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How a Prior DOJ Settlement Doomed a SEC Enforcement Action: A Volkswagen Case Study

It is not uncommon for various government agencies and offices to investigate the same company, particularly following a major scandal. We have grown accustomed to seeing simultaneous investigations by the U.S. Department of Justice (“DOJ”) and the U.S. Securities Exchange Commission (“SEC”), sometimes followed by indictments and complaints from both. When the SEC and DOJ are interested in the same or overlapping subject-matter, the government offices frequently coordinate their investigations and share information. The August 20, 2020 decision in In re: Volkswagen “Clean Diesel” Mktg., Sales Practices, and Prods. Liab. Litig., MDL No. 2672 CRB (JSC) by the United States District Court for the Northern District of California (“the Opinion”), dismissing a significant portion of the SEC’s federal securities claims against Volkswagen as having been previously released by the DOJ, serves as an important reminder for why such coordination is important and how defendants may take advantage of the failure to coordinate, as did Volkswagen. 

Although the SEC first brought its federal securities claims against Volkswagen (including two subsidiaries) and the Company’s former CEO in 2019, arising out of the Company’s emissions scandal, in which the Company allegedly used “defeat devices” to evade federal and state emissions standards, the underlying facts of the case became publicly known in 2015. On September 18, 2015, the U.S. Environmental Protection Agency issued a notice to Volkswagen of violation of the Clean Air Act. Hundreds of civil actions followed, which have since been consolidated into a multi-district litigation. On March 10, 2017, Volkswagen pled guilty to, inter alia, conspiracy to violate the wire fraud statute and the Clean Air Act. See United States v. Volkswagen AG, No. 16-CR-20394 (E.D. Mich. filed Mar. 10, 2017), Dkt. No. 68. 

Also in 2017, more than a year prior to the SEC asserting claims against Volkswagen and its former CEO pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, for including, inter alia, allegedly false and misleading statements concerning emissions compliance in various securities offerings, the DOJ and Volkswagen reached a $50 million settlement pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Under the settlement agreement, the DOJ agreed to release “any civil claims that the United States has against the VW Released Entities for the Covered Conduct . . . that the Civil Division of the Department of Justice has actual and present authority to assert and compromise pursuant to 28 C.F.R. § 0.45.” See In re Volkswagen “Clean Diesel” Mktg., Sales Practices, and Prods. Liab. Litig., MDL No. 2672 CRB (JSC) (N.D. Cal. filed Apr. 10, 2020), Dkt. 7349-3. 

When Volkswagen filed its motion to dismiss the SEC’s complaint, one of its principal arguments was that the claims arising from the auto asset-backed securities (i.e., those tied to auto loans and leases) were released by the DOJ’s 2017 settlement. Based on the natural reading of the settlement agreement, Volkswagen argued that: (i) the United States, the releasing party, encompasses the SEC; (ii) 28 C.F.R. § 0.45, which grants the DOJ the authority to assert claims for “civil matters . . . by . . . the United States [and] its agencies . . . to enforce Government rights, functions, and monetary claims . . . .” does not carve out the SEC or federal securities claims; and (iii) the settlement agreement does not carve out the SEC’s claims. The SEC opposed, arguing that “the DOJ could not unilaterally release the SEC’s civil securities fraud claims against [VW’s subsidiary] without the SEC’s consent[,]” and even if the DOJ had such authority, the DOJ did not “unambiguously release” the SEC’s federal securities claims. 

Ultimately, the District Court agreed with Volkswagen. First, the District Court assessed whether the DOJ had the authority to settle the SEC’s claims, as “[t]he DOJ’s authority to settle the SEC’s civil claims . . . depends on whether an exception to its presumptive authority to resolve those claims” exists. Opinion at 6 (citing 28 U.S.C. § 516). The Court found no such exceptions and noted “the fact that the SEC has authority to assert and resolve civil securities law claims does not mean that authority is exclusive.” Opinion at 7. Moreover, although it is the usual practice for the SEC to assert civil federal securities claims, “[n]o authority, statutory or otherwise, purports to divest the DOJ of the power to file civil enforcement actions under the securities laws.” Opinion at 7. Implicitly acknowledging there was little case law on point, the District Court found its conclusion was consistent with a 2014 decision from the District of Nevada, which stated in the context of a dispute over a pro hac vice application that “[t]he SEC’s authorization to bring the present civil enforcement action does not mean that only the SEC’s own attorneys may do so, such that the U.S. Attorney cannot represent the United States or the SEC in this action.” Opinion at 7 (quoting SEC v. Banc De Binary Ltd., 2014 WL 2197740, at *1 (D. Nev. May 27, 2014)). Second, the Court readily found that the covered conduct released under the Settlement Agreement, in fact, included the civil securities claims at issue here arising from the issuance of the nearly $5 billion asset-backed securities offerings. Opinion at 8. That the SEC was not a party to nor referenced in the Settlement Agreement was found to be irrelevant. Id. In addition to dismissing the federal securities claims arising from the asset-backed securities offerings, the District Court also culled the SEC’s federal securities claims based on Volkswagen’s 144A bond offerings.

Assuming this decision stands on appeal, it serves as an important reminder to those on the defense-side and those expecting compensation based on SEC disgorgement to examine whether a prior Government settlement could have implications for current claims. 

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Ellen Shapiro


Ellen Shapiro focuses her practice on complex commercial litigation and securities litigation, including shareholder class actions and opt-outs. She represents companies in the life sciences and in other industries and also maintains an active pro bono practice.