Damning SEC Charges on Volkswagen ‘Clean Diesel’ Fraud

AutoInformed.com on VW Diesel fraud.

This is a company threatening crisis. Unlike Europe and other parts of the world where automakers tell regulators and governments what to do, U.S. regulators mostly –  real news here – follow the law.

A quick summary for AutoInformed’s viewers of the substantial SEC charges of the Volkswagen Diesel Crimes.* (Volkswagen Pleads Guilty on Felony Charges in Dieselgate) Given the level of detail thus far revealed, they are difficult if not impossible to defend against in our view. See for yourself:

  1. From at least 2007 through September 2015, VW perpetrated a massive fraud. VW, including its CEO Martin Winterkorn and numerous other senior officials, repeatedly lied to and misled United States investors, consumers, and regulators as part of an illegal scheme to sell its purportedly “clean diesel” cars and billions of dollars of corporate bonds and other securities in the United States. VW marketed these bonds and other securities without disclosing that its “clean diesel” cars used defeat devices to conceal substantial emissions problems.

  1. Winterkorn and other VW executives were made aware of the defeat device as early as November 2007, during a meeting with VW engineers, to discuss the emissions problems with VW’s “clean diesel” vehicles. At least one meeting participant warned that putting the existing vehicles on the road in the U.S. would damage VW’s reputation if the vehicles’ high emissions were later discovered, those concerns were ignored.
  1. VW subsequently sold in the U.S. hundreds of thousands of “clean diesel” vehicles containing the defeat device. Meanwhile, it raised billions of dollars from U.S. investors to fund its expanding sales of “clean diesel” cars across the globe. Years later, when U.S. authorities began investigating emissions problems with VW vehicles, the company misled government investigators, concocted a sham software fix, and destroyed thousands of incriminating documents and other evidence.
  1. Eventually, U.S. regulators exposed the long-running fraud and ensuing cover-up, and VW was forced to admit its criminal behavior. On March 10, 2017, VW pled guilty in a United States District Court to conspiracy to commit fraud, obstruction of justice, and importing goods by false statements.
  1. Although the seeds of VW’s “clean diesel” fraud were sown in 2005, the scheme firmly took root in early 2007. That is when defendant Martin Winterkorn was named CEO and Chairman of VWAG’s Board of Management. Winterkorn, who had spent decades climbing the corporate ladder at VW, announced a bold and aggressive plan to make VW the biggest, most profitable, and most environmentally-friendly car company in the world by 2018.
  1. The success of Winterkorn’s plan – “Strategy 2018” – depended in large part on VW’s ability to develop, market, and sell its diesel vehicles, particularly in the United States. Known historically for being more powerful and fuel efficient than their gasoline counterparts, diesel engines emitted far more harmful pollutants into the environment. Diesel vehicles, therefore, had difficulty complying with the strict vehicle emissions laws in the United States and were unpopular with American consumers.
  1. But VW claimed to have developed a revolutionary solution to this problem— the “clean diesel” During Winterkorn’s reign as CEO, VW unleashed a global marketing campaign touting its groundbreaking “clean diesel” engines and its supposed commitment to reducing toxic vehicle emissions. The successful production and sale of cars with “clean diesel” engines was the cornerstone of Winterkorn’s plan to dominate the world auto industry.
  1. To finance their ambitious Strategy 2018, VW and Winterkorn needed money. And they relied on the U.S. capital markets to get it. From 2010 to 2015, VW sold billions of dollars of corporate bonds and asset-backed securities (“ABS”) in the United States. In its offering documents, VW stressed its continuing commitment to and dependence upon developing energy-efficient vehicles and the reduction of vehicle emissions. VW assured bond underwriters that its cars complied with all applicable emissions laws and regulations.
  1. But it was all a lie. VW’s “clean diesel” engines were a fraud. They did not exist. In fact, the engines emitted pollutants, including nitrogen oxides (“NOx”)—described by the U.S. Environmental Protection Agency (“EPA”) as a family of poisonous, highly reactive gases—into the environment at levels nearly 40-times greater than U.S. emissions limits.
  1. To hide this fact, VW installed illegal software (called a “defeat device”) in 11 million diesel vehicles sold worldwide, including more than 580,000 in the United States. The defeat device software recognized when the car was being tested on a treadmill and then reduced the car’s emissions to legal levels. When the defeat device sensed the car was being driven in normal road conditions, it deactivated the car’s emission control system, causing it to emit excessive amounts of NOx gas into the environment.
  1. For years, VW lied and made misleading omissions to conceal the existence of a defeat device. VW lied about its cars’ compliance with environmental regulations and its commitment to protecting the environment. It lied to U.S. investors, who then paid artificially inflated prices for VW’s bonds and ABS. These investors did not know that VW was lying to consumers to fool them into buying its “clean diesel” cars and lying to government authorities in order to sell cars in the United States that did not comply with U.S. emission standards. The entire time, Winterkorn and other senior officials at VW knew the truth: VW’s “clean diesel” engine was a sham.
  1. VW’s elaborate fraud started to unravel in March 2014. During an industry conference held in San Diego, researchers from West Virginia University disclosed the results of a study commissioned by the International Council on Clean Transportation (“ICCT Study”). Using equipment capable of testing a car’s emission levels while it was being driven in normal road conditions (as opposed to on a treadmill), the researchers announced that two of the three cars they tested discharged NOx pollutants at levels greatly exceeding legal limits

Word of the ICCT Study spread quickly throughout VW. By May 2014, multiple internal memos were circulating inside VW among its most senior officials, including Winterkorn, detailing the depth of the problems VW was facing:

  • VW’s “clean diesel” engines were emitting deadly NOx at levels nearly 40-times legal limits;
  • there was no way to fix the problem; and
  • U.S. regulators were investigating and would look for a defeat device.

13. By VW’s own assessment, its potential financial liability for the fraud exceeded $20 billion. VW faced a choice. It could admit its scheme or cover it up. It chose a cover-up.

AutoInformed.com - VW Diesel Scandal*From AutoInformed January 2018

Significant Automotive Stories and Trends of 2018 and 2019

So here comes AutoInformed on significant automotive related stories of the 2017 year and predicted future implications, with our wry awareness, as always, that columnists conduct their education – sometimes demonstrably not perfectly informed – in public.

  • Technology, no surprise, (with more technology issues farther down) dominates the ongoing Dieselgate scandal at Volkswagen Group with its larger implications. It is now clear that a cartel of German automakers deliberately violated U.S. and EU emissions regulations to sell dirty, law-breaking diesel technology under the guise of “clean.”
  • In the latest Dieselgate technology twist [Dieselgate Once Again – Porsche to Fix Dirty V6 Diesels] with its resulting seemingly unlimited criminal and financial charges still to come, Porsche is now recalling dirty diesel engines years after they were knowingly sold. Back at the very end of July 2017, Porsche in an arrangement with the German Federal Motor Transport Authority, aka KBA, recalled Cayenne 3-liter V6 diesel models in the EU6 emissions class. The profitable subsidiary of the Volkswagen Group – which has produced the largest toxic emissions fraud in history by using so-called defeat devices or software – claimed to have noticed “irregularities in the engine control software during internal investigations.” About 21,500 vehicles in Europe from model years 2014 to 2017 are affected, including 6,000 in Germany. Some are in the U.S.
  • An embarrassed Porsche stressed during the recall that it does not develop or manufacture diesel engines itself – Audi, also part of the VW Group, supplied the dirty engines. Diesel Cayenne models are badge-engineered trucks that take advantage of a European loophole with taxpayer subsidies reducing the price of diesel fuel. Now, a software fix is available, one that should have been in place during what was a deliberately cheating certification.
  • In an unexpected turn of the track, both Audi and Porsche have withdrawn from the top class in FIA endurance racing – LMP1 (Le Mans prototype arguably the most exciting from of racing that previously existed) that they recently dominated [Porsche to Show New 919 Hybrid For Le Mans at Monza; Ford Going back to Le Mans with Four GT Cars; Audi Dumps World Endurance Cup Racing and Le Mans after 18 Years of Success for Boring Formula E?24 Hours of Le Mans in 2030 – Intriguingly Unpredictable] due to the expense of the endurance racing programs ($100,000,000 annually?) and the folly of promoting non-clean diesel engines [Hybrid Vehicles Overtaking Diesels on Fuel Economy]. Add the seven years in prison sentence of Oliver Schmidt, an ex-Volkswagen manager in Michigan who claims he was used by VW, and a cost at least +$20 billion in fines and settlements thus far means dieselgate lives on. This will continue and likely reach top management – German car companies don’t make such decisions at lower levels as anyone who covers German companies knows – before dieselgate dies.

About Ken Zino

Ken Zino is an auto industry veteran with global experience in print and electronic media. He has auto testing, marketing, public relations and communications expertise garnered while working in Asia, Europe and the U.S.
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