A year ago Volkswagen Group confessed in private to U.S. authorities that it had rigged diesel engines to fool emissions tests. Two weeks later, VW's cheat was made public. The time in between cost some investors dearly.
On Sept. 3 last year VW confessed to the U.S. Environmental Protection Agency that nearly half a million clean diesels it sold in the country over the course of several years were fraudulent, unable to even remotely meet emission limits on the road.
Of course, no one outside of the respective two parties had any clue at the time about this momentous admission of guilt, because Volkswagen kept everyone in the dark: customers, dealers, workers and not the least its owners – the carmaker’s shareholders.
It wasn’t until Sept. 18 that the public was informed and then only because the EPA posted the Notice of Violation it sent to Volkswagen, which the company claimed was “unexpected." VW alleges the previous discussions were going well enough that the EPA notice was a surprise.
Do shareholders that bought shares after the guilty admission on Sept. 3 to see their value implode a couple of weeks later have a legitimate case to claim financial damages?
Volkswagen insists that German shareholder lawsuits are without merit, arguing the maximum penalty - $18 billion – had never been applied and that the previous record fine amounted to just $100 million for 1.1 million vehicles. The implication is that the worse it could have realistically expected was $45 million and hence would not have been sufficiently high enough to move the stock price. Instead the real significance came when it revealed in a financial market disclosure on Sept. 22 that 11 million cars were affected.
Even if that was the case, investors clearly didn’t see it that way. The stock cratered at the first opportunity, losing a quarter of its value as investors discounted into the price the reputational damage and the deliberate and intentional nature of the crime.
Moreover, lawyers say the risks to Volkswagen could be far greater. A court ruling coincidentally stemming from a case in the auto industry could completely undermine Volkswagen’s argument and open up the risk of claims reaching much further back in time than just September 3.
According to the European Court, not only must the actual event that moves the stock be considered disclosable by law, “also the intermediate steps of that process which are connected with bringing about that future circumstance or event”.
This cryptic legalese stems from the European Court of Justice’s 2012 ruling on Daimler. It found that the company violated insider information laws when it didn’t promptly inform markets that the deeply unpopular CEO, Juergen Schrempp, had discussed with key members of the company’s supervisory board and senior management whether the time had come for him to resign.
By that same logic, this could mean VW investors may have a case even if they bought shares in December 2014, for example, when Volkswagen issued a voluntary recall of its U.S. diesels to address EPA concerns.
In doing so, Europe’s highest tribunal reversed previous rulings by German courts that supported Daimler. Since then it hasn’t proven to be any more lenient. When other insider information cases came before the ECJ, they have proven to be much stricter in their interpretation of capital markets laws, handing down decisions such as in March 2015 with Wendel Chairman Jean-Bernard Lafonta and Saint-Gobain, that protect international investors even as domestic judges tend to favor national corporations.
One year later, the exact circumstances surrounding Dieselgate - who knew what and when - remain unclear. But Volkswagen itself states that former CEO Martin Winterkorn received memos in May and November 2014 in which the exceedingly high diesel emissions in the U.S. were mentioned, and was finally informed of the admission to the EPA on the 4th. These are all possible intermediate steps at which point Volkswagen may have needed to inform the public regardless of whether Winterkorn claimed knowledge or not - ignorance does not protect against liability in the eyes of the law.
Unsurprisingly, prosecutors are already building a case against Volkswagen. In June Winterkorn and current VW brand CEO Herbert Diess became the target of an investigation into violating regulations governing insider information at the behest of Germany’s financial markets regulator BaFin.
None of this bodes well for VW as it attempts to fight off investor lawsuits. Volkswagen has already set aside 16.2 billion euros for the diesel scandal last year and a further 1.6 billion in the first half of this one. Its apparent mistake to inform shareholders of the coming crisis one year ago could make things far, far costlier for the carmaker.