The U.S. District Court of the Northern District of California denied a German automaker's motions to dismiss securities fraud claims arising from the automaker's alleged material misrepresentations and omissions concerning its emission reports. The Court allowed the case to move forward with discovery, although the Court expressed some doubt as to whether the plaintiff could establish a presumption of reliance sufficient to certify a class.
According to the proposed lead plaintiff (a public pension fund), American affiliate of German automaker Volkswagen, Volkswagen Group of America Finance LLC ("Volkswagen"), issued bonds that plaintiff purchased in the primary bond market, pursuant to the terms of an Offering Memorandum that contained certain statements regarding Volkswagen's research and development priorities, and exposure to regulatory risk. Plaintiff alleges that Volkswagen programmed its diesel engines to meet U.S. standards only during regulatory testing. Once out of testing, the cars exhibited illegally high emission levels. Plaintiff alleged in the complaint that the deception of vehicle emission testing made the Offering Memorandum's research and development statements and regulatory risk statements materially misleading. According to the Court's previous decisions, the original Complaint successfully pleaded that these statements were misleading, but both the original complaint and a First Amended Complaint did not adequately allege reliance because those Complaints did not "plausibly support that investors had, in fact, read the [Offering] Memorandum" or support a class-wide presumption of reliance.
However, the Court found that the plaintiff's Second Amended Complaint cured this pleading deficiency by alleging that the plaintiff's investment advisor, acting as an authorized agent of the plaintiff, "reviewed and relied upon" the material misrepresentations and omissions contained in the Offering Memorandum. Id. Finding that the plaintiff had sufficiently pleaded its own direct reliance, the Court examined whether it could also presume reliance for purposes of class certification. Although Judge Charles R. Breyer rejected the plaintiff's fraud-on-the-market theory of reliance because the plaintiff failed to plead that Volkswagen's bond issuance was an efficient market, he noted that Affiliated Ute Citizens of Utah v. United States reliance might still be possible. Affiliated Ute allows a class action presumption of reliance if Exchange Act Section 10(b) and Rule 10(b)-5 claims are based on alleged material omissions. In this case, the fraud allegation against Volkswagen included both the alleged material omission that its vehicles could not lawfully pass emission standards, and allegations that Volkswagen made affirmative misrepresentations. The Court noted that the mix of alleged material omissions and alleged affirmative misrepresentations muddied the question of whether Affiliated Ute could apply and allow a class-wide presumption of reliance. Ultimately, the Court reserved ruling on the Affiliated Ute question until the class certification stage, explaining that factual allegations supporting plaintiff's individual claim of direct reliance were sufficiently pleaded to survive the motion to dismiss.
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