VW Dealt Blow in Investors’ Diesel Case as Judge Questions Memo

(Bloomberg) -- Volkswagen AG was dealt a series of setbacks on the second day of hearings in a 9 billion-euro ($10.4 billion) investor lawsuit tied to the diesel emissions scandal as judges questioned some of the carmaker’s key arguments.

Presiding Judge Christian Jaede in Braunschweig took issue with VW’s longstanding claim that it put off disclosure of the U.S. diesel probe because its lawyers had said fines were unlikely to affect the share price. The judge cited an August 2015 letter by law firm Kirkland & Ellis, and said the lawyers tried to be vague but discussed the potential penalties.

"By no means could you infer from that memo that VW could except leniency," Jaede said on Tuesday. "The court leans to the view that you couldn’t expect a fine that’s not material to the stock price, given that VW had concealed the manipulations for more than a year in the talks with the authorities."

Investors are claiming VW should have released information about its use of a so-called defeat device that rigged emissions tests as early as 2007. The scam first became public on Sept. 18, 2015, when U.S. authorities disclosed their probe and VW issued formal notification to the markets four days later. VW has calculated the scandal’s overall financial impact at 27.4 billion euros.

VW also failed to convince the court that it kept the issue secret to avoid jeopardizing talks with the U.S. authorities, according to the judge. Such a defense is only convincing if the company had fully and swiftly cooperated with the U.S. once the leadership learned about it. When exactly top executives were first informed, isn’t yet clear and VW must prove it was as late as September 2015, he said.

The investors’ argument that former Chief Executive Officer Martin Winterkorn may have known as early as 2008 about the rigging, isn’t simply made up or only fishing for more facts, Jaede said. He cited a speech Winterkorn made in Vienna in April of 2008 about the prospects of the diesel technology in the U.S. market, saying that suggests that Winterkorn had at least looked into the details of the engines.

VW has the opportunity to submit more filings to respond to the court’s concerns, Jaede said. The court’s views are preliminary and may change before a final ruling. Hearings continue on Sept. 17.

Jaede also referred to a court filing by Quinn Emanuel, a law firm representing a group of investors in the case, which cites a 2007 campaign by German environmental group Deutsche Umwelthilfe DUH. The group back then had already criticized the emissions of diesel cars. Winterkorn at the time replied to DUH’s concerns, suggesting that the then CEO also took a deeper look into the matter at the time, according to the judge.

Another issue for judges concerns a crucial event in July 2015, when Winterkorn and Herbert Diess, now VW’s CEO, attended a meeting that discussed technological problems. Plaintiffs claim that both were informed about the widening diesel problems at the session, a regularly scheduled event that was known as the "damage table."

While VW has said the discussions can’t be reconstructed due to conflicting accounts of what happened, Jaede complained that the company failed to explain in detail who said what. The judge asked the company to provide more information on the meeting.

"A righteous board member, who is interested in cooperating with the authorities, would have thoroughly investigated the issue and informed them fully right away," Jaede said. "It seems that didn’t happened."

The court yesterday had said that claims based on VW actions before July 2012 are likely to be dismissed because of the statute of limitations. Some of the events after July 10, 2012, may be crucial, though, and investors may be able to invoke them for the suit, the judges said.

Several events after July 2012 may have warranted disclosure of the diesel problems to capital markets, Jaede said Tuesday. The closer to Sept. 18, 2015, the clearer the duty, since the magnitude of the case was becoming hard to ignore. The clearest one was Aug. 19, 2015, when VW admitted to a California regulator that it had cheated and lied, according to the judge.

The case is: OLG Braunschweig, 3 Kap 1/16.

(An earlier version of the story was corrected to amend the date of a speech in the sixth paragraph.)

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