SAN FRANCISCO (CN) – A federal judge on Wednesday refused to dismiss a second shareholder class action against Volkswagen, finding its failure to warn investors about its use of emissions-cheating software in 11 million vehicles was “misleading.”
In a May 2014 offering memo to major investors, Volkswagen focused heavily on its development of emissions-reducing technology and the need to comply with government regulations. U.S. District Judge Charles Breyer found the company’s failure to mention that it was also using defeat devices to skirt environmental laws painted an inaccurate picture for investors.
“Together, the inference that arises from these statements is that Volkswagen was a good investment because of its commitment to emissions-reducing technology,” Breyer wrote in his 31-page ruling. “That inference was misleading because Volkswagen was in its fifth year of a massive fraud to cheat emissions standards.”
A retirement fund for Puerto Rico’s government employees is the lead plaintiff in one of two U.S. securities class actions against Volkswagen and its former top executives. The retirement fund seeks to represent a class of institutional investors that purchased $8.3 billion in bonds from Volkswagen between May 2014 and May 2015.
Breyer declined to consider other financial reports and statements issued by Volkswagen in his ruling because the May 2014 offering memo stated that investors “should only rely on the information contained in” the memo.
The judge also refused to dismiss securities fraud allegations against Volkswagen’s former CEO Martin Winterkorn. The company argued Winterkorn had nothing to do with drafting or approving the offering memo at issue. But Breyer found Winterkorn’s role as head of the company and involvement in its day-to-day operations “plausibly support” that he had ultimate authority over the memo.
Breyer also found it was reasonable to infer that Winterkorn knew of the company’s fraudulent behavior in May 2014. The judge found it plausible that Winterkorn received a letter from Robert Bosch GmbH, maker of the defeat devices, in 2007, warning that the emissions-cheating software would be considered illegal. The plaintiffs say Winterkorn was also put on notice by an internal whistleblower in 2011.
“Together, these allegations give rise to a strong inference that, by May 2014, and likely much earlier, Winterkorn knew that Volkswagen was using an illegal defeat device in its ‘clean diesel’ vehicles,” Breyer wrote.
However, the judge dismissed securities fraud allegations against former Volkswagen Group of America CEO Michael Horn, who started his job in January 2014 and received a letter about Volkswagen’s non-compliance with U.S. emissions standards on May 15, eight days before the retirement fund’s purchase of Volkswagen bonds was finalized.
The May 2014 email from Oliver Schmidt in Volkswagen’s U.S. Regulatory Compliance Office warned that 500,000 to 600,000 vehicles in the U.S. “could be affected by the diesel scandal,” making the company liable for fines of $37,500 per car, and an extra $5,500 per car in California.
Breyer said managers must be given a reasonable period of time to consider, digest and investigate information before they have to disclose it to the public.
“Here, it would have been reasonable for Horn to have obtained the Schmidt email and to have considered and investigated the issue for more than a week before disclosing the information to potential bondholders or the public,” Breyer wrote.
Breyer dismissed the claims against Horn, and claims against Volkswagen Group of America based on his conduct, with leave to amend. The plaintiffs have 30 days to file an amended complaint.
Last month, 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.
The U.S. 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 immediately respond to an email seeking comment Wednesday morning.