.

U.S. prosecutors filed criminal charges against former Volkswagen CEO Martin Winterkorn in May, but Germany does not extradite its citizens to the United States.

Bondholders class attorney Ian Berg, of Abraham Fruchter and Twersky in San Diego, did not immediately return an email and phone call seeking comment Friday afternoon.

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