Investor test case in VW emissions scandal goes to court
BERLIN — Volkswagen AG could have to pay up to US$11 billion in damages related to its diesel emissions-cheating scandal if a German court sides with investors in a lawsuit that goes to trial next week.
The suit represents the most significant outstanding legal challenge still facing the company in the wake of the three-yearold scandal.The case that will start being heard on Monday in a court in Braunschweig, near Volkswagen’s headquarters in Wolfsburg, is a test suit. If successful, it could unleash a barrage of similar claims related to the emissions cheating, which has already cost the company about $27 billion in fines, penalties and compensation.
On Sept. 18, 2015, U.S. environmental authorities accused Volkswagen of violating of environmental law after it admitted to installing illegal software on more than 500,000 diesel vehicles sold in the U.S. It later admitted to installing the software on nearly 11 million vehicles worldwide, the bulk of them in Europe.
The allegations sent Volkswagen shares falling 37 per cent from the closing price the day before the announcement to €106 on Sept. 22, when Volkswagen first issued a statement to financial markets warning of risks to the company’s earnings from potential penalties in the aftermath of the U.S. Environmental Protection Agency’s complaint.
Shareholders who suffered considerable losses from the sudden price drop now claim in the lawsuit that management waited too long to warn them of the risks and are seeking billions of dollars in compensation.
“This is the largest outstanding legal risk for the company,” said Arndt Ellinghorst, automotive analyst at Evercore ISI, a London-based brokerage.
A decision in favour of investors, including some of the largest investment funds in the world, is far from certain. In addition to the complex technical issues to be resolved, German courts rarely grant large awards for damages in civil litigation cases.
“It will be difficult to prove that management deliberately misinformed the market in order to manipulate the share price,” Mr. Ellinghorst said.
Because Germany doesn’t allow U.S.-style class action lawsuits, the case being heard in Braunschweig is a test case, brought by Deka Investment GmbH, one of the biggest investment funds in Germany.
The outcome of Deka’s lawsuit would inform rulings on around 1,668 additional lawsuits pending that seek up to €9.2 billion ($10.7 billion) in damages from Volkswagen.
In Volkswagen’s rebuttal, viewed by The Wall Street Journal, the company’s lawyers argue that management couldn’t have foreseen the enormous fines and penalties sought by U.S. authorities for the company’s violations. An analysis by the company’s lawyers at the time concluded that based on precedent, potential penalties would be so low as to have “no relevance for financial markets.”
“There was a paradigm shift in the Volkswagen case,” said a person familiar with Volkswagen’s defence, adding that the EPA has “changed its way of handling such cases.”
The largest fine imposed on an auto company for environmental violations until then was in 2014, when the EPA and U.S. Justice Department imposed a fine on Hyundai Motor Co. of $91 per vehicle, or about $100 million in total.
In January 2017, Volkswagen agreed to plead guilty and pay $4.3 billion in criminal and civil penalties to resolve the Justice Department’s investigation.