VW emissions scandal: VW knew of defeat device in May 2014

VW admits that the issue was “treated as one of many product issues facing the company” and “did not initially receive particular attention at the management levels of Volkswagen”. At this time, it was the responsibility of a division of VW called ‘Committee for Product Safety’ (APS).

VW notes that deficiencies between test and real-world figures are common in the industry, as are recalls, but the company “expressly regrets that, looking back, the situation is different”.

Subsequent tests from CARB found VW’s fixes proposed from December 2014 as insufficient. The APS set up its own diesel task force in summer 2015, and as such VW retained US law firm Kirkland & Ellis to advise it on US emissions law.

The issue was then discussed by VW employees on 27 July 2015 on the periphery of a meeting that included Winterkorn and VW brand chief Herbert Diess on damage and product issues, although the exact meeting contents are still being reconstructed.

On this meeting, VW adds: “It is not clear whether the participants understood already at this point in time that the change in the software violated US environmental regulations. Mr Winterkorn asked for further clarification of the issue.”

A month later, VW technicians “gave a full explanation of the technical causes for the irregularities discovered regarding the emission of nitrogen oxides in the US to lawyers from the Volkswagen Legal Department as well as to the US attorneys from Kirkland & Ellis”.

At this point, VW management realised that “the modification of the engine management software constituted a prohibited defeat device under US law” and VW said that it would “communicate this information transparently to CARB and EPA”. This happened at a meeting on 3 September 2015, which Winterkorn was informed on the following day.

VW was told that past violations of this type resulted in sanctions that weren’t that high for a company of VW’s size. The highest fine had been $100million in a case involving 1.1 million vehicles in 2014, resulting in a fine of around $91 per vehicle. As such, VW then expected that disclosing the software modification, making the vehicles compliant with law again and paying fines in line with recent precedent could resolve the matter.

By early September 2015, VW believed the issue was still largely “limited to the United States”. However, this quickly changed.

On 18 September 2015 a ‘Notice of Violation’ was served on VW, which surprised the company due to the discussions that had been going on with authotities behind the scenes. VW then decided to set up a ‘group internal audit’ to “pursue an urgent investigation of the facts”.

VW made an “ad hoc announcement” to the markets on 22 September 2015, the earliest date it could, according to the company, reliably inform on the global risks of the scandal when a “still preliminary, factual basis had been determined” for the first time.

VW notes that its stock price was only impacted from 18 September when the US environmental violation was announced, and it had no prior knowledge that this would happen due to the behind-the-scenes discussions. And at that point, it still believed the number of cars affected to be a “manageable” one of around 500,000 units, and that fines of a maximum of around “low three digit million” amount would be imposed in the US, in line with recent other cases.

“Additionally, to the best knowledge, the diesel matter appeared to be an issue that could be contained by measures that were common in such cases, including effective technical solutions, and, thus, appeared to be neutral with regard to the company’s stock price,” said VW, which added that the maximum $18billion fine discussed from 18 September “had never been fully applied in other cases to any extent”.

“Once an initial reliable data basis regarding the global risks had been established after the ‘Notice of Violation’, the company promptly published its ad-hoc announcement on 22 September 2015,” VW added.

VW says that after internal and external legal examinations it “confirms its belief that its management board duly fulfilled its disclosure obligation under German capital markets law”.

As such, VW believes that lawsuits from shareholders to be “without merit, since any ad hoc disclosure obligation requires that the persons responsible for the fulfillment of this obligation obtain knowledge of facts relevant for the stock price and can assess the economic effects of those facts”.