‘Voltswagen’ prank results in class action

Where a putative class action suit was filed on behalf of persons who purchased stock after Volkswagen announced it was changing its name to “Voltswagen,” but later admitted that was an April Fools prank, the court held the complaint sufficiently pleaded that Volkswagen Group of America Inc. made material misstatements with the requisite degree of scienter, but dismissed the claims against parent Volkswagen AG because there were insufficient allegations showing it exercised sufficient control over its subsidiary’s statements to be deemed the “maker” of those statements.

Background

Plaintiff filed a class action on behalf of persons or entities who purchased publicly traded American Depositary Shares, or ADSs, of Volkswagen Aktiengesellschaft, or Volkswagen AG, between March 29, 2021, and March 30, 2021, following Volkswagen Group of America Inc., or VWGoA’s, publication of allegedly false and misleading statements that the VWGoA would be changing its name from Volkswagen to Voltswagen.

The amended complaint alleges that VWGoA and the individual defendants violated § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The complaint also alleges that Volkswagen AG and the individual defendants violated § 20(a) of the Exchange Act as control persons of VWGoA and are therefore directly liable for the alleged actions taken by VWGoA in violation of § 10(b) and Rule 10b-5. Defendants have filed a motion to dismiss.

Exchange Act

In Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), the Supreme Court held that § 10(b) covers “only transactions in securities listed on domestic exchanges, and domestic transactions in other securities.” Plaintiffs do not argue the unsponsored ADSs are listed on domestic exchanges.

Turning to the second prong, the court finds that, at the motion-to-dismiss stage, the allegations made by plaintiffs here “provide sufficient indicia” that they “incurred irrevocable liability to purchase the ADRs in the United States.” As such, this court finds sufficient allegations in the amended complaint to justify the potential application of § 10(b) and Rule 10b-5 in this case.

Securities fraud

There are two primary false statements in the amended complaint: (1) the actual name change announcement and (2) the company’s initial reassurances to numerous journalists that the name change was no joke and which were reported publicly soon thereafter. The allegations lead this court to conclude that “a reasonable jury could find it ‘substantially likely’ that a reasonable investor would believe that the disclosure of [the name change] (and nothing but the disclosure of the name change) would alter the ‘total mix’ of information available to the reasonable investor.”

However plaintiffs have not alleged with particularity that Volkswagen AG provided final approval over the press release and its details. On this ground alone, plaintiffs have not sufficiently alleged an actionable securities fraud claim against Volkswagen AG. But given plaintiffs’ claim is not implausible as a matter of law, this court will allow plaintiffs to amend their allegations in a second amended complaint.

Turning to scienter, plaintiffs’ allegations allow this court, at this stage of the litigation, to find that the individual defendants “knew facts or had access to information suggesting [their] public statements were not accurate,” because the individual defendants later confirmed their understanding, from the beginning, that the name change and associated logistical changes were always meant to be a farse.

Plaintiffs have also sufficiently alleged that the individual defendants are authorized agents of VWGoA. But given this court’s earlier determination that plaintiffs have not sufficiently pleaded Volkswagen AG exercised “ultimate authority” over VWGoA, this court is unable to attribute the severe recklessness of the individual defendants to Volkswagen AG by way of a “collective scienter” theory.

In connection with

Plaintiffs have sufficiently alleged that Volkswagen continues to play an active role in the unsponsored ADR program and that it was reasonable for investors to rely upon those alleged false statements. But they have not sufficiently pleaded that the alleged false statements by the individual defendants and VWGoA “coincide” with or “touch[]” the ADRs purchased by plaintiffs because the issuer of the underlying securities has not been shown to be liable under § 10(b).

Loss causation

This court finds that plaintiffs have, collectively, pleaded economic loss and loss causation. The declines in share price following the public revelation of the alleged false statement, could plausibly be understood to have impacted the share price after market close on March 30, 2021.

Conclusion

This court is not necessarily persuaded that the incident giving rise to this litigation was an April Fool’s joke gone wrong. However, based on § 10(b) of the Securities and Exchange Act and the Supreme Court’s clear teachings governing the disposition of matters such as those raised herein, this court cannot, based on the facts alleged in the amended complaint, allow the case to proceed.

Defendant’s motion to dismiss amended complaint granted.

In re Volkswagen AG Securities Litigation, Case No. 1:22-cv-00045, March 14, 2023. EDVA at Alexandria (Alston). VLW 023-3-125. 61 pp.