VW rocked by emissions scandal as prosecutors come calling

June 23, 2015: A man walks past a screen displaying a logo of Volkswagen at an event in New Delhi, India. (Reuters)

BERLIN – Volkswagen, the world's top-selling automaker, lost a stunning 17.1 percent of its value Monday after admitting that it intentionally rigged nearly half a million cars to defeat U.S. smog tests.

The Obama administration, meanwhile, announced it is expanding its investigation of what it's calling "defeat devices" in diesel vehicles, to make sure other manufacturers aren't using similar schemes to thwart federal Clean Air laws.

Volkswagen has now admitted that it intentionally installed software programmed to switch engines to a cleaner mode during official emissions testing. The software then switches off again, enabling cars to drive more powerfully on the road while emitting as much as 40 times the legal pollution limit.

The U.S. Environmental Protection Agency is working closely with the California Air Resources Board, which spent years pressing Volkswagen to explain why its diesel engines ran dirtier in actual driving than during smog tests.

"VW did not self-disclose these issues," said EPA spokeswoman Liz Purchia said.

Volkswagen's chief executive, Martin Winkerton, was under withering pressure Monday as the scandal erased more than 13 billion euros (around $15 billion) from the company's market value in the first trading session after the EPA announced the violations Friday.

Winkerton apologized, promised an internal investigation and acknowledged that his company had "broken the trust of our customers and the public."  VW shares closed at a nearly three-year low of 133.70 euros.

VW, facing as much as $18 billion in fines, halted U.S. sales of the affected vehicles and pledged to cooperate with regulators after finally acknowledging its scheme on Sept. 3, Purchia said.

The investigation also could test the Justice Department's resolve, announced Sept. 9, to hold individual executives accountable for corporate wrongdoing. Purchia said the Justice Department is already involved, and a VW official confirmed that the Department has contacted the company. The official spoke on condition of anonymity for lack of authorization to discuss the matter publicly.

The EPA warned VW Friday that in addition to corporate fines of up to $37,500 per vehicle, individuals could be fined $3,750 per violation of the Clean Air Act, which could theoretically add up to nearly $1.9 billion, given the number of cars involved.

Industry analysts said the VW CEO faces difficult questions in the coming days. The German news agency dpa reported that key members of the VW board will hold a crisis meeting Wednesday, and the full board is set to meet Friday.

"At the moment, I'd be surprised if Winterkorn can ride this out, but in Germany there's often a slightly slower process in these matters," said Christian Stadler, a professor of strategic management at Warwick Business School. If VW were a U.S. company, the CEO would have gone more or less immediately, he said.

For a company to engage in such blatant trickery, top executives must have been informed, said Guido Reinking, a German auto expert.

Winterkorn is an engineer by training who led research and development across the VW group beginning in 2007, and became chairman of the management board the same year.

The illegal software was made and installed in vehicles with 2.0-liter diesel engines during the model years 2009 through 2015, the EPA said. They include the Audi A3, VW Jetta, Beetle, Golf and Passat models.

"It's almost impossible to imagine that he didn't know about this special way of programming the engine," Reinking told German television station n-tv.

Volkswagen marketed these diesel-powered cars, which account for about 25 percent of sales, as being better for the environment.

The EPA has ordered VW to fix the cars at its own expense, but said car owners do not need to take any immediate action. The cars threaten public health, but the violations pose no safety hazards, and the cars remain legal to drive and sell while Volkswagen comes up with a recall and repair plan, the agency said.

Volkswagen had insisted for years that unrelated technical issues or unexpected conditions were to blame for the higher pollution levels regulators confirmed during regular driving. VW finally acknowledged installing the devices only after the California Air Resources Board and the EPA insisted on a better explanation before approving its 2016 diesel models.

"We met with VW on several occasions, and they continued to dispute our data, so we'd return to the lab. Over time, VW had no other explanations left, and it was our lab staff who actually got VW to admit that there was, in fact, a defeat device," CARB spokesman Dave Clegern said.

In Germany, the transport minister said VW models will be examined for any similar manipulation.

"I have instructed the Federal Motor Transport Authority to order strict, specific follow-up tests of the VW diesel models by independent experts immediately," Alexander Dobrindt told Germany's Bild newspaper.

Volkswagen recently edged out Japan's Toyota to become the world's top-selling automaker, but it has had a difficult year amid signs of faltering sales in the U.S. and China. Its share price has fallen from more than 250 euros.

Toyota had to recall 9 million cars between 2009 and 2011 after some of the Japanese automaker's vehicles experienced unintended acceleration. That's far more than the half-million or so that VW is having to fix. The cost to Toyota, including fines, was a little more $5 billion, according to Warwick Business School's Stadler.

"To some extent the cheating by Volkswagen seems more blatant, but the numbers are lower and there are no fatalities involved," Stadler said. "This suggests that in the `heat of the moment,' the long-term effect on Volkswagen may be overstated. Sure it will hurt, but maybe not quite as bad as we expect right now."

Volkswagen's woes were felt across the European car market Monday. France's Renault SA watched its share price drop 3.2 percent, and BMW AG ended 1.5 percent lower. Daimler AG, which owns Mercedes-Benz, dropped 1.4 percent.