Can U.S. law firms push VW into investor settlement in Holland?

February 19, 2016

(Reuters) – If I were an investor in Volkswagen common stock, I’d be very confused about the best way to try to hold the company accountable for the billions of dollars of market capitalization that disappeared when VW admitted its clean diesel cars were rigged to cheat emissions tests. As I told you in a post in December, all kinds of U.S. and European law firms and litigation funders are trying to convince VW shareholders to sign up with them to pursue litigation in Germany or a settlement in Holland. This week, the field got even more crowded when the New York shareholders’ firm Bernstein Litowitz Berger & Grossmann announced that it has formed a Dutch “settlement foundation,” or stichting, for VW investors to join.

Like fellow U.S. plaintiffs’ firm Labaton Sucharow, which set up a VW stichting in October, Bernstein Litowitz is funding the foundation’s operations. Both firms have brought in Dutch counsel and helped put together a board of luminaries intended ultimately to persuade the Amsterdam Court of Appeals to approve a global settlement with VW to resolve the claims of all European shareholders.

Before that could happen, obviously, one of the Dutch stichtings – or, perhaps, both of them, working together – would have to convince Volkswagen to entertain settlement discussions. Stichtings have the power, under a 2012 Dutch appellate decision in a case involving the reinsurance company Converium, to negotiate settlements that bind defendants and investors across Europe. But stichtings do not litigate. They are only vehicles to resolve investors’ claims.

Volkswagen may decide instead to try its luck in the courts in Germany, where shareholders have announced plans to bring bellwether securities fraud actions. In the German Capital Market Investors’ Model Proceedings Act (KapMuG), a “model plaintiff” litigates to establish the defendant’s liability, then additional shareholders opt in with their own individual claims. The process, as Deutsche Telekom shareholders know all too well, can be grindingly slow – but sometimes that’s just what defendants want.

Bernstein Litowitz nevertheless believes it has the leverage to get VW to discuss a global settlement through its Dutch stichting. Ironically, the firm’s crowbar is the American securities fraud class action against Volkswagen – even though the U.S. case involves only holders of American Depository Receipts, who are a tiny fraction of VW’s investor base.

In January, the judge overseeing all of the U.S. litigation stemming from VW’s emissions cheating scandal, U.S. District Judge Charles Breyer of San Francisco, appointed Bernstein Litowitz to lead ADR holders’ consolidated securities fraud class action against Volkswagen. There wasn’t much competition for the job. Under the U.S. Supreme Court’s ruling in Morrison v. National Australia Bank in 2010, shareholders and bondholders who purchased securities on exchanges outside of the United States can’t sue in American courts. Despite the enormous decline in VW’s share price after the emissions cheating news broke, the ADR float is so relatively small that Bernstein Litowitz ended up being the only plaintiffs’ firm to ask for appointment as lead counsel.

Until it secured that assignment, according to Bernstein partner Jeroen van Kwawegen, the firm had stayed out of the scramble in Europe. “We thought there was no leverage to get VW to the table,” said van Kwawegen, a Dutch transplant. But Volkswagen would have to talk to Bernstein about the U.S. case, Kwawegen said. So the firm made what he called a “strategic decision” to try to parlay its leadership of the U.S. case into control of talks on behalf of all European investors. In meetings with shareholders all over Europe, van Kwawegan said, Bernstein Litowitz’s pitch has been that its litigation of the U.S. case will put so much legal and political pressure on Volkswagen that the company will want to resolve all investors’ claims through the Dutch stichting.

“European investors and consumers are going to be angry if U.S. investors and consumers are compensated and they aren’t,” van Kwawegan said. He acknowledged that Bernstein Litowitz can’t sacrifice the interests of U.S. class members his firm has been appointed to represent in order to push VW into global talks. But he said there won’t be a conflict.

Both he and Lawrence Sucharow of the Labaton Sucharow, who is heading up his firm’s recruitment of investors for its four-month-old VW stichting, said that because the Dutch nonprofits are just settlement vehicles and not litigating entities, VW shareholders are permitted to sign up as stichting members and simultaneously bring individual claims in Germany. That way, according to Sucharow and van Kwawegan, investors can preserve their rights however VW decides to proceed.

Of course, as both plaintiffs’ lawyers said, there’s no precedent for European investors to simultaneously pursue litigation against a securities defendant in Germany while negotiating a settlement in the Netherlands. The VW case is creating a new model for shareholder fraud claims outside of the U.S., informed by U.S. lawyers and U.S. class action history.

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