If ever a case of corporate misconduct could compel the Justice Department to follow through on its new promises to prosecute individuals more vigorously, the emissions scandal at Volkswagen is it.

Less than two weeks after the Justice Department trumpeted its new Yates Memo on Sept. 9, demanding much more cooperation from companies to find individual wrongdoers, Volkswagen confessed that it had sold millions of cars with “defeat devices” to evade federal standards on auto emissions. The CEO has been fired. Top lieutenants have been fired. The fines and penalties could hit $20 billion.

And investigations are springing up like weeds, from Washington to Europe to state capitals all over the country. Ultimately, Volkswagen will need to deal with them all.

In a recent statement, Volkswagen’s U.S. CEO Michael Horn spoke candidly about the wrongdoing: “Let’s be clear about this: Our company was dishonest, with the [Environmental Protection Agency] and the California Air Resources Board,” he said. “We have totally screwed up. We have to make this right.”

Well, the first step to recovery is admitting you have a problem.

“Our message is clear: zero tolerance on fraud and rigorous compliance with EU rules. We need full disclosure and robust pollutant emissions tests in place.”
Elzbieta Bienkowska, European Commissioner

Volkswagen’s scandal erupted just after arrival of the Yates Memo, which says (among numerous points) that companies must provide the department with all relevant facts relating to the individuals responsible for misconduct, if the company hopes to receive cooperation credit during that investigation. For Volkswagen, that effectively means whatever evidence it uncovers in the course of its internal investigation, it must turn over to the government to be considered cooperative.

Specific types of evidence the Justice Department likely will be seeking include e-mails, technical documents concerning the development of the software, and testimony from employees. “They’re going to cast a pretty wide net,” says John Libby, a partner at law firm Manatt.

“Whether the individuals are located here or Germany, prosecutors in both countries certainly would be looking to hold individuals responsible for what appears to have occurred there,” Libby says. Because the conduct appears to be deliberate, “that’s the type of situation where you’d want to see individual responsibility,” he says.

That’s a fair statement to make about Volkswagen, but the same could be said about the last two major criminal cases in the auto industry—where Toyota and General Motors agreed to pay $1.2 billion and $900 million, respectively, in criminal penalties to resolve product safety violations. To date, however, these cases have not resulted in any individual prosecutions. And the GM settlement came after the Yates Memo heralded a new determination to hold executives accountable.

At a news conference announcing the GM settlement, Preet Bharara, U.S. attorney for the Southern District of New York, described the high burden of proof required of the Justice Department to bring an individual prosecution: “You have to be able to prove with respect to any particular person that that person knew the facts, knew the safety problems in a very specific way, had an obligation to tell someone else—a regulator or the public—about them, and then made misstatements to the public.” 

Bharara hinted, however, that prosecutions in the GM case are still a possibility. “We’re not done,” he said. “It remains possible that we may charge an individual.”

Similar legal hurdles will apply to Volkswagen. “The investigation will focus on discovering facts that reveal actual knowledge of criminal wrongdoing on the part of individual decision makers within the company,” says Greg Brower, a partner at law firm Snell & Wilmer and a former U.S. attorney himself. “Mistakes, bad business judgment, even negligence won’t support a criminal case, so prosecutors will be looking for actual criminal intent.”

One factor that could make Volkswagen’s investigation painfully complex: the sophistication in the coding and development of the defeat-device software it installed in cars. “It is not typically the case that a fraud case is premised on a very complex software program like this,” says Gregory Linsin, a partner at law firm Blank Rome and a former environmental crimes prosecutor at the Justice Department.

“I think that will be one of the challenges the government will face, because that will be a key piece of the evidence that will be used to establish fraud,” Linsin says. “Figuring out who may have been involved and who may have been responsible for that will also be a challenge.”


Below is a prepared statement from Volkswagen in response to the emissions-testing scandal.
Volkswagen is working at full speed to clarify irregularities concerning a particular software used in diesel engines. New vehicles from the Volkswagen Group with EU 6 diesel engines currently available in the European Union comply with legal requirements and environmental standards. The software in question does not affect handling, consumption or emissions. This gives clarity to customers and dealers.
Further internal investigations conducted to date have established that the relevant engine management software is also installed in other Volkswagen Group vehicles with diesel engines. For the majority of these engines the software does not have any effect.
Discrepancies relate to vehicles with Type EA 189 engines, involving some eleven million vehicles worldwide. A noticeable deviation between bench test results and actual road use was established solely for this type of engine. Volkswagen is working intensely to eliminate these deviations through technical measures. The company is therefore in contact with the relevant authorities and the German Federal Motor Transport Authority (KBA – Kraftfahrtbundesamt).
To cover the necessary service measures and other efforts to win back the trust of our customers, Volkswagen plans to set aside a provision of some 6.5 billion EUR recognized in the profit and loss statement in the third quarter of the current fiscal year. Due to the ongoing investigations the amounts estimated may be subject to revaluation. Earnings targets for the Group for 2015 will be adjusted accordingly.
Volkswagen does not tolerate any kind of violation of laws whatsoever. It is and remains the top priority of the board of management to win back lost trust and to avert damage to our customers. The group will inform the public on the further progress of the investigations constantly and transparently.
Source: Volkswagen.

On a practical level, the firing of the CEO and other senior Volkswagen executives shouldn’t matter much to the quality of the investigation (which will be an enormous undertaking for VW no matter what). Taking remedial action after the investigation, and sharing all findings with various regulators—that’s what will keep Volkswagen in relatively good standing with the government, Brower says.

Beyond the United States, countries around the world have launched investigations of their own against Volkswagen: Australia, Canada, France, Germany, India, Italy, Norway, and South Korea. The global nature of the investigation adds “an additional layer of complexity in this matter for the Department of Justice as it evaluates how to proceed,” Linsin says. It may be that German regulators will take the lead on prosecuting individuals, he says.  

“Since the target of this investigation is a large, multinational company for which the United States is an important market and which has a lot at stake in terms of reputational and brand issues, I would expect a very high level of cooperation between VW and all of the investigators, whether from the United States or elsewhere,” Brower says. “That will, in turn, lead to easy collaboration between the various investigative agencies.”

Calculating the Fines

The civil and criminal penalties that Volkswagen potentially faces could be astronomical. The Environmental Protection Agency has indicated that Volkswagen could face fines up to $37,500 for each of its 482,000 vehicles not in compliance with the Clean Air Act. That’s $18 billion on EPA fines alone.

Volkswagen already has a black mark with the EPA concerning rigged emissions testing. In 1974, the EPA slapped the automaker with a $120,000 civil penalty for using defeat devices on certain 1973 models.

Meanwhile, the Justice Department could levy criminal penalties for wire fraud charges. “The wire fraud statute is a very broad statute that criminalizes the use of electronic transmissions to further a scheme to defraud,” says Linsin. “If an e-mail is sent forwarding information about the test results that are themselves fraudulent that could be wire fraud.”

Last year, for example, the Justice Department brought wire fraud charges against Toyota for repeatedly and intentionally misleading the public, regulators, and members of Congress about widespread incidents of unintended vehicle acceleration in 2009 and 2010, resulting in a record $1.2 billion criminal penalty (currently the largest of its kind in the auto industry).

Aside from any potential charges to come from the federal government, attorneys general for 28 states also have announced a coordinated investigation into Volkswagen. “The complexities for Volkswagen may be unprecedented here in terms of having to manage and attempt to accommodate a pretty wide range of investigative authorities regarding a very serious compliance issue for the company,” Linsin says.

Industry-Wide Threat

The revelation of Volkswagen’s emissions-testing scandal may open a Pandora’s Box of investigations for other companies in the auto industry, both inside and outside the United States. According to a recent analysis compiled by Transport & Environment, a European environmental group, newer model cars—including certain Mercedes, BMW, and Peugeot models—are swallowing around 50 percent more fuel than their lab tests would suggest.

The gap between official test results for carbon-dioxide emissions and real-world performance has increased to 40 percent on average in 2014 from 8 percent in 2001, according to T&E’s report, which highlights the abuses by carmakers of the current tests.

On Sept. 24, the European Commission called on national authorities “to look into the implications for vehicles sold in Europe and ensure that EU pollutant emission standards are scrupulously respected.” The Commission has offered to facilitate the exchange of information between member states. 

“Our message is clear: zero tolerance on fraud and rigorous compliance with EU rules,” European Commissioner Elzbieta Bienkowska said in a statement. “We need full disclosure and robust pollutant emissions tests in place.”