VW Fights Investors as Diesel-Scandal Cost Could Top $35 Billion

September 8, 2018, 7:19 PM UTC

Volkswagen AG’s bill for cheating on diesel emissions could potentially top 30 billion euros ($35 billion) as a legal battle with thousands of investors heats up in the German carmaker’s own backyard.

A court in the town of Braunschweig, just over 20 miles from VW’s Wolfsburg headquarters, has scheduled a series of hearings starting on Sept. 10 in a case combining claims by some 4,000 shareholders demanding 9 billion euros in compensation.

They argue VW failed to warn them soon enough about an investigation by U.S. regulators, who triggered a collapse in the stock after they announced their diesel probe three years ago.

Enraged shareholders filed the first cases in October 2015. A year later, a wave of institutional investors followed, among them BlackRock Inc., the California Public Employees’ Retirement System and Allianz Global Investors. 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.

Volkswagen admitted in late 2015 that it rigged diesel vehicles to cheat emissions tests in the U.S. and that about 11 million 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.

Complete Victory

Should the investors score a complete victory, that toll would grow by a third. While a full award is unlikely and the company hasn’t made any provisions for the risks, VW has added 3.4 billion euros to contingent liabilities in its financial statements for that litigation — potentially bringing the overall cost above 30 billion euros.

“There’s clearly a risk that VW may have to pay something in the end, and I would scale it at about 50 percent,” said Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler who recommends buying the stock. “Claiming 9 billion euros is certainly overblown. I would see the risk rather at 3 or 4 billion euros.”

To avoid a costly scenario, VW has been toiling for almost three years to deflect the actions. The company said said it denies the allegation and says the suit is unfounded.

The hearings will kick off a new season of legal skirmishes showing how deeply VW is still mired in the diesel scandal — above all in Germany. Here are some of the other issues that are likely to emerge over the coming months:

On Sept. 10, the day the investor suits hearings start, a labor court will hear a case by a manager VW fired in August over the diesel scandal Oliver Schmidt, a former VW manager serving a seven-year prison term in the U.S., is suing for unfair dismissal and the Braunschweig labor court will hear his case at some point in the future Braunschweig prosecutors are wrapping up their two probes targeting almost 50 suspects, all of them linked to VW; indictments are likely to be filed early next year In November, a law will take effect allowing the consolidation of claims by customers who want to make VW take back their diesel cars or pay compensation. The new form of group action aims to make it easier for car owners to file claims and may bring another wave of suitsIn Monday’s case, the Braunschweig court is hearing the dispute under a special procedure akin to a U.S. class action, that centralizes the evidence phase for all suits pending. The plaintiffs must convince the court that top managers knew early on about the manipulation, that they should have disclosed their knowledge to the markets and that the failure to do so makes them liable under capital markets rules.

Lead Plaintiff

These issues aren’t no-brainers, said Andreas Tilp, the lawyer for the lead plaintiff in the case, admitting that it is hard to tell which side the court will take.

“You first have to kill the bear before you can divide the fur,” he told a group of reporters on Sept. 4.

The most hotly contested question revolves around when VW had to disclose the issue to the markets. The earlier that was, the more money shareholders could get, since payouts would hinge on when investors bought or sold shares.

Tilp argues that VW knew as early as 2008 that it wouldn’t be able to meet the strict environmental standards in the U.S. for diesel cars and should have publicly said so back then.

But even if the court sees the crucial point only in May 2014 — when information about the U.S. probe started being fed toward top management — about 40 percent of his clients would still have a case, according to Tilp.

Top Managers

VW argues that the relevant top managers only learned in 2015 about the problems with U.S. regulators. The leadership was in discussions with them to find a solution and lawyers told them the risk of fines was manageable.

Only when the U.S. surprisingly disclosed the probe did the impact for the stock become clear and VW then promptly issued a disclosure statement, the carmaker says.

“VW may have been too late in informing its shareholders, but we’re probably only talking about a time frame of one or two weeks,” said Pieper. “Moving that back to the middle of July 2015 when some managers showed some slides at some meeting seems a bit overboard.”

On the first session, the three judges are expected to discuss how they will handle the case and may tell the parties their preliminary view of some of the legal issues. They have scheduled 13 days of hearings until the end of the year but it’s unclear whether all those dates, mostly Mondays, will be needed and whether witnesses will be heard.

Porsche Automobil Holding SE, which holds the majority of VW shares, is also a defendant in the case. Some of its own shareholders sued because they say Porsche was also late in disclosing what was going on. Like VW, its majority holder denies the allegations.