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.
Law firm Labaton Sucharow on June 20 filed the lawsuit for the $4 billion State-Boston Retirement System on behalf of all bondholders who acquired Volkswagen 144A bonds between May 23, 2014, and Sept. 22, 2015.
Because 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 firm partner Thomas A. Dubbs, New York.
Mr. 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% 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.
Securities lawyers see increasing interest in 144A bonds among foreign companies seeking to raise capital in the U.S. because, as private debt, the bonds fall outside the purview of federal exchange regulators. That makes it is a riskier proposition for investors, who nonetheless like the higher interest rates offered.
The Financial Industry Regulatory Authority in 2014 began publicly disseminating Rule 144A transaction data to bring transparency “to a market that had previously operated in the dark,” it said.
By May 2016, 144A transactions comprised 21.3% of the corporate debt market, up from 18.5% in 2014, with trades of $6.5 billion, up from $3.7 billion in August 2014, according to data from the Securities Industry Financial Markets Association.