Volkswagen has admitted that then CEO Martin Winterkorn was first aware of the NOx emissions irregularities with its EA189 diesel engine in 2014, but has denied that it misled shareholders by withholding the information until September 2015.
The revelation came in an official statement by VW outlining the timeline of events, as part of its defence against legal action by shareholders who say the company illegally withheld information regarding the scandal.
The chief purpose of VW’s carefully worded statement is to explain its defence of legal action, but it also offers a fascinating timeline of events that unfolded in the build-up to the scandal for the first time.
VW traces the scandal back to 2005, when it decided to launch diesel engines in the US. It would do so with the EA189 engine, but US regulations were far stricter than those in Europe, with the 31mg/km nitrogen oxides (NOx) emissions limit six times less than that allowed under EU5 law at the time. VW says that reducing the NOx emissions would impact on CO2 emissions.
During development of the EA189 for the US, VW says that “a group of persons – whose identity is still being determined – at levels below the group's management board in the powertrain development division, decided to modify the engine management software”.
This act, VW says, produced emissions values in bench testing that “differed substantially from those under real driving conditions”.
VW says that this was done by a “significant modification of the existing engine management software” and was done so with “relatively small changes and within the budget that was available for the development of the engine management software and without the need to involve superior levels”.
This software manipulation first came to light in May 2014 when the Californian environmental agency California Air Resources Board (CARB) heard of the irregularities in a study published by the International Council on Clean Transportation (ICCT).
This study looked at NOx values for two VW models and the fact they “deviated significantly between bench testing and road operation than would be expected under normal circumstances”. CARB requested an explanation from the Volkswagen Group of America, which investigated over several months, and offered to recalibrate first- and second-generation EA189 engines as part of planned service work from December 2014.
It was after the ICCT report that the VW CEO Winterkon was first informed, on 23 May 2014 as part of his “extensive weekend mail”. The statement reads: “Whether and to which extent Mr Winterkorn took notice of this memo at that time is not documented.”
A second memo to Winterkorn followed on 14 November 2014, saying that the issue would cost €20 million to fix in North America.
VW admits that the issue was “treated as one of many product issues facing the company” and “did not initially receive particular attention at the management levels of Volkswagen”. At this time, it was the responsibility of a division of VW called ‘Committee for Product Safety’ (APS).
VW notes that deficiencies between test and real-world figures are common in the industry, as are recalls, but the company “expressly regrets that, looking back, the situation is different”.
Subsequent tests from CARB found VW’s fixes proposed from December 2014 as insufficient. The APS set up its own diesel task force in summer 2015, and as such VW retained US law firm Kirkland & Ellis to advise it on US emissions law.
The issue was then discussed by VW employees on 27 July 2015 on the periphery of a meeting that included Winterkorn and VW brand chief Herbert Diess on damage and product issues, although the exact meeting contents are still being reconstructed.
On this meeting, VW adds: “It is not clear whether the participants understood already at this point in time that the change in the software violated US environmental regulations. Mr Winterkorn asked for further clarification of the issue.”
A month later, VW technicians “gave a full explanation of the technical causes for the irregularities discovered regarding the emission of nitrogen oxides in the US to lawyers from the Volkswagen Legal Department as well as to the US attorneys from Kirkland & Ellis”.
At this point, VW management realised that “the modification of the engine management software constituted a prohibited defeat device under US law” and VW said that it would “communicate this information transparently to CARB and EPA”. This happened at a meeting on 3 September 2015, which Winterkorn was informed on the following day.
VW was told that past violations of this type resulted in sanctions that weren’t that high for a company of VW’s size. The highest fine had been $100million in a case involving 1.1 million vehicles in 2014, resulting in a fine of around $91 per vehicle. As such, VW then expected that disclosing the software modification, making the vehicles compliant with law again and paying fines in line with recent precedent could resolve the matter.
By early September 2015, VW believed the issue was still largely “limited to the United States”. However, this quickly changed.
On 18 September 2015 a ‘Notice of Violation’ was served on VW, which surprised the company due to the discussions that had been going on with authotities behind the scenes. VW then decided to set up a ‘group internal audit’ to “pursue an urgent investigation of the facts”.
VW made an “ad hoc announcement” to the markets on 22 September 2015, the earliest date it could, according to the company, reliably inform on the global risks of the scandal when a “still preliminary, factual basis had been determined” for the first time.
VW notes that its stock price was only impacted from 18 September when the US environmental violation was announced, and it had no prior knowledge that this would happen due to the behind-the-scenes discussions. And at that point, it still believed the number of cars affected to be a “manageable” one of around 500,000 units, and that fines of a maximum of around “low three digit million” amount would be imposed in the US, in line with recent other cases.
“Additionally, to the best knowledge, the diesel matter appeared to be an issue that could be contained by measures that were common in such cases, including effective technical solutions, and, thus, appeared to be neutral with regard to the company’s stock price,” said VW, which added that the maximum $18billion fine discussed from 18 September “had never been fully applied in other cases to any extent”.
“Once an initial reliable data basis regarding the global risks had been established after the ‘Notice of Violation’, the company promptly published its ad-hoc announcement on 22 September 2015,” VW added.
VW says that after internal and external legal examinations it “confirms its belief that its management board duly fulfilled its disclosure obligation under German capital markets law”.
As such, VW believes that lawsuits from shareholders to be “without merit, since any ad hoc disclosure obligation requires that the persons responsible for the fulfillment of this obligation obtain knowledge of facts relevant for the stock price and can assess the economic effects of those facts”.
Despite this statement clarifying some of the timeline of events, VW says its own investigation into the scandal remains ongoing and is incomplete. “The company is making this public announcement to correct the selective and incomplete publication of documents in the media about the diesel matter and to avoid having partial excerpts of its statement of defense published in the media,” read the statement, which added that VW still “deeply regrets the incidents related to the diesel issue”.
VW says that its investigators are sifting through 102 terabytes of data, which is the equivalent of around 50 million books. The preliminary results of the investigation will be published in the second half of April.