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October 7th, 2015
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German Auto Fraud Hits US; Volkswagen Stock Prices Plunge - Lawsuits Filed Over "Diesel Dupe"

German Auto Fraud Hits US; Volkswagen Stock Prices Plunge - Lawsuits Filed Over

For automobile lovers around the world, just hearing the name “Volkswagen” evokes an iconic image of precise German engineering and a storied legacy of the world’s most popular car.

But now, the German car giant is enmeshed in an international scandal that can only be dubbed as the “diesel dupe.” After investigations into the matter, Volkswagen has admitted to intentionally rigging emissions tests that are required by the Environmental Protection Agency (EPA) in order to place a priority on selling more cars in the United States.

Having launched a mammoth marketing campaign that touts the ostensibly low emissions of its vehicles, it appears that Volkswagen circumvented governmental testing. The EPA reported that detection of testing was accomplished by the manufacturer placing devices in their diesel engine vehicles; thus changing the performance accordingly to improve results.

The findings of the EPA cover approximately 482,000 cars sold by Volkswagen in the US, including their name brands of Jetta, Beetle, Golf and Passat as well as the Audi A3, that is manufactured by VW.

In a shocking admission, VW said that about 11 million cars worldwide are fitted with the so-called "defeat device".

Although the precise details of the sophisticated detection system have not been revealed, the EPA has said that the computer software located in the engines could detect scenarios of testing by monitoring the speed of the vehicle, the operation of the engine, air pressure and even the positioning of the steering wheel.

According to a Reuters report, “the device appears to have put the vehicle into a sort of safety mode in which the engine ran below normal power and performance. Once on the road, the engines switched from this test mode.”

This essentially means that the engines emitted nitrogen oxide pollutants up to 40 times above what is allowed in the US.

Meanwhile, at VW an internal investigation has been launched and its CEO Martin Winterkorn issued an apology on behalf of his company saying that they have "broken the trust of our customers and the public".  The VW America chairman added that, “we’ve totally screwed up.”

As a result of the growing scandal, Winterkorn resigned his post last Wednesday and four senior executives at VW are expected to be ousted. The VW board has named Matthias Mueller, 62, the head of its Porsche division as CEO.

"Under my leadership, Volkswagen will do all it can to develop and implement the strictest compliance and governance standards in the whole industry," Mueller said in a statement.

As if VW did not already have enough troubles, it was announced last Friday by Germany’s transportation minister that the car company also rigged emission tests on about 2.8 million diesel cars in that country, making it six times as many as it admitted to cheating on in the US.

Reuters reported that shares in the German company, which had started to steady after sharp falls earlier this week, were down 4.5 percent after Bloomberg also reported that executives in Germany controlled aspects of the manipulated U.S. tests, citing three people familiar with the U.S. business.

The EPA has the authority to fine companies up to $37,500 for each vehicle that contravenes the agency’s standards and late last week they said that VW could face civil fines of up to $18 billion for violations of the U.S. Clean Air Act.

Currently, speculation is growing that the Justice Department will initiate a criminal probe and legal filings emanating from company shareholders and consumers have already been promulgated.

Thus far, there have been 89 lawsuits initiated against VW across the country. According to a CNN report, the vast majority of the suits filed have been on behalf of car owners who have proffered the argument that their vehicles have been significantly devalued because of VW’s illegal actions. The suits are seeking class action status, and according to CNN, could provide verdicts in the hundreds of millions of dollars. It was also reported that Toyota agreed to pay $1.1 billion to settle a class action suit with car owners who were beset with an unintended acceleration problem.

Another suit has been filed on behalf of those in the US that are VW shareholders. "The senior executives named in this lawsuit misrepresented the very nature of the product they were selling," said Darren Robbins, the Atlanta attorney who filed the shareholder suit. "When the truth about the product was revealed, the stock dropped precipitously. That's an easy story to get a jury to understand."

Robbins said lack of knowledge of the scheme by top executives is not a defense in a shareholder suit.

"When representations are made to the investors about a core product, the notion that some of them said they didn't know those representations were false is reckless in and of itself," he said.

CNN reported that Robbins' firm also expects to file a separate suit on behalf of Volkswagen dealers. Mark Dearman, the attorney working on the dealership lawsuit, said they would be seeking compensation for lost value of both new and used cars in dealers' inventories as well as damage to their reputation that could hurt sales in the future.

Additionally, investigations on VW’s rigging are being opened in such countries as the UK, Canada, Italy, South Korea and France. Australia is monitoring the situation.  France's finance minister Michel Sapin said a "Europe-wide" probe was needed in order to "reassure" the public.

With about 11 million VW diesel cars potentially affected, further costly recalls and refits are possible, according to a Reuters report. In the days subsequent to the breaking of the scandal, investors sold off VW stock when assessing the financial and reputational implications to the world’s largest auto company. The dumping of VW stock drove the company’s share price down to a shocking 17.1 percent early last week.

"This is a mess. The CEO's resignation makes it more of a mess because it's a rudderless ship," said Richard Torrenzano, CEO of the Torrenzano Group, a firm specializing in crisis management for corporations.

It's important to remember that Volkswagen was already in trouble before the term "defeat device" started trending on Google and social media.

Reuters also reported that Christian Klingler, a management board member and head of sales and marketing is leaving the company, although VW said this was “part of long-term planned structural changes and was not related to recent events.”

California's Air Resources Board is now looking into other manufacturers' testing results. Ford, BMW, and Renault-Nissan said they did not use "defeat devices", while other firms had yet to respond or simply stated that they complied with the laws.

The UK trade body for the car industry, the SMMT, said: "The industry acknowledges that the current test method is outdated and is seeking agreement from the European Commission for a new emissions test that embraces new testing technologies and is more representative of on-road conditions."

According to Reuters, diesel sales were already slowing, so the VW scandal came at a bad time. "The revelations are likely to lead to a sharp fall in demand for diesel engine cars," said Richard Gane, automotive expert at consultants Vendigital.

"In the US, the diesel car market currently represents around 1% of all new car sales and this is unlikely to increase in the short to medium term. However, in Europe the impact could be much more significant, leading to a large tranche of the market switching to petrol engine cars virtually overnight."


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