Volkswagen : SEC Charges VW, Ex-CEO Winterkorn With Defrauding U.S. Bond Investors -- 3rd Update
By William Boston
BERLIN -- The U.S. Securities and Exchange Commission charged Volkswagen AG and its former Chief Executive Martin Winterkorn with defrauding U.S. investors in connection with the emissions cheating scandal that the auto maker is trying to leave in the past.
The surprise move by the SEC, which also charged two of VW's units, comes just over two years after Volkswagen settled civil and criminal matters with U.S. authorities, agreeing to pay a criminal fine of $2.8 billion after pleading guilty to violating U.S. laws.
After settling civil complaints, other fines and legal fees, the diesel scandal has cost Volkswagen around $25 billion so far with some civil cases pending in Germany.
The SEC alleges that Volkswagen defrauded bond investors, raising billions of dollars through corporate-bond and fixed-income markets while making a series of deceptive claims about the environmental impact of the company's "clean diesel" fleet.
The SEC alleges in its complaint that from April 2014 to May 2015 VW issued more than $13 billion in bonds and asset-backed securities in the U.S. markets at a time when senior executives knew that more than 500,000 vehicles in the U.S. grossly exceeded legal vehicle-emissions limits, exposing the company to massive financial and reputational harm.
"Issuers availing themselves of American capital markets must provide investors with accurate and complete information," said Stephanie Avakian, co-director of the division of enforcement at the SEC, in the statement. "As we allege, Volkswagen hid its decadelong emissions scheme while it was selling billions of dollars of its bonds to investors at inflated prices."
The SEC charges add a new dimension to the saga that began when U.S. authorities exposed Volkswagen's diesel fraud in 2015 and the company admitted to rigging nearly 11 million diesel vehicles world-wide to cheat emissions tests.
VW on Friday called the complaint "legally and factually flawed" and said it would contest the charges "vigorously."
"The SEC has brought an unprecedented complaint over securities sold only to sophisticated investors who were not harmed and received all payments of interest and principal in full and on time," the company said in a statement.
Mr. Winterkorn, through his attorney, declined to comment.
The complaint alleges that VW, by concealing the emissions scheme, reaped hundreds of millions of dollars in benefits by issuing the securities at more-attractive rates for the company, the agency said. The SEC said it charged VW, Mr. Winterkorn and subsidiaries Volkswagen Group of America Finance LLC and VW Credit Inc. with violating the antifraud provisions of the federal securities laws.
The SEC complaint seeks permanent injunctions, the repayment of ill-gotten gains with prejudgment interest, and civil penalties, the SEC said. The complaint also seeks an officer and director bar against Mr. Winterkorn, the SEC said, that would prevent him from serving as and senior officer or director of any corporation. It isn't immediately clear if such a bar would apply to corporations outside of U.S. jurisdiction. The complaint was filed in the U.S. District Court for the Northern District of California, the SEC said.
In 2005, Volkswagen decided to launch a new push into the U.S. auto market with a new generation of diesel engines, a niche market in the U.S. But the cost of making the new "clean diesel" engines compliant with U.S. emissions rules was so high that the new vehicles would have been too expensive for U.S. consumers.
Volkswagen engineers devised a workaround, installing illegal software, a so-called defeat device, that allowed the vehicle's engine to conform to emissions tests but then emit multiple times the legal limits of toxic tailpipe emissions during normal road use.
The SEC alleges that the "clean diesel" cheat was accelerated after Mr. Winterkorn became CEO in 2007.
The SEC complaint says Mr. Winterkorn "announced a bold and aggressive plan to make VW the biggest, most profitable, and most environmentally-friendly car company in the world by 2018," adding that the success of Mr. Winterkorn's plan "depended in large part on VW's ability to develop, market, and sell its diesel vehicles, particularly in the United States."
Mr. Winterkorn has previously denied any knowledge of the defeat device before the Environmental Protection Agency charged the company with violating U.S. law on Sept. 18, 2015.
Volkswagen has argued that lower-level engineers developed the defeat device and then carried out an elaborate cover-up as U.S. authorities began suspecting the company was cheating in the Spring of 2014, after the International Council on Clean Transportation, an environmental research group, published a study showing elevated emissions in two VW diesel vehicles.
When Mr. Winterkorn and other senior VW executives became aware of the cheat is a crucial point in charges like those brought by the SEC that focus on potential defrauding of investors.
The SEC argues that Volkswagen's top management knew of the defeat device at least as early as 2014, alleging that they intentionally withheld this information from their shareholders and bond investors.
A previous complaint in U.S. courts by investors making similar arguments was dismissed.
In Germany, investors are seeking around EUR9 billion ($10.19 billion) in damages for share losses, alleging that Volkswagen management withheld vital information about the diesel scandal and prosecution in the U.S. until the EPA went public.
Mr. Winterkorn and nearly a dozen former Volkswagen employees have been indicted by U.S. attorneys and two former executives have pleaded guilty and are serving prison sentences in U.S. federal prison. Most of the people indicted are German citizens and cannot be extradited to the U.S. to stand trial.
Write to William Boston at email@example.com