VW seeks reliance standard guidance on omitted information

Still facing litigation relating to the 2015 "clean emissions" scandal, Volkswagen asked the 9th U.S. Circuit Court of Appeals to weigh in on a district court's denial of a motion to dismiss claims the automaker tricked a pension fund into buying overpriced bonds by failing to mention the emissions' "cheat device" in offering documents.

Government Employees & Judiciary Retirement Systems -- a fund comprised of buyers with at least $100 million in discretionary investment funds -- claims the offering memorandum for bonds sold prior to the scandal contained misleading statements because they did not disclose certain vehicles contained software that cheated on emissions tests.

The automaker said the investors seek to base their fraud claim on the Affiliated Ute reliance standard, which holds that when a fraud consists of omissions rather than misstatements, reliance may be presumed, according to Tulane University Law School professor Ann M. Lipton.

However, according to a petition granted after its motion for summary judgment was denied, Volkswagen said it learned during discovery the investors' advisor did not read the offering memorandum and thus could not prove reliance, "an essential element" to their claims. In re: Volkswagen "Clean Diesel" Marketing, Sales Practices, and Products Liability Litigation, 15-md02672., (N.D. Cal., filed Dec. 8, 2015).

"Lead plaintiff is a sophisticated institutional investor who purchased privately placed bonds and has not asserted a viable securities claim," a Volkswagen spokesperson said in an email Wednesday. "Volkswagen believes that an appeal will lead to the efficient resolution of this action and eliminate further waste of time and resources."

In granting Volkswagen's petition request, U.S. District Judge Charles Breyer of San Francisco said the order "involves a controlling question of law as to which there is substantial ground for difference of opinion," and "an immediate appeal from the order may materially advance the ultimate termination of the litigation."

Volkswagen, represented by New York-attorney Robert J. Giuffra of Sullivan & Cromwell LLP, hopes the 9th Circuit will consider two questions.

As framed by Volkswagen in its interlocutory appeal recieved at the 9th Circuit on Tuesday, the questions are: First, whether the presumption of the reliance standard established in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) applies in cases based on misleadingly incomplete statements. And second, whether Affiliated Ute applies if the issuer does not owe the plaintiff a fiduciary duty to affirmatively disclose the omitted information.

In his order allowing the case to proceed, Breyer held Volkswagen had not rebutted the Affiliated Ute presumption, reasoning among other things that although an investor's failure to read disclosure documents "could indeed be fatal" in a "run-of-the-mill omissions case," Volkswagen's alleged scheme was "so substantial and so blatant" its hypothetical disclosure that the company's diesel vehicles contained a "cheat" device in an offering memorandum that plaintiff's advisor never read still would have been noticed by the "investing public."

However, Breyer has been conflicted about the reliance question, changing his mind four times in the last two years, Volkswagen said. In four opinions, Breyer has made statements acknowledging "the 9th Circuit has not offered detailed guidance" on the issues, and the limited precedent is "somewhat confusing."

From 2009 to 2015, Volkswagen sold about 600,000 diesel cars containing the cheat device, which allowed it to pass emissions tests. Volkswagen has already paid out at least $23 billion to settle multiple disputes arising from the scandal and is scheduled to go to trial in San Francisco on Feb. 18 in a multi-district litigation brought by plaintiffs who opted out of the settlements.