Volkswagen’s Dieselgate Scandal Just Got Bigger

November 7, 2016, 7:29 PM UTC

Two new developments in 48 hours have ripped new holes in Volkswagen’s efforts to present itself as a company trying to come clean about its diesel emissions scandal. At least one of them may have serious financial consequences for Europe’s largest carmaker.

First, California regulators have discovered a new software package in certain vehicles made by VW’s high-end subsidiary Audi that engineered artificially low readings of carbon dioxide emissions in test conditions.

Second, German prosecutors have widened their criminal investigation into whether VW misled investors by concealing the extent of the ‘dieselgate’ scandal to include Hans Dieter Pötsch, who was promoted to be supervisory board chairman last year after the scandal broke. Having been a key member of the group’s management board all through the years when VW was selling its tainted cars in the U.S., Pötsch was a controversial choice at the time—and now in the crosshairs of German prosecutors.

The first incident, if confirmed, would further erode VW’s defense that the scandal was plotted by a handful of rogue engineers at its headquarters in Wolfsburg. Even worse, it implicates people who were supposed to have been brought in to clean up the mess. The newspaper Bild am Sonntag dug up minutes of a meeting in February 2013 at which Axel Eiser, Audi’s head of powertrains, allegedly pressed VW executives to deliver the software as soon as possible:

“When will we have the cycle-optimized shift program?…(the program) “needs to be configured to be 100% active on the dyno, but only 0.01% in the hands of the customer.”

Bild reported that Audi had continued to sell cars that ran the software until May of this year, nine months after the scandal broke. That is less scandalous than it sounds. U.S. regulators are much less bothered with carbon dioxide emissions than with nitrogen oxides. However, it does at the very least underline how much VW swallowed its own propaganda when it came to designing emissions control systems.

EU legislation, which was written under the heavy influence of the auto industry, allows software to shut off emissions control systems in cases where to run them would damage the engine. Bild reported that the software package was designated as “warm-up” mode, but actually kicked in if it realized that no-one was turning the steering wheel. That suggests it was really only looking to recognize lab conditions, not looking to protect an engine on a cold morning in the Alps.

Click here for Fortune’s in-depth investigation of the Volkswagen affair.

Embarrassingly, the same Axel Eiser used such technicalities to defend the company in the EU Parliament in July (the German-language stream can be seen here), saying that the company’s critics didn’t understand the complexity of all the factors involved.

“Many self-appointed NGOs are not necessarily in a position to carry out measurements on the ground taking into account all the relevant aspects,” Eiser said in a hearing where he and other VW executives took pains to stress how they had learned the lessons of the scandal.

VW Brass Looking Tarnished

But the more damaging revelation of the weekend could yet be that prosecutors in Brunswick (Braunschweig) have now formally extended their criminal investigations to Pötsch. That investigation focuses on whether VW responded adequately to warnings from an internal investigator to CEO Martin Winterkorn over a year before the issue became public.

It isn’t clear whether Winterkorn read or understood the e-mailed warnings, but the 16-month gap between them and the day VW admitted the problem to investors is the subject of a class-action lawsuit by investors seeking up to $9 billion in damages. That suit is probably the biggest remaining financial risk to VW now that it has settled its issues with U.S. regulators for $15 billion. On Sunday, VW said that it “reaffirms its belief that the Volkswagen Board of Management duly fulfilled its disclosure obligation under German capital markets law.”

VW’s controlling shareholders–the Porsche and Piëch families along with with the German state of Lower Saxony–elevated Pötsch to the chairmanship of the board when Winterkorn, their intended candidate, was forced to resign. The appointment of such a senior insider–along with Porsche head Matthias Müller as CEO–immediately provoked suspicions that the company was more concerned with covering its tracks than with getting to the bottom of the matter, as it promised to do in public. Subsequent disclosures, like that of a whistleblower at VW’s U.S. operations who alleges the company fired him after he warned IT employees against destroying evidence, haven’t exactly helped create an image of honesty either, even if the employee in question, Daniel Donovan, subsequently withdrew the suit.

VW has commissioned a thorough investigation of the affair from law firm Jones Day, whose team will present their report to a small board committee headed by Pötsch. VW had originally promised to publish at least some preliminary findings in time for its annual shareholder meeting in May, but subsequently changed its mind, saying it would prejudice ongoing investigations.


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