VW struggles to escape diesel scandal fallout

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 has plagued the automaker for the past three years.

In the coming months, Volkswagen Group 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 $32b to settle lawsuits and pay damages, the automaker faces more than $10b in 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 started 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 Brunswick, 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 €9b ($10.4b) lawsuit by investors who say they lost money because VW failed for months or even years to disclose the cheating.

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 would not 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 would not 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 not 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 Brunswick. Prosecutors are investigating whether CEO Officer Herbert Diess, Chairman Hans Dieter Poetsch, and former CEO Martin Winterkorn manipulated capital markets by delaying an announcement of the U.S. probe that ultimately revealed the cheating.

Poetsch 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 are innocent, people familiar with the matter say they are 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 Poetsch 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.

Winterkorn and top VW engineers face a separate fraud probe by Brunswick 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 pre-trial detention as part of the inquiry, but he has retained his seat on VW's management board (though he has 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 had not yet filed to join the action before a deadline for claims at the end of the year. 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-Rene 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."