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From Securities Regulation Daily, October 6, 2016

Class action against Fiat Chrysler for false compliance claims survives motion to dismiss

By Gregory Kane, J.D., M.B.A.

The court granted in part and denied in part auto maker Fiat Chrysler’s motion to dismiss a putative class action suit regarding supposedly false and misleading statements about the company’s compliance with the U.S. safety laws and its loss reserves related to safety recalls. Claims regarding the false statements were allowed to move forward, but the loss reserves claim was dismissed without leave to amend (Pirnik v FIAT Chrysler Automobiles, October 5, 2016, Furman, J.).

Background. Fiat Chrysler (FCA) was involved in many vehicle recalls over the class period including several high profile recalls, such as the Takata airbag recall which affected the entire auto industry. During this time, the company and its executives made multiple statements that FCA was "substantially in compliance" with all relevant safety laws. The National Highway Traffic and Safety Administration (NHTSA) investigated FCA due to what it perceived as shortcomings in its recall process and ultimately reached a consent order with the company that included a $105 million fine for violations of the National Traffic and Motor Vehicle Safety Act. FCA’s stock price declined nearly 5 percent on the news. Three months later, FCA announced its third quarter results and disclosed that it recorded a €761 million pre-tax charge for estimated future recall costs based on long-term historical averages. In December of the same year, the NHTSA and FCA entered into an amendment to the consent order over failure to send early warning information to the NHTSA that included an additional $70 million fine and resulted in a 0.07 percent stock price decline.

Plaintiffs claimed that FCA’s statements that the company was in compliance with all relevant safety laws was false and misleading, and that the company had falsely estimated the necessary recall reserves that would be necessary.

False statements. The court found that the statements that FCA was substantially in compliance, which were proven false when they were fined nearly $200 million by the NHTSA for not being in compliance, were demonstrably false and that a reasonable investor would have found them misleading. Also, the executives making such claims were aware of nonpublic facts including correspondence with the NHTSA, contradicting such statements which were sufficient to show scienter at this stage. The court placed the loss reserves in a different category, however, following the Second Circuit in Fait v. Regions Fin. Corp., (655 F.3d 105 (2d Cir. 2011)) finding that loss reserves are a matter of opinion, not fact. Without a subjective rule to contradict what may have been an optimistic estimate, no fraud can be shown.

The case is No. 15-CV-7199 (JMF).

Attorneys: Michael Jonathan Wernke (Pomerantz LLP) for Victor Pirnik. Robert Joseph Giuffra, Jr. (Sullivan & Cromwell LLP) for Fiat Chrysler Automobiles N.V.

Companies: Fiat Chrysler Automobiles NV

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