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In re Volkswagen "Clean Diesel" Marketing, Sales Practices, and Products Liability Litigation

United States District Court, N.D. California

June 28, 2017

IN RE VOLKSWAGEN “CLEAN DIESEL” MARKETING, SALES PRACTICES, AND PRODUCTS LIABILITY LITIGATION This Order Relates To: MDL Dkt. Nos. 3059, 3060 City of St. Clair Shores, 15-6167 Travalio, 15-6168 George Leon Family Trust, 15-6168 Charter Twp. of Clinton, 16-190 Wolfenbarger, 16-184


          CHARLES R. BREYER United States District Judge.

         In September 2015, Volkswagen admitted to regulators and the public that it had used a “defeat device”-software designed to cheat emissions tests-in nearly 600, 000 TDI diesel engine vehicles sold in the United States (the “Affected Vehicles”). Soon after, purchasers of Volkswagen-sponsored Level 1 American Depository Receipts (“ADRs”) filed actions against the Company and management under the Private Securities Litigation Reform Act (“PSLRA”). These actions were consolidated before this Court and, in January 2016, the Court appointed Arkansas State Highway Employees' Retirement System (“ASHERS”) as Lead Plaintiff. (Dkt. No. 545.) On March 10, 2017, Volkswagen AG pled guilty to three criminal felony counts as a result of the defeat-device scheme, including conspiracy to defraud the United States and the Company's U.S. customers, and to violate the Clean Air Act, by lying about whether the Affected Vehicles complied with U.S. emissions standards. (See United States v. Volkswagen AG, No. 16-CR-20394, Dkt. 68 (E.D. Mich. Mar. 10, 2017).)

         In an Order issued on January 4, 2017, the Court granted in part and denied in part Defendants' motions to dismiss the Consolidated Securities Class Action Complaint (the “Original Complaint”). (Dkt. No. 2636.) Plaintiffs subsequently filed their First Amended Consolidated Securities Class Action Complaint (the “Amended Complaint”), in which they attempt to cure the deficiencies the Court identified with the Original Complaint. (Dkt. No. 2862.) In response, Defendants filed motions to dismiss the Amended Complaint, which are currently before the Court. (Dkt. Nos. 3059-60.) Having considered the parties' submissions and the arguments made during the hearing on June 27, 2017, the Court GRANTS in part and DENIES in part Defendants' motions. As to the portions of the Amended Complaint that the Court dismisses, leave to amend is DENIED.


         Lead Plaintiff represents a proposed class of all persons who purchased Volkswagen-sponsored Level 1 ADRs from November 19, 2010 through January 4, 2016 (the “Class Period”). (First Amended Compl. (“FAC”) ¶ 6.) The Defendants are Volkswagen Aktiengesellschaf (“VW AG”); Volkswagen Group of America (“VWGoA”); Volkswagen of America (“VWoA”); and Audi of America, Inc. (“AoA”) (collectively, the “Corporate Defendants”), and individual Defendants Martin Winterkorn (“Winterkorn”), the former CEO and Chairman of the Management Board of VW AG; Michael Horn (“Horn”), the former President and CEO of VWGoA, as well as President of the VWOA brand, from January 2014 to March 2016; and Herbert Diess (“Diess”), a Member of the Board of Management of VW AG and Chairman of the Board of Management of the Volkswagen Passenger Cars Brand (collectively, the “Individual Defendants, ” and all together, “Defendants” or “Volkswagen”).[1]

         Plaintiffs contend that Defendants violated Section 10(b) of the Securities Exchange Act, and SEC Rule10b-5, by making untrue and misleading statements during the Class Period about Volkswagen's financial condition and the Affected Vehicles' compliance with U.S. emissions standards. (FAC ¶ 409.) Plaintiffs also allege that VW AG and the Individual Defendants are liable under Section 20(a) of the Exchange Act as “control persons” of the Corporate Defendants. (Id.¶¶ 553-64.) As a result of Defendants' conduct, Plaintiffs contend that they purchased Volkswagen's ADRs at artificially high prices, and that the value of their ADRs dropped significantly after disclosure of the Company's misconduct. (FAC ¶ 523.)

         In the January 4 Order, the Court reached the following holdings in Plaintiffs' favor: (1) Plaintiffs' claims fall within the territorial reach of Section 10(b); (2) the claims should not be dismissed on forum non conveniens grounds; (3) personal jurisdiction exists over Winterkorn and Diess; (4) Plaintiffs adequately pled their Section 10(b) claims, except on certain limited grounds; and (5) Plaintiffs adequately pled Section 20(a) control-person claims against Winterkorn and VW AG. (Dkt. No. 2636 at 40-41.)

         Ruling against Plaintiffs in the January 4 Order, the Court held that the allegations in the Original Complaint did not support (1) that VW AG understated its financial liabilities “in each of its quarterly and annual financial statements issued during the Class Period;” (2) that Diess acted with scienter in approving VW AG's Third Quarter 2015 Interim Report; (3) that Diess was a control person under Section 20(a) of the Exchange Act; or (4) that Horn was a control person under Section 20(a) of the Exchange Act. (Id.)

         On February 3, 2017, Plaintiffs filed their Amended Complaint. (Dkt. No. 2862.) Defendants responded by filing two motions to dismiss the Amended Complaint; Horn filed the first (Dkt. No. 2059), and the Corporate Defendants, Winterkorn, and Diess filed the second (Dkt. No. 3060). In their motions, Defendants argue that Plaintiffs' Amended Complaint does not cure the four previously noted deficiencies.


         The Court may dismiss a claim under Rule 12(b)(6) if the allegations in the complaint do not support that the claim is plausible. Fed.R.Civ.P. 12(b)(6); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

         Claims for fraud must meet the heightened pleading standard of Rule 9(b), which requires a party “alleging fraud or mistake [to] state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). Securities fraud claims must also meet the heightened pleading requirements of the PSLRA, which requires the complaint to “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1); Tellabs v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007).

         The PSLRA also requires the plaintiff to state with particularity facts giving rise to a strong inference of the defendant's scienter. See 15 U.S.C. § 78u-4(b)(2). “[A]n inference of scienter must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314. “Where pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a ‘strong inference' that misleading statements were knowingly or . . . reckless[ly] made to investors, a private securities fraud complaint is properly dismissed under Rule 12(b)(6).” Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001).

         If the Court dismisses a claim under Rule 12(b)(6), it will grant leave to amend “when justice so requires.” Fed.R.Civ.P. 15(a)(2). But if in an amended complaint the plaintiff is unable to cure noted shortcomings, the Court can reasonably conclude that further amendment would be futile and deny leave to further amend. See Rutman Wine Co. v. E & J. Gallo Winery, 829 F.2d 729, 738 (9th Cir. 1987).


         Plaintiffs contend that the Amended Complaint cures the four pleading deficiencies noted in the January 4 Order. Each is addressed in turn below.

         A. Understatement of Financial Liabilities Throughout the Class Period or After May 2014

         Plaintiffs allege that VW AG and Winterkorn intentionally or recklessly misstated “each of [VW AG's] quarterly and annual financial statements issued during the Class Period” by failing to include a provision or contingent liability related to the emissions fraud. (FAC ¶¶ 275, 301.) As VW AG's CEO, Winterkorn signed all of VW AG's financial statements during the Class Period except VW AG's Third Quarter 2015 Interim Report, which was signed by Diess. (See Id. ¶ 413; Dkt. No. 3200 at 9-10.) The Court addresses allegations related to the alleged misstatements by Diess in Section B.

         Recognition of “provisions” and “contingent liabilities” for German companies like VW AG is governed by International Accounting Standard (“IAS”) 37, which requires a company to recognize a “provision” if, among other things, “it is probable that an outflow of resources embodying economic benefits will be required to settle . . . a present obligation (legal or constructive) as a result of a past event.” (FAC ¶ 265.) An outflow is considered “probable” when the loss is “more likely than not, i.e., a probability of greater than 50%.” (Id. ¶ 267.) If the likelihood of an outflow does not reach the 50 percent threshold, IAS 37 requires companies to recognize a “contingent liability” for possible or present obligations, when the possibility of an outflow of resources embodying economic benefits is more than “remote.” (Id. ¶ 275.)

         In their Original Complaint, Plaintiffs asserted that provisions were necessary throughout the Class Period because “[t]he losses relating to the use of defeat devices were ‘probable' under IAS 37 because it was more likely than not that the defeat devices would be discovered and that VW AG would incur enormous liabilities to address this self-inflicted problem.” (Dkt. No. 1510 ¶ 222.) In the January 4 Order, the Court concluded that the allegations did not support this inference, reasoning that:

There are no factual allegations permitting the reasonable inference that Volkswagen knew or should have known that its losses were probable during the entirety of the Class Period. For example, although Plaintiffs allege that VW AG knew that it faced “potential EPA fines of $37, 500 and CARB fines of $5, 000 for each affected car in the United States” (Compl. ¶ 220; see also Dkt. No. 2041 at 86), they do not provide sufficient allegations to infer that VW AG would have had such knowledge as early as November 19, 2010. To the contrary, the earliest-identified notice of such potential fines in the complaint was the May 15, 2014 email that Horn received, which included a letter stating potential fines of “EPA: $37, 500, and CARB: $5, 500” per violation. (Compl. ¶ 288.) Given such allegations, the Court cannot find that each and every Volkswagen quarterly and annual statement ...

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