(Bloomberg) -- A veteran Volkswagen AG engineer pleaded guilty to conspiring to defraud U.S. regulators and customers, the first criminal charge in the Justice Department’s year-long investigation into the company’s rigging of federal air-pollution tests.
The engineer, James Liang, who entered his plea in Detroit federal court on Friday, is cooperating with the investigation, increasing pressure on higher-ranking officials of the company. His lawyer said that Liang was “one of many at Volkswagen” involved in the scheme.
Although the company has already agreed to settlements that may total $16.5 billion to get 482,000 emissions-cheating diesel cars off U.S. roads., the Justice Department is continuing its criminal inquiry into the company’s manipulation of emissions systems.
“Almost from the beginning of VW’s process to design its new ‘clean diesel’ vehicles, Liang and his fellow co-conspirators designed these VW diesel vehicles not to meet U.S. emissions standards, but to cheat the testing process,” prosecutors contend in an indictment unsealed on Friday.
The government described a 10-year conspiracy begun by Volkswagen employees as soon as they realized they couldn’t meet new U.S. emissions standards. As the emissions-control devices began to age, Liang and others doubled down and programmed the devices to run dirty for longer, hoping to avoid warranty claims. Later, when confronted by regulators, they tried to cover up their actions.
The conspiracy described by the government will make it difficult for the company to dismiss the scheme as only the work of rogue engineers and will complicate its efforts to revive its scandal-tainted business.
VW’s shares fell as much as 1 percent on Friday and closed down 0.83 percent at 124.85 euros in German trading.
Liang, 62 years old, spent 25 years with Volkswagen in Wolfsburg, Germany, before moving to the U.S. in 2008, according to an indictment unsealed on Friday. As the head of the Diesel Competence unit in the U.S., he reported to Germany, prosecutors said.
“I know VW did not disclose the defeat device to U.S. regulators in order to sell the cars in the U.S.,” Liang told the judge in court on Friday. “That’s what makes me guilty.”
In 2006, while still in Wolfsburg, Liang and his co-conspirators began to design a “clean diesel” engine for sale in the U.S. -- a project known within VW as “US ’07.” From the beginning, prosecutors said, Liang and his co-conspirators realized they couldn’t design a diesel engine that could both meet U.S. emissions standards and also satisfy customers.
So, prosecutors wrote, they “designed, created and implemented a software function (the “defeat device”) to cheat the standard U.S. emissions test.” The defeat device software -- which they called “acoustic function,” “cycle beating software” or “emissions-tight mode” -- was designed to recognize when the car was undergoing U.S. emissions testing and switch to a lower-emissions setting.
Those engines went on sale in beginning in the 2009 model year. In September 2013, Liang exchanged an e-mail with a VW colleague about preparing one of the vehicles for a test. “If this goes through without problems, the function is probably truly watertight! ;.) ” the employee wrote to Liang, according to the indictment.
At one point, VW’s warranty costs rose as the emissions systems’ parts and components failed. Some of Liang’s colleagues believed that was because the cars would sometimes operate on the road in the low-emission mode, the government said in Liang’s plea agreement.
Liang and his co-conspirators updated the software in 2014. VW fraudulently told customers that the update was intended to improve the cars, the government said, when in fact it was intended to keep the cars running in dirtier “defeat” mode on the road.
By 2014, e-mails between Liang and other employees were asking how to respond to regulators in California concerned about large discrepancies between the cars’ emissions in the lab and on the road. A VW employee sent Liang and other workers an e-mail in 2015 for suggestions. In German, that employee wrote: “The key word ‘creativity’ would be helpful here.”
Later, the employees received a group update saying that California was waiting for answers. “We still have no good explanations!!!!!” the employee wrote.
Liang admitted on Friday to a charge of conspiracy to commit fraud against U.S. regulators and customers and to violate the Clean Air Act. He faces a maximum penalty of five years in prison and a fine of up to $250,000, although cooperators often receive leniency at sentencing. He is to be sentenced on Jan. 11.
Liang “is coming here to Detroit today to accept responsibility for his actions,” said his lawyer, Daniel Nixon. “He is remorseful.”
The information Liang is providing to prosecutors could speed the investigation of the company. Settlement talks in the criminal matter could be resolved by the end of the year, according to two people familiar with the probe. Germany and South Korea are conducting separate criminal probes of the company.
Jeannine Ginivan, a Volkswagen spokeswoman, declined to comment on Liang’s guilty plea.
The Justice Department a year ago put in place a policy requiring that all corporate cases include a plan to charge individuals -- a policy that came amid criticism that company officials weren’t being held accountable even as the businesses paid billions of dollars in fines. The department has said companies that want credit for cooperating with investigators must name individuals whom they consider responsible for any misconduct.
“Today’s criminal charges are just the beginning in the VW case,” said David Uhlmann, a law professor at the University of Michigan in Ann Arbor and a former head of environmental prosecutions at the Justice Department. He said he expects more charges against individuals. “What is less clear is whether there are more individuals in the United States who can be charged or whether everyone else is a German national who would need to be extradited to be brought to justice.”
Top-ranking auto executives have rarely been prosecuted in their companies’ scandals. In cases brought against General Motors Co. for ignition problems and Toyota Motor Corp. for uncontrolled acceleration, no high-ranking executives were accused of wrongdoing in the U.S.
VW still faces lawsuits by at least five states and by investors and dealerships in the U.S. There are parallel lawsuits, including consumer complaints, in Germany, all of which could raise the scandal’s price tag for the automaker.
Future expenses could include hundreds of millions of dollars in fees for the lawyers who secured the multibillion-dollar deal for car owners.