VW fights investors as diesel scandal cost could top US$35 Billion

Volkswagen admitted in late 2015 that it rigged diesel vehicles to cheat emissions tests in the US. (Bloomberg pic)

BERLIN: Volkswagen AG’s bill for cheating on diesel emissions could potentially top 30 billion euros (US$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 US 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 centre 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 US 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 US 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%,” 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 ites 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.

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 US 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% 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 US 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 US 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.