In re Volkswagen "clean Diesel" Mktg.
| Decision Date | 04 January 2017 |
| Docket Number | MDL No. 2672 CRB (JSC) |
| Parties | IN RE: VOLKSWAGEN "CLEAN DIESEL" MARKETING, SALES PRACTICES, AND PRODUCTS LIABILITY LITIGATION This Order Relates To: 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 |
| Court | U.S. District Court — Northern District of California |
In September 2015, the public learned of Volkswagen's allegedly deliberate use of a "defeat device"—software designed to cheat emissions tests and deceive federal and state regulators—in nearly 500,000 Volkswagen- and Audi-branded turbocharged direct injection ("TDI") diesel engine vehicles, also called "clean diesel" vehicles, sold in the United States. Litigation quickly ensued, and those actions were consolidated and assigned to this Court as a multidistrict litigation. In addition to actions brought by purchasers of the "clean diesel" vehicles and by car dealers, various plaintiffs also filed actions against Volkswagen under the Private Securities Litigation Reform Act ("PSLRA") for securities fraud related to the defeat device emissions scandal.
This order relates to one such securities action brought by Lead Plaintiff Arkansas State Highway Employees' Retirement System ("ASHERS") and Plaintiff Miami Police Relief and Pension Fund ("Miami Police") (collectively, "Plaintiffs"), who represent a proposed class of all persons who purchased Volkswagen-sponsored Level 1 American Depositary Receipts ("ADRs")1on an over-the-counter ("OTC") market in the United States from November 19, 2010 through January 4, 2010 (the "Class Period"). Plaintiffs allege that Volkswagen made material misrepresentations and omissions regarding its vehicles' compliance with emissions regulations as well as the company's overall financial condition that led to the decline in value of their ADRs.
Now before the Court are Defendants' collective motion to dismiss and Martin Winterkorn's and Herbert Diess's individual motions to dismiss for lack of personal jurisdiction. (See Dkt. Nos. 1705, 1706, 1708.) Central to Defendants' collective motion are (1) whether the Volkswagen ADRs, which represent foreign shares on a foreign exchange in Germany, are beyond the territorial reach of Section 10(b) of the Securities Exchange Act, and (2) whether Plaintiffs' claims are more properly litigated in Germany, where Volkswagen is already subject to ongoing government investigation and other private litigation. Because Volkswagen sponsored the ADRs in the United States and Plaintiffs purchased the ADRs here, and because the United States has an interest in protecting domestic investors against securities fraud, the Court concludes that Section 10(b) applies to the Volkswagen ADRs and that Plaintiffs' claims are properly before this Court.
As discussed below, the Court GRANTS IN PART and DENIES IN PART Defendants' motion to dismiss and DENIES Winterkorn's and Diess's individual motions to dismiss.
This matter is a proposed securities fraud class action relating to Volkswagen ADRs traded here in the United States against corporate Defendants 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"), former CEO and Chairman of the Management Board of VW AG; Michael Horn ("Horn"), former President and CEO of VWGoA, as well as President of the VWOA brand, from January 2014 to March 2016; Jonathan Browning("Browning"), former President and CEO of VWGoA from October 2010 to December 2013; 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").
(Compl. ¶ 33.) Volkswagen first sponsored its preference share ADRs in the United States in 1988 through a Deposit Agreement entered into with J.P. Morgan (then Morgan Guaranty Trust Company of New York). (Id. ¶ 34; Dkt. No. 1708-4.) Volkswagen also sponsored ordinary ADRs through two Deposit Agreements with J.P. Morgan in 1990 and 2003. (Dkt. Nos. 1708-3, 1708-5.) Both types of ADRs—Volkswagen Ordinary ADRs (Ticker: VLKPY; CUSIP: 928662303) and Volkswagen Preference Share ADRs (Ticker: VLKAY; CUSIP: 928662402)—trade on an over-the-counter market called the OTCQX market, run by OTC Markets Group Inc. (Compl. ¶ 34.) During the Class Period, ASHERS purchased, in the United States, Volkswagen's ordinary ADRs, and Miami Police purchased, in the United States, Volkswagen's preference share ADRs. (Id. ¶¶ 35-36.)
As is now well known, Volkswagen effected a massive fraud related to the alleged compliance of its "clean diesel" vehicles, having installed software "defeat devices" in 11 million vehicles sold worldwide, including 580,000 sold in the United States, that allowed the vehicles to meet emissions standards when undergoing official testing even though the vehicles emitted up to 40 times the legal limit of nitrous oxide (NOx) during normal operation. (Id. ¶¶ 7-14.) Despite its knowledge that the vehicles did not comply with U.S. and European emissions regulations, Volkswagen and its executives misled the investing public before and during the Class Period byassuring them to the contrary—namely, that the diesel vehicles met all applicable emissions standards, including those in all 50 states of the United States. (Id. ¶ 8.) Volkswagen also understated the liabilities that it would suffer as a result of its known emissions non-compliance, including at least $18 billion in fines that it potentially faced for violations of the Clean Air Act alone. (Id.)
Volkswagen's material misrepresentations and omissions artificially inflated the price of its securities around the world, including the ordinary and preference ADRs traded here in the United States. (Id. ¶¶ 434-35.) Once the truth was revealed in September 2015, Volkswagen's share prices were negatively affected, resulting in a $63-billion drop in Volkswagen's market capitalization. (Id. ¶¶ 8, 25.) With respect to the securities at issue here, Volkswagen's fraudulent conduct caused the price of the ordinary ADRs to decline from $38.03 per ADR on September 17, 2015, the day before the Environmental Protection Agency ("EPA") and the California Air Resources Board ("CARB") announced the emissions cheating scandal, to $28.34 per ADR on January 5, 2016; the price of Volkswagen's preference ADRs similarly declined from $38.05 per ADR on September 17, 2015 to $26.16 per ADR on January 5, 2016. (Id. ¶¶ 436-445.)
Plaintiffs seek compensatory damages and other equitable relief from Volkswagen for violations of Securities Exchange Act Section 10(b) and SEC Rule 10b-5 because Defendants "made untrue statements of material fact and omitted to state material facts necessary to make their statements not misleading" with regards to Volkswagen's financial condition as well as the defeat devices that Volkswagen installed in its "clean diesel" cars in order to give the appearance of compliance with various emissions standards in the United States and in the European Union. (Id. ¶¶ 459-65.) Plaintiffs also allege that VW AG and the Individual Defendants are liable under Section 20(a) of the Exchange Act for Volkswagen's fraudulent conduct as "controlling persons" of the various Corporate Defendants. (Id. ¶¶ 466-78.)
Defendants collectively move to dismiss Plaintiffs' complaint on five grounds: (1) Plaintiffs' claims fall outside the territorial reach of Section 10(b) under the Supreme Court's decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010); (2) the case should bedismissed on forum non conveniens grounds because Germany is the superior forum for resolution of Plaintiffs' claims; (3) Plaintiffs failed to adequately plead facts giving rise to a "strong inference" that Defendants acted with scienter; (4) the misstatements or omissions Plaintiffs identified were merely aspirational and not actionable under Section 10(b); and (5) Plaintiffs failed to plead control person liability under Section 20(a). (Dkt. No. 1708.) Diess and Winterkorn each also separately move to dismiss the complaint for lack of personal jurisdiction. (Dkt. Nos. 1705, 1706.)
In Morrison v. National Australia Bank Ltd., the Supreme Court considered the extraterritorial application of Section 10(b) of the Securities Exchange Act—that is, whether Section 10(b) applies to acts beyond the borders of the United States. 561 U.S. at 254. The Supreme Court, noting the presumption against extraterritoriality as well as Congress's silence about Section 10(b)'s extraterritorial application, found that "there is no affirmative indication in the Exchange Act that § 10(b) applies extraterritorially" and "therefore conclude[d] that it does not." Id. at 265. The Supreme Court thus held that "it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies." Id. at 267; see also id. at 273 (...
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