SAN FRANCISCO (CN) – A federal judge on Friday appeared unwilling to let Volkswagen off the hook for failing to warn investors that it was skirting environmental laws, even as it touted its commitment to developing emissions-reducing technology.
“It’s not that they have to disclose wrongdoing,” U.S. District Judge Charles Breyer said in court on Friday. “But when you say, ‘Look at all the government is doing to monitor this,’ and you fail to say, ‘And we’re devoting resources to defeat this,’ that’s a misstatement by omission.”
Breyer was referring to a document drafted in May 2014 to court big investors such as a retirement fund for Puerto Rico’s government employees, which serves as the lead plaintiff in one of two U.S. securities class actions against Volkswagen and its former top executives.
The retirement fund claims Volkswagen overstated its profitability and hid the billions of dollars in liabilities it faced for its worldwide distribution of 11 million vehicles tainted with emissions-cheating software.
During a motion-to-dismiss hearing Friday, Volkswagen attorney Robert Giuffra insisted the German automaker can’t be held liable for securities fraud because it made no false statements in a May 2014 memo that institutional investors relied on when purchasing bonds.
“Every company issues warnings that we are subject to laws,” Giuffra said. “If that’s enough for a misstatement, every company that gets fined could be liable.”
But Breyer found Volkswagen focused heavily on its commitment to emissions-reducing technology in that memo while failing to disclose that it also invested in devices intended to conceal emissions.
“The truth and context of what Volkswagen is doing is important,” Breyer said.
The judge said he would not consider other statements and financial reports issued by the company because the memo stated that investors should “rely only on information contained in this offering memorandum.”
Attorneys for Volkswagen and the proposed class of qualified institutional buyers also argued over whether the proposed class period should start on May 15, 2014, when the bonds were purchased, or May 23, 2014, when the transaction was complete.
That eight-day difference is important because the plaintiffs claim then-Volkswagen of America CEO Michael Horn received an email on May 15 warning him that Volkswagen vehicles did not meet U.S. emissions standards and of the potential consequences.
Class attorney Ian Berg argued that because the transaction was not completed until May 23, that date should represent the start of the class period. He contended Horn knew about the fraud before the retirement fund completed its purchase of bonds on May 23, 2014.
“If the truth was disclosed, they would have had the opportunity to cancel that order,” Berg said.
But Volkswagen attorneys, including Giuffra, insisted the company and its executives can only be held liable for conduct that occurred before the purchase date of May 15, 2014.
Volkswagen sold three sets of bonds to qualified institutional buyers between May 23, 2014, and May 22, 2015. It sold $3.5 billion in bonds in May 2014; $2 billion in bonds in November 2014; and $2.8 billion in bonds in May 2015, according to the retirement fund’s complaint.
Giuffra said it was “telling” that no other named plaintiffs have stepped forward in the case, adding that the retirement fund for Puerto Rico’s public employees only lost $66,000, or 1.6 percent in value when it sold the bonds in October 2015.
“People didn’t lose a lot of money on these bonds, and some made money,” Giuffra said.
Breyer indicated that the proposed class would need to find additional named plaintiffs that purchased bonds in November 2014 and May 2015 to pursue claims of securities fraud for those transactions.
After about an hour of debate, Breyer took the arguments under advisement.
Last week, Breyer refused to dismiss claims against Volkswagen in a separate class action brought by U.S. investors who purchased Volkswagen shares in the form of level 1 American Depository Receipts, or ADRs.
Giuffra is with Sullivan and Cromwell in New York. Berg is with Abraham, Fruchter & Twersky in San Diego.