The UK’s West Midlands Pension Fund (WMPF) has filed a lawsuit against Porsche Automobil Holding SE for failing to disclose its own financial risks incurred by its subsidiary Volkswagen (VW) through installing ‘defeat device’ software in hundreds of thousands of diesel vehicles sold worldwide, which allowed them to violate emissions standards.
The £11.7bn (€13.1bn) pension fund, which covers local government employees in the city of Birmingham and the surrounding area, filed the €5.7m claim in the Landgericht – or Regional Court – in Stuttgart, the capital of Baden-Württemberg, where Porsche’s headquarters are located.
It is the first claim against Porsche to be heard in court.
WMPF claims Porsche should itself have disclosed its own financial risk involved through VW’s use of the software – and should have done so much earlier, rather than wait for the fraud to be made public by the US Environmental Protection Agency (EPA) – because of its direct potential effect on Porsche’s stock price and dividend payments.
Porsche’s share price fell by more than 30% within days after the EPA issued a violation notice on 18 September 2015.
According to Marc Schiefer, lawyer at law firm TILP, which is representing clients bringing €547m worth of claims via other lawsuits against Porsche, Porsche’s majority shareholding of 52% in VW is the major link in pursuing a claim.
However, it is necessary to show that Porsche itself had a duty to disclose information related to the financial risks involved.
Schiefer told IPE: “The issue is that a claimant needs to show there was knowledge attributable to Porsche – i.e. that certain Porsche officers knew or should have known about the fraudulent software and did not disclose the facts in a timely manner.
“We think it’s provable that knowledge was attributable because Martin Winterkorn, the chief executive at VW at the time the fraud was being carried out, was also chief executive at Porsche. We are very confident we have a good case and think we could win on that basis.”
He added: “Specifically, Sections 37b and 37c of the German Securities Trading Act provide a solid basis to bring a claim, since this material claim also contains a shift in the burden of proof concerning intent and gross negligence.”
The law says the plaintiff only has to prove a wrongdoing, while a defendant has to prove they did not act with intent or gross negligence when they were disseminating false information or when they omitted to provide important information to the stock market.
“Because this is hard to prove on the side of the defendant,” Schiefer said, “it helps a lot in establishing a claim against them.”
A further claim by the plaintiff is that engines manufactured by VW and Audi were used in Porsche cars, and that Porsche officers knew the software was fraudulent but did nothing.
WMPF’s claim is one of nearly 150 against the car manufacturer that are in process in the Stuttgart court.
The claims total around €900m, and plaintiffs include German, UK and other European pension funds, as well as pension funds from the US.
At a hearing in the Stuttgart court on 30 September, presiding Judge Fabian Richter Reuschle indicated he would aggregate the lawsuits into a single model case – the KapMuG – similar to a US-style class action.
This process provides a group model to allow court rulings won by individual investors to set damages for other investors in the same position.
Germany, unlike the US, has no opt-out class-action system.
The German procedure requires each injured party to actively file its own complaint to get compensation.
Last March, 278 international institutional investors filed claims totalling €3.2bn against VW in the Regional Court in Braunschweig (Brunswick), Lower Saxony, the home state of VW’s headquarters in Wolfsburg.
The claimants have also filed proceedings for a KapMuG model case.
The lead plaintiff will have to be determined by the court during the next couple of months.
But some of the lawsuits in Stuttgart also contain a claim against VW because the plaintiffs contend VW is also liable for harm done to the Porsche share price.
The Stuttgart court could therefore consider initiating model case proceedings against VW too, although the main case against VW itself is being dealt with in Brunswick.
This means there could potentially be competition between the two jurisdictions as to where the litigation will take place, said Schiefer.
In February 2017, Judge Reuschle will rule on initiating model case proceedings in Stuttgart, after he has heard a separate investor case against both Porsche and VW at the end of January.