New Discovery Broadens VW Emissions-Cheating Crisis – Wall Street Journal

Posted: Monday, November 07, 2016

Volkswagen Chairman Hans-Dieter Pötsch pictured in June.

BERLIN—Regulators in California recently discovered software installed on some of Volkswagen AG’s Audi models that appears to have allowed the cars to cheat carbon-dioxide emissions testing standards, according to people familiar with the matter.

The Audi software was designed to mask emissions implicated in global warming, instead of smog as in the Volkswagen emissions-cheating scandal that erupted last year, the people said.

The newly discovered software was detected four months ago during laboratory tests by the California Air Resources Board, one of the people said. Neither Volkswagen nor U.S. regulators have publicly disclosed the discovery.

Officials at CARB, which has been heavily involved in a continuing U.S. probe of Volkswagen engines, didn’t respond to requests for comment.

Audi, Volkswagen’s luxury-car unit, declined to comment, citing the Justice Department investigation into the Volkswagen scandal, which broke more than a year ago when U.S. environmental authorities disclosed that the German auto maker used illegal software on many of its diesel-engine models to cheat emissions testing for nitrogen oxides.

It isn’t clear how seriously officials in California and federal officials in Washington view the latest discovery, or whether Volkswagen, under intense regulatory scrutiny around the world, had identified it privately to regulators.

Whatever the case, the discovery threatens fresh anger from officials, investors and car owners just as Volkswagen is wrapping up billions of dollars in settlements with states and owners of diesel-powered vehicles in the U.S. and a recall of nearly nine million tainted diesel vehicles in Europe.

Volkswagen’s previously disclosed “defeat device” software was used on Volkswagen and Audi diesel engines to make it appear that they complied with emission standards for nitrogen oxides during lab tests.

The newly discovered software, installed on Audis with both diesel and gasoline engines, did the same with CO 2 emissions standards in the U.S. and Europe, according to the people familiar with the matter.

The CARB caught the emissions-cheating software through lessons learned from the earlier probe of Volkswagen diesel engines, according to Germany’s weekly Bild am Sonntag newspaper, which earlier reported the software’s discovery.

CARB technicians conducting lab tests on Audi’s vehicles made them react as if on a road by turning the steering wheel, the people said.

When the cars deviated from lab conditions, their CO 2 emissions rose dramatically.

The latest discovery comes at a sensitive moment for Volkswagen. The company said Sunday that a German criminal investigation related to the diesel emissions scandal has widened to include its chairman.

The auto maker said prosecutors in the city of Braunschweig, near Volkswagen headquarters, had widened their investigation of former Chief Executive Martin Winterkorn and Herbert Diess, head of the Volkswagen brand passenger cars division, to include Chairman Hans Dieter Pötsch.

The investigators allege that the company’s management willfully kept the company’s shareholders in the dark about the U.S. diesel investigation and the potential financial risks.

The company said it has found no indication that management failed to inform investors in a timely manner.

Before becoming chairman in September 2015, Mr. Pötsch was Volkswagen’s finance chief, responsible for communications with financial markets.

He became chairman in a management shake-up in the wake of the emissions scandal.

U.S. environmental authorities disclosed on Sept. 18, 2015, that the company installed software on about 500,000 diesel-powered vehicles in the U.S. that American authorities consider illegal.

Volkswagen later admitted to installing the software on nearly 11 million vehicles world-wide.

Volkswagen agreed in June to a $14.7 billion settlement with state authorities and owners of 475,000 two-liter diesel vehicles affected in the U.S. The company is still in talks on a settlement for owners of 85,000 vehicles with three-liter diesel engines that were built by Audi.

Volkswagen and Audi management discussed the CO 2 defeat-device software in detail during a “Summer Drive” event in South Africa in the second half of February 2013, according to one person familiar with the situation and excerpts from the minutes of the meeting, which were reviewed by The Wall Street Journal.

A worker stands at the assembly line of the Audi TT at the plant in Gyor, west of Budapest, in November 2014.

According to the minutes, Axel Eiser, the head of Audi’s powertrain division, said, “the shifting program needs to be configured so that it runs at 100% on the treadmill but only 0.01% with the customer.”

Audi declined to make Mr. Eiser available for comment.

It isn’t clear which Audi models might contain the newly discovered software, which could raise fresh questions in Europe, where regulators have been stricter on emissions of greenhouse gases like CO 2 than on nitrogen oxides.

Volkswagen insists that its software didn’t violate European law. In Germany, Volkswagen hasn’t been charged with violating the law.

Criminal probes and civil lawsuits are instead focusing on whether Volkswagen’s management violated securities law or committed fraud and should be held liable for damages suffered by investors and consumers.

News of the U.S. investigation last year sparked a massive selloff in Volkswagen shares, causing the company to lose 35% of its market value by Sept. 22, when Volkswagen first warned investors of financial risks stemming from the probe. Mr. Winterkorn, then CEO, resigned under pressure the next day.

Mr. Diess has acknowledged the investigation but has declined to comment.

Mr. Winterkorn has declined to comment through his attorney.

Volkswagen faces nearly $9 billion in damages claims from hundreds of investors, including the California Public Employees’ Retirement System of the U.S., Norway’s huge oil fund, and several German states that hold Volkswagen shares. The plaintiffs allege that Volkswagen’s top executives intentionally withheld information from shareholders, who later suffered huge losses when Volkswagen’s shares plunged.

Volkswagen said no evidence has emerged to suggest that the company’s management failed to disclose the diesel issue to markets as early as possible, reaffirming its belief that its management board “duly fulfilled its disclosure obligation under German capital markets law.”

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