Defeat to Cheat

corporate-cheatingVolkswagen AG’s troubles have widened as supervisory board Chairman Hans Dieter Poetsch became enmeshed in the probe into the company’s emissions scandal and a prominent German newspaper reported that U.S. testers found defeat software in Audi cars this summer. The carmaker said the public prosecutor’s office in Braunschweig near its Wolfsburg headquarters was investigating two board members including Poetsch for alleged market manipulation in the period when he was chief financial officer. Poetsch and VW are supporting the inquiry, the company said in a statement.

VW maintains its management “fulfilled its disclosure obligation under German capital markets law,” it said. The disclosure is the latest dose of bad news for the iconic German automaker, mired in a scandal over software designed to cheat on emissions tests by operating cars differently under inspection than while being driven. The scandal has cost Volkswagen’s former CEO, Martin Winterkorn, his job, sliced VW’s market value, and has the company staring at a $14.7 billion settlement covering 2.0-liter engine cars in the U.S.

Poetsch was CFO of VW from 2003 to 2015 and he also sits on the supervisory boards of VW units Porsche AG and Audi. Volkswagen’s U.S. woes may also have worsened after authorities in California discovered certain Audi cars with automatic transmissions which included software that would burn less fuel and emit less C02 when on the testing stand than while driven, per Germany’s Bild am Sonntag newspaper. The findings made over the summer apply to Audi A6 and A8 cars and its Q5 SUV, the newspaper said. Audi had stopped installing the defeat devices in new vehicles by that time, Bild said. An Audi spokesman declined to comment on the Bild report, citing ongoing negotiations with authorities.

Volkswagen said in a statement that prosecutors in the German city of Braunschweig are investigating three members of the board including Poetsch. Prosecutors were already investigating former Volkswagen CEO Martin Winterkorn and VW brand chief Herbert Diess over allegations they didn’t inform investors soon enough. “Based on careful examination by internal and external legal experts, the company reaffirms its belief that the Volkswagen board of management duly fulfilled its disclosure obligation under German capital markets law,” it said in a statement. The company said VW and Poetsch would “continue to give the inquiries by the public prosecutor’s office their full support.”

German law requires publicly traded companies to alert investors as soon as they become aware of unforeseen developments that could affect a decision to buy or sell the stock. The company has acknowledged learning in May 2014 that an environmental group had uncovered emissions irregularities, but that top officials didn’t discuss the matter until more than a year later. The U.S. Environmental Protection Agency issued a violation notice on Sept. 18, 2015, leading Volkswagen to assess the risks as more serious and issue its investor advisory on Sept. 22, 2015. Last month, a U.S. federal judge in San Francisco approved a $15 billion settlement under which Volkswagen will buy back or fix almost half a million cars affected by the emissions scandal in the United States.

The investigation, which relates to Poetsch’s time as finance chief of VW, is the latest fallout from the carmaker’s admission last year that it cheated on diesel emissions tests. VW has admitted that it installed software that deactivated pollution controls on more than 11 million diesel vehicles sold worldwide, rattling its global business, damaging its reputation and prompting the departure of Chief Executive Martin Winterkorn. Adding to its woes, a German newspaper reported on Sunday that a U.S. regulator found another cheat software device in vehicles made by its luxury division Audi. The paper said the device was not the same as the one which triggered last year’s diesel emissions scandal at Audi parent VW. The prosecutor’s office in Braunschweig first announced the market manipulation probe in June, targeting former CEO Winterkorn and VW brand chief Herbert Diess for suspected market manipulation related to the emissions scandal.  The prosecutor’s office said at the time that its probe centered on evidence that VW’s duty to disclose possible financial damage from the emissions test cheating may have arisen before Sept. 22, 2015, when the carmaker publicly admitted its wrongdoing. “Based on a thorough examination by internal and internal legal experts, the company reaffirms its belief that VW’s management fulfilled its duties to inform the capital market,” VW said.

The German magazine Bild report said that the California Air Resources Board (CARB) had made a new discovery of cheating software in an automatic transmission Audi in summer 2016. Audi, the main contributor to earnings at parent VW, had already admitted last year to using illicit emissions-control devices in about 85,000 3.0 liter diesel engines and has so far this year set aside 752 million euros ($838 million) to cover related costs. Bild, which cited no sources, said the software in CARB’s new discovery lowered carbon dioxide emissions by detecting whether a car’s steering wheel was turned as it would be if it was driving on a road. If the steering wheel was not turned, as if it was being tested in a laboratory, the software turned on a gear-shifting program which produced less carbon dioxide, allowing the car to meet the emissions criteria. If the wheel turned by more than 15 degrees, as if it was being driven, it turned the software off. The newspaper did not say if other performance criteria improved when this was switched off.

Audi stopped using the software in May 2016, just before CARB discovered the manipulation in an older model, the paper said. It said the affected transmissions were used in several hundred thousand vehicles, adding that the carmaker had suspended several engineers in connection with the matter. Any revelation of further cheating software would be a major setback after VW just reached a near $15 billion settlement with U.S. regulators and car owners, crossing one of the biggest hurdles in the clean-up of the scandal.