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Eastern District Of New York Dismisses Putative Class Action For Failure To Allege Actionable Misstatements
06/02/2021On May 20, 2021, Judge Dora L. Irizarry of the United States District Court for the Eastern District of New York dismissed with prejudice a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 against a car manufacturer and certain of its current and former Board members. Mucha v. Volkswagen Aktiengesellschaft, — F. Supp. 3d —, 2021 WL 2006079 (E.D.N.Y. May 20, 2021). Plaintiffs alleged the company engaged in anticompetitive conduct which rendered a number of statements in the company’s SEC filings false or misleading. The Court held that plaintiffs failed to sufficiently allege that the alleged misstatements were false, and therefore dismissed the complaint in its entirety.
As a threshold issue, the Court considered defendants’ arguments that the Court lacked personal jurisdiction over the individual defendants and that Germany was a more appropriate forum. As for personal jurisdiction, the Court explained that due process requires both that a particular defendant has sufficient contacts with the forum to justify the exercise of personal jurisdiction and that the assertion of personal jurisdiction is reasonable in that specific instance. Id. at *4. Because the Exchange Act provides for worldwide service of process, the Court noted that the “minimum contacts” requirement turns on whether the defendant should “reasonably anticipate being hailed into court” in the United States. Id. Although the individual defendants had not signed any SEC filings, the Court held that the exercise of personal jurisdiction was proper because they signed Board reports and other materials that were posted to company websites in English, “thus suggesting that [they] knew that U.S. investors would rely upon them.” Id. at *6. However, the Court agreed that it lacked jurisdiction as to one individual defendant who had not been served and did not appear in the action, and whom plaintiffs conceded they would be unable to serve. Id. at *5.
The Court also rejected defendants’ motion for dismissal based on forum non conveniens. The Court first considered various factors regarding the litigants and found they did not weigh heavily one way or the other. For example, the Court declined to accord any deference to plaintiffs’ choice of forum, explaining that plaintiffs had failed to allege their residence and therefore the Court could not determine if they were United States citizens, and there were also indications that plaintiffs had engaged in “forum shopping” to gain access to comparatively favorable law in New York courts regarding class action litigation and discovery. Id. at *8-10. Moreover, the Court noted that the majority of the evidence and witnesses were in Germany, and that plaintiffs conceded that Germany was an adequate forum, id. at *9-10, but that, on the other hand, the company’s resources “may mitigate” the extent of any burden and the company had “not identified any witnesses who would be unwilling to appear in New York,” id. at *10. However, the Court determined that the fact that the company sponsored American Depository Shares in the United States “weighs heavily in favor in finding that this Court is an appropriate forum.” Id. at *9. The Court thus concluded that, on balance, the “private interest factors are neutral” and that defendants could not meet the “heavy burden in the forum non conveniens analysis” to overcome the “strong interest” of the “Court and the public at large” in “ensuring a domestic means of redress for victims of fraud in the United States securities markets.” Id. at *10-11.
Turning to the challenged statements, the Court first explained that, while plaintiffs provided detailed allegations of the company’s anticompetitive conduct in coordinating with other German automakers, plaintiffs failed to identify any specific law that had been violated or to allege specifically how defendants’ conduct violated that law. Id. at *14. The Court distinguished plaintiffs’ allegations from other cases in which courts had declined to dismiss allegations based on unlawful conduct where a specific law was alleged to be violated. Id. at *14-15. Here, in contrast, plaintiffs merely referred generally to “competition laws established by the European Commission and Germany,” which the Court held was insufficient. Id. Thus, the Court held that the complaint should be dismissed in its entirety for this reason alone.
Nevertheless, the Court examined “alternative bases for dismissal” in the interest of “completeness.” Id. at *15. While plaintiffs claimed that certain statements regarding commodities prices were misleading because the prices depended on the company’s anticompetitive conduct and not global economic forces, the Court held that there were no specific facts alleged to show why the statements were false. Id.
Further, the Court held that challenged statements regarding the company’s culture and goals, including its “compliance with international rules” and “fair treatment of our business partners and competitors,” were quintessential examples of nonactionable puffery. Id. at *15-16. With respect to statements that the company had prepared its financial statements in compliance with International Financial Reporting Standards, the Court observed that the company was not required to disclose allegedly anticompetitive conduct until authorities began investigating the company’s conduct, and such investigations only commenced well after the challenged statements were made. Id. at *16. The Court also concluded that the Company was not otherwise required to disclose the alleged unlawful conduct prior to these investigations. Id. at *17.
Nevertheless, the Court concluded that certain other challenged statements were potentially actionable and could create a duty to disclose illegal conduct inconsistent with those statements, even if there was otherwise no independent duty to disclose such conduct. Id. For example, the Court determined that statements that the company faced challenges from the “difficult market environment” and “fierce competition,” but was nonetheless “in a good position globally compared to [its] competitors,” were potentially actionable because they referred to overcoming specific pressures from competition but did not “tell the whole truth” regarding alleged anticompetitive activities with its competitors. Id. at *18.
The Court next evaluated plaintiffs’ allegations with respect to scienter for this category of challenged statements. The Court rejected plaintiffs’ suggestion that an anonymous email sent at an unknown time and referencing a “‘secret’ meeting” supported allegations of conscious misbehavior or recklessness because, if anything, the email suggested the meeting at issue might not be secret. Id. at *19. In addition, the Court explained that media reports describing unsourced communications speculating about the risk of a finding of anticompetitive behavior were also lacking in detail and only suggested that some unknown individuals had misgivings about the activities in question. Id. With respect to allegations that the company’s CEO had a reputation for being a micromanager and that he had advocated for the company to engage in specific improper conduct, this was not sufficient to connect the CEO to the broader anticompetitive activities that allegedly took place. Id.
The Court noted that plaintiffs’ strongest argument was that the company’s alleged misconduct was so widespread that the company’s leadership must have known about it, particularly as to statements occurring after the company voluntarily disclosed to the European Commission suspected infringements of European anticompetition law. Id. Indeed, the Court determined that it was reasonable to infer that the company’s Board knew of the disclosure and therefore there was a strong inference of scienter for a statement thereafter touting the company’s success in “achiev[ing] a new vehicle sales record in 2016 amid fierce competition in a market environment that remained challenging.” Id. However, for this statement, the Court had already separately determined that plaintiffs failed to sufficiently allege falsity and that the company’s conduct was unlawful. Id. at *21. Moreover, the Court observed that plaintiffs failed to raise any allegations of scienter for the period prior to the company’s disclosure to the European Commission, and in particular there were no allegations that the company’s senior leadership were involved in meetings where anticompetition concerns were raised. Id. at *20. Thus, the Court dismissed the action in its entirety.
