Who Will Get The Last Laugh? Eastern District Of Virginia Dismisses Complaint Predicated On Statements Claimed To Be An April Fool’s Joke For Failure To Plead Foreign Parent’s Responsibility For U.S. Subsidiary’s “Joke,” But Grants Leave To Replead
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  • Who Will Get The Last Laugh? Eastern District Of Virginia Dismisses Complaint Predicated On Statements Claimed To Be An April Fool’s Joke For Failure To Plead Foreign Parent’s Responsibility For U.S. Subsidiary’s “Joke,” But Grants Leave To Replead
     

    03/24/2023
    On March 14, 2023, Judge Rossie D. Alston, Jr. of the United States District Court for the Eastern District of Virginia dismissed without prejudice a putative class action against an automobile manufacturer, its U.S.‑based based subsidiary, and certain of its officers, asserting claims under the Securities Exchange Act of 1934.  In re Volkswagen AG Sec. Litig., 2023 WL 2505539 (E.D. Va. Mar. 14, 2023).  Plaintiffs alleged that the company’s U.S. subsidiary misrepresented that the company would change its name to one suggesting an increased focus on electric vehicles, which the company later indicated had been intended as an April Fool’s joke.  The Court held that plaintiffs adequately alleged falsity and scienter but failed to show that the challenged statements were sufficiently connected to the securities at issue to be actionable.

    Plaintiffs alleged that the price of the company’s American Depository Receipts (“ADRs”) was inflated after the company posted press releases on March 29 and March 30, 2021, announcing a name change.  Id. at *4-6.  After the close of trading on March 30, the company allegedly removed the press release and stated that the name change had been an “April Fool’s gag” and “just a marketing action to get people talking.”  Id. at *5.

    The Court first assessed whether the Exchange Act applied to the unsponsored ADRs at issue under Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), in which the Supreme Court ruled that the Exchange Act applies only to “transactions in securities listed on domestic exchanges, and domestic transactions in other securities.”  Volkswagen, 2023 WL 2505539, at *8.  The Volkswagen Court held that the ADRs at issue traded over the counter and not on a domestic exchange but concluded that plaintiffs had adequately alleged domestic transactions in securities by alleging that U.S. brokers facilitated the trade and transfer of title via an over-the-counter market in the United States.  Id. at *10–12.

    With respect to the statements challenged by plaintiffs, the Court observed that the company’s announced “name change carried all the signs one would expect of an official corporate name change,” and was, thus, sufficiently alleged to be a false statement.  Id.  Further, Court then determined that the statement “me[t] the materiality threshold” because it indicated that the company was “going to even greater lengths” to promote its electric vehicles and the statement generated significant public attention and thus altered the mix of information available to reasonable investors.  Id. at *14-15.

    The Court held, however, that plaintiffs failed to sufficiently allege that the statement of the company’s subsidiary could be attributed to the parent company, because plaintiffs had not alleged that the parent company “provided final approval over the press release and its details” or that the subsidiary and its officers “lacked final control of the [press release’s] contents or did not make the ultimate decision as to what specific information to include.”  Id. at *16.

    The Court further held that plaintiffs adequately alleged scienter against the individual defendants under a theory of severe recklessness.  Id. at *17.  The Court explained that such an inference was supported by, among other things, plaintiffs’ allegations that the challenged statements concerned a “core business” of the company, that the individual defendants were involved in “drafting, producing, reviewing and/or disseminating” the press release, and that they had “confirmed the legitimacy of the name change to the press.”  Id.  In addition, the Court rejected the company’s argument that no employee had contemplated “that the joke would influence investors in any way,” that the statement was carried out “for ‘marketing and public relations’ reasons,” and that “[n]othing about the joke was in any way tied to … financial performance or prospects.”  Id. at *18.  The Court concluded that the company’s narrative “require[d] too many far-fetched inferential leaps” and that it was “more likely, based on the allegations,” that the company had intended to get “free publicity” but that, “after a sloppy, mistimed announcement, used April Fools’ Day as a scapegoat mechanism to the ‘joke campaign.’”  Id.

    Because the Court determined that the individual defendants were sufficiently alleged to be authorized agents of the company’s American subsidiary, the Court also concluded that scienter was sufficiently alleged as to the subsidiary.  Id. at *20.  The Court held, however, that the allegations fell short for the parent issuer because plaintiffs had not alleged that the parent had “final approval power over the alleged false statements.”  Id.

    The Court then assessed whether the ADRs plaintiffs purchased in the parent company were sufficiently related to the challenged statements such that plaintiffs had standing to bring a claim under the Exchange Act.  The Court observed that the parent company allegedly owned 100% of the entity that published the challenged statement and allegedly monitored its day-to-day operations.  Id. at *22.  The Court also determined that, although he ADRs were unsponsored, plaintiffs had sufficiently alleged that the company received a benefit from the demand for the ADRs and that one of the depositary banks offering the ADRs had stated that the best practice for it and other banks is to obtain a foreign issuer’s consent before creating an unsponsored ADR program.  Id. at *23.  The Court nevertheless explained that, while such circumstances could support a finding that challenged statements “coincide” or “touch” the ADRs of a foreign company, they failed to do so here because, as noted above, plaintiffs failed to sufficiently allege that the parent company could be held liable for the specific challenged statements at issue.  Id. at *24.

    The Court further concluded that plaintiffs had adequately alleged economic and loss causation. The Court noted that plaintiffs alleged that they purchased ADRs on the day of the initial name change announcement and sold them at a lower price after the name change had been retracted.  Id. at *25.  The Court held that, because plaintiffs had alleged plausible circumstances in which the challenged statements impacted market prices and had suffered an economic loss, that was sufficient at the pleadings stage.  Id. at *26.

    While the Court explained it was “not necessarily persuaded that the incident giving rise to this litigation was an April Fool’s joke gone wrong,” it also noted that it could not at this juncture allow the case to proceed absent a more particularly pleaded connection between the events at issue and the corporate issuer.  Id. at *27.  Thus, the Court dismissed the action but permitted plaintiffs to file a motion for leave to further amend their complaint.

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