May 09, 2019

The U.S. Securities and Exchange Commission's allegations that Volkswagen fraudulently raised billions of dollars through bonds while failing to mention that scores of its vehicles flouted emissions standards throws a wrench in the German automaker's attempts to move past its "clean diesel" emissions scandal.

The SEC alleged in March that U.S. investors were duped when Volkswagen issued more than $13 billion in bonds and asset-backed securities in 2014 and 2015, a blunt reminder that the auto giant hasn't insulated itself from enforcement actions related to the emissions scandal despite already paying out billions of dollars in penalties and settlements with the U.S. government more than two years ago.

As the SEC and Volkswagen gear up for an initial hearing Friday before U.S. District Judge Charles Breyer in the Northern District of California, experts say the case underscores that companies must carefully negotiate resolutions with the government for operational and compliance failings or face the sting of the SEC's aggressive enforcement stance.

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Some attorneys described the SEC's suit as unusual, given that it comes years after Volkswagen negotiated an approximately $20 billion deal with the U.S. Department of Justice in 2016 over the automaker's admission the year before that it rigged thousands of diesel vehicles with so-called defeat devices to fool regulators' tests, but allowed for emissions to spike during normal driving conditions.

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But some attorneys say that for the SEC, it's black and white: If you didn't disclose something that you knew would be relevant to institutional investors, you're in trouble.

Steven Toll of Cohen Milstein Sellers & Toll PLLC, who represents investors in securities litigation, told Law360 he thinks the SEC has a strong case, given that Volkswagen admitted its misconduct and deception in the emissions-cheating scandal.

"Most securities fraud class action cases affect sophisticated institutional investors in the same way they affect small individual investors," he said. "Just the fact that you have institutional investors buying is not much of a defense. If they were lying about what's in their documents, then it's a strong fraud case."

Volkswagen might have a better chance at mounting a stout defense with a dismissal motion loaded with public relations criticism about government piling on, Potter said, and then negotiating a relatively quick settlement that doesn't add materially to the existing settlement amounts it already paid.

As part of its 2016 deal with the U.S. government, Volkswagen agreed to pay $4.3 billion in civil and criminal penalties, invest $2 billion in zero-emission vehicle technology, spend up to $14 billion to compensate consumers and buy back or fix the approximately 580,000 affected vehicles, and contribute $2.93 billion to an emissions mitigation trust.

"The SEC is different than the DOJ. The multibillion-dollar settlement with the DOJ was not a securities-related case, so they're totally different," Toll said.

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