Emissions Scandal VW to Court: Ex-CEO Knew of 'Irregularities' in 2014

Volkswagen’s former chief executive Martin Winterkorn, who resigned last September after the carmaker’s diesel manipulation scandal went public, was informed about emissions irregularities as early as May 2014. But the automaker says he may have failed to heed the warnings. VW’s shares fell as much as 2.5 percent.
Martin Winterkorn, left, and his successor, Matthias Müller, the current VW CEO.

Volkswagen’s former chief executive Martin Winterkorn, who resigned last September after the carmaker’s diesel manipulation scandal went public, was informed about emissions irregularities as early as 16 months before he stepped down, VW said in a statement released in response to a lawsuit in Germany.

But the automaker maintained that Mr. Winterkorn did not know about the illegal software installed in up to 11 million vehicles that was in fact causing the irregularities until days before VW publicly admitted the deception last September.

In its lengthy press release, Volkswagen implied that the former chief executive, while informed of the irregularities through a series of high-level memos from his subordinates, may not have read or fully understood the import of the communications.

"I think this is a very critical situation,” said Ferdinand Dudenhöffer, a business and economics professor at the University of Duisburg-Essen and an auto industry expert. “If Mr. Winterkorn was informed earlier one has to ask whether the finance chief was also notified. Financial interests were at stake as well.”

The complaints from investors and stakeholders pose a great risk. Therefore, it is important that VW files a charge against Mr. Winterkorn. Ferdinand Dudenhöffer, Business professor, University of Duisburg-Essen

Two weeks after the scandal broke, finance head Hans Dieter Pötsch moved to the VW supervisory board and became the carmaker’s non-executive chairman. He is considered a confidante of the Porsche and Piëch families, which control VW with a 52 percent stake.

“The complaints from investors and stakeholders pose a great risk. Therefore, it is important that VW files a charge against Mr. Winterkorn,” Mr. Dudenhöffer told Handelsblatt Global Edition. “I believe that VW should act for reasons of precaution and file a complaint against the former chief executive, because he has allowed considerable damages to emerge.”

VW’s preference stock shares fell as much as 2.5 percent on Thursday and were down 1 percent at €114.55, or $124.52, by mid-morning in Frankfurt. The German blue-chip DAX Index dropped 0.3 percent.

The carmaker’s statement came in response to a shareholder lawsuit filed at a court in Braunschweig, the town close to Volkswagen’s headquarters in Wolfsburg and the location of German prosecutors who are trying to determine if senior executives ordered the trickery.

The lawsuit alleges that VW’s top managers, including Mr. Winterkorn, broke their fiduciary responsibility by failing to inform investors about potential problems with VW’s diesel engines in a timely fashion.

VW in September admitted it had installed software on up to 11 million vehicles worldwide that tricked air pollution tests. But the automaker in its statement said that Mr. Winterkorn was first apprised of the “irregularities” as early as May 2014.

 

of a Crisis volkswagen march 3 2016-01

 

In the statement that accompanied a chronology of events leading up to the scandal, VW said that despite the early warning to Mr. Winterkorn and other  VW managers, it “duly fulfilled its disclosure obligation under German capital markets law.”

Shareholders claim Europe’s largest carmaker knew about the diesel emissions manipulation before U.S. regulators made it public. The failure to disclose led to investment losses, the investors alleged in their suit.

VW’s preference stock shares fell as much as a 40 percent after the scandal broke on September 18, erasing more than €20 billion ($21.6 billion) of the company’s market value.

After the U.S. Environmental Protection Agency threatened to bar the automaker’s 2016 models from the U.S. market, VW admitted that it had installed illegal software in some diesel engines installed in its VW, Audi, Porsche, Skoda and Seat brands.

Mr. Winterkorn, who resigned a few days after the admission, knew about irregularities with diesel emissions in May 2014, but “whether and to which extent Mr. Winterkorn took notice of this memo at that time is not documented,” VW said in the statement.

“According to current knowledge, the diesel matter, as it was treated as one of many product issues facing the Company, did not initially receive particular attention at the management levels of Volkswagen,” the company said in its statement.

Mr. Winterkorn, and his successor, fomer Porsche chief Matthias Müller, have denied knowledge of the software fraud. Mr. Müller has repeatedly described the manipulation as the work of a small band of rogue engineers responsible for technical development.

U.S. law firm Jones Day, hired by Volkswagen to investigate the scandal, found no evidence that top managers knew of or ordered the carmaker's diesel emissions fraud, Handelsblatt learned from company insiders last month. Volkswagen’s supervisory board plans to present findings of the internal investigation in April.

VW said in its statement managers only realized at the end of last August — days before the scandal became public — that “the modification of the engine management software constituted a prohibited defeat device under U.S. law.”

The German automaker, the largest listed company on the country’s benchmark DAX Stock Index, then informed the EPA in early September about this and Mr. Winterkorn learned of the software manipulation on September 4, 2015, VW said.

VW has set aside €6.7 billion to cover the costs for recalling and repairing the cars, but this figure does not include possible legal penalties or any compensation for customers that bought the faulty cars. More than 500 lawsuits have been filed in the United States against the carmaker.

The scandal could cost VW between €20 billion and €30 billion, analyst Frank Schwope of German bank Nord LB estimated in a report last week, adding that the damages were more likely to surpass this range than stay below it.

Earnings at the carmaker's luxury brand Audi suffered from the diesel scandal, with last year's profit after tax falling 3 percent to €4.3 billion as the subsidiary set aside €228 million to fix manipulated diesel engines and cover expected legal costs and sales expenses. The profit fall came despite an 8.6 percent rise of turnover to €58.4 billion in 2015 and a 3.6 percent increase of the number of Audi cars sold, the carmaker said on Thursday.

Around 100,000 German VW employees will get a 2015 bonus in spite of the carmaker's diesel scandal and the billions set aside to solve it, news agencies DPA and Reuters reported, citing an internal employee magazine. CEO Mr. Müller and work's council chair Bernd Osterloh have agreed on a so-called "recognition reward" for their commitment to VW even as the dieselgate scandal rocked the company.

Mr. Osterloh, in the magazine, said the exact amount of the 2015 reward had yet to be decided. In 2014, employees under the company's union labor contract were given a bonus of €5,900, the news agencies said.

 

Kevin O'Brien is editor in chief of Handelsblatt Global Edition. Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the author: [email protected] and [email protected]