SAN FRANCISCO (CN) – Major investors must prove they relied on Volkswagen’s alleged misstatements in order to hold the company liable for securities fraud related to its emissions cheating scandal, a federal judge ruled Friday.
U.S. District Judge Charles Breyer granted Volkswagen’s motion to dismiss one of two shareholder class actions against the company, finding institutional investors failed to prove they relied on allegedly misleading statements in a May 2014 offering memo.
The memo, used to promote the sale of $8.3 billion in bonds between May 2014 and May 2015, touted Volkswagen’s commitment to developing emissions-reducing technology and focused heavily on its need to comply with government regulations.
Absent from the memo was the fact that Volkswagen had installed emissions cheating software in some 11 million vehicles worldwide, allowing cars to spew up to 40 times more nitrogen oxide on the road than allowed under U.S. law.
In a previous ruling, Breyer found major investors had adequately alleged Volkswagen and its top executives misled them by omitting material facts, such as the company’s liability of $21.5 to $25.8 billion in potential fines or skirting U.S. environmental laws.
On Friday, Breyer reached a different conclusion, finding that reliance on misstatements cannot be presumed just because the complaint primarily alleges omissions.
A 1972 Supreme Court ruling, Affiliated Ute Citizens of Utah v. United States, established that reliance is presumed when a defendant omits material facts as part of a fraudulent scheme. But more recent court rulings persuaded Breyer to rethink that conclusion and rule that the plaintiffs must still prove they relied on alleged misstatements to advance their suit.
“To plausibly plead direct reliance, plaintiff must also allege that one or more of its agents actually read the Memorandum and relied on the statements therein that are at issue,” Breyer wrote in his 16-page ruling.
The plaintiffs have 30 days to file an amended complaint.
A retirement fund for Puerto Rico’s government employees serves as lead plaintiff in this case, one of two securities class actions filed against Volkswagen over its Dieselgate emissions scandal.
In June last year, 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.
Volkswagen pleaded guilty in March 2017 to conspiracy and obstruction of justice, and agreed to pay $4.3 billion in criminal and civil penalties. The automaker struck three settlements with U.S. car owners, regulators, and dealerships, totaling more than $17 billion, to settle claims related to the emissions cheating scandal.
Volkswagen attorney Robert Giuffra Jr., of Sullivan and Cromwell in New York, said they were “pleased with Judge Breyer’s decision dismissing these bondholder claims.”
Attorneys for the plaintiffs did not immediately return phone calls and emails seeking comment Friday afternoon.
The bondholder plaintiffs are represented by Ian Berg, of Abraham, Fruchter & Twersky, in San Diego.