VW Gets Mixed Messages as Judges Weigh $10.4 Billion Suit

(Bloomberg) -- Volkswagen AG received mixed messages as German judges signaled their initial thoughts on a 9 billion-euro ($10.4 billion) lawsuit by thousands of investors who claim the carmaker misinformed them on the diesel scandal.

On the first day of the hearings, the court indicated that some claims may be too old to be considered. But in a less positive opening gambit, judges said they must review whether VW should have disclosed the scandal as early as May 2014 or even the second half of 2012.

Investors are claiming VW should have released information about its use of a so-called defeat device as early as 2007 or in the years up to until July 2012. But they may not have a case because of time-bar rules and because they may not be able to prove the required recklessness of the non-disclosure, Presiding Judge Christian Jaede said after opening the hearing on Monday.

But the court may conclude that VW should have told markets in May 2014 about an American probe based on a study showing that its cars emitted way too much pollution, Jaede said. The study was done by the International Council on Clean Transportation.

VW would then have the burden to prove that its executives hadn’t acted in a “grossly negligent” way by not disclosing it at the time, he said. The judges will also look at whether VW was allowed to hold the information back to avoiding hurting talks with the authorities.

Rigged Engines

The judges will also review whether VW had to disclose that it used rigged diesel engines between July 2012 and May 2014 before the probe started, said Jaede, calling this point “a not so unimportant issue.”

For that period, VW couldn’t argue that it needed to hold back the release of information because of talks with regulators, which only started after the ICCT study was published, Jaede said.

The view of the three judges hearing the case is preliminary and may still change, he said.

"We have to look at a lot of crucial issues on this case and we can’t give you a conclusive answer to all of them today," said Jaede. "It’s also not clear at this point whether and when we will hear witnesses."

Investors argue VW failed to give an early warning about its failure to comply with U.S. emission standards and the resulting American regulators’ probe, which triggered a collapse in VW’s stock after it was disclosed three years ago.

Institutional Investors

Enraged shareholders filed the first cases in October 2015. A year later, a wave of institutional investors followed, including BlackRock Inc., the California Public Employees’ Retirement System and Allianz Global Investors. The U.S. is also a plaintiff in the case. The proceedings were moved to the Braunschweig civic center to make space for the hordes of lawyers as well as investors who want to attend. But more than two-thirds of seats in the audience weren’t taken.

Volkswagen admitted in late 2015 that it rigged diesel vehicles to cheat emissions tests in the U.S. and that about 11 million vehicles worldwide could be affected. VW has calculated the scandal’s overall financial impact at 27.4 billion euros. That includes payouts to U.S. customers, states and regulators and a 1 billion-euro settlement with German prosecutors.

VW and Porsche Automobil Holding SE, which is also a defendant in the case, both said they informed investors correctly at each stage.

One of the key issues of the dispute is whether any payouts require that VW’s board members knew about the cheating or whether it’s enough that managers ranking right below them were aware, said Jaede. When settling with U.S. regulators, VW admitted that some non-board executives were aware of the cheating, but said that board members didn’t learn about it before well into 2015.

"This is one of the major contested issue of the case," said Jaede.

Jaede said that for now, the judges remain split about this issue but will make up their minds to find a common view after getting more written arguments from both sides. Only then they will also decide on whether to hear witnesses. The burden of proof that the board was clueless is on VW, the judge said.

The judge also said the court isn’t inclined to buy one of VW’s main defense argument. VW has long said it didn’t have to disclose anything before the scandal broke. According to the company, the announcement of the U.S. Department of Justice probe in September 2015 signaled a change of how it prosecutes these sort of violations, including much stiffer penalties than ever before, and that caused the shares to tank.

Judge Jaede said VW reacted with its own ad hoc statement the following trading day, on Sept. 21, but didn’t include any provisions for penalties. The stock also dropped the next day, showing that he markets assumed the issue was worse than what the DOJ statement had indicated.

The court will resume hearings on Tuesday.

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

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