Judge tosses case against Volkswagen, states plaintiff did not sufficiently plead reliance

By Michael McGrady | Mar 21, 2018

SAN FRANCISCO – Earlier this month, a federal judge in California dismissed a class action lawsuit against Volkswagen AG after a group of bondholders sued the company over its controversial “clean diesel” incident and its alleged unlawful marketing practices.

Federal Judge Charles Breyer of the U.S. District Court for the Northern District of California shut down the case March 2 because the institutional investors of the suing class failed to prove that they made their investments by relying on an offering memorandum filed with the Securities and Exchange Commission in May 2014. 

“Because reliance is not sufficiently pled, the court grants defendants’ motions to dismiss the amended complaint, with leave to amend,” Breyer wrote in his official order, obtained by Northern California Record. “In light of the holdings with respect to reliance, the court does not consider at this time other issues that were raised in the motions. ... As currently pled, the court concludes that plaintiff cannot rely on either of these alternative theories.”

Breyer added: “An acknowledgment that investors have relied only on the information in the offering memorandum in making their investment decisions—and not on anything outside the memorandum—accomplishes the same goal. It signals that if investors intend to rely on extrinsic information, they do so at their own risk, and that their reliance on such information will not be justifiable.”

Initially, a proposed class action was filed for the Boston Retirement System (BRS) in June of 2016 signaling the beginning of the first class-action lawsuit against Volkswagen over its allegedly unlawful marketing practices associated with the “clean diesel” controversy.

As many consumers can recollect, Volkswagen installed special software secretly to evade specific emissions rules in some 11 million vehicles worldwide. Ultimately, this allowed the company to circumvent regulators by providing false information about the company’s alleged “clean diesel” technology.

The company openly admitted to the public that the software was implemented and soon, the company was subject to several legal probes and legal actions.

In the immediate suit, the class sought to recover $8 billion that it alleged it invested between May 23, 2014, and Sept. 22, 2015. 

In response, the suit stated that the company is liable for securities fraud due to its alleged false statements. The only catch was that Breyer saw no groundings for these allegations.

Initially, the suit argues "false and misleading statements and omissions" were made by Volkswagen and caused the bonds to trade at "artificially inflated prices..., only to decline after the emissions' scandal went public," according to a 2016 statement by Labaton Sucharow LLP, who represents BRS.

The judge dismissed these claims.

“A statement that investors have relied on the information within the memorandum does not further the same purpose. It effectively confirms that investors have performed a certain level of due diligence, which is less of a cautionary note and more of an attestation. Such a statement would be out of place,” Breyer concluded.

This case, BRS v. Volkswagen AG, is one of the dozens of lawsuits filed by institutional investors from all over the world.

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