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

United States District Court, N.D. California

July 19, 2017

Volkswagen AG, et al., Case No. 16-cv-3435 (“Bondholders Securities Action”)


          CHARLES R. BREYER United States District Judge

         This order addresses the second of two consolidated securities actions in this MDL. Both actions are against Volkswagen and members of management, and arise from the Company's use of a “defeat device” in nearly 600, 000 TDI diesel engine vehicles sold in the United States from 2009 through 2015. The first action is by Volkswagen shareholders (the “ADR action”). (See Dkt. Nos. 2636, 2862, 3392.) This action is by Volkswagen bondholders-specifically, institutional investors who purchased bonds offered by Volkswagen Group of America Finance, LLC (“VWGoAF”) between May 23, 2014 and September 22, 2015. (Dkt. No. 2507 (Compl.).) The bondholders allege that during the class period Volkswagen failed to disclose its emissions fraud, which rendered statements to prospective bondholders misleading and caused VWGoAF's bonds to sell at inflated prices. The bondholders contend that Defendants' conduct violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).

         Defendants have filed motions to dismiss the bondholders' Complaint. Central to the motions is the contention that Defendants did not make any material misrepresentations or omissions in the Bond Offering Memorandum on which Lead Plaintiff relied; and, to the extent Defendants did so, the allegations do not support that Defendants made those misrepresentations or omissions with scienter. For the reasons that follow, the Court concludes that Lead Plaintiff has plausibly alleged that the relevant Offering Memorandum was misleading, and that at least some (but not all) Defendants made statements and omissions therein with scienter. The Court accordingly GRANTS in part and DENIES in part the motions.


         I. The Defeat Device Scheme

         Between 2009 and 2015, Volkswagen sold nearly 600, 000 Volkswagen-, Audi-, and Porsche-branded TDI “clean diesel” vehicles in the United States, which it marketed as being environmentally friendly, fuel efficient, and high performing. (Compl. ¶¶ 148-49.) Unbeknownst to consumers and regulatory authorities, Volkswagen installed a software defeat device in these cars that allows the vehicles to evade EPA and California Air Resources Board (“CARB”) emissions test procedures. The defeat device senses whether the vehicle is undergoing emissions testing or being operated on the road. During emissions testing, the defeat device produces regulation-compliant results. When the vehicle is on the road, the defeat device reduces the effectiveness of the vehicles' emissions control systems. Only by installing the defeat device in its vehicles was Volkswagen able to obtain Certificates of Conformity from EPA and Executive Orders from CARB for its 2.0- and 3.0-liter TDI diesel engine vehicles; in fact, these vehicles release nitrogen oxides (NOx) at a factor of up to 40 times permitted limits. (Id. ¶ 54.)

         In the fall of 2015, the public learned about Volkswagen's emissions scheme, when EPA issued two Notices of Violation of the Clear Air Act to Volkswagen Aktiengesellschaf (“VW AG”), Volkswagen Group of America, Inc. (“VWGoA”) and related entities, announcing that Volkswagen had admitted to deliberately cheating on emissions tests. (Id. ¶¶ 232-33, 270-71.) Martin Winterkorn, the CEO and Chairman of the Management Board of VW AG from 2007 to September 23, 2015, acknowledged that Volkswagen broke the public's trust by manipulating environmental standards. (Id. ¶ 237.) Michael Horn, the President and CEO of VWGoA from January 2014 to March 2016, also admitted that “our company was dishonest with the EPA, and [] CARB and with all of you . . . . We've totally screwed up.” (Id. ¶ 241.)

         After public disclosure, consumers, dealers, investors, and government entities filed suit against Volkswagen, and hundreds of lawsuits were consolidated before this Court as part of this MDL. Volkswagen has since settled claims related to the defeat device scheme brought by classes of U.S. consumers, franchise dealers, and reseller dealerships, as well as claims brought by EPA, CARB, and the FTC. On March 10, 2017, VW AG also pled guilty to three criminal felony counts, 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 its “clean diesel” vehicles complied with U.S. emissions standards. (See United States v. Volkswagen AG, No. 16-CR-20394, Dkt. 68 (E.D. Mich. Jan. 11, 2017).) Together, civil and criminal penalties and civil settlements are expected to cost Volkswagen approximately $20 billion.

         II. The Bond Offerings

         On three occasions in 2014 and 2015-prior to public disclosure of the emissions fraud- Volkswagen issued U.S.-dollar denominated bonds, through VWGoAF, for a total of $8.3 billion in par value. (Compl. ¶ 3.) VWGoAF is a wholly-owned subsidiary of VWGoA, and the bonds were guaranteed by VW AG, the ultimate parent company of VWGoA and VWGoAF. (Id. ¶¶ 20-22.) VWGoAF issued the bonds in private placements led primarily by U.S.-based investment banks. (Id. ¶ 15.) The bonds were exempt from registration with the SEC under Rule 144A, and accordingly could be purchased only by qualified institutional buyers (“QIBs”)-institutional investors with at least $100 million in securities under management. See 17 C.F.R. § 230.144A(a)(1)(i). The bonds traded during the Class Period. (Compl. ¶ 3.)

         Each VWGoAF bond offering was made pursuant to an Offering Memorandum. The Offering Memoranda are dated May 15, 2014 (for a May 23, 2014 offering), November 12, 2014 (for a November 20, 2014 offering), and May 19, 2015 (for a May 22, 2015 offering). (Id. ¶ 4.) Each Memorandum includes legal and financial disclosures, the terms of the offering, and various business and regulatory risk factors for investors to consider. (See, e.g., Stanley Decl., Dkt. No. 2896-6 (May 15, 2014 Mem.).) Appended to each Memorandum are certain audited and unaudited financial statements of VW AG. (See id.; see also Giuffra Decl., Dkt. No. 2898-1 (excerpts of the May 15, 2014 Mem.).)

         III. The Bondholders' Lawsuit

         After learning about Volkswagen's emissions fraud, VWGoAF bondholders filed securities fraud claims against the Company and members of management. On October 11, 2016, the Court appointed the Puerto Rico Government Employees and Judiciary Retirement Systems Administration as Lead Plaintiff (“Lead Plaintiff, ” “Plaintiff, ” or “PRGERS”), and Abraham, Fruchter & Twersky, LLP as Lead Counsel. (Dkt. No. 2023.) Lead Plaintiff purchased 4, 210 bonds (CUSIP: 928668AA0) issued as part of the May 23, 2014 offering and pursuant to the May 15, 2014 Offering Memorandum. (Compl. ¶ 16.)

         In its Class Action Complaint, Plaintiff names as defendants VW AG, VWGoA, and VWGoAF (collectively, the “Corporate Defendants”), and Martin Winterkorn and Michael Horn (collectively, the “Individual Defendants, ” and all together, “Defendants” or “Volkswagen”). (Id. ¶¶ 20-25.) Plaintiff alleges that each Defendant is responsible for false and misleading statements and omissions in the Bond Offering Memoranda with respect to the emissions fraud. (Id. ¶¶ 199-202.) Plaintiff also alleges that VW AG and Winterkorn made false and misleading statements in the financial statements appended to the Offering Memoranda, by failing to recognize probable liabilities related to the fraud. (Id. ¶¶ 215-17.) Finally, Plaintiff contends that Defendants made false and misleading statements and omissions in materials outside the Offering Memoranda, including in interim and annual reports (id. ¶¶ 203-14), press releases (id. ¶¶ 218-26), and Corporate Social Responsibility and Sustainability Reports (id. ¶¶ 227-30) issued during the class period. As a result of Defendants' conduct, Plaintiff asserts that each Defendant violated Section 10(b) the Exchange Act, and that VW AG, VWGoA, Winterkorn, and Horn are also liable as “controlling persons” under Section 20(a) of the Exchange Act.

         Horn, Winterkorn, and the Corporate Defendants have each filed a motion to dismiss the Complaint. (See Dkt. Nos. 2893, 2895, 2897.) Horn and Winterkorn have also joined the Corporate Defendants' motion. Together, Defendants argue that the Court should dismiss the Complaint because Plaintiff (1) lacks standing; (2) fails to allege any actionable misstatements or omissions; (3) does not adequately plead that Defendants possessed scienter at the time Plaintiff purchased VWGoAF bonds; and (4) does not adequately plead reliance. (Dkt. No. 2897 at 3-4.) Winterkorn and Horn also challenge the control-person claims against them (Dkt. Nos. 2893 at 20-21; 2895 at 15-16), and Winterkorn additionally argues that Plaintiff's claims against him should be dismissed for lack of personal jurisdiction (Dkt. No. 2895 at 16-23). The Court held a hearing on the motions on July 7, 2014.

         IV. The ADR Lawsuit

         The shareholders in the ADR action are persons who purchased Volkswagen-sponsored Level 1 American Depositary Receipts in an over-the-counter market in the United States from November 19, 2010 through January 4, 2016. (See Dkt. No. 2862 ¶¶ 6, 35-36.) The Court addressed motions to dismiss the ADR action on two prior occasions, granting in part and denying in part the motions both times. (See Jan. 4, 2017 Order, Dkt. No. 2636; June 28, 2017 Order, Dkt. No. 3392.) The causes of action and many of the allegations in the ADR action and the bondholders' action are the same, and in a number of instances the parties here rely on the Court's ADR orders.


         Pursuant to the authority granted to the SEC under Section 10(b) of the Exchange Act, the SEC adopted Rule 10b-5, which makes it unlawful for any person, in connection with the purchase or sale of a security, “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). The elements of a securities fraud claim under Section 10(b) and Rule 10b-5 are (1) that the defendant made a material misrepresentation or omission, (2) that the defendant did so with scienter, (3) a connection between the misrepresentation or omission and the purchase or sale of a security, (4) reliance upon the misrepresentation or omission, (5) economic loss, and (6) loss causation. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011); Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). At the pleading stage, plaintiff “must satisfy the dual pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (‘PSLRA').” Reese v. Malone, 747 F.3d 557, 568 (9th Cir. 2014) (citing In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir. 2012)). Rule 9(b) requires that plaintiff “state with particularity the circumstances constituting fraud or mistake, ” while the PSLRA requires plaintiff to plead both falsity and scienter with particularity. Fed.R.Civ.P. 9(b); 15 U.S.C. § 78u-4(b); Tellabs v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 321-22 (2007).

         Section 20(a) of the Exchange Act makes certain “controlling persons” liable for violations of Section 10(b). See 15 U.S.C. § 78t(a). “[A] defendant employee of a corporation who has violated the securities laws will be jointly and severally liable to the plaintiff, as long as the plaintiff demonstrates ‘a primary violation of federal securities law' and that ‘the defendant exercised actual power or control over the primary violator.'” Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009) (quoting No. 84 Emp'r-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 945 (9th Cir. 2003)).

         In considering a motion to dismiss a securities fraud action, “courts must, as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true.” Tellabs, 551 U.S. at 322. Presuming all factual allegations to be true, the Court must then determine if the complaint pleads “enough facts to state a claim to relief that is plausible on its face.” 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). “Courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Tellabs, 551 U.S. at 322. If the Court grants a motion to dismiss, it will give leave to amend “when justice so requires.” Fed.R.Civ.P. 15(a)(2).


         I. Standing

         Initially, Defendants argue that Lead Plaintiff lacks standing to bring claims on behalf of persons or entities who purchased different classes of bonds, or who purchased bonds in offerings other than the May 2014 offering in which Lead Plaintiff participated. (Dkt. No. 2897 at 45-46.) Defendants' argument is based on two related decisions by Judge Pfaelzer, holding that “the named plaintiff must have standing to sue for each of the asserted claims by purchasing in the offerings that are putatively part of the class action.” FDIC v. Countrywide Fin. Corp., No. 2:12-CV-4354 MRP, 2012 WL 5900973, at *10 (C.D. Cal. Nov. 21, 2012); see also In re Countrywide Fin. Corp. Mort.-Backed Sec. Litig., 934 F.Supp.2d 1219, 1229-30 (C.D. Cal. 2013) (citing favorably to decisions where “courts extend standing only to the offerings or tranches purchased by the named plaintiff”).

         Judge Pfaelzer's decisions predate Melendres v. Arpaio, 784 F.3d 1254 (9th Cir. 2015), cert. denied, 136 S.Ct. 799 (2016), which clearly controls and supports Plaintiff's standing. In Melendres, the Ninth Circuit noted that there are two rubrics for determining whether a lead plaintiff may pursue claims on behalf of unnamed class members: the “standing approach” and the “class certification approach.”

The “standing approach” treats dissimilarities between the claims of named and unnamed plaintiffs as affecting the “standing” of the named plaintiff to represent the class. In other words, if there is a disjuncture between the injuries suffered by named and unnamed plaintiffs, courts applying the standing approach would say the disjuncture deprived the named plaintiff of standing to obtain relief for the unnamed class members. See, e.g., Blum v. Yaretsky, 457 U.S. 991, 999-1002 (1982). The “class certification approach, ” on the other hand, “holds that once the named plaintiff demonstrates her individual standing to bring a claim, the standing inquiry is concluded, and the court proceeds to consider whether the Rule 23(a) prerequisites for class certification have been met.” NEWBERG ON CLASS ACTIONS § 2:6.

Melendres, 784 F.3d at 1261-62. After discussing these two approaches, the court in Melendres held that, “We adopt the class certification approach.” Id. at 1262. As a result, “representative parties who have a direct and substantial interest have standing, ” and “the question whether they may be allowed to present claims on behalf of others who have similar, but not identical, interests depends not on standing, but on an assessment of typicality and adequacy of representation.” Id. (quoting 7AA Charles Alan Wright et al., Federal Practice & Procedure § 1785.1 (3d ed.)).

         Defendants do not attempt to distinguish Melendres, but instead assert that Melendres does not help Lead Plaintiff, who has failed to state a claim on its own behalf. (See Dkt. No. 3124 at 11 n.2.) If Lead Plaintiff does not plead facts sufficient to state its own claim, Defendants are correct that Lead Plaintiff cannot represent others who may have a claim. See Lierboe v. State Farm Mut. Auto. Ins. Co., 350 F.3d 1018, 1022 (9th Cir. 2003) (“[I]f Lierboe has no stacking claim, she cannot represent others who may have such a claim . . . .”). But if Lead Plaintiff is able to state its own claim (and it is able to do so as discussed below), Melendres clearly forecloses Defendants' argument that Plaintiff lacks standing to represent other putative class members who purchased VWGoAF bonds in different tranches or offerings.

         II. Section 10(b) Claims

         A. The Universe of Statements

         In considering Plaintiff's Section 10(b) claims, it is first necessary to address whether Plaintiff may rely on statements outside the May 15, 2014 Offering Memorandum, which is the Memorandum that governed Plaintiff's bond purchase. The Complaint relies on statements and omissions within the body of the May 2014 Offering Memorandum, in financial statements appended to the Memorandum, and in materials outside the Offering Memorandum, including in various interim and annual reports (Compl. ¶¶ 203-14), press releases (id. ¶¶ 218-26), and Corporate Social Responsibility and Sustainability Reports (id. ¶¶ 227-30) issued by Volkswagen during the class period. Plaintiff contends that at least certain of these materials were incorporated by reference into the Offering Memorandum and accordingly should be considered. (Id. ¶ 203; see also Dkt. No. 3021 at 31.)

         The Court agrees with Defendants that Plaintiff can base its securities fraud claims only on the May 2014 Offering Memorandum and the financial statements appended thereto. Near the front of May 2014 Offering Memorandum, at the top of the page and in bold-faced type, is the statement that “You should rely only on the information contained in this Offering Memorandum” when considering this investment. (Dkt. No. 2898-1 at 4.) In accepting the Memorandum, “Investors also acknowledge[d] that . . . they ha[d] relied only on the information contained in this document” in making an investment decision. (Id.)

         Based on this instruction and acknowledgment, Plaintiff, as an institutional investor with more than $100 million in securities under management, could not reasonably have relied on statements outside the May 2014 Offering Memorandum and the appended financial statements in making its investment decision. See Harsco Corp. v. Segui, 91 F.3d 337, 342-44 (2d Cir. 1996) (affirming dismissal where sophisticated plaintiff disclaimed reliance on matters outside of agreement but brought Section 10(b) claim “principally alleging conduct that falls outside [the] boundaries [of the agreement]”).

         Nor does Plaintiff explain how the May 2014 Offering Memorandum incorporated by reference any of Volkswagen's interim and annual reports, let alone the cited press releases and Corporate Social Responsibility and Sustainability Reports. The only section of the Memorandum that appears to address the interim and annual reports is a section stating that:

Information presented in this Offering Memorandum is qualified in its entirety by the description of recent developments related to the Volkswagen Group set forth in ‘Developments since January 1, 2014 and Outlook' which reflects among other things information disclosed in the unaudited interim report of Volkswagen AG and its consolidated subsidiaries for the period from January 2014 to March 2014.

(Dkt. No. 2898-1 at 9 (second emphasis added).) This statement does not incorporate Volkswagen's interim reports into the Memorandum. Rather, it provides that, under the heading Developments since January 1, 2014 and Outlook, which is a particular section in the Memorandum, certain information from the interim report is disclosed. Plaintiff does not assert that the representations in the interim report on which it relies were included in that disclosure.

         Given that Plaintiff is a large institutional investor and the May 2014 Offering Memorandum expressly instructed it to rely only on information contained within it, Plaintiff cannot base its securities fraud claims on statements in documents or sources other than the Offering Memorandum and the appended financial statements.

         B. The Body of the May 2014 Offering Memorandum

         Plaintiff makes different arguments for why the body of the May 2014 Offering Memorandum was false and misleading, and why the appended financial statements were false and misleading. The Court first addresses the statements and omissions within the body of the Memorandum and in Section C discusses the financial statements.

         1. Whether the Statements and Omissions Were False ...

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