Shareholder Suits VW Board Chief Comes Under Scrutiny

Leaked documents suggest former Volkswagen CFO Hans Dieter Pötsch, now chairman of its supervisory board, knew of emissions problems weeks if not months before the public. Some VW shareholders say they are getting nervous.
Former VW CFO Hans Dieter Pötsch -- who is now chairman of the automaker's top board -- could be forced to sue himself and his former boss and colleagues if VW investigations show the company failed to inform shareholders of its Dieselgate scandal in a timely fashion.

VW’s chief financial officer Hans Dieter Pötsch was appointed as chairman of the company's supervisory board -- its top non-executive panel -- last October to clear up the emissions-rigging scandal.

At the time, there were doubts he was the right man for the job because he had been a key top manager while VW was installing fraudulent software into some 11 million diesel engines to cheat emissions tests.

Now, less than five months into his job as chairman of the automaker's oversight panel, those misgivings are flaring again as internal documents have revealed that as chief financial officer he had been informed early on that U.S. authorities were investigating VW for excessive diesel emissions.

The German automaker, Europe's largest and the world's No. 2 after Toyota, only went public with the scandal last September under pressure from U.S. environmental authorities, which had threatened to bar VW's new vehicle line from the U.S. market unless it publicly admitted the scope of the deception.

In the days following VW's dramatic public admission, the besieged automaker promoted Mr. Pötsch from chief financial officer to head of its supervisory board -- pledging to get to the bottom of the scandal.

But now, as investigators working for the German and U.S. governments, and for Volkswagen, move ahead with their investigations into Dieselgate, a conflict of interest has arisen between Mr. Pötsch’s old and new roles at VW.

Should investigators decide that Mr. Pötsch and other top VW managers, such as ex-Chief Executive Martin Winterkorn, failed to inform VW shareholders in a timely fashion, VW's supervisory board may sue the executives.

In this case, however, that could mean that Mr. Pötsch will have to decide whether to sue his ex-boss and colleagues, and perhaps, himself. The potential conflict is raising concerns among VW's powerful labor unions and the state of Lower Saxony, both of which sit with Mr. Pötsch on the supervisory board.

At the time he was appointed supervisory board chairman last October, both groups expressed concern about elevating a manager to the chairman's post who had been so closely involved with the company during the scandal.

To be sure, Mr. Pötsch is still backed by the shareholders who matter most: the Porsche and Piëch families which together own the controlling interest in VW.

But employee representatives on Volkswagen's supervisory board, and the state of Lower Saxony which owns 20 percent of VW, are watching with concern the developments surrounding Mr. Pötsch and the investigations into Dieselgate, sources on the supervisory board told Handelsblatt.

There’s no proof that Mr. Pötsch did anything wrong and VW, for the record, has said the software manipulation at the heart of the scandal was the work of a series of mid-level managers, not Mr. Winterkorn, Mr. Pötsch or other top VW managers at the time.

But as the focus of the ongoing investigations shifts to the explosive question of whether the automaker upheld its fiduciary duty and informed shareholders in a timely fashion, some supervisory board members are growing increasingly nervous.

The state premier of Lower Saxony, Stephan Weil, had demanded that Volkswagen make a real fresh last October in the wake of the personnel changes, not least to lessen the risk of lawsuits.

Shareholders are now suing Volkswagen in Braunschweig, and hundreds of class action cases are being brought on behalf of VW buyers in the United States. In each of these cases, the question of whether VW managers acted responsibly will be central to claims that could reach into the billions of euros.

Increasingly, the disclosure of the Dieselgate scandal is drawing scrutiny and skepticism. Volkswagen's management board informed U.S. authorities about the automaker's manipulation of its diesel engines last September 3, but allegedly only told its own supervisory board about it on September 18.

In the days following VW's dramatic public admission, the besieged automaker promoted Mr. Pötsch from chief financial officer to head of its supervisory board -- pledging to get to the bottom of the scandal.

Given the nature of the scandal and expected fines and claims, VW managers are being accused of informing investors too late. Mr. Pötsch in particular has come under fire because as chief financial officer he was responsible for the automaker's official communications with investors.

Investors and analysts have since joined his doubters. Lawyer Andreas Lotze said Mr. Pötsch should consider taking a leave of absence or at least refraining from taking part in supervisory board decisions relating to the investigation.

One representative of a large German investor, who declined to be named, told Handelsblatt that if Mr. Pötsch was aware of the difficult situation VW was in while he was chief financial officer, “he can’t remain in office.”

Last week VW, in a statement released in response to the Braunschweig lawsuit, said Mr. Winterkorn, who resigned last September, was informed about emissions irregularities as early as 16 months before he stepped down.

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

Even though VW’s internal investigation into the scandal has been going on for months, a central question remains unanswered: Who in the company knew that the diesel emissions software had been manipulated? Was it just a small group of engineers, as Mr. Winterkorn's successor, former Porsche boss Matthias Müller, keeps insisting?

 

-who knew what when VW volkswagen diesel gate emissions timeline

 

 

Sources close to Volkswagen's engine development team said they had felt they were being “covered from above.” That’s a question for which Mr. Pötsch, now the automaker's supreme supervisor, has yet to answer.

Volkswagen is conducting its own investigation.

The supervisory board hired the German law firm Gleiss Lutz to investigate whether VW’s former management board did all it could to prevent the disaster. If their answer is no, VW faces more legal action and compensation claims.

The legal investigators have to probe deep into VW’s engine development department, whose specialists were seen as the elite among the automaker’s 600,000-strong workforce — until Dieselgate confronted VW with costs expected to run into tens of billions of euros.

Mr. Müller has said that the engine developers alone were to blame.

But if you ask around among VW’s engineers, you get a different version of events. They were sure that the company wasn’t breaking any laws, said one, who declined to be named.

“After all, representatives of the legal department were firmly integrated in the team,'' the person said. "And they reported to the head of their department.”

In addition, VW had employees in the United States who were responsible for maintaining contacts with U.S. authorities, said some of the people involved, who declined to be named.

It’s doubtful that engineers unwittingly broke the law. An internal investigation by U.S. law firm Jones Day, also hired by VW, is believed to have found evidence to the contrary.

But it’s significant that engineers felt they were covered from “above.”

Employees have taken a similar view in similar cases. Past corruption probes at industrial companies Siemens and Ferrostaal showed that staffs believed they were acting in the interests of their companies.

There are other similarities.

VW CEO Matthias Müller has said that the automaker's engine developers alone were to blame for the software manipulation. But if you ask around among VW’s engineers, you get a different version of events. They were sure that the company wasn’t breaking any laws, said one, who declined to be named.

At Siemens and Ferrostaal too, there were repeated indications of wrongdoing in the ranks.

A VW legal document seen by Handelsblatt lists a series of occasions between spring 2014 and September 2015 when then-CEO Winterkorn was informed by subordinates of the “diesel topic” — a reference to the scandal. That begs the question whether Mr. Winterkorn should have acted sooner.

Shareholders suing Volkswagen in Germany are arguing that the automaker informed the public too late about the scandal, and is therefore legally responsible for their investment losses.

VW shares plunged by up to 40 percent in the wake of the scandal.

The purpose of the legal document, which was prepared by lawyers at Göhmann law firm in Braunschweig, another firm hired by VW, is to defend the automaker against lawsuits brought by several shareholders in Germany. The Göhmann document concludes VW’s top managers didn't violate any laws.

But it also indicates that the flow of information between the engine development department and the management board did work.

By mid-May 2015, an employee in the VW legal department received a reference to “the possible use of a so-called defeat device,” according to the defense document. The term defeat device is defined by the U.S. environmental authorities as a device or software that illegally reduces exhaust emissions during testing.

 

 

But VW management appears not to have given the matter much attention. Top managers weren't fully informed of the case until September, the Göhmann document asserts.

Jones Day is expected to complete its report on its findings in the second half of April. Then it may become clear whether the supervisory board will have to take legal action against Mr. Pötsch and other managers.

If they do, Mr. Pötsch may make legal history by becoming the first supervisory board chairman in Germany to be forced to sue fellow former managers and himself for compensation in the name of his employer.

According to German corporate law, he doesn’t have to have been actively involved in any wrongdoing. It’s sufficient if he neglected his duties as a management board member to stop wrongdoing.

Meanwhile, as lawyers seek clients to sue VW for damages over its share price decline, the company is trying to win a precedent-setting ruling in a Braunschweig regional appeals court to fend off such cases.

Handelsblatt has seen an application by VW’s firm Göhmann for the court to reject the shareholders' case as “irrelevant or simply unfounded” because the management board didn’t act in a premeditated way and didn’t misinform investors.

Volkswagen declined to comment for this story.

It’s unclear if the automaker's legal maneuver will succeed.

Separately, it’s becoming clear that VW’s own belt-tightening, evident at the Geneva Motor Show last week with a radically slimmed-down presentation devoid of the usual glitz and glamor, may also dent its soccer sponsorships.

VW makes financial contributions to no fewer than 20 of 36 clubs in the top two German soccer leagues, the first and second Bundesliga. That’s going to change this summer.

Handelsblatt has learned that VW is ending its sponsorship of top club Schalke 04, currently 4th in the Bundesliga, and of 1860 München in the second league.

There was no confirmation from either club. Sources close to VW merely said the company was considering making cuts, without saying where.

The sums involved aren’t huge in either case — probably in the low single-digit millions of euros — but it’s a sign that VW is saving money wherever it can.

 

Martin Murphy is an editor with Handelsblatt and specializes in the automotive, defence and steel industries. Volker Votsmeier is an editor with Handelsblatt's investigative reporting team. To contact the authors: [email protected] and [email protected]