U.S. District Judge Charles Breyer says that Volkswagen AG (VW) and ex-CEO Martin Winterkorn must face an investor lawsuit related to its diesel emissions cheating scandal. Breyer turned down VW brand chief Herbert Diess’s request that the proposed securities fraud cases be dismissed from a California court. The company is still under criminal investigation by the US Justice Department.
The plaintiffs are primarily municipal pension funds that invested in Vokswagen via American Depositary Receipts. An ADR is a type of equity ownership in a non-US company that represents the company’s foreign shares that are kept on deposit by a bank in the home country of that company.
Volkswagen believes that the investor complaints at issue should be heard in Germany. Judge Breyer, however, ruled that since the US is invested in protecting investors from this country against securities fraud, the complaints should proceed in the US. Investors believe that the German automaker and its executives misled the public when it assured them that its diesel vehicles fulfilled all emission standards while downplaying the liabilities that would result because the company was not, in fact, complying with these standards.
It was in 2015 that VW admitted to cheating on exhaust emissions tests with the help of secret software. This impacted 11 million vehicles globally. As a result, nearly 580,000 US diesel vehicles emitted up to 40 times the pollution levels that were legally allowed.
In other ADR-related news, the US Securities and Exchange Commission said that broker ITG will pay over $24.4M to resolve charges accusing it of issuing ADRs without the underlying foreign shares, which are required. ITG agreed to be censured but did not admit to or deny the findings that it improperly handled these securities from ’11 to ’14.
The broker had obtained ADRs for counterparties from depository banks. The regulator said that ITG facilitated transactions referred to as ADR “pre-releases” to these counterparties without possession of the foreign shares or employing the necessary measures to make sure that the shares were custodied by the counterparties. ADRs were purportedly used to short sell and for dividend arbitrage.
The SEC said IDR did not properly supervise its securities lending desk, which allowed the ADR-related violations to happen. This left the securities vulnerable to market abuse.
IDR will pay over $15M in disgorgement, over $1.8M in interest. and a more than $7.5M penalty.
At The SSEK Partners Group, our securities fraud law firm represents pension funds, other institutional investors, and high-net worth individual investors. Contact us today.
Pension funds’ Volkswagen lawsuit may proceed in U.S., court rules, Pensions and Investments, January 5, 2017
Judge Orders Volkswagen to Face Investor Lawsuit Over Emissions Scandal, Fortune, January 5, 2017