Volkswagen Under Siege: Unprecedented Search, Unanswered Questions – Forbes

Posted: Tuesday, April 18, 2017

Photo by Harold Cunningham/Getty Images

Last month’s raid on Jones Day in Munich by German authorities triggered a number of differing responses, depending on where you happen to sit geographically and professionally. Jones Day is the global law firm hired by Volkswagen in 2015 to conduct a comprehensive internal investigation and provide authorities in Europe and the United States with independent findings as to how the now-famous diesel emissions violations occurred and who was responsible. Based on those findings, VW pleaded guilty in Detroit earlier in March to fraud, obstruction, and other charges.

Now, however, it seems painfully obvious that the authorities in Germany weren’t quite satisfied with the investigation. (The Jones Day sortie was one of a series of raids that included Audi facilities as well as private homes elsewhere in Germany.) Along with raising doubts as to how credible the recent guilty plea was, the very fact that the authorities saw fit to take the drastic step of searching files at a major law firm creates reputational exposure for Jones Day as well as Volkswagen. The search was not wholly unprecedented; in 2009, Russian officials raided DLA Piper and White & Case while investigating a Moscow hotel development – but that was Putin’s Russia, not Merkel’s Germany.

Internal investigations have been relatively commonplace in the U.S. for decades yet they continue to raise what one lawyer speaking to their ethical issues in an American Bar Association publication called “a veritable minefield for all involved.” In other countries, the issue is even muddier. In a soon-to-be-published survey by the Association of Corporate Counsel, less than 40% of European respondents (all in-house counsel) said they enjoy privilege. Even so, the German authorities were taking no chances; they buttressed their position by maintaining that, while hired by Volkswagen, Jones Day was not functioning as the company’s legal representative. Privilege, assuming there’s any to begin with, cannot therefore apply in this instance.

For the Germans, “privilege law is nuanced,” says Rachel Cannon, a partner at Dentons U.S.  “Authorities may believe they can seize Volkswagen’s records from Jones Day because they plan to prosecute individual employees not represented by the firm. But the government should be careful: it’s a razor’s edge any time they search a law office. One misstep, even an unintentional one, and an entire case can dissolve in a sea of violated rights.”

In England, “companies instruct outside counsel to first ensure that privilege is preserved” before launching an internal investigation, says Johanna Walsh, a lawyer specializing in corporate crime at Kingsley Napley in London. “It would be unheard-of for prosecutors to raid law firms in the way we’ve seen in Germany. The Serious Fraud Office, which investigates and prosecutes the most serious corruption, has said it finds investigations which ‘churn up the crime scene’ to be unhelpful. The SFO prefers genuine cooperation with their own investigation rather than one by the company itself.”

The ethical parameters are, in any event, tough enough for credibly independent investigators to decode on a global basis; much worse when the investigations are seen as whitewashes because, as one Forbes commentator observed of the Enron investigation conducted by Vinson & Elkins early in this century, “management [is] hiring lawyers to investigate management.” All too often, the middle-level executives wind up in the soup while C-Suites go home for dinner. It seems the happy exception when law firms deliver a final report that, like Shearman & Sterling’s investigation of Wells Fargo, is generally perceived as “scathing” in its treatment of C-Suites (and even that report has been read by some observers as a “whitewash” of the bank’s directors).

From a public communications standpoint, these investigations are thus a double-edged sword. In this case, VW was pressured by U.S. regulators to retain an independent auditor as was another German giant, Siemens, during its mammoth FCPA bribery case in 2015. Yet regardless of whether or not they’re being compelled by the government, companies can achieve significant optical benefits when they take such ostensibly resolute steps toward total compliance and transparency. Shareholders are reassured, regulators are pacified, and everybody else can now shift their attention to some other headline-grabbing scandal. Siemens, for one, garnered some nearly giddy praise for its cultural transformation of which the independent investigation was presumably one important agency.

Alas, it’s clearly been a bumpier road for Volkswagen. Optics perceived to be eyewash simply create bigger, potentially unmanageable crises in public confidence. The raid on Jones Day only encourages that perception.

Conversely, the vexing questions as to the actions taken by the Munich prosecutor are all the more vexing in light of the real possibility that the authorities leaked news of the raid in order to make examples of both Volkswagen and Jones Day. VW responded aggressively – unusually so for the cautious culture of German business practice – condemning the Jones Day search as “unacceptable” and “a clear breach of the principles of the rule of law.”

How well-advised was that strong response? “The company would have been better advised to fight against the prosecutor’s office rather quietly,” observes Uwe Wolff, Chief Executive Officer of NAIMA Strategic Legal Services GmbH in Berlin. “Volkswagen is not (yet) in a position to stylize itself as a victim of an overeager prosecution and its loud response to the searches is very harmful,” adds Wolff. “It seems the lawyers are driving communications while the communicators are left to pick up the shards.” VW’s aggressive response devolves around a legalistic point; i.e., the propriety of raiding a law office. But the public is a lot less concerned with that than with the underlying substance of the matter.

Volkswagen faces at least one more big decision in the weeks and months ahead. While the company has taken an aggressive position in the Court of Public Opinion, the company must now determine the likely impact on its business that a protracted legal case in Europe will have.

On the one hand, many more European drivers use diesel fuel; drawing a line in the sand could lessen VW’s considerable exposure in civil courts throughout the continent. In combating these cases, Volkswagen has the benefit of weaker consumer laws and less onerous discovery requirements.

On the other hand, even successful contestation might be a Pyrrhic victory if it keeps Dieselgate front and center in public consciousness for the foreseeable future. “The public has a deep impression that VW wants to keep the truth from coming to light,” comments Wolff. “It is not interested in legal skirmishes.”

To be sure, businesses need speedier closure in order to rehabilitate and protect their wounded brands. Unfortunately, this pressure to achieve that closure, to return to business as usual, gives their public sector adversaries a negotiating advantage, whatever a raid on a corporate law firm discloses or fails to disclose.

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

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