VW Executives and Ex-CEO charged with market manipulation

Herbert Diess, Volkswagen’s chief executive, at the Frankfurt International Motor Show in Germany on Sept. 9, 2019. German prosecutors on Sept. 24, charged Diess, Hans Dieter Pötsch; the chairman of Volkswagen’s supervisory board, and Martin Winterkorn; a former chief executive, with stock market manipulation for not alerting shareholders when they learned authorities were investigating the company’s diesel emissions.
Image: Felix Schmitt/The New York Times

FRANKFURT, Germany — Volkswagen was supposed to turn the corner this year from the shadow of a costly diesel emissions scandal, with a new emphasis on electric vehicles, a new logo and a new commitment to ethical behavior.

But on Tuesday, German prosecutors charged the automaker’s two highest-ranking executives with stock market manipulation for failing to inform shareholders of an investigation in the United States that led to its conviction for emissions cheating.

The allegations against Hans Dieter Pötsch, chairman of Volkswagen’s supervisory board, and Herbert Diess, chief executive, mean that the world’s largest automaker will be led by criminal defendants as it tries to refashion itself as a climate-friendly manufacturer of affordable electric cars. The prosecutors, in Braunschweig, also charged Martin Winterkorn, a former Volkswagen chief executive.

The day brought bad news for another German automaker, too, again tied to an emissions scandal. Daimler, the maker of Mercedes-Benz cars, agreed to pay a fine of 870 million euros ($957 million) in Germany for selling diesel cars that polluted more than allowed. The company has disclosed that it is also under investigation in the United States.

The legal actions were a further setback to the German car industry, the backbone of the economy, when it is struggling with declining sales and a transition to electric vehicles.

At Volkswagen, Pötsch and Diess indicated that they would stay in their jobs, and there was no sign of any move by other members of Volkswagen’s supervisory board or its largest shareholder to oust either of them. Both men, who could be sentenced to up to five years in prison if convicted, denied the charges against them, as did Winterkorn.

Pötsch, who was chief financial officer of Volkswagen throughout the period when the company was installing illegal emissions cheating software in millions of vehicles, is a close confidant of the Porsche and Piëch families, which own a majority of Volkswagen’s voting shares.

Volkswagen’s other major shareholder is the German state of Lower Saxony, which owns 20% of the voting stock. Outside shareholders are heavily outnumbered and have little influence.

A spokeswoman for Stephan Weil, the state prime minister and a member of the Volkswagen supervisory board, said through a spokeswoman that he would have no immediate comment.

Diess’ lawyers issued a statement in which he vowed “to carry out his duties in the company with absolute commitment.”

Pötsch’s lawyer, Norbert Scharf, said in a statement that his client “has nothing to blame himself for.”

It is unusual but not unprecedented for managers of blue-chip German companies to keep their jobs when facing criminal charges. Josef Ackermann remained chief executive of Deutsche Bank after he was charged with approving excessively high bonuses to managers of a company where he was a member of the supervisory board. The charges were dropped in 2006 after he agreed to pay several million euros in a settlement.

Senior managers of Volkswagen have faced criminal charges before. In the early 1990s, the chief purchasing officer was accused of corporate espionage against General Motors, his former employer. In 2007, the head of personnel was convicted of supplying prostitutes and Viagra to labor leaders at company expense.

Volkswagen has acknowledged that its company culture had become toxic. Under a 2017 plea agreement that resolved criminal charges in the United States, Volkswagen promised to change its ways.

Overseeing the ethics drive is Hiltrud Dorothea Werner, a member of Volkswagen’s management board. She defended the accused executives on Tuesday.

“The company has meticulously investigated this matter with the help of internal and external legal experts for almost four years,” Werner said in a statement. “The result is clear: The allegations are groundless.”

But the case could also have financial consequences for Volkswagen. Shareholders have sued, seeking damages that could reach $10 billion.

At issue is when the Volkswagen executives learned that the company was under investigation in the United States for deploying software that produced artificially low emissions in diesel cars when they were being tested. German law requires senior managers to warn shareholders of events that could affect the stock price.

Prosecutors said Tuesday that Winterkorn had known no later than May 2015 that the company could face serious penalties in the United States. Pötsch was informed at the end of June 2015 and Diess at the end of that July, prosecutors said.

The three defendants withheld information from shareholders in order to protect the Volkswagen share price, prosecutors said.

Volkswagen shareholders did not learn of the cheating until the Environmental Protection Agency issued a notice of violation in September 2015. Volkswagen’s share price fell by almost half, and the cost of the scandal has since topped $30 billion in court settlements and fines.

The allegations are a particular blow to Diess, a former BMW executive who arrived only months before the EPA publicly accused Volkswagen of cheating. He has been trying to restore Volkswagen’s image by changing the authoritarian, win-at-all-costs company culture that helped foster the scandal.

This month, he presided over the flashy introduction at the Frankfurt International Motor Show of a battery-powered hatchback, the ID.3. Volkswagen has staked its future on what it says will be a family of moderately priced electric vehicles, making emission-free transportation accessible to middle-class buyers. Volkswagen also introduced a cleaner logo.

“Neither the facts nor the law justify the charges,” lawyers for Diess said in a statement. “Newly arrived in July 2015, Dr. Diess was not in any position to foresee the magnitude of the economic consequences actually resulting from the diesel emissions fraud.”

Diess received moral support on Tuesday from Elon Musk, chief executive of Tesla. “Herbert Diess is doing more than any big carmaker to go electric,” Musk wrote on Twitter. “The good of the world should come first. For what it’s worth, he has my support.”

The charges also put pressure on Pötsch, who was chief financial officer when the scandal came to light in 2015 and was responsible for communicating with shareholders. As supervisory board chairman, he oversees senior management and presides over the annual shareholders meeting.

“The indictment against Mr. Pötsch is unfounded,” his lawyer said in a statement. “In the summer of 2015, no obligation to inform the capital market arose at any time even from a purely capital market law perspective.”

Winterkorn’s lawyer, Felix Dörr, said in a statement that the former chief executive had trusted assurances from Volkswagen employees that excess emissions in diesel cars were the result of a technical problem, which could be worked out with regulators in the United States.

Volkswagen later admitted that it had programmed the vehicles to recognize when an emissions test was underway and to crank up pollution controls so the cars were deemed compliant. On the road, the cars polluted far more than allowed.

Winterkorn “had no prior knowledge of the intentional use of forbidden motor management software in diesel passengers cars in the U.S.,” the statement said. Winterkorn, who resigned days after the scandal burst into public view, already faces fraud charges in connection with the emissions cheating, which he has denied.

Prosecutors had previously disclosed that they were investigating the three executives, as well as dozens of other suspects, for possible involvement in the emissions deception. The cases in Germany are likely to take years to resolve and will continue to corrode the company’s reputation.

The Volkswagen case has focused attention on the degree to which nearly all carmakers in Europe built diesel cars that flouted emissions rules in one way or another.

European laws do not generally provide for fines as hefty as those that Volkswagen paid in the United States, and it is difficult for car owners in Europe to sue for damages. But sales of diesel cars, once the most popular engine option in Europe, have plunged.

Daimler said it would not contest the fine imposed by prosecutors in Stuttgart. The company, which is based in Stuttgart, was accused of failing to adequately supervise employees who, in 2008, secured regulatory approval for 684,000 vehicles that did not meet emissions standards.

In a statement on Tuesday, the Stuttgart state’s attorneys office said it continued to investigate unnamed Daimler employees who were suspected of illegally manipulating engine-control software in diesel vehicles.