Federal court tosses ‘Voltswagen’ fraud suit

In the wake of “Dieselgate,” Volkswagen is defending against another class action suit — this time by investors claiming they were misled when the company announced it was changing its name to “Voltswagen,” and later revealed it was an April Fools’ prank.

The Eastern District of Virginia found that the complaint stated a plausible securities fraud claim. The intentional misrepresentations were material and the plaintiffs “incurred irrevocable liability” to purchase Volkswagen’s foreign stock in the United States.

But U.S. District Judge Rossie D. Alston Jr. said the allegations failed to connect Volkswagen with the “reckless” statements of its subsidiary.

“This Court will not [hold] that the statements of a non-publicly traded wholly-owned subsidiary and its employees may be actionable upon the parent issuer when the Amended Complaint fails to adequately plead that the alleged material misstatements may be attributed to the parent issuer,” he said.

Alston dismissed the complaint with leave to amend. The plaintiffs have filed motions for reconsideration and leave to amend.

The opinion is In re Volkswagen AG Securities Litigation (VLW 023-3-125).

Rebranding reneged

Volkswagen Aktiengesellschaft, or Volkswagen AG, is a German automobile manufacturer that sells vehicles in the U.S. via its wholly owned subsidiary, Volkswagen Group of America Inc., or VWGoA.

In 2020, Volkswagen AG announced its commitment to the electric vehicle, or EV, market. On March 29, 2021, VWGoA published in a “draft” press release on its website that the company was changing its name to “Voltswagen.”

Although visible on VWGoA’s website for only an hour, the name change announcement was reported nationally. The next day, VWGoA issued a lengthier statement about the name change; Mark Gillies, VWGoA’s head of communications, confirmed the company was serious.

When the stock markets closed that day, VWGoA removed the second release from its website.

Volkswagen soon revealed that the name change was “an April Fools’ gag” and said “we didn’t mean to mislead anyone. The whole thing is just a marketing action to get people talking.”

Free publicity

Volkswagen AG issues foreign stock that U.S. investors may trade by using American Depository Receipts, or ADRs, purchased from U.S. custodian institutions, such as banks, where the foreign shares are deposited.

A class of investors sued VWGoA, Gillies and Scott Keogh, the CEO and president of VWGoA, for violations of § 10(b) of the Securities Exchange Act and SEC Rule 10b-5. They also sued Volkswagen AG, Gillies and Keogh as control persons directly liable for VWGoA’s actions.

According to the suit, Volkswagen’s stock value increased dramatically after the misleading announcements but fell after the retraction. While the investors took losses, Volkswagen received millions of dollars in free publicity for its new EV, the suit alleged.

The plaintiffs claimed that the risk of misleading investors was so obvious — the company recently having paid more than $35 billion in fines connected “Dieselgate” — as to make Volkswagen’s conduct reckless.

The defendants moved to dismiss.

Securities fraud

Alston said § 10(b) and Rule 10b-5 could be applied to trades of Volkswagen AG stock because the investor allegations “‘provide sufficient indicia’ that [the plaintiffs] ‘incurred irrevocable liability to purchase the ADRs in the United States.’”

Rather than argue the falsity of VWGoA’s statements, the defendants said the subsidiary’s statements weren’t legally attributable to Volkswagen AG as its parent company and issuer of the ADRs.

Further, the defendants said the statements weren’t material; no reasonable investor would base their decisions on an April Fools’ joke. They claimed the statements merely reinforced Volkswagen’s public commitment to expanding its EV business.

Alston disagreed.

“Under the seminal Supreme Court decision in Basic, Inc. v. Levinson, a fact is material if there is a ‘substantial likelihood that the disclosure of the … fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available,’” the judge explained.

Here, Alston found allegations of significant public response and investment recommendations generated by Volkswagen’s announcement revealed its effect on sophisticated members of the securities industry, “which is a higher standard than that of a reasonable investor.”

“Taken together, these 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,’” the judge said.

Final approval

Alston noted that the U.S. Supreme Court determined in Janus Capital Grp., Inc. v. First Derivative Traders that “[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.’”

Volkswagen AG could rely on the Janus defense if its board was independent from VWGoA’s and it was “acting in a ‘speechwriter’ assisting capacity rather than as a ‘speaker who takes credit — or blame — for what is ultimately said,’” he pointed out.

Here, the allegations didn’t state with particularity that Volkswagen AG provided final approval over the VWGoA press release and its details.

“Merely alleging a daily monitoring function and the participation in the preparation of public statements does not allow this Court to infer that Volkswagen AG ‘collaborated with the authors to such an extent that they controlled the [press release’s] publication,’” Alston wrote.

‘Smoking gun’

The judge rejected inferences that Gillies and Keogh didn’t intend to deceive the public; allegations that they only sought free publicity were “as close to a smoking gun as one could hope to have at the pleading stage.”

Where Gillies and Keogh were authorized agents of VWGoA who knew their statements were false, Alston found the allegations of scienter “cogent and compelling,” but he refused to apply a collective scienter theory to Volkswagen AG.

“Without a plausible theory of liability ascribed to the issuer, Plaintiffs’ purchase or sale of Volkswagen ADRs cannot be said to ‘touch[]’ or ‘coincide’ with the alleged false statements of the Individual Defendants and VWGoA,” Alston wrote.

While he wasn’t “necessarily persuaded that the incident giving rise to this litigation was an April Fools’ joke gone wrong,” Alston dismissed the complaint without prejudice to amend.