German financial regulator BaFin emerges as key player in VW scandal ahead of key developments

Its probe is ultimately more significant than Jones Day’s as car giant enters busy time

Embattled German auto giant Volkswagen (VW) will soon unveil the results of an investigation into the diesel emissions scandal conducted by the US law firm Jones Day. When it was commissioned after the scandal broke last September, VW’s board insisted that it would be enormously helpful in getting to the bottom of how and why the firm cheated on US diesel emissions standards.

Seven months later, it’s open to question whether the enquiry will live up to VW’s claim or satisfy outraged investors that have sued it for billions of euros in damages stemming from the scandal. As the week began, several of Jones Day’s findings were leaked to German news agency dpa.

According to dpa, Jones Day’s investigators have traced the origins of the ‘defeat device,’ to a group of individuals working within VW. The device is the software that was used to rig EA189-type diesel engines so their emissions of nitrogen oxide (NOx) would be lower during tests in the US. But that’s all that Jones Day has apparently achieved. According to dpa, neither has the law firm been able to “reconstruct the chain of events that led to the development of the scam” nor “find those responsible for the scandal.”

Then there is the contention in the report that former VW Chief Executive Martin Winterkorn had “no involvement” in the scandal. This is despite the fact he was in charge of VW’s technology development as CEO.

And VW has already admitted that Winterkorn was informed that US authorities were looking into the emissions rigging via a memo sent to him in May 2014, although the automaker says it can’t verify whether he read the memo.

The full Jones Day report is expected later this week. So it’s still very possible that it helps VW’s stakeholders – i.e. investors, employees and politicians – get to the truth about what happened at one of Germany’s best-known companies. And if the findings should fall short of expectations, VW can ask Jones Day to keep digging.

Even so, German corporate governance experts say the Jones Day investigation is not the main event that VW has sought to promote. In fact it’s a sideshow.

The main event, say the experts, is a probe by German financial markets regulator BaFin meant to determine whether VW knew about the emissions rigging but deliberately delayed informing investors (and the public) about it. If BaFin finds that VW did delay the disclosure, this would be a violation of German securities law – in German the Wertpapierhandelsgesetz (WpHG).Any fines levied by the BaFin would be the least of VW’s problems considering the lawsuits that have been filed over by hundreds of VW investors as well as the US government. Those lawsuits seek tens of billions of euros in damages from the automaker.

Says Marc Tüngler, CEO of German shareholder association DSW: “The BaFin’s determination on whether VW violated the WpHG is crucial because of its role as the regulator. The (German) courts will follow whatever it decides on the matter.” Tüngler adds that as the BaFin has yet to make its determination, the DSW has refrained from advising investors in VW from filing a claim.

“We don’t want to see a situation where the BaFin decides in favour of VW and investors incur legal costs for nothing.”

The DSW has set up a Dutch Stichting (foundation) whose purpose is to seek a legal settlement with VW. According to the association, the idea is to give VW investors a low-cost way of getting compensation from the scandal. This, however, presupposes that the automaker is at all interested in a settlement.

Volkswagen’s share price lost 45% in the wake of the scandal, but has since recouped some (15%) of that loss.

Regarding the lawsuits filed since last September, the ones that have gotten the most attention are from the German law firms TILP and Nieding + Barth (Germany) as well as a case from Quinn Emanuel (US). This is partly because all three have recruited big international investors like US pension giants CalPERS and CalSTRS. VW’s defence of the charge that it did not disclose the emissions scandal early enough is that while there was internal knowledge of it before the statement – indeed the Winterkorn memo reflects this – its board was not fully briefed until early September 2015.

VW goes on to say that even after the board knew about it, it had no reason to expect that the US Environmental Protection Agency (EPA) would, for the emissions violations, seek a maximum fine of €18bn. Only after knowing (and regretting) the EPA’s intention was it ready to disclose the entire affair via a statement to the markets, VW says.

It’s not clear when the BaFin, which began its probe of VW in early October, will announce whether the company violated Germany’s WpHG. A spokesman said only that the investigation was continuing. However, BaFin President Felix Hufeld will certainly be asked about the probe at a press conference on May 10, which could turn out to be a key date for investors.
And between the release of the Jones Day report on Thursday and the BaFin event, VW is hosting a news conference at its headquarters in Wolfsburg on April 28, so VW’s stakeholders may learn more about the emissions scandal and where things go from here.

Whatever happens, one crucial question lingers: Why didn’t the German state of Lower Saxony, which has a blocking 20% minority stake in VW, do more to ensure that the company was better governed?

The diesel emissions scandal is just the latest, and most damaging, in a string of governance failures at the firm dating back to the 1990s. These include industrial espionage, a sex scandal involving union representatives and former VW CEO and Chairman Ferdinand Piëch making his wife, a former nanny, a board director.

Piëch’s family and his Porsche relatives own a majority of VW’s voting shares, but the two clans must share power with Lower Saxony.The state’s government has two seats on VW’s board, currently held by Industry Minister Olaf Lies and Prime Minister Stephan Weil.

Clearly the state could have paid more attention to VW’s governance. Why it didn’t has a lot to do with Ferdinand Piëch himself. During his reign as CEO and Chairman (1993 to 2015), Piëch’s revitalization of VW created a jobs and tax powerhouse for Lower Saxony.

Responsible Investor put the question of Lower Saxony’s oversight of VW to the government itself. A spokeswoman e-mailed a speech from Stephan Weil from last October. In the speech, Weil promises that the Jones Day investigation will get to the bottom of the scandal at the VW. Weil insists that he, Lies and the Lower Saxony directors that preceded them upheld their duties as supervisors of VW.

In the final analysis, though, it is poor governance that has put VW in its current crisis.