Volkswagen won an important ruling from a divided U.S. Court of Appeals for the Ninth Circuit that eliminated significant liability for the company in massive securities litigation involving $8.3 billion of bonds. The ruling will also limit the ability of plaintiffs in the Ninth Circuit, home of many of America’s leading technology companies, to use the Supreme Court’s Affiliated Ute presumption of reliance in securities lawsuits more generally. As the dissenting judge stated in the June 25 ruling reversing the lower court, this decision “narrows drastically the availability of the Affiliated Ute presumption of reliance” to plaintiffs.
The Ninth Circuit reversed and remanded the case for the district court to determine whether “a triable issue of material fact exists” as to whether plaintiff, Puerto Rico Government Employees & Judiciary Retirement Systems Administration, relied on the challenged statements, or if summary judgment is appropriate on its individual claims. Most significantly, even if plaintiff’s claims withstand summary judgment, this case cannot proceed as a class action with hundreds of millions in potential damages at stake. As the Ninth Circuit has previously recognized, without the Affiliated Ute presumption, “individual questions of reliance would predominate over questions common to the class.”
Nor can plaintiff rely on Basic’s fraud-on-the-market theory to prove reliance in this case. As the district court previously held, plaintiff “purchased the bonds at issue at a time when the bonds were not actively traded on a well-developed market” and thus Basic cannot apply. Instead, the plaintiff is limited to recovering alleged losses of just $66,000.
Clarifying Affiliated Ute
The Supreme Court held 49 years ago in Affiliated Ute that when securities litigation plaintiffs raise claims that a defendant has failed to disclose material information, they do not have to show reliance. The reasoning is that it is too difficult to prove the speculative negative that plaintiffs would have relied on the omitted information had it been disclosed. In so-called “mixed” cases, where plaintiffs are alleging both omissions and affirmative misrepresentations, courts in the Ninth Circuit have looked to whether the allegations primarily involve omissions, but the parameters of this test were unclear.
This case involved alleged misstatements and omissions. The plaintiff had bought $4 million of bonds from a Volkswagen U.S. subsidiary in a private placement in 2014. The following year, federal and California environmental regulators cited Volkswagen for installing “defeat devices” to evade emissions laws. This caused the market price of the plaintiff’s bonds to fall below par value.
The plaintiff filed this purported securities class action alleging 10-b-5 claims, seeking to represent other investors who bought Volkswagen bonds in three private placements in 2014 and 2015, with hundreds of millions of dollars at stake. When the district court denied Volkswagen’s motion for summary judgment, citing Affiliated Ute, S&C persuaded the district court and the Ninth Circuit to grant an interlocutory appeal to clarify the scope of this Supreme Court ruling.
S&C emphasized that the plaintiff, a sophisticated investor, had devoted ten pages of its complaint to chronicling alleged affirmative misrepresentations in the offering documents that it had relied on. For that reason, the Firm maintained, Affiliated Ute did not apply.
The Ninth Circuit agreed, finding that these facts “push this case outside Affiliated Ute’s narrow presumption.”
The appeal attracted amicus briefs from prominent securities experts and business groups supporting Volkswagen. One, written by former SEC commissioner Joseph Grundfest of Stanford Law School, was filed on behalf of other former high-ranking SEC officials and professors in securities law. Another was filed by the Chamber of Commerce of the United States, the Securities Industry and Financial Markets Association, and the Alliance for Automotive innovation, which all warned that the lower court decision, if not reversed, “would impose significant costs on American companies and investors.”
“It’s likely the most important interpretation of the Affiliated Ute presumption of reliance, which is absolutely central in major litigation involving private placements and debt issuances that don’t trade on public markets,” says Professor Grundfest about the Ninth Circuit’s decision.
S&C’s team was led by Robert Giuffra Jr. and Suhana Han.