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VOL. 39 | NO. 38 | Friday, September 18, 2015

VW rocked by emissions scandal as prosecutors come calling

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BERLIN (AP) — Volkswagen's chief executive was under withering pressure Monday as an emissions-testing scandal erased more than 13 billion euros (around $15 billion) from the company's market value in a single trading session.

The stock plunge followed revelations that the German carmaker had rigged U.S. emissions tests for nearly 500,000 diesel cars. VW CEO Martin Winterkorn apologized, acknowledging that his company had "broken the trust of our customers and the public."

Investors considering the financial and reputational implications of the scandal on the world's top-selling carmaker dumped VW stock Monday, driving the company's share price down a stunning 17.1 percent in the first trading since the U.S. Environmental Protection Agency announced the violations. VW shares closed at a nearly three-year low of 133.70 euros.

VW, facing as much as $18 billion in fines, has halted U.S. sales of the affected vehicles and pledged to cooperate with regulators.

The investigation also could test the U.S. Justice Department's resolve, announced Sept. 9, to hold individual executives accountable for corporate wrongdoing.

"We will be working closely with DOJ throughout this investigation," EPA spokeswoman Liz Purchia said Monday.

Separately, a VW official confirmed that the Justice Department has contacted the company about the case. The official spoke on condition of anonymity for lack of authorization to discuss the matter publicly.

The EPA warned VW Friday that it may refer the case to Justice for enforcement, and noted that in addition to corporate fines of up to $37,500 per vehicle, individuals could be fined $3,750 per violation of the Clean Air Act, which could theoretically add up to nearly $1.9 billion, given the number of cars involved.

Industry analysts said the VW CEO faces difficult questions in the coming days. The German news agency dpa reported that key members of the VW board will hold a crisis meeting Wednesday, and the full board is set to meet Friday.

"At the moment, I'd be surprised if Winterkorn can ride this out, but in Germany there's often a slightly slower process in these matters," said Christian Stadler, a professor of strategic management at Warwick Business School. If VW were a U.S. company, the CEO would have gone more or less immediately, he said.

The EPA says Volkswagen violated the federal Clean Air Act by installing "defeat devices" — software programmed to switch engines to a cleaner mode during official emissions testing. The software then switches off again, enabling cars to emit as much as 40 times the legal limit of pollutants during normal driving.

For a company to engage in such blatant trickery, top executives must have been informed, said Guido Reinking, a German auto expert.

Winterkorn is an engineer by training who led research and development across the VW group beginning in 2007, and became chairman of the management board the same year.

The illegal software was made and installed in vehicles with 2.0-liter diesel engines during the model years 2009 through 2015, the EPA said. They include the Audi A3, VW Jetta, Beetle, Golf and Passat models.

"It's almost impossible to imagine that he didn't know about this special way of programming the engine," Reinking told German television station n-tv.

Volkswagen marketed these diesel-powered cars, which account for about 25 percent of sales, as being better for the environment.

The EPA has ordered VW to fix the cars at its own expense, but said car owners do not need to take any immediate action. The cars threaten public health, but the violations pose no safety hazards, and the cars remain legal to drive and sell while Volkswagen comes up with a recall and repair plan, the agency said.

Volkswagen also could face sanctions in California. The carmaker had insisted for years that unrelated technical issues or unexpected conditions were to blame for the higher pollution levels state regulators found during regular driving. VW acknowledged installing the "defeat devices" only after the California Air Resources Board and the EPA refused to approve its 2016 diesel models without a better explanation.

Germany's transport minister meanwhile said authorities would examine VW models to check whether similar manipulation is evident in Europe.

"Independent checks routinely take place," Alexander Dobrindt told Germany's Bild newspaper. "However I have instructed the Federal Motor Transport Authority to order strict, specific follow-up tests of the VW diesel models by independent experts immediately."

Volkswagen recently edged out Japan's Toyota to become the world's top-selling automaker, but it has had a difficult year amid signs of faltering sales in the U.S. and China. Its share price has fallen from more than 250 euros.

Toyota had to recall 9 million cars between 2009 and 2011 after some of the Japanese automaker's vehicles experienced unintended acceleration. That's far more than the half-million or so that VW is having to fix. The cost to Toyota, including fines, was a little more $5 billion, according to Warwick Business School's Stadler.

"To some extent the cheating by Volkswagen seems more blatant, but the numbers are lower and there are no fatalities involved," Stadler said. "This suggests that in the 'heat of the moment,' the long-term effect on Volkswagen may be overstated. Sure it will hurt, but maybe not quite as bad as we expect right now."

Volkswagen's woes were felt across the European car market Monday. France's Renault SA watched its share price drop 3.2 percent, and BMW AG ended 1.5 percent lower. Daimler AG, which owns Mercedes-Benz, dropped 1.4 percent.

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