Mighty Volkswagen faces bleak future after deceit on 500 000 polluting cars

There’s something really sick about Volkswagen being caught cheating the US’s Environmental authorities. For six years, we now hear, the German manufacturer’s diesel cars have been breaking the well defined rules on how much pollution a vehicle should be pumping into the atmosphere. This was not some technical mistake. Models sold in the US were designed with sophisticated algorithms whose sole purpose was to deceive those testing the equipment. The company’s share price plunged 20% on the news yesterday, partly because it forces a recall of almost 500 000 cars, introduces the potential of $18bn in fines.– and possibly billions more in forced buy-backs from defrauded customers. But the long-term reputational damage stretches far beyond what we’ve just seen. Would you buy another Volkswagen? Or Audi? You’ll soon have your pick as thousands of Americans go to court in an effort to extract financial compensation from the company. – Alec Hogg

Attendees take part in the 2016 Volkswagen Passat reveal in the Brooklyn borough of New York September 21, 2015. Volkswagen AG's U.S. head on Monday said he was confident the German automaker would restore customer confidence after it "totally screwed up" by rigging emissions tests of diesel-powered vehicles in the United States. Michael Horn vowed to make amends at a lavish event in New York to promote the 2016 Passat where the carmaker doled out German beer, pretzels and "cheddary ale fondue" to dealers and the media, before a performance of rockstar Lenny Kravitz. REUTERS/Darren Ornitz
Attendees take part in the 2016 Volkswagen Passat reveal in the Brooklyn borough of New York September 21, 2015. Volkswagen AG’s U.S. head on Monday said he was confident the German automaker would restore customer confidence after it “totally screwed up” by rigging emissions tests of diesel-powered vehicles in the United States. Michael Horn vowed to make amends at a lavish event in New York to promote the 2016 Passat where the carmaker doled out German beer, pretzels and “cheddary ale fondue” to dealers and the media, before a performance of rockstar Lenny Kravitz. REUTERS/Darren Ornitz

by Del Quentin Wilber, Naomi Kresge and Richard Weiss

(Bloomberg) — The U.S. Justice Department is conducting a criminal investigation of Volkswagen AG’s admission to systemically cheating on federal air pollution tests, according to two U.S. officials familiar with the inquiry.

Volkswagen said last week it’s cooperating with regulators probing gaps between emissions on the road and lab tests on some diesel models, affecting more than half a million cars. The U.S. officials described the inquiry Monday on condition of anonymity because it’s a continuing investigation.

The admission has marred the reputation of the world’s largest automaker and sent its shares Monday to the lowest level in more than three years. Volkswagen’s admission puts pressure on Chief Executive Officer Martin Winterkorn to repair the damage as the company faces the possibility of prosecution or regulatory action in the U.S. and Europe.

The investigation comes as the Justice Department says it’s seeking to increase prosecutions of individuals for corporate crimes. The case may test the department’s ability to hold executives accountable after lawmakers have complained that senior Wall Street executives weren’t sent to prison after the 2008 financial crisis.

Criminal inquiries can take months or years and lead to charges against individuals and companies. They can also result in fines and deferred-prosecution agreements, such as the one recently struck with General Motors Co., to spur companies into improving their behavior and addressing problems revealed during the investigations.

VW Admission

Justice Department spokesman Wyn Hornbuckle declined to comment.

Volkswagen admitted on Sept. 18 to fitting some of its U.S. diesel vehicles with software that turns on full pollution controls only when the car is undergoing official emissions testing, the Environmental Protection Agency said Friday. Affected are diesel versions of the VW Jetta, Golf, Beetle and Passat and the Audi A3.

The violations could result in as much as $18 billion in fines, based on the cost per violation and the number of cars.

Diesel and VW’s reputation for German engineering were cornerstones of Winterkorn’s effort to catch up in the U.S. market. Winterkorn, whose contract renewal is scheduled for a supervisory board vote on Friday, now faces a serious challenge to his leadership, said Arndt Ellinghorst, a London-based analyst for Evercore ISI. “This latest saga may help catalyze further management changes at VW,” Ellinghorst wrote in a note Monday. ‘Deeply Sorry’ VW said it’s cooperating with regulators probing gaps between emissions on the road and lab tests on some diesel models. According to the EPA, the company insisted for a year that discrepancies were mere technical glitches.  

Winterkorn, who has led VW since 2007, was forced to halt sales of the cars on Sunday and issue a public apology, saying he’s “deeply sorry” for breaking the public’s trust and that VW would do “everything necessary in order to reverse the damage this has caused.”

Top Volkswagen supervisory board members will convene on Wednesday, according to two people with knowledge of the plans, who asked not to be named because the meeting is private.

The Wolfsburg, Germany-based automaker’s preferred shares plunged almost 19 percent to 132.2 euros in Frankfurt, the lowest since July 2012. Monday was the first trading day after Volkswagen’s admission.

House Probe

A House Energy and Commerce subcommittee will hold a hearing the matter in the coming weeks, said committee Chairman Fred Upton, a Michigan Republican, and Pennsylvania Republican Tim Murphy, chairman of the oversight and investigations subcommittee.

“The American people deserve answers and assurances that this will not happen again,” the lawmakers said in an e-mailed statement.

During normal driving, the cars with the software — known as a “defeat device” — would pollute 10 times to 40 times the legal limits, the EPA estimated. The discrepancy emerged after the International Council on Clean Transportation commissioned real-world emissions tests of diesel vehicles including a Jetta and Passat, then compared them to lab results.

President Barack Obama’s spokesman, Josh Earnest, wouldn’t comment directly on the EPA’s investigation, but he said the White House is paying close attention.

“It’s fair to say we’re quite concerned about some of the reports we’ve seen” and the president is “well aware” of the situation, he said.

The U.S. accusations are “grave” and must be clarified swiftly, said Stephan Weil, prime minister of the German state of Lower Saxony, which owns 20 percent of Volkswagen’s voting shares. “Possible consequences can be decided after that.”

The European Commission said it’s taking VW’s cheating seriously and is in contact with U.S. regulators and the company about details of the case. German financial regulator Bafin also said Monday it’s looking at possible rules violations.