VW may not settle SEC suit alleging investor fraud

While Volkswagen seemed more than willing to dish out $23 billion in various settlements in attempts to put the "dieselgate" emissions scandal behind it in 2016, the company might not be as willing to settle with the U.S. Securities and Exchange Commission's investor fraud suit filed last week.

"Our strategy has been to settle the Volkswagen cases that could be settled on reasonable terms as quickly as possible and to litigate where Volkswagen had no other choice," Volkswagen attorney Robert J. Giuffra Jr. of Sullivan & Cromwell LLP wrote in an email Thursday.

"We've won the environmental cases brought by the non-177 states in their own state courts," he said, referring to Section 177 of the Clean Air Act that allows only California to set its own emissions standards. "We're confident that we can achieve a good result for VW by litigating with the SEC, and we may have to try the SEC's case," Giuffra said. U.S. Securities and Exchange Commission v. Volkswagen et al., 19-CV01391(N.D. filed March 14, 2019).

The SEC accused Volkswagen, two of its subsidiaries, and its former CEO, Martin Winterkorn, of defrauding U.S. investors, raising billions of dollars through the corporate bond and fixed income markets, while making a series of deceptive claims about the environmental impact of the company's "clean diesel" fleet.

Similar to those already settled, the suit arises from the "dieselgate" scandal in which the Environmental Protection Agency found Volkswagen had intentionally installed a "cheat device," in certain diesel vehicles to help them pass laboratory emissions tests.

The SEC also seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, civil penalties and an officer and director bar against Winterkorn.

"As we allege, Volkswagen hid its decadelong emissions scheme while it was selling billions of dollars of its bonds to investors at inflated prices." said Stephanie Avakian, co-director of the SEC's Division of Enforcement in a statement released shortly after the suit was filed March 14.

Critics of the suit have called the action taken by the SEC an example of a recent trend in securities enforcement and investor litigation in which plaintiffs have a growing tendency to frame alleged operational misconduct as a violation of securities laws. Some have referred to the practice as "event-driven securities litigation," or pejoratively as, "everything is securities fraud."

"The SEC's filing in this matter, which at its core originates not with financial statement or financial performance concerns, but with the discovery of alleged misrepresentations related to environmental standards, suggests that U.S. regulators, like private civil plaintiffs' counsel, may be willing to attempt to apply the securities laws in less traditional areas," wrote attorneys from Davis Polk & Wardwell LLP in a client memorandum released Thursday.

According to Volkswagen's public statement, the bonds at issue in the complaint did not default and were sold only to sophisticated investors who received all payments of interest and principal in full and on time. The SEC claims investors were harmed because they paid more for the securities than they would have if they had known that Volkswagen vehicles did not meet U.S. emissions standards.

In a client memorandum, attorneys from Simpson Thacher & Bartlett LLP argue the SEC is taking an "expansive view on materiality," by doing this.

"From the SEC's perspective, the materiality of a company's alleged misstatements, at least in relation to its debt securities, does not turn on the performance of those securities," the memorandum reads.

The case was assigned to U.S. District Judge Charles R. Breyer in San Francisco late Thursday. Breyer presided over the 2016 "clean diesel" marketing, sales practices and product liability litigation suit which Volkswagen settled for $14.7 billion with consumers, the Federal Trade Commission and other regulatory agencies. At the conclusion of the settlement conference, Breyer commented that he was impressed at how quickly the parties were able to settle.