Former Chief of Volkswagen Is Charged With Fraud

Posted May 3, 2018 8:59 p.m. EDT

The Volkswagen emissions scandal reached the highest echelons of the company Thursday after its former chief executive was charged with conspiracy in the company’s rigging of diesel vehicles to feign compliance with federal pollution standards.

The indictment of the former executive, Martin Winterkorn, who resigned shortly after the emissions scandal erupted in September 2015, significantly raises the stakes for Volkswagen.

The charges contradict the German carmaker’s steadfast insistence that no members of its management board were involved in the emissions fraud. They also weaken the company’s defense in a related suit by shareholders — potentially adding billions of dollars to the scandal’s already astronomical cost.

Despite President Donald Trump’s efforts to water down auto emissions standards, the indictment indicates that the Justice Department continues to pursue an investigation of Volkswagen that began during the Obama administration. And it provides a rare spectacle: a chief executive facing criminal charges.

“If you try to deceive the United States, then you will pay a heavy price,” Attorney General Jeff Sessions said in a statement Thursday. “These are serious allegations, and we will prosecute this case to the fullest extent of the law.”

Many in the industry have long said it was implausible that the illegal software could have been installed in millions of diesel models worldwide for nearly a decade without the knowledge of top management — especially at Volkswagen, known for its top-down culture.

The accusations against Winterkorn will raise further questions about the thoroughness of Volkswagen’s internal investigation of the wrongdoing. Volkswagen never made the findings public, although it had promised to do so.

And the indictments provide ammunition to critics who say Volkswagen continues to rely on managers who held high-ranking positions while the wrongdoing was taking place, and who worked closely with Winterkorn. They include Hans Dieter Pötsch, chairman of Volkswagen’s supervisory board and former chief financial officer, and Rupert Stadler, head of the Audi division.

“Volkswagen continues to cooperate with investigations by the Department of Justice into the conduct of individuals,” the company said in a statement Thursday. “It would not be appropriate to comment on individual cases.”

The grand jury indictment was unsealed in U.S. District Court in Detroit only hours after Volkswagen’s annual shareholders meeting in Berlin. Many shareholders complained about a lack of accountability at the top.

Among the speakers was Michael Viehs, associate director of responsibility at Hermes EOS, a firm in London that represents the interests of large investors. In an interview before the meeting, Viehs referred to surveys showing that even Volkswagen employees are concerned that not enough has been done to create a healthier corporate culture.

“This is a little bit concerning that, three years after the emissions scandal became public, employees say they don’t see that much progress in overhauling the corporate culture,” he said.

Herbert Diess, who was appointed chief executive last month, acknowledged in a speech to shareholders that Volkswagen had a lot of work to do to prevent future scandals.

“Volkswagen has to become more honest, more open, more truthful,” he said. “Every large organization experiences unethical conduct and instances of noncompliance. But to speak plainly: We clearly had too much of that going on until recently.”

Winterkorn, 70, is believed to be in Germany, which does not normally extradite its citizens. He has repeatedly denied wrongdoing, including in testimony before the German parliament.

But the U.S. case probably increases the chances that Winterkorn will face charges in Germany. Prosecutors there are conducting their own wide-ranging investigation, which included a raid on offices of the company’s Porsche division last month.

Last year, Volkswagen pleaded guilty to U.S. charges that included conspiracy to violate the Clean Air Act. But the company blamed lower-level managers for the wrongdoing and maintained that no members of its top management had been involved.

If it is proven that Winterkorn was a party to the conspiracy, Volkswagen would be significantly more vulnerable to lawsuits brought by shareholders who accuse top managers of shirking their obligation to inform them of the risks the company was taking. The shareholders are seeking some $10 billion in damages, which would be on top of the roughly $26 billion in fines and civil damages that the carmaker has already paid. According to the indictment, Winterkorn was informed in early 2014 that U.S. regulators were asking why Volkswagen diesel vehicles had produced low emissions during laboratory tests but drastically higher emissions on the road.

The indictment said Winterkorn had approved plans to conceal from regulators the true reason for the discrepancies: The cars were equipped with software, known as a defeat device, that could detect when emissions tests were underway. If the car was being tested, it deployed equipment to keep emissions within legal limits. At other times, the pollution controls were disabled or only partly deployed to protect components from wear.

Winterkorn continued to endorse efforts to cover up the wrongdoing until shortly before a Volkswagen employee disobeyed orders and revealed the defeat device to California regulators in August 2015.

Winterkorn, known as an unforgiving boss who loudly berated subordinates who failed to meet his standards, was Volkswagen’s chief executive for eight years and an influential executive for two decades. He was a protégé of Ferdinand Piëch, the Porsche family scion who dominated the company for two decades.

Winterkorn joins five other defendants, all former managers who worked in engine development, who were charged last year. They are accused of conspiring to defraud the U.S. government in its enforcement of pollution standards under the Clean Air Act, and conspiring to commit wire fraud and to violate the Clean Air Act itself.

In pleading guilty to felony charges last year, Volkswagen admitted that it had illegally sold nearly 600,000 vehicles equipped with defeat devices. It paid $4.3 billion in penalties and was put on probation for three years, with a former federal prosecutor, Larry D. Thompson, overseeing its compliance with ethics and regulatory measures.

A former Volkswagen manager in Michigan, Oliver Schmidt, was sentenced in December to seven years in prison for his role in the scheme. A former Volkswagen engineer who worked in California, James Liang, was sentenced last year to 3 1/2 years in prison.

In addition, U.S. authorities are seeking extradition of Zaccheo Giovanni Pamio, 61, a former Audi manager who is in Germany. As an Italian citizen, Pamio does not enjoy the same immunity from extradition that the German defendants do.

German prosecutors have made no formal charges but are expected to do so by the end of the year. Two suspects are in custody after judges determined there was a risk they might flee or obstruct the investigation. More than 50 people are suspected of wrongdoing, according to German authorities.