Publications

(Article from Securities Law Alert, April 2023) 

For more information, please visit the Securities Law Alert Resource Center

On March 14, 2023, the Eastern District of Virginia dismissed without prejudice a securities fraud class action alleging: (i) that the U.S. subsidiary of a global auto manufacturer, the subsidiary’s CEO/President, and its Head of Product and Technology Communications violated Section 10(b) and Rule 10b-5 by making false and misleading statements that it would be changing its name; and (ii) control person liability against the parent company. In re Volkswagen AG Sec. Litig., 2023 U.S. Dist. LEXIS 43031 (E.D. Va. 2023) (Alston, J.).

Background

The parent company is a global auto manufacturer that sells gas-powered vehicles in the U.S. through its wholly owned subsidiary and has been expanding into electric vehicles. On March 30, 2021, the subsidiary published a press release announcing that in May it would be changing its name to emphasize its electric vehicle products.[1] Reporters confirmed the authenticity of the name change with the parent company. The March 30 press release remained on the subsidiary’s website until after market close on March 30, 2021 and was then removed. Subsequently, the Wall Street Journal reported that the parent company intended the name change to be “an April Fools’ gag” and that it was intended “to get people talking.” Plaintiffs allege that the press releases led to an increase in the parent company’s American Depositary Share price, which fell following the name change retraction.

The Parent Company’s Liability Was Not Established for Purposes of Rule 10b-5

Defendants argued that plaintiffs did not allege any statement by the parent company and that any subsidiary statement was not legally attributable to the parent company under Rule 10b-5. The Supreme Court determined in Janus Capital v. First Derivative Traders, 564 U.S. 135 (2011) that “for purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” The district court explained that the Supreme Court “held that a Janus defense is available in a private plaintiff Rule 10b-5 case even for the parent of a wholly owned subsidiary insofar as the entities retain independent boards and the parent is acting in a ‘speechwriter’ assisting capacity rather than as a ‘speaker who takes credit—or blame—for what is ultimately said.’”

The court noted plaintiffs’ allegations that the parent company owns 100% of the subsidiary, appoints all of the subsidiary’s directors and executive officers, directly monitors its day-to-day operations, financial reporting and accounting, and participates in its public statement preparation and dissemination. Plaintiffs alleged more specifically that a parent company official told the Wall Street Journal that, “There will be no name change,” in response to an inquiry, which the court stated “further suggest[ed the parent company’s] role as the chief speaker in these circumstances.” However, the court determined that plaintiffs failed to allege with particularity that the parent company “provided final approval over the press release and its details.” Citing Noto v. 22nd Century Grp., 35 F.4th 95 (2d Cir. 2022), the court concluded that “[m]erely alleging a daily monitoring function and the participation in the preparation of public statements does not allow this Court to infer that [the parent company] ‘collaborated with the authors to such an extent that they controlled the press release’s publication.’”[2] The court held that plaintiffs failed to allege that the subsidiary’s executive defendants and the subsidiary “lacked final control over the press release’s contents or did not make the ultimate decision as to what specific information to include.” (quoting Noto, 35 F.4th at 104).

The court gave plaintiffs leave to amend their allegations finding plaintiffs’ claim to not be implausible as a matter of law. On March 28, 2023, plaintiffs filed a motion for leave to amend and a proposed second amended complaint, alleging that on March 29, 2021, the parent company also published the draft press release on its own global media website and that this website explicitly attributed the statements in this draft press release to the parent company.