The investigation into Volkswagen’s emissions scandal has for the first time reached the top echelon of management, threatening to undermine the company’s claim that wrongdoing was limited to a handful of lower-ranking managers and potentially increasing the already enormous financial damage.
German prosecutors said Monday that the former Volkswagen chief, Martin Winterkorn, is suspected of market manipulation for having waited too long to disclose that the company faced an inquiry. They are looking into another member of the management board as well for potential violations of securities laws. By expanding the investigation into the executive suite, prosecutors signaled that they had begun focusing on a possible cover-up after Volkswagen learned that it was suspected of violating clean air rules in the United States.
US regulators first began asking Volkswagen questions about suspicious emissions data in mid-2014. It was more than a year later that the company admitted to installing illegal software in 11 million cars worldwide to cheat pollution tests. All along, the carmaker has insisted that top management was not aware of cheating software, known as a defeat device, until shortly before the disclosure of the deception in September. Instead, the company has cast the blame on a small group of middle managers suspected of installing the software, starting with 2009 models. The investigation comes at an especially awkward time for Volkswagen. On Wednesday, top managers will face shareholders at the company’s annual meeting.
Next week, there is a court deadline for Volkswagen to hash out a settlement with authorities and car owners in the United States. The agreement is expected to cost the company well over $10 billion. The decision by prosecutors to pursue Winterkorn could further increase the financial fallout from the deception, providing ammunition to investors who have filed suits claiming the company violated its duty to keep them abreast of risks to the share price.
Volkswagen will be more vulnerable to shareholder lawsuits if it turns out top managers failed to disclose crucial information. “I think this is very good for shareholders,” said Christopher Rother, a Berlin lawyer who represents some of the investors.
Volkswagen said Monday it was surprised by the prosecutors’ decision to investigate Winterkorn. The company said it had engaged outside law firms to examine the circumstances, and they concluded that no current or former members of the management board had violated their responsibility to shareholders. “No serious and manifest breaches of duty on the part of any serving or former members of the board of management have been established,” Volkswagen said in a statement.
The expansion of the investigation means that prosecutors will focus more intensely on the year leading up to the disclosure of the deception, a period when Volkswagen executives tried to deflect questions about emissions by its diesel cars. Winterkorn resigned in September, several days after US regulators publicly accused the company of manipulating results of emissions tests. At the time, Winterkorn said he learned about the defeat devices only shortly before that point.
"I am not aware of any wrongdoing on my part," he said. But US regulators at the Environmental Protection Agency started asking Volkswagen about suspicious emissions data in mid-2014. Court documents, internal memos and emails suggest that Winterkorn and other executives were informed about possible cheating around that time. The company has acknowledged that a lower-ranking executive sent Winterkorn a memo in May 2014 informing him about a private study that raised questions about Volkswagen diesel cars sold in the United States. The memo mentioned the risk that Volkswagen would be accused of using a defeat device.
Volkswagen said in March that it was not clear whether Winterkorn took note of the memo. Michael Horn, the chief executive of Volkswagen’s US unit, testified to Congress in October that he was also informed in May 2014 of the possibility that the EPA would test for defeat devices. Horn, who has since resigned, said he was told that Volkswagen technicians had a plan to make the cars compliant with clean air rules. In the months that followed, according to a civil suit filed by the US Justice Department, Volkswagen provided misleading information and impeded attempts by US officials to understand why diesel vehicles emitted more on the road than in lab tests.
In late 2014, Volkswagen even recalled diesel vehicles in the United States. But an update to the engine software did not repair the problem. The management board, led by Winterkorn, also repeatedly pushed back against technical proposals for upgrading the emissions controls, according to two people who attended meetings where the proposals were discussed. The management board rejected the proposals because of cost, the people said.
Volkswagen did not issue a formal statement to shareholders about the problem until September 22nd , four days after the EPA had formally cited the company.
Volkswagen said then that it was setting aside €6.5 billion to cover the cost of recalls. It has since raised the amount to €16.2 billion.
The New York Times