Chasing Down Old Nazis in New York Court: Suit Against Volkswagen Controlling Shareholders and Key Managers Over Massive Clean Diesel Fraud

This is Naked Capitalism fundraising week. 545 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in the financial realm. Please join us and participate via our donation page, which shows how to give via check, credit card, debit card, PayPal, Clover, or Wise. Read about why we’re doing this fundraiser, what we’ve accomplished in the last year, and our current goal, supporting our new Coffee Break/Sunday Movie features

In a bit of “sentence first, verdict afterwards,” perhaps we should start by explaining the apparent violation of Godwin’s Rule in the headline, as in starting with a mention of Nazis early on. We’ve featuring the pleading below not just out of salacious interest but because it is also a vignette of what an uphill legal battle it is to bring miscreant boards and executives to account.

The case at issue is Lambinet v. Pötsch, which is a derivative suit on behalf of Volkswagen shareholders against the controlling shareholders and some of their minions over the so-called Volkswagen “clean diesel” scandal, in which Volkswagen systematically installed equipment in US diesel vehicles to show they were meeting diesel emission standards when they were in fact not. An overview from Wikipedia:

The Volkswagen emissions scandal, sometimes known as Dieselgate or Emissionsgate, began in September 2015, when the United States Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to German automaker Volkswagen Group. The agency had found that Volkswagen had intentionally programmed turbocharged direct injection (TDI) diesel engines to activate their emissions controls only during laboratory emissions testing, which caused the vehicles’ NOx output to meet US standards during regulatory testing. However, the vehicles emitted up to 40 times more NOx in real-world driving. Volkswagen deployed this software in about 11 million cars worldwide, including 500,000 in the United States, in model years 2009 through 2015.

And much further down, from the section on legal actions in the US:

By June 2020, VW had already expended $33.3 billion in settlements and other costs including buybacks of the excessively polluting diesel vehicles.

You can see why shareholders might be unhappy. The filing shows the damage done:

So why the invocation of Nazis, which you will see in the filing below? Isn’t that a bit ad hominem for a serious case?

Wellie, it turns out the defendants tried smearing plaintiff’s counsel, an indignity often suffered by contingency fee lawyers. The attorneys in this case are the core team, Michelle Lerach and, Albert Chang, no doubt with input from the formidable if controversial former litigator Bill Lerach. Regular readers will know them from the Jarndyce and Jarndyce of of public pension fund litigation, the Kentucky Retirement Systems case against private equity kingpink KKR & Blackstone, and their executives.

The denigration opened the door for a response in kind:

Equally misguided is Defendants’ attack on Plaintiffs’ counsel and their prosecution of this case. The Controlling Shareholders are descendants of VWAG co- founders (Anton Piëch and Ferdinand Porsche) who built and ran VWAG as an armaments factory for the Third Reich, using forced laborers confined in concentration camps on the Wolfsburg property. ¶126 & n.7. Thousands died at the hands of SS guards. Perpetuating a corporate culture built on this Nazi past, the Controlling Shareholders ran VWAG “through ‘a reign of terror’” and “‘by fear and intimidation.’” ¶¶72, 287. This corrupt culture led to the Clean-Diesel Scheme and defrauded regulators and car-buyers. While VWAG paid tens of billions in fines and settlements, the Controlling Shareholders and other Defendants have not paid absingle penny for the harm they have caused. By this derivative action, Plaintiffs seek to hold these wayward fiduciaries to account.

Because the filing below focuses on legal/procedural issues as opposed to the merits of the case, we’ll be so bold as to put on our amateur lawyer hat and attempt to pick apart the major areas of dispute. As indicated above, even if you don’t fully grasp the fine points, this filing is worth a skim because it illustrates how thorny the legal arguments are when trying to make the supposed grownups in the room who were either wildly negligent or in on the con personally responsible for the bad results.

Keep in mind that what is in the trade called “motions practice,” as in throwing out lots of procedural arguments, can be an effective defense strategy even if the defendants in the end lose on all of them. Delay favors the defendant. Memories of key witness fade and if the defense is really lucky, they might even die.

To get up to speed on the misconduct, go first to the Background section, which starts on PDF page 20/numbered page 6.

Below are some of the legal issues:

The use of a derivative suit. In derivative suit, shareholders step up to assert rights that normally belong to the corporation which it has failed to exercise for its, and derivatively, the shareholders’ benefit. Often in this type of action (it depends on the jurisdiction, among other things), the plaintiffs have to demonstrate “demand futility” as in their either tried to get the inert executives or board to shape up and fly right, or it would be pointless even to try. The recap of the Plantiffs’ argument from the filing below:

The Complaint is replete with particularized allegations of domination and control by the Controlling Shareholders. Their voting-rights abuses are detailed in Plaintiffs’ motions to strike the Nottebaum and Bopp Affidavits. VWAG’s corrupt culture—present from its founding in Nazi Germany—allowed the Controlling Shareholders to orchestrate the Clean-Diesel Scheme and the subsequent cover-up. Using their voting control, they devised the purported “Settlement” to absolve themselves of liability. That tainted Settlement does not bar Plaintiffs’ claims, but instead supports a finding that demand on the Board is futile.

But Demand is futile not only because the Controlling Shareholders control the Board; their misconduct—causing the “worst industrial scandal” in history (¶¶64, 94)—is egregious on its face.

Pinning the conduct of the four American subsidiaries on the parent company. This leg of the argument is key to hauling the Controlling Shareholders and key executives before the court. From the filing:

Applying the traditional, lower standard to §1315, AirTran holds that a subsidiary’s business activities can be imputed to a parent to determine whether the parent is “doing business” in New York. Id. at 218. In finding an agency relationship between the subsidiary and the parent, AirTran considers several factors, including that the parent (1) provides the subsidiary with operating capital and insurance coverage, (2) services the subsidiary’s debts, and (3) derives 70% of its annual revenues from the subsidiary’s operations. Id. at 210. Based on these facts, the subsidiary’s New York activities are imputed to the parent supporting a finding that the parent is “doing business in [New York.]” Id. at 220.

Under AirTran, VWAG is “doing business in this state” through its wholly owned subsidiaries, including VWGoA, VWGoAF, AudiAmerica, and PorscheAmerica. ¶¶131–136. As Plaintiffs’ accounting expert explains, VWAG “a holding company … that operates … in large part via controlled (and often 100% owned) subsidiaries.” GalesAff. ¶4. VWAG’s subsidiaries operate as “divisions” of the “Volkswagen Group.” Id. ¶9. The Volkswagen Group issues a single “consolidated financial statement” and “presents the assets, liabilities, income, revenue, expenses, and cash flows of these consolidated, controlled entities as a unified legal and economic entity.” Id. ¶26. Just like the subsidiary in AirTran, the New York activities of VWAG’s subsidiaries must be imputed to VWAG for purposes of §1317.

The defendants argued, citing a single Federal case, that a different standard applies. The filing below was dismissive of a Federal court interpreting state law.

Suing a German company in New York court. One of the defendants’ arguments is that German law on derivative cases, and not New York law, applies. The pleading below covers at length how New York, by statute, makes companies doing business in New York subject to New York law, and so can be hauled into New York court. The legislature even added to the statute to confirm that parties outside New York could sue companies doing business in New York in the state. This is fundamental to New York’s status as a commercial and financial center, that among other things, parties who operate in or through New York can avail themselves of strong securities and contract law protections.

This argument crops up in the case via the discussion of the “internal affairs doctrine”. Open Casebook discuses why this matter is often contested:

The “internal affairs doctrine” is a choice of law rule that applies the law of the state of incorporation to the corporation’s “internal affairs.”

While many in the U.S. treat the internal affairs doctrine as self-evident, other countries frequently insist on applying their corporate law to all corporations that have their headquarters in that country, or some other substantial connection to that country. Such insistence on a substantial connection is no stranger to U.S. choice of law. In fact, for most contracts, U.S. courts generally refuse to apply “[t]he law of the state chosen by the parties to govern their contractual rights and duties” if “the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice,” see Restatement of the Law (2nd) Conflict of Laws § 187(2)(a). U.S. courts will, however, enforce any chosen state’s corporate law under the internal affairs doctrine.

The plaintiffs contend:

In asserting German exclusivity and supremacy, Defendants ignore precedents precluding foreign law from divesting New York courts of jurisdiction, and they have no answer to BCL’s [New York’s Business Corporation Law] statutory conferrals of jurisdiction:

• Subject-matter jurisdiction exists because VWAG is a foreign corporation doing business in New York under Article 13, under which even non- residents may sue foreign corporations (§1314);
• §1317 subjects VWAG’s Supervisors and Officers to §720 liability “to the same extent as directors and officers of a domestic corporation[,]” and such liability may be enforced in “the courts in this state, in the same manner as
in the case of a domestic corporation;
• §720 creates a cause of action to be asserted derivatively in New York by “owner[s] of a beneficial interest,” with a “savings clause” preserving all other remedies, including remedies under the GSCA;
• §720’s reference to §626—New York’s “gatekeeper rules”—renders GSCA §148 inapplicable; and
• The BCL (§720) and the GSCA (§§76–77, 91, 93, 111, 116–117) prohibit the same fiduciary misconduct and can be enforced in harmony, consistent with the internal-affairs doctrine as modified.

Another argument by the defendants is forum non conveniens. That is when defendants ask the court to dismiss the case because it can be at least as fairly pursued in another jurisdiction, and that one is more convenient for the defendants. Substantive forum non conveniens arguments include that more records or key witnesses or relevant experts exist in the alternate jurisdiction and the plaintiffs’ case will not suffer if the matter is adjudicated there.

Even the raw assertion that Volkswagen top brass will be inconvenienced by possibly having to appear in New York is dismissed as silly, given how often they came to the state in the normal conduct of business. And it’s evident that the US and New York in particular was a major nexus of the abuses, as in relevant witnesses and records are there. For instance:

The Scheme has substantial New York nexus. NYC “has always been a vital market for Volkswagen in achieving long-term U.S. growth.” ¶236. In addition to owning the hundred-million-dollar flagship store in NYC, VWAG developed nearly 100 dealerships in New York. ¶¶197, 214, 235. The Scheme targeted New York, causing over 25,000 Altered Vehicles to be sold to New Yorkers. ¶214. To that end, VWAG and its subsidiaries devised a “Defeat Device Plus” specifically to meet New York’s emissions standards.

The Defendants also tried to bolster their position by submitting expert opinions which this filing argues are improper because they reach legal conclusions, contain hearsay, and are premature at this stage of the case. They plaintiffs submitted a motion to strike in a separate filing.¹

Asserting personal jurisdiction over the plaintiffs. In layperson’s terms, the question of personal jurisdiction is whether a party had enough of a connection to the jurisdiction for a court to have authority over them in the legal matter at hand. An overview from a course outline from Lewis and Clark Law School:

In order to enter a binding judgment against a defendant, a federal court (and a state court) must have personal jurisdiction over that defendant. Stated another way, personal jurisdiction describes the authority of a court in a “forum state” (i.e., the state where the lawsuit is filed) to exercise power over a person, entity, or property and enter a lawful judgment against that person, entity, or property. This is a geographical limitation on where a lawsuit can be filed. You cannot just drag anyone or any company into court anywhere in the United States.

Again from the pleading:

There is no merit to Defendants’ contest to personal jurisdiction. Many travelled repeatedly to New York to conduct VWAG business. And the allegations of their purposeful availment of New York satisfy CPLR §302’s single-transaction requirement

The “single-transaction requirement” = a party does not have ever to have set foot in New York to be subject to the personal jurisdiction of New York courts. Merely “transacting business,” say signing a contract, and having the plaintiffs’ claims result from that business transacted, suffices.

Again, this not-all-that-long filing is a case study in the uphill battle lawyers fight in seeking to get a measure of justice against legally well-bunkered directors and officers. But the flip side is that if more cases had been filed after the financial crisis, particularly by attorneys general, there would be more favorable rulings on key legal points that private plaintiffs could leverage. At least some attorneys are still fighting this good fight.

_______

¹ A key section:

The Court should disregard or strike Bopp’s and Nottebaum’s affidavits they are procedurally improper, and because their statements are irrelevant and inadmissible. As a matter of procedure, Bopp’s and Nottebaum’s affidavits aim to refute the truth of Plaintiffs’ allegations regarding the Families’ control and domination over VWAG’s Board. At the pleadings stage, Plaintiffs’ allegations must be deemed as true. Morone v. Morone, 50 N.Y.2d 481, 484 (1980). The Court should Bopp’s and Nottebaum’s submissions. See Goshen v. Mut. Life Ins. Co., 98 N.Y.2d 314, 326 (2002) (reversing a dismissal because “documentary evidence” failed to “utterly refute[] plaintiff’s factual allegations, conclusively establishing a defense as a matter of law”).

Both affidavits contain inadmissible hearsay statements. Bopp’s affidavit contains “matters” made known to her “available to [PorscheSE]” after what she claims was her “reasonable inquiry.” BoppAff. ¶2. Similarly, Nottebaum’s affidavit information he obtained after “consultation with Supervisory Board members named as defendants” and “matters” made known to him after what he
claims was a “reasonable inquiry.” NottebaumAff. ¶2.

Hearsay aside, some of these affiants’ statements are irrelevant. For example, Bopp and Nottebaum claim inconvenient forum by asserting that the Supervisors or PorscheSE personnel will have to travel to New York to participate in a trial. BoppAff. ¶25; NottebaumAff. ¶21. These claims ignore the fact that, as alleged in the Complaint, Defendants regularly traveled to New York on VWAG business. Because such claims of inconvenience fall far short of Defendants’ “heavy” burden of demonstrating hardship to procure an FNC dismissal,3 these claims are irrelevant.

00 VWAG_MEMO