The majority of a three-judge panel held that bondholders cannot invoke a 1972 Supreme Court precedent to sidestep a legal hurdle requiring it to show that it relied on statements allegedly misleading when he bought Volkswagen bonds.
SAN FRANCISCO (CN) – Major investors must meet a higher standard of proof to hold Volkswagen accountable for claims of securities fraud linked to an emissions fraud scandal that cost the automaker billions in losses, said on Friday a divided panel of the Ninth Circuit.
Puerto Rican government employee retirement fund serves as lead plaintiff in class action lawsuit claiming Volkswagen misled institutional investors when they bought $ 8.3 billion in bonds between May 2014 and May 2015 .
In a May 2014 offer note, Volksagen touted its commitment to developing emission reduction technology and its need to comply with environmental laws, but failed to mention that it had installed test cheat devices. emissions in 11 million diesel vehicles worldwide.
Emissions cheat software allowed cars to trick regulators by spewing less pollution during compliance testing than on the road. About 600,000 of the contaminated vehicles were sold in the United States.
When the scandal was made public in September 2015, the prices of the German automaker’s bonds fell and institutional investors like the Puerto Rican government employee pension fund lost money. Then they sued Volkswagen for securities fraud.
Volkswagen sought summary judgment in the case, arguing that the bondholders had failed to prove that they relied on alleged false statements in a May 2014 offer note when purchasing the ‘obligations. U.S. District Judge Charles Breyer dismissed this petition in September 2019. He found that, because the bondholders mostly alleged omissions rather than misrepresentation, they could make a presumption that they relied on the missing information.
On Friday, the majority of a three-judge panel from the Ninth Circuit disagreed and overturned Breyer’s decision. The majority held that previous Ninth Circuit decisions establish that the presumed confidence is only available in “pure omissions” cases and not in “mixed” cases which allege both misrepresentation and omissions.
The standard comes from a Supreme Court case from 1972, Ute Affiliate Citizens of Utah, who ruled that because it is impossible to prove that one would have relied on undisclosed information, confidence should be presumed in such cases.
The majority cited numerous statements from Volkswagen’s May 2014 offer note, cited in the bondholders’ complaint, including that Volkswagen was focusing on offering “environmentally friendly” vehicles. The complaint also stated that investors relied on these statements when they bought the bonds.
Writing for the majority, American circuit judge Milan Smith Jr., appointed by George W. Bush, held that a defendant’s cover-up of the truth does not automatically turn his false statements into implied omissions.
“The Ute Affiliate the presumption of reliance does not apply because the plaintiff can prove reliance by ordinary means by demonstrating a connection between the alleged inaccuracies and his prejudice, ”Smith wrote. “Otherwise, the exception would swallow up the rule.
United States Court of International Trade Judge Jane Restani, a person nominated by Ronald Reagan sitting by designation on the panel, joined Smith in the majority.
In a dissenting opinion, U.S. Circuit Senior Judge J. Clifford Wallace, appointed by Richard Nixon, argued that the majority had misinterpreted previous court decisions to conclude that the presumed reliance could never be applied in a case alleging wrongdoing. omissions and misrepresentation.
“In my view, the plaintiff primarily alleged an omissions case based on the material omission of Volkswagen because the omission made those affirmative misrepresentations misleading,” Wallace wrote.
The majority overturned Breyer’s dismissal of Volkswagen’s summary judgment motion and ordered him to reconsider the motion in light of its ruling that the deemed reliance does not apply.
In an emailed statement, Volkswagen attorney Robert Giuffra Jr. of Sullivan & Cromwell LLP called the Ninth Circuit decision an important decision that clarifies the scope of the alleged reliance on an appellate court circuit which is home to many of the country’s leading technology companies.
“The plaintiffs were trying to transform Ute affiliate into an unlimited presumption that would apply in all cases, since every case of misrepresentation can be classified as involving omissions, ”Giuffra said.
Lawyer for the bondholders, Mitchell Twersky of Abraham, Fruchter & Twersky LLP, said he believed his clients had sufficient grounds to challenge the panel’s split decision.
“The majority opinion appears to have overlooked an important point of fact regarding the previous District Court order limiting the scope of the case to only alleged omissions, and the majority opinion appears to contradict previous Ninth Circuit rulings,” said said Twersky.
When asked if the bondholders would request a new bench hearing, Twerskey co-counsel Ian Berg said the team “are looking at all of our options.”
In 2018, Volkswagen agreed to pay $ 48 million to settle a separate securities class action lawsuit brought by buyers of American Depositary Receipts, or ADRs (Foreign Company Share Certificates) for Volkswagen.
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 reached deals with US car owners, regulators and dealers totaling more than $ 17 billion to resolve claims related to the emissions fraud scandal.