Volkswagen ruling makes securities fraud class actions harder, plaintiff says

Reversing a district court's denial of Volkswagen's motion for summary judgment in a securities fraud class action, the 9th U.S. Circuit Court of Appeals made it harder Friday for plaintiffs to bring such claims, the dissenter and plaintiffs' attorney said.

Still facing litigation relating to the 2015 "clean emissions" scandal, in which Volkswagen installed a cheat device to pass emissions checks, the car company filed an interlocutory appeal, asking the 9th Circuit to reverse a district court's denial of a summary judgment motion. The case involved claims it tricked a pension fund into buying overpriced bonds by failing to mention the cheat device in offering documents.

Agreeing with Volkswagen, the majority of a 9th Circuit panel said the Affiliated Ute presumption -- case law holding that when an allegation of fraud is based on omissions rather than misstatements, reliance may be presumed -- is limited to cases that primarily allege omissions and not omissions and affirmative misstatements.

Reacting to the opinion Friday, New York attorney Robert J. Giuffra of Sullivan & Cromwell LLP who represents Volkswagen in the underlying litigation and the appeal, said in a statement:

"This is an important decision that clarifies the scope of the Affiliated Ute presumption of reliance in the Ninth Circuit, home to many of our nation's leading tech companies. Plaintiffs were trying to turn Affiliated Ute into an open-ended presumption that would apply in every case, since every misrepresentation case can be categorized as involving omissions."

Also reacting to the opinion, New York attorney Mitchell Twersky of Abraham Fruchter & Twersky LLP said in a statement on behalf of the plaintiff:

"We appreciate the consideration that the Ninth Circuit has given to this matter, but we believe we have adequate grounds to challenge the split decision. The majority opinion appears to have overlooked a material point of fact regarding the district court's previous order narrowing the scope of the case to only alleged omissions, and the majority opinion seems to contradict previous Ninth Circuit decisions."

"We also believe that the majority opinion seeks to impose a greater burden on plaintiffs than the Supreme Court's decision in Affiliated Ute would suggest, in a way that is not consistent with how other circuits have interpreted the Affiliated Ute presumption of reliance," he added.

The case came to the 9th Circuit in the form of an interlocutory appeal by Volkswagen to address the scope of the Affiliated Ute presumption of reliance in mixed securities fraud cases that allege both "omissions" and "affirmative misrepresentations."

The plaintiff, Government Employees & Judiciary Retirement Systems -- a fund composed of buyers with at least $100 million in discretionary investment funds -- claimed the offering memorandum for bonds sold before the scandal contained misleading statements because they did not disclose certain vehicles contained software that masked emissions during smog tests.

The buyers alleged an omission -- that Volkswagen failed to disclose it was secretly installing defeat devices in its "clean diesel" line of cars -- but also multiple affirmative misrepresentations about environmental compliance and financial liabilities in the carmaker's offering documents.

The panel included Circuit Judges John Clifford Wallace and Milan D. Smith Jr., with Judge Jane A. Restani of the Court of International Trade. The majority held the Affiliated Ute presumption is limited to cases that primarily allege omissions and in which a plaintiff would be hard pressed to prove the speculative negative: That they would have relied on that omitted information had it been disclosed.

"We acknowledge at the outset that plaintiff alleges an omission, and that omission looms large over plaintiff's claims," Smith wrote for the majority. "However, plaintiff also alleges more than nine pages of affirmative misrepresentations that were made by Volkswagen and relied upon by plaintiff and its investment adviser. These affirmative misrepresentations, which plaintiff alleges it relied upon when purchasing the bonds, push this case outside Affiliated Ute's narrow presumption."

In a strongly worded dissent, Wallace said the majority's reasoning effectively overruled existing case law, something only an en banc panel should do.

"The majority's argument that proving a speculative negative would not be 'impossible' here due to the numerous affirmative misrepresentations downplays both the severity of Volkswagen's omission and its role in the alleged fraud, as well as adds a new evidentiary hurdle for plaintiffs, i.e., a plaintiff may only call upon the Affiliated Ute presumption if it is 'impossible' to prove direct reliance or 'positive proof of reliance.' Neither the Supreme Court nor our court has set such a bar."

From 2009 to 2015, Volkswagen sold about 600,000 diesel cars containing the cheat device. Volkswagen has already paid out at least $23 billion to settle multiple disputes arising from the scandal. After the panel reversed the district court's order denying Volkswagen's motion for summary judgment, it remanded the suit back to U.S. District Judge Charles Breyer for further consideration. Plaintiff now has 14 days to challenge the appellate ruling or seek en banc review. In re: Volkswagen "Clean Diesel" Marketing, Sales Practices, and Products Liability Litigation, 15-md02672., (N.D. Cal., filed Dec. 8, 2015).