Attorney: Michael J. Wernke
Pomerantz Monitor November/December 2016
The district court for the Southern District of New York has substantially denied defendants’ motion to dismiss our complaint in Koopman v. Fiat Chrysler Automobiles N.V. et al. The complaint alleges Section 10(b) and 20(a) violations against the Fiat-Chrysler (“FCA”), CEO Sergio Marchionne, and the executive in charge of vehicle safety regulatory compliance.
The complaint alleges that defendants misled investors when they asserted that FCA was “substantially in compliance” with the National Highway Traffic Safety Administration’s (“NHTSA”) regulations. In truth, FCA had a widespread pattern of systemic regulatory violations dating back to 2013, in which FCA would delay required owner notification of defects and vehicle repair. Prior to defendants’ statements regarding compliance, NHTSA had at least twice written directly to Marchionne and the executive in charge of regulatory compliance, expressing concern about FCA’s regulatory violations/non-compliance. The truth was revealed on July 26, 2015, when NHTSA announced a Consent Order against FCA, fining the company a record-high $105 million and requiring a substantial number of recalls and repairs. Then on October 28, 2015, the company announced a $900 million pre-tax charge for an increase in estimated future recalls. The stock declined about 5% following each disclosure.
The court denied defendants’ motion to dismiss. It found that the complaint adequately alleged that defendants’ statements that FCA was “substantially in compliance” with the “relevant global regulatory requirements” were false when made. The court rejected defendants’ argument that violations in one country as to one regulator did not render such a broad statement misleading, agreeing with our argument that given the context of the statement the reasonable investor would conclude that FCA was in substantial compliance as to each area of regulation, including vehicle safety. The court also found that defendants’ statements regarding the “robustness” of FCA’s compliance systems and that they were “industry best” and similar statements were not puffery. However, the court found that the complaint failed to allege that the company’s statements of loss reserves for recalls, which were opinions, were false.
The court also found that the complaint adequately alleged scienter because defendants had received a letter from NHTSA expressing concern about certain compliance issues. The court also found that defendants repeated public discussions of compliance, access to reports identifying violations and the abrupt resignation of the compliance executive supported an inference of scienter.