Volkswagen CEO, other Execs Knew of Diesel Scandal Months – if Not Years – Before Public Exposure of the Fraud

The VW diesel scandal continues to admit high levels of noxious publicity fumes.

Volkswagen AG submitted a statement of defense today to the Braunschweig District Court that admitted top executives knew of the diesel emission fraud months before it was publicly known. It was a response to German shareholder lawsuits on the violation of disclosure obligations under the capital markets law. Similar to the U.S. Security and Exchange rules that require the filing of Form 8K when a development that could material effect the financial results of the firm, Germany also has regulations calling for public disclosure.

The German defense of the ongoing diesel scandal appears weak to AutoInformed (caveat: we know little about German law) because former CEO Martin Winterkorn on 27 July 2015 discussed with Volkswagen employees the diesel emissions problem at a regular meeting about “damage and product issues.” Herbert Diess, Volkswagen passenger car CEO, was also present. Memos were sent more than a year earlier.

It’s amazing how isolated, insulated and tone deaf senior German exectives are to public opinion. Worse their dealers are paying the price as sales slump. (See also VW Group CEO Martin Winterkorn Resigns, More VW Exec Changes Due to Diesel Emissions)

It was only months later on 18 September 2015 that the emissions non-compliance became known because of U.S. actions over emissions violations from EPA (Environmental Protection Agency) and CARB (California Air Resources Board). In the ensuing months the diesel scandal has grown, as have the number of vehicles involved to at least 11 million. Year-to-date VW brand sales at 22,00o are off 14% in the record setting U.S. market. Worse, in U.S. litigation over the fate of 600,000 cars,  U.S. District Judge Charles Breyer last month set a 24 March deadline for the automaker to state whether it has found a fix that is acceptable to American authorities. VW might be able to manipulate EU emissions regulations and control German courts, but it can’t touch a sitting Federal judge, one appointed for life.  (See VW, Audi, Porsche V6 Diesels added to EPA, CARB Probes)

Initial Indications of Diesel Emissions Fraud

The EPA and CARB actions the judge was referring to came about after a CARB received indications of irregularities from a study published by the International Council on Clean Transportation (ICCT) in May 2014.

On 23 May 2014, a memo about the ICCT study was sent to Martin Winterkorn, then-Chairman of the Management Board of Volkswagen AG. On 14 November 2014, Mr. Winterkorn received another memo that reported, among other things, on several then current product defect cases and referred to a cost framework of ~€20 million for the diesel emissions fraud in North America.

German Lawsuits

In the German matter at hand, Volkswagen claims its Management Board “fulfilled its disclosure obligation under German capital markets law.” Ongoing shareholder lawsuits vehemently disagree. Aside from the ruinous effect on VW shares, the company still faces an $18 billion buy viagra pills dollar fine in the U.S. for non-compliance of emissions laws. This does not include global fines or the cost of repairing or buying back defective Volkswagen, Audi and Porsche diesel vehicles.

In the U.S. at the end of September Hagens Berman, which filed the first class-action lawsuit against Volkswagen AG’s U.S. manufacturer and distributor, expanded its national suit alleging that the automaker deceived consumers by using software to cheat emissions tests, allowing its “Clean Diesel” vehicles to emit nitrogen oxides (NOx) at illegal levels. At least three more class action suits have since been filed by other firms that see a fee bonanza in the making. (see Legal Challenges Grow in VW Diesel Recall)

Why the Dirty Diesel Scandal is a Problem

Volkswagen in 2005 started a major “Clean Diesel” campaign in the United States. It basically centered all its marketing efforts around the now demonstrably false claim. At that time VW decided to develop a new diesel powertrain unit with the EA 189 type diesel engine that has high performance and cost-efficient production in Europe.

However, U.S. emissions limits for emissions of pollutants are stricter than Europe where the automakers effectively control regulators. Under the strictest standard in the U.S. at the time, only 31 mg/km of nitrogen oxides (NOx) were allowed to be emitted, about six times less than under the EU5 standard then applicable.

When designing modern diesel engines, technicians and engineers face the scientific challenge that any measure to reduce nitrogen oxides has negative effects with regard to other emissions, say CO2 emissions, which are directly related to fuel economy – and fuel economy was the reason VW was promoting diesels in the U.S. Dirty diesel meant higher fuel economy ratings, but this came about only by deliberately and flagrantly violating U.S. and California emission regulations. TILT!

VW claims, “In the ensuing period, in order to resolve this conflicting objective satisfactorily within the time-frame and budget of the EA189 project, according to the current state of knowledge, a group of persons – whose identity is still being determined – at levels below the Group’s Management Board in the powertrain development division, decided to modify the engine management software. With this software modification, emissions values were generated in bench testing that differed substantially from those under real driving conditions.”

Sounds like hooey to us.

VW Group Financial Results and Annual Meeting Delayed

As previously announced, Volkswagen will report preliminary results of an investigation it commissioned by law firm Jones Day are due in the second half of April. A lot can change between then and now. The way things are going, there wont be changes for the good of VW’s corporate, engineering or good citizenship reputations.

The beleaguered company has postponed its annual meeting. New dates for the Annual Press Conference (previously planned for March 10, 2016) as well as the Annual General Meeting of shareholders, (previously planned for April 21, 2016) will be announced “as soon as possible.”