VW Ordered to Face U.S. Investor Suit Over Diesel Cheating

Volkswagen AG must face claims it misled U.S. investors after installing so-called defeat devices in diesel vehicles used to cheat emissions tests.

A San Francisco federal judge also rejected a request to dismiss shareholder claims against former VW Chairman Martin Winterkorn, who said investors in VW’s American depositary receipts couldn’t prove he knew the extent of the company’s “diesel issue.”

The company contended the judge didn’t have jurisdiction to hear the dispute, saying any wrongdoing occurred outside the U.S. The argument was rejected by U.S District Judge Charles Breyer.

“While much of defendants’ alleged fraudulent scheme was perpetrated in and from Germany, the court cannot conclude, as defendants urge, that no relevant conduct occurred in the U.S.,” Breyer said in his order Wednesday. “The court concludes that plaintiffs, who are U.S. residents and bring claims based on U.S. securities laws, are entitled to considerable deference to their forum choice.”

Shares of VW’s most commonly traded ADR plummeted 25 percent in the week after the scandal broke on Sept. 18, 2015, to $27.16 in New York trading. Shares have fallen 20 percent in the almost 16 months since the allegations were made public.

Although total damages in the suit remain unknown, they’re likely to pale in comparison to theoretical shareholder damages in Germany alleged to surpass $9 billion, according to Bloomberg Intelligence.

VW spokeswoman Jeannine Ginivan didn’t immediately respond to phone and e-mail messages seeking comment on the ruling.

Winterkorn’s Travel

Lawyers for investors contend the company and Winterkorn were well aware of the fraud in Germany. Winterkorn traveled to the U.S. to promote the company while neglecting to mention the defeat devices, they said.

The case could be one of the final pieces of litigation before the German carmaker in the U.S. The company has already committed to spending almost $20 billion to settle complaints by car owners, dealerships and the government in the U.S. and Canada.

VW’s agreement to resolve claims over 480,000 cars in the U.S. with 2.0-liter engines was approved by Breyer in October. The company has reached a preliminary accord to settle claims involving 83,000 VW, Porsche and Audi diesel vehicles with 3.0-liter engines.

The company still faces investor and consumer lawsuits in Germany, along with criminal investigations there and in the U.S. A regional German court on Wednesday ordered VW to replace one customer’s polluting car, dealing a setback to the company’s plan to minimize compensation to Europeans affected by the diesel emissions scandal. The case is the first of its kind in the carmaker’s home country.

A Volkswagen car is tested for compliance with emissions laws in California in 2016. Photographer: Patrick T. Fallon/Bloomberg

VW must face U.S. investor lawsuit in emissions scandal

Volkswagen AG (VOWG_p.DE) and former Chief Executive Officer Martin Winterkorn must defend an investor lawsuit in California over the company's diesel emissions cheating scandal, a U.S. judge has ruled.

The plaintiffs, mostly U.S. municipal pension funds, have accused VW of not having informed the market in a timely fashion about the issue as well as understating possible financial liabilities, according to the 41-court document seen by Reuters.

The pension funds include those representing Arkansas State Highway Employees and Miami Police. The lawsuits said VW's market capitalization fell by $63 billion after the diesel cheating scandal became public in September 2015.

The plaintiffs had invested in VW through American Depositary Receipts (ADR), a form of equity ownership in a non-U.S. company that represents the foreign shares of the company held on deposit by a bank in the company's home country.

"Volkswagen is convinced that the accusations raised by buyers of the corporate securities (so-called American Depositary Receipts) lack any foundation," a spokesman at VW's German headquarters said by email.

"It's our intention to make this clear in the further course of proceedings," he added.

VW shares did not react to the latest legal developments and were trading up 0.7 percent at 139.7 euros as of 1115 GMT (6:15 a.m. ET).

SECRET SOFTWARE

U.S. District Judge Charles Breyer rejected a request by VW brand chief Herbert Diess to have the proposed securities fraud lawsuits tossed out of a California court. Other defendants include VW's U.S. unit and its Audi of America unit and the former head of its U.S. unit, Michael Horn.

Volkswagen argued that German courts were the proper place for investor lawsuits.

Breyer said in his ruling that "because the United States has an interest in protecting domestic investors against securities fraud" the lawsuits should go forward in a U.S. court.

CEO Winterkorn resigned days after the scandal became public and much of the company's management has changed since 2015.

VW in September 2015 admitted using sophisticated secret software in its cars to cheat exhaust emissions tests, with 11 millions vehicles worldwide affected. The cheating allowed nearly 580,0000 VW's U.S. diesel vehicles sold since 2009 to emit up to 40 times legally allowable pollution levels.

The lawsuits said VW and its executives misled the investing public "assuring them to the contrary — namely, that the diesel vehicles met all applicable emissions standards" and it "understated the liabilities that it would suffer as a result of its known emissions non-compliance."

Volkswagen has agreed to spend as much as $17.5 billion in the United States to resolve claims from owners and federal and state regulators over polluting diesel vehicles.

Volkswagen could still spend billions of dollars more to resolve a U.S. Department of Justice criminal investigation and federal and state environmental claims; come under oversight by a federal monitor and face other conditions.

The Justice Department and VW are in settlement talks and it is possible a deal could be reached before Jan. 20, when President Barack Obama leaves office, according to sources briefed on the matter.


Volkswagen Must Face U.S. Investor Suit Over Emissions, Judge Rules

Volkswagen AG, former Chief Executive Martin Winterkorn and other top executives must face a lawsuit filed in the U.S. by investors seeking damages after the German auto maker’s share price dropped in the aftermath of its emissions-cheating scandal, a U.S. court has ruled.

Federal Judge Charles Breyer’s decision to allow the lawsuit to proceed increases the likelihood that Volkswagen will face additional costs to resolve the scandal. Volkswagen argued the suit should be heard in Germany, where courts are less inclined to award plaintiffs with large payouts for damages.

Volkswagen, after more than a year of misleading U.S. environmental authorities, acknowledged in September 2015 that it had rigged diesel engines on as many as 11 million cars world-wide to cheat on emissions tests. The company so far has reached three settlements with consumers and dealers with potential compensation of as much as $17.5 billion. It is still in talks with the U.S. Justice Department over criminal penalties.

The investors’ class-action lawsuit was filed in October by pension funds Boston Retirement System and Puerto Rico Government Employees on behalf of holders of Volkswagen’s American depositary receipts, or ADRs, which are a proxy instrument for its shares. The company isn’t listed directly in the U.S. Several pension funds have since joined the suit, mainly municipal ones such as the Arkansas State Highway Employees and Miami Police.

Volkswagen shed roughly $63 billion in market value after the diesel scandal became public. The lawsuit alleges that Volkswagen failed to inform investors in a timely fashion about financial risks from the emissions-cheating scandal and that the company understated the risks.

Volkswagen argued that the U.S. had no jurisdiction in the case. But Judge Breyer disagreed, saying U.S. law applied because the ADRs are sold and purchased in the U.S. and “because the United States has an interest in protecting domestic investors against securities fraud.”

The court also ruled that in addition to Mr. Winterkorn, Michael Horn, who resigned as head of Volkswagen of America last year, and current Volkswagen passenger car brand chief Herbert Diess will have to face the investor lawsuit.

Volkswagen dismissed the investors’ claims as unfounded.

“Volkswagen believes that the claims of purchasers of its American depositary receipts are without merit, which we intend to demonstrate as this case proceeds,” the company said in an emailed comment.

Mr. Winterkorn declined to comment through his attorney. Mr. Horn couldn’t be reached to comment. Volkswagen didn’t make Mr. Diess available to comment.

Volkswagen, seeking to have the lawsuit dismissed, had argued that it didn't withhold information from investors or understate the financial risks, but acted on assumptions—later shown to be faulty—of much lower penalties, which wouldn't require disclosure.

An internal memo sent to Mr.Winterkorn in November 2014 estimated total liabilities from the emissions violation of no more than €20 million ($21 million), Robert Giuffra, an attorney with Sullivan & Cromwell representing Volkswagen, told the court last month.

Judge Breyer agreed with the plaintiffs that Messrs. Winterkorn, Horn and Diess were principal players and in a position to know that Volkswagen’s claims in its “clean diesel” campaign were untrue. If the truth had been known, it would have affected decisions by a “reasonable investor,” he said.

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