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VW Can’t Escape the Diesel Scandal Fallout

(Bloomberg Businessweek) -- A popular 1960s ad for the VW Beetle claimed that the diminutive car “runs, and runs, and runs, and runs… .” The same could be said of the diesel emissions scandal that’s plagued the automaker for the past three years. In the coming months, Volkswagen AG will have to deal with at least a half-dozen court actions stemming from its use of software to cheat on diesel emission tests.

After putting aside some $32 billion to settle lawsuits and pay damages, the automaker faces more than $10 billion in further claims from disgruntled investors and customers—as well as untold damage to its reputation as top executives risk being hauled before the court. “The investigations are grinding away at VW like sand in a machine,” says Uwe Wolff, a crisis communications consultant in Berlin. “It’s a huge burden for the company, and it’s absorbing too much of its energy.”

The legal wrangling kicked off on Sept. 10, almost three years to the day after the first revelations that VW had installed software designed to clean up the emissions from its diesel engines when the car was being tested. Officials in the city of Braunschweig, a half-hour’s drive from Volkswagen’s headquarters in Wolfsburg, had to construct a makeshift courtroom in the local civic center to accommodate the legions of lawyers, shareholders, and media expected for a €9 billion ($10.4 billion) lawsuit by investors who say they lost money because VW failed for months or even years to disclose the cheating.

VW Can’t Escape the Diesel Scandal Fallout

The key questions are when top managers knew about the manipulation and when VW was obligated to inform the public of the problem. The earlier that was, the more money shareholders could get, because payouts would hinge on when investors bought or sold shares. “VW knew by 2008 that they wouldn’t be able to meet U.S. pollution standards,” Andreas Tilp, the lawyer for the lead plaintiff in the case, told the court. “They should have told everybody, ‘We won’t make it.’ ” The judges said that 2012 or later was a more likely benchmark, potentially limiting the number of shareholders who might collect damages. VW says the relevant top executives only learned about the problems with U.S. regulators in 2015 and that attorneys had told the managers any fines would probably be manageable and wouldn’t have a dramatic effect on the share price.

Across town on the same day, a labor court started hearing a lawsuit by a manager fired in August because of her role in the scandal. The company said she failed to alert senior executives to the engine manipulation and destroyed evidence after the scandal came to light. The manager, whose full name can’t be published under German law, says her termination was unfair because other officials who were aware of the cheating still have their jobs. Her case is one of five similar lawsuits the same court will hear in coming months, including one by Oliver Schmidt, a former VW manager convicted of fraud in the U.S. last year and serving a seven-year sentence in Michigan.

The greatest risk to VW’s reputation comes from another case pending in Braunschweig. Prosecutors are investigating whether Chief Executive Officer Herbert Diess, Chairman Hans Dieter Pötsch, and former CEO Martin Winterkorn manipulated capital markets by delaying an announcement of the U.S. probe that ultimately revealed the cheating. Pötsch was VW’s chief financial officer at the time and responsible for communication with investors, and Diess was on the board. While all three executives say they’re innocent, people familiar with the matter say they’re likely to face charges in the next several months. If that were to happen, it would be “extremely painful” for VW, says Peter Kasiske, a professor of criminal law at Augsburg University. “The reputational damage would be immense, especially for a huge company like VW that’s always on the media’s radar.”

Such cases often take more than a year in Germany, with defendants required to be present for hearings at least once or twice a week. Prosecutors are letting defendants’ lawyers review their files, an indication that they plan to proceed with an indictment. People close to the company say that if the charges appear substantial, Diess and Pötsch may be asked to quit. But such a move could have reverberations in the investor case: If VW were to acknowledge that the two had hidden the cheating from shareholders, it might be interpreted as admitting a violation of disclosure rules.

VW Can’t Escape the Diesel Scandal Fallout

Winterkorn and top VW engineers face a separate fraud probe by Braunschweig prosecutors. That investigation, which began shortly after the scandal broke in 2015, seeks to unravel the mechanics of the cheating and determine responsibility. This summer, defense attorneys got access to the findings. That probe parallels similar inquiries into the Porsche and Audi brands, both of which also used the cheating software in their cars. One key figure—former Audi boss Rupert Stadler—is in pretrial detention as part of the inquiry, but he’s retained his seat on VW’s management board (though he’s been suspended from his position at Audi).

Volkswagen customers are jumping in as well. More than 20,000 German buyers of VW diesels with the cheating software have filed lawsuits seeking compensation, saying the resale value of their cars has tumbled. In November a measure the legal community has dubbed the “VW Law” takes effect, allowing consumer claims to be bundled into one lawsuit, something like class actions in the U.S. German lawmakers this year rushed to pass the regulation to allow drivers who hadn’t yet filed to join the action before a deadline for claims at yearend. Government officials expect that the law will prompt thousands of others to file cases as well. Resolving the customer lawsuits and the myriad other legal issues stemming from the diesel cheating will likely take many more years, says Marc-René Tonn, an analyst at M.M. Warburg & Co. “Volkswagen is struggling to get into calmer waters,” he says. “The additional financial impact will be not that high, but the topic will continue to hang over the company.” —With Christoph Rauwald

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