What Did Volkswagen Know and When Did It Know It?

SAN FRANCISCO (CN) — A federal judge said Tuesday that U.S. shareholders need more proof to show that Volkswagen knew it was facing fines for its emissions cheating scandal as far back as 2008.
Did U.S. regulators know the company was using illegal defeat devices in its “clean diesel” vehicles back in 2008, and did Volkswagen know the government was onto them?

That’s the critical question to determine whether the German automaker was on notice about its potential liability long before its scandal was made public in 2015, U.S. District Judge Charles Breyer said during a Tuesday hearing.

“What did the regulators tell Volkswagen about what they knew Volkswagen was doing?” Breyer asked during a hearing on VW’s motion to dismiss a U.S. shareholder class action.

The shareholders claim documents exist, somewhere, that show the California Air Resources Board questioned Volkswagen about its diesel emissions in 2008, demanded a statement affirming that no defeat devices were used, and threatened to fine Volkswagen $5,000 per vehicle.

However, the only evidence of those documents is an October 2015 article by Germany’s largest daily newspaper, Süddeutsche Zeitung.

“What weight do I give to an allegation in a newspaper of which there is no evidence to corroborate?” Breyer asked.

If the allegation is true, it would strengthen arguments for holding Volkswagen liable for public statements it issued between November 2010 and January 2016. The shareholders say those statements deceived investors and inflated the company’s stock price.

Investors’ attorney James Harrod told Breyer he should interpret the allegations in the complaint as true, even if they are based on an unconfirmed news report.

Volkswagen attorney Robert Giuffra disagreed, saying the standard for alleging scienter, or knowledge of wrongdoing, requires more than mere citation to a news article.

“They could have used the Freedom of Information Act to get documents from CARB,” Giuffra said. “Instead, they relied on speculation.”

Turning to liability of Volkswagen’s senior officers, Breyer said he would accept, as sufficient, claims that Volkswagen’s senior officers could be held liable for misleading investors.

The shareholders seek damages from former Volkswagen CEO Martin Winterkorn, former Volkswagen of America CEO Michael Horn, and former VW board member and senior manager Herbert Diess.

Volkswagen attorneys argued Tuesday that the shareholders failed to show Diess and Horn were “control persons” who exercised the kind of power over the company necessary to establish liability for securities fraud.

“They failed to identify specific circumstances of control,” attorney Joseph Gonzalez said of allegations against his client, Horn, who was president of Volkswagen’s U.S. subsidiary from January 2014 to March 2016.

Harrod countered that Horn admitted in testimony to Congress in October 2015 that he was informed of “possible emissions non-compliance” in March 2014, but that he allowed the company to keep issuing false financial statements and marketing materials after he learned the truth.

Gonzalez replied: “Testifying to Congress doesn’t show control.”

Breyer had said as the hearing began that the shareholders’ complaint would “support liability if proven” against the individual defendants.

The shareholders claim Volkswagen underreported its liabilities at 277 million Euros in October 2015 after the scandal broke. To date, Volkswagen has paid more than $20 billion in civil settlements and criminal fines in the scandal — nearly 70 times more than 277 million Euros.

The company installed defeat devices, which mask nitrous oxide pollution during emissions test, in some 11 million vehicles worldwide. Volkswagen sold nearly 600,000 of the falsely marketed “clean diesel” vehicles in the United States.

Harrod is with Bernstein Litowitz Berger Grossmann in New York; Giuffra with Sullivan and Cromwell in New York; and Gonzalez with Schertler & Onorato in Washington, D.C.

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