High-level VW executives could face U.S. charges, report says

Complaint says executive management was made aware of cheating devices

January 09, 2017 12:00 AM

From staff and wire reports

Schmidt, shown here in his booking photo taken earlier Monday, is accused in court documents of playing an important role in VW's efforts to hide emissions cheating from U.S. regulators.

U.S. prosecutors are planning to charge high-level Volkswagen executives based in Germany over the automaker’s diesel-cheating scandal, a person familiar with the matter told Bloomberg, after the FBI arrested a manager in the U.S. for allegedly misleading regulators.

VW's executive management was informed about the "existence, purpose and characteristics" of an emissions cheating device in July 2015, and chose not to disclose it to U.S. regulators, a court filing on Monday showed.

Oliver Schmidt, 48, who headed the company's regulatory compliance office in the U.S. from 2014 to March 2015, was arrested on Saturday by federal investigators in Florida, the New York Times reported, citing people familiar with the matter. The Times reported the arrest earlier Monday.

The person familiar with the situation declined to specify when charges against more senior-level executives may be filed or whether the executives to be charged are still employed by the automaker, Bloomberg reported.

Schmidt appeared in U.S. District Court in Miami on Monday. He did not enter a plea and was ordered held pending a hearing on Thursday by U.S. Magistrate Judge William C. Turnoff.

Schmidt, who was shackled and wearing a jail uniform, was charged with fraud and conspiracy in not disclosing a cheating device used to rig U.S. diesel emissions tests from 2006 through 2015.

He was arrested on Saturday in Florida after attempting to return to Germany from a vacation, the Justice Department said. Schmidt's lawyer David Massey said Schmidt had learned of the investigation and reached out to the U.S. Federal Bureau of Investigation to offer to cooperate. Schmidt then met with FBI agents in London last year, he said.

The criminal complaint against Schmidt was unsealed Monday in U.S. District Court in Detroit.

The U.S. complaint said Schmidt and other employees gave a presentation to VW's executive management on or about July 27, 2015. The complaint did not identify the other executives who attended the meeting.

"In the presentation, VW employees assured VW executive management that U.S. regulators were not aware of the defeat device," the complaint said.

"Rather than advocate for disclosure of the defeat device to U.S. regulators, VW executive management authorized its continued concealment."

In the meeting, Schmidt and other VW employees prepared a chart with possible consequences from a meeting with California regulators. One of the "negative for VW" consequences was "there could be an 'indictment,'" the complaint says.

It was not immediately clear if or when Schmidt was terminated at VW. VW officials declined to identify Schmidt's employment status.

"Volkswagen continues to cooperate with the Department of Justice as we work to resolve remaining matters in the United States," the company said in a statement early Monday. "It would not be appropriate to comment on any ongoing investigations or to discuss personnel matters.”

Herbert Diess, VW brand chief, was asked by Automotive News about the charges on the sidelines of the Detroit auto show on Monday. He said:

“Naturally I can say little about that. We simply have to accept that the investigations continue and we hope that we can soon reach a point where we put this behind us. But these are things that the management board itself has no knowledge of,” he said referring to the status of the investigations.

“Naturally this is not good news for us at the show.”

Diess declined to comment when asked if he expected further arrests of VW executives.

Building the case

Europe's biggest carmaker initially blamed a small group of "rogue engineers" for the test-cheating, and has repeatedly said no current or former board members were involved.

According to an affidavit filed by FBI Special Agent Ian Dinsmore, internal VW emails and accounts from two anonymous cooperating witnesses from inside VW's engine development department and from James Liang, an engine department employee who pleaded guilty to fraud charges in September 2016, provided enough evidence to charge Schmidt.

When the evidence first arose that something was off with VW's diesel engines, Schmidt wrote an email to another executive questioning whether the company should fess up. "It should first be decided whether we are honest," he wrote. "If we are not honest, everything stays as it is."

After several meetings in Germany, Virginia, Michigan and California, Schmidt and other executives in August 2015 came up with a plan to conceal the defeat device from regulators. Schmidt wrote an email to another VW manager explaining that one employee would not be coming to a meeting with California regulators "so he would not have to consciously lie."

The complaint reads: "Nevertheless, in the summer of 2015, Schmidt agreed to travel to the United States to participate in direct conversations with U.S. regulators in which he intended to, and did, deceive and mislead U.S. regulators by offering reasons for the discrepancy other than the fact that VW was intentionally cheating U.S. emissions tests, in order to allow VW to continue to sell diesel vehicles in the United States."

From U.S. complaint

Witness told Calfornia

An unnamed witness, referred to in the complaint as "CW1" met with California regulators on Aug. 19, 2015 and "disclosed, in direct contravention of instructions from his management, that certain VW diesel vehicles used different emissions treatment depending on whether the vehicles were on the (testing) dynamometer or on the road, thereby effectively admitting that VW had cheated U.S. emissions tests."

The FBI was not immediately available for comment.

Senior VW officials are not attending this year's Detroit auto show, which is taking place this week.

Lawsuits filed against VW by the New York and Massachusetts state attorneys general accused Schmidt of playing an important role in VW's efforts to conceal its emissions cheating from U.S. regulators, the paper said. Schmidt and other VW officials repeatedly cited false technical explanations for the high emissions levels from the automaker's vehicles, according to the state attorneys general.

20 years at VW

Schmidt began working in Volkswagen engine development in 1997, after receiving a degree in mechanical engineering, from the University of Applied Sciences, in Hanover, Germany.

Throughout his career at Volkswagen, he held various positions in development, marketing, and production -- all within the field of powertrain development.

Schmidt was the Head of Powertrain Product Management, for the VW brand, before moving to the U.S., in March of 2012.

He was then responsible for everything that was related to tailpipe emissions, starting with regulatory, leading to certification and in the end, taking care of the defect reporting, up to 15 years in a cars life.

He made several public appearances in the U.S. in recent years, including the 2012 CAR Management Briefing Seminars in Traverse City, Mich.

Schmidt followed Norbert Krause, who was head of VW's U.S. environmental office until 2009 and who retired from VW in 2011. Krause told Reuters in 2015 that nobody at Volkswagen of America was involved in the process of engineering the manipulated diesel cars.

Schmidt was a high visibility VW executive. He spoke at the 2012 CAR Management Briefing Seminars in Traverse City, Mich.

Scandal breaks

VW admitted in September 2015 to installing secret software known as "defeat devices" in 475,000 U.S. 2.0-liter diesel cars to cheat exhaust emissions tests and make them appear cleaner in testing. In reality, the vehicles emitted up to 40 times the legally allowable pollution levels.

The news comes as VW is nearing a deal to resolve criminal and civil allegations over its diesel cheating in the U.S., crucial steps toward moving past the scandal, which has cost it billions of dollars and its reputation.

Last week a South Korean court sentenced an executive of VW's local unit to one year and six months in prison for fabricating documents on emissions and noise-level tests to achieve certification for vehicles for import.

Bloomberg, Reuters, Sharon Silke Carty, Philip Nussel, Christiaan Hetzner and Automotive News staff contributed to this report.