VW Is on a Roll As $4.3 Billion DoJ Dieselgate Deal Nears

Jan 10, 2017

Volkswagen is on the up.

The German company looks likely to have pipped Toyota to the title of the world's biggest-selling automaker in 2016, despite a never-ending stream of dispiriting about its "Dieselgate" scandal.

The reason is simple: in 2015, the German group had two separate crises. In addition to the diesel woes, it had a shockingly bad year in China, its most important market outside Europe, where it initially missed a shift in consumer preferences towards sport utility vehicles and crossovers.

In 2016, as Dieselgate dominated the news flow in the U.S., VW was quietly putting its problems in China behind it: sales there rose over 12% to 3.98 million – almost 40% of a global sales total of 10.312 million, according to figures released by the company Tuesday.

To judge by the stock market's reaction, that operational turnaround is much more important than the final acts of the Dieselgate scandal. The company's preferred stock in Frankfurt hit its highest level since the diesel scandal broke on Tuesday in reaction to the sales news.

Dieselgate, when it broke, had initially wiped over 60 billion euros ($64 billion) off VW's market value. But analysts' forecasts of the likely actual damage soon coalesced around 30 billion euros. So far this year, the company has paid some $17.5 billion to settle civil claims from the Justice Department and environmental regulators, and smooth the ruffled feathers of its U.S. dealers and customers. It's also paid smaller fines in countries such as South Korea, which also last week became the first country to jail a VW executive in connection with the scandal.

Read More: Inside Volkswagen’s Emissions Scandal

But the general market view is that the bulk of the financial damage from Dieselgate is now accounted for, and that outstanding lawsuits against it will still leave the total bill well short of that 30 billion euro benchmark.

How far short is another question. The company cleared up one of the biggest remaining variables on Tuesday, announcing that it is in advanced talks to settle the Department of Justice's criminal investigation with a guilty plea and fines of around $4.3 billion (bringing the total in U.S. settlements to $21.8 billion). That will ensure that Dieselgate hits this year's earnings too, but the company doesn't yet know how much by.

Resolving the U.S. criminal investigation still leaves it facing another one in Germany, as well as civil actions in both countries from investors about its failure to warn them in a timely manner of the extent of the scandal. A German Musterklage, a lawsuit representing an individual shareholder that could be used as a template for thousands more, was filed by law firm MyRight and accepted by a court in Braunschweig last week.

Tuesday's announcement of an imminent settlement appears to have been precipitated by a growing body of evidence from former employees who had agreed to turn state's evidence.

On Monday, VW's former head of compliance in the U.S., Oliver Schmidt, was arraigned and charged with conspiring to defraud U.S. regulators on the basis of new FBI evidence. The charges unsealed in a Florida court included a direct assertion that top management had chosen to continue lying to regulators even after Schmidt and others had briefed them on the issue of 'defeat devices' (designed to trick emissions testers) in July 2015.

James Liang had become the first VW employee to turn state's evidence in September as part of a plea bargain. But on Tuesday, the German newspaper Sueddeutsche Zeitung reported that at least five VW employees have now turned state's evidence, and that two of them have alleged that both VW brand head Herbert Diess and former Chief Executive Martin Winterkorn knew about the issue no later than July 2015.

Winterkorn had resigned within days of the scandal breaking in September 2015. He has always insisted that he knew nothing of the defeat devices, and that line has been central to VW's strategy of damage limitation ever since, a strategy that has deflected blame on to a small group of supposedly rogue engineering executives below the C-suite.

A spokeswoman for VW said in an e-mailed statement that "Volkswagen continues to cooperate with the Department of Justice as we work to resolve remaining matters in the United States. It would not be appropriate to comment on any ongoing investigations or to discuss personnel matters.”

VW's statement Tuesday confirmed that it would be agreeing to a "statement of facts" about its deception. That will be closely parsed by the investors suing VW for details of who knew how much, when. That will have a big bearing on efforts to prove management complicity in keeping bad news from the stock market.

It's still too early to say how much more such an admission could cost it. Germany has no tradition of handing down punitive fines to companies that are important employers and taxpayers. However, U.S. investors were told last week by federal judge Charles Breyer that their complaint against VW could be heard in a U.S. court too, with a nod to the German's group's New York-listed depositary receipts.

As such, those hoping that VW could walk away from Dieselgate with substantial change out of 30 billion euros might still end up disappointed.

UPDATE: This story has been updated to include the news of Volkswagen's statement about talks to settle the DoJ's criminal case.

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