Death of a Plaintiff: A Cautionary Tale for VW Investors

(Bloomberg) -- Investors suing Volkswagen AG over the diesel scandal should exercise patience if a similar case in Germany is any guide: litigation there has dragged on so long that the lead plaintiff passed away.

When a Frankfurt court restarted a lawsuit Thursday involving claims by roughly 17,000 Deutsche Telekom AG shareholders, it had to do so without the lead plaintiff, who brought the case one and a half decades ago. The death of German pensioner Bruno Kiefer won’t change the case, but the 15-year-old dispute shows a lot about how large investor lawsuits fare in German courts.

It’s a warning to the 1,400 shareholders suing Volkswagen AG for 8.2 billion euros ($8.9 billion) over the diesel scandal that they are in for a long wait. The Deutsche Telekom case, like Volkswagen, is being heard under Germany’s "model-case law," a procedure put in place at the beginning of the millennium to handle large, complex suits more efficiently. In reality, things started out slowly, and then really got bogged down.

"The Deutsche Telekom case is certainly a cautionary tale," said Axel Halfmeier, a professor at Leuphana Law School in Northern Germany, who has been working for plaintiff lawyers in the VW case. "The way the case went makes you wonder whether this is really the right instrument."

Case Similarities

The similarities between the Deutsche Telekom and VW cases extend well beyond the model case law to the causes of action and even to some of the lawyers involved.

The system, which only applies to investor lawsuits, is Germany’s first attempt to create collective redress, but still stops far short of a U.S. class action. It was introduced in the wake of the thousands of filings by Deutsche Telekom shareholders seeking a combined 80 million euros.

The investors, many of whom were buying shares for the first time, argued Deutsche Telekom’s sales prospectus for a share offering more than a decade ago contained dozens of mistakes. They claimed the company improperly reported the value of real estate and didn’t disclose in a timely manner its intention to acquire U.S. phone operator VoiceStream in 2000. It took more than a decade for the first judgment from a Frankfurt court in 2012 that rejected the case, arguing investors weren’t misled.

But Germany’s top civil court in 2014 overturned the ruling, saying Deutsche Telekom misstated the book value of one of its U.S. assets. The case was sent back to Frankfurt where judges now have to look into whether Deutsche Telekom acted negligently and whether that flaw influenced investors.

Deutsche Telekom’s lawyers on Thursday argued that errors in the prospectus didn’t effect the company’s share price, and that some defendants may have bought the shares even though they knew of the mistake -- meaning those cases should be heard and decided individually.

‘Dying Off’

That would lead to many years of litigation that would stand in the way of fair and timely verdicts, said Andreas Tilp, a lawyer for shareholders in both the Deutsche Telekom and VW cases.

"The people are dying off," he said Thursday at the Frankfurt court, adding that unnecessarily prolonging the proceedings means "working toward a biological solution.”

Deutsche Telekom is confident the tribunal will rule in its favor, company spokesman Nico Goericke said.

Volkswagen Lawsuits

The first investor suit against Volkswagen was filed a year ago, shortly after the diesel scandal broke. More suits have been added over the course of the year. The Braunschweig court hearing the case ruled in August that the litigation will be handled under the model-case rules and the parties are now waiting for the next step, the appointment of a lead plaintiff.

Under the model-case rules, the suit of one investor, usually the one with most at stake, is chosen as the "model case" to clarify central issues of fact and law for all of the plaintiffs.

In the Deutsche Telekom suit, the now deceased "model plaintiff" was Bruno Kiefer, a pensioner who lost so much on the stock he was impoverished, according to Tilp. Kiefer, like his attorney, was from Swabia, a region in south of Germany with a reputation for thriftiness and saving money.

While in individual lawsuits, the case would be continued by the claimant’s heirs, the court in the Deutsche Telekom litigation won’t change anything unless the lead attorney asks to appoint a different model plaintiff, according to court spokesman Jens Kreiling.

“The model case isn’t just done for this one plaintiff, but for all the investors involved, so we will proceed it unless his lawyer asks for a change," Kreiling said.

Driver’s Seat

Tilp won’t do that because such a step would remove him from the driver’s seat. The lawyer has played that key role in similar suits, giving him visibility in the investor-litigation market where numerous lawyers are competing for the big lawsuits. Tilp has the biggest chunk of claims in the Volkswagen litigation and hopes one of his clients will be the model there as well.

While the Volkswagen cases just started, the Deutsche Telekom case is far from any resolution. The company has asked the court to look into dozens of new questions of law and fact, which both sides have the right to do.

In the first round of the litigation, shareholders repeatedly filed such requests, which contributed to the delays.

Because of the experiences in the Deutsche Telekom litigation, the model-case law was revised to mend some of its deficiencies. It now also allows for settlements with multiple investors, but the new rules only apply to new cases, like the one against VW.

‘Last Chance’

Tilp says it’s key Germany can show it has something to offer for investors seeking the help of courts or it risks being left behind when competing with other nations.

"Frankly, we’ve already long lost that competition. Institutional investors are going to the Netherlands with these issues or are using class actions in the U.S.," he said. "The VW litigation is the last chance for the German capital market to show it’s worth to invest here because adequate legal redress is available."

The Deutsche Telekom case is: OLG Frankfurt am Main, 23 Kap 1/06.

To contact the reporters on this story: Karin Matussek in Berlin at kmatussek@bloomberg.net, Stefan Nicola in Berlin at snicola2@bloomberg.net. To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Anthony Palazzo