The Feds Move On VW: Does Fiat Chrysler Get The Message? – Forbes

Posted: Sunday, January 15, 2017

Sergio Marchionne, CEO of Fiat Chrysler Automobiles. (GEOFF ROBINS/AFP/Getty Images)

The timing is exquisite if not intended. On Thursday, the EPA accused Fiat Chrysler of knowingly using software that enables its diesel trucks to circumvent emissions tests. It was a mere one day after federal prosecutors announced they’d filed criminal charges against six Volkswagen executives for committing the same crime.

Fiat Chrysler denied the allegations and said its software does comply with regulatory requirements. For Volkswagen, the denial train is long derailed. U.S. regulators started looking at Volkswagen early in 2014 when a West Virginia University study revealed that its diesel cars pollute far more after than during emissions tests.

VW responded obstructively, providing false information for more than a year to the California Air Resources Board as well as the EPA. The company has admitted, for example, that its employees destroyed emails and other evidence in 2015. “When a publicly traded company destroys evidence, it might as well wrap itself in the deadliest form of catnip,” says Rachel Cannon, a litigation partner at Dentons and former federal prosecutor. “Both prosecutors and judges will be overwhelmingly tempted to view its actions as an assault on the legal system.”

At the same time, presumption of innocence is a golden rule where I come from and right now it applies to Fiat Chrysler in equal measure. But I can’t help thinking of those moments on Law and Order when the cops say to the suspect, “Listen pal, if you’ve got anything to tell us, now’s the time to tell it.” One ill-advised denial isn’t fatal, but Fiat Chrysler should understand the full context in which the company has been accused before it digs itself in any further. A few realities distinguish that context.

First, the Volkswagen employees who were charged on Wednesday are all rank-and-file line managers, not C-Suite or Board members. They include brand development, engine development, and quality management overseers as well as a regulatory liaison. True, higher-ups at VW can, for now at least, breathe a little easier; they can still go home at night.

Yet when line managers are culpable at multiple operational levels, it suggests systemic malfeasance. The accountability of those at the top is as much about what they should have known as what they actually knew. How confident is Fiat Chrysler that its current denial of the EPA charges is well-enough informed? The days ahead demand of Fiat Chrysler some very careful thinking to determine its next best move.

Second, it’s all to the point that Fiat Chrysler is accused of the same software manipulation that could land at least one VW executive in jail sooner rather than later. (That VW exec was picked up in Florida; the others are in Germany.) This software activates pollution controls during government tests and switches them off during actual drives, allowing nitrogen oxide emissions up to forty times above legal limits.

So who else might be fudging the software?

“To have a pandemic in these kinds of cases, you typically need an industry-wide design defect,” says Bill Powers, chair of Jackson Walker’s Government and Internal Investigations Group and formerly chair of the special committee that examined Enron’s financial transactions. “Depending on the extent of its usage, the software in question might well constitute just such a defect and therefore represent the agency of a pandemic.”

Federal investigators have confirmed that they’re pondering the same possibility. If a design defect affects two major manufacturers, why not a third or fourth or fifth? Fiat Chrysler may not be the only company that needs to engage in some strategic soul-searching at this particular moment in time.

Third, Fiat Chrysler must be realistic about both the current political climate and the realities that will likely still pertain after Trump takes office. The criminal charges against the Volkswagen executives are clearly a parting shot from the Obama regulators, all the louder in response to criticism that they’ve been too soft on corporate criminals in the past. But don’t expect the legal burdens to suddenly lighten after January 20.

“Maybe you can repeal Obamacare, but these kind of prosecutorial initiatives don’t unwind just because we’ve had a change in leadership, however dramatic,” says litigator Charles “Chip” Babcock, also a partner at Jackson Walker. “My advice to clients is to worry about potential prosecutions – and to keep on worrying about them.”

Besides, state regulators won’t be affected much one way or another, advises Kent Sullivan, Babcock’s colleague at Jackson Walker who as Texas First Assistant Attorney General was that state’s second-most powerful enforcement official. “States traditionally have broader consumer protection and enforcement purview,” he says. Nor do state regulators and prosecutors typically blunt their swords because of political philosophies and affiliations.

Finally, the sheer enormity of the Volkswagen case should directly impact Chrysler and the treatment it can expect as the inquiry goes forward. Even compared to the mega-settlements of recent years, VW’s financial cost is staggering. At $4.3 billion in criminal and civil penalties, with another $15.7 billion to settle car owner suits, it’s one of the most expensive scandals ever.

But it’s not just about penalties. “At its core this case is not merely one large scandal but three,” says Pete Anderson, a former DOJ environmental crimes prosecutor who now leads the White Collar/Compliance group at Beveridge & Diamond. “It involved serious violations of the Clean Air Act, multiple lies and cover-ups, and the fraudulent sale of automobiles. The other aggravating facts that give this case such shock value are the calculated means of the deceptions and the significant financial gains that motivated the crimes.”

It is therefore a very hard case that will make very tough law. No doubt the VW investigation culminates the policy codified in September 2015 when Deputy Attorney General Sally Yates told prosecutors to focus on going after company officials. And what Volkswagen culminates, Fiat Chrysler inherits. Even if that aforesaid “pandemic” goes no further than Fiat Chrysler, regulators won’t want to blow the Act Two finale, no matter which president or governor they work for.

Again, presumption of innocence above all, especially when people might face incarceration. Yet, as Leslie Caldwell, an assistant U.S. attorney general, advised, “Volkswagen…lied to the regulators and the Department of Justice once our investigation had started…That’s what distinguishes this” (my emphasis).

For Fiat Chrysler, VW is thus a “reminder that corporate secrets rarely stay secret for long,” as Pete Anderson puts it. “Despite wishful thinking or rationalizations, significant regulatory crimes eventually leak out. When they do, the consequences are far worse.”

Richard Levick, Esq., @richardlevick, is Chairman and CEO of LEVICK. He is a frequent commentator on television and SiriusXM‎.


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