On March 14, 2019, the Securities and Exchange Commission (“SEC”) charged Volkswagen AG,two of its subsidiaries, and its former CEO, Martin Winterkorn, with fraud in connection with a 2015 scandal commonly known as “dieselgate.” (SEC, Press Release). “Dieselgate” was a fraudulent scheme, masterminded by Winterkorn, under which Volkswagen marketed environmentally-friendly diesel engine vehicles that, in reality, emitted pollutants at levels 40-times greater than the legal limit in the United States. (SEC, Complaint). The parties were charged with violating the following federal securities laws: Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, SEC Rule 10b-5(b), and Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. (Id.).

From at least 2007 through September 2015, Volkswagen committed massive fraud by purporting to sell “clean diesel” cars that actually emitted nitrogen oxides and other dangerous pollutants into the air. (Id.). Volkswagen used illegal “defeat devices” in these cars to hide the true levels of emissions. (Id.). These devices were able to recognize instances when the vehicles were being tested for emissions on a treadmill, and reduced the car’s emissions to a legal level to conceal the actual amount of pollutants the cars emitted when driven on public roads. (Id.). The SEC charged Winterkorn and Volkswagen for failing to disclose to investors that the diesel vehicles violated U.S. emission standards. (Peter Blumberg and Karin Matussek, Bloomberg). 

The SEC argued in its complaint that, had the truth been known, Volkswagen would have never been able to charge U.S. investors with the inflated prices for its diesel engine vehicles. (SEC, Complaint). Volkswagen’s sales of diesel vehicles soared as the company promoted and sold its illegal cars. (Id.). To finance its “Strategy 2018” plan, in which Volkswagen sought to become the “biggest, most profitable, and most environmentally-friendly car company in the world by 2018,” Volkswagen conducted bond offerings in the U.S. and sold over $8 billion of bonds to investors and over $4.9 billion of asset-backed securities in 2014 and 2015. (Id.). Under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b), the SEC argued that Winterkorn and Volkswagen made untrue and misleading statements and omissions of material fact in connection with their sale of those securities. (Id.). The SEC further alleged that the parties misled investors in the company’s offering memoranda by claiming that Volkswagen had created a vehicle that had the benefits of an ordinary diesel engine while still complying with U.S. environmental laws. (Id.). In reality, Volkswagen was violating federal laws set forth by the Environmental Protection Agency (“EPA”) when the company sold cars that emitted illegal levels of pollutants. (Id.). Another alleged material omission was the fact that Volkswagen installed illegal defeat devices in their vehicles. (Id.). The SEC reasoned that a reasonable investor would find this information important because the use of illegal devices impacts the profitability and creditworthiness of Volkswagen, the company’s ability to repay its debts, the risks associated with purchasing such bonds, and the interest rates paid on the bonds. (Id.).

One potential issue for the SEC’s claim under 10(b) and 10b-5 is the element of scienter, which requires an awareness of the falsity of the statement or omission. Under the facts and circumstances, it seems Winterkorn had actual knowledge of the illegality of his scheme. In 2009, he announced that “Strategy 2018” was his primary goal as CEO. (Jeff Eggers, Fortune). Following an investigation, the SEC found that Winterkorn and other company executives were made aware of the defeat devices during a meeting with Volkswagen engineers in 2007. Despite concerns and objections from other meeting participants about the defeat device scheme, the devices were ultimately installed on the vehicles. (SEC, Complaint). However, though Winterkorn likely knew of the scheme itself, he did not personally issue any of the bonds in question. Further, it remains unclear whether any employee involved in the bond issuances had any knowledge of the scheme. Following the SEC’s complaint, a spokesperson for Volkswagen issued a statement on behalf of the company, which stated “The SEC does not charge that any person involved in the bond issuance knew that Volkswagen diesel vehicles did not comply with U.S. emissions rules when these securities were sold, but simply repeats unproven claims about Volkswagen AG’s former CEO, who played no part in the sales.” (Peter Blumberg and Karin Matussek, Bloomberg). On the other hand, the SEC’s rebuttal is that Winterkorn had power and control over the company’s day-to-day operations, which included issuing bonds. (SEC, Complaint). In this sense, scienter may be satisfied. 

Another potential issue arising out of the SEC’s 10(b) claim is the element of damages. The same Volkswagen spokesperson stated “The SEC has brought an unprecedented complaint over securities sold only to sophisticated investors who were not harmed and received all payments of interest and principal in full and on time.” (Peter Blumberg and Karin Matussek, Bloomberg). While this may be true, the SEC’s prayer for relief does not mention disgorgement, but rather asks the United States District Court in California to enjoin Volkswagen and Winterkorn from violating 10(b) in the future. (SEC, Complaint). An order for civil penalties under Section 20 of the Securities Act of 1933 was also requested. (Id.). 

The “dieselgate” scandal has already cost Volkswagen more than $30 billion, which included billions of U.S. dollars in civil and criminal fines that the company was forced to pay. (David Shepardson, Reuters). German investors have also filed lawsuits in their home country. (Peter Blumberg and Karin Matussek, Bloomberg). Years after the initial scandal was revealed, the SEC and global investors are still seeking additional punishment for this enormous scandal.