VW Suit Maps Out New Route in U.S. Courts

Pensions & Investments
June 27, 2016

Thomas A. Dubbs comments on latest lawsuit against automobile manufacturer on behalf of bondholders

The first bondholders' class action against Volkswagen AG and its U.S. subsidiaries could provide a new avenue for U.S. investors to sue foreign companies in U.S. courts. Firm Labaton Sucharow on June 20 filed the lawsuit for the $4 billion Boston Retirement System on behalf of all bondholders who acquired Volkswagen 144A bonds between May 23, 2014, and Sept. 22, 2015.

These bonds—also known as private placements or sophisticated investor bonds—are not subject to the same prohibition on legal action against foreign issuers of securities established by a landmark U.S. Supreme Court ruling in 2010, the Boston pension fund decided to open an avenue of recovery for investors, said partner Thomas A. Dubbs.

Dubbs, who said he is in discussions with more potential public pension plan participants in the lawsuit, advised institutional investors to check their holdings in Volkswagen 144A bonds. “They should determine whether and how they want to participate and potentially obtain a recovery,” he said.

The lawsuit, Boston Retirement System vs. Volkswagen, filed in U.S. District Court in San Francisco, claims Volkswagen raised more than $8 billion in the U.S. capital markets by issuing 144A bonds that were traded at “artificially inflated prices” up to 100 percent over par value. After the Environmental Protection Agency issued a notice of violation in September disclosing the automaker's emission-testing improprieties, investors lost hundreds of millions of dollars when the bonds' value declined, the lawsuit claims.

The Boston Retirement suit marks the first major legal case to address whether these private debt offerings fall outside the scope of the Supreme Court's 2010 decision in Morrison vs. National Australia Bank Ltd., which prohibits actions in U.S. courts against foreign-bought securities.

“The pressure that's being put on them by the U.S. litigation creates a dynamic where they are probably best served by looking for a global solution,” said Dubbs.