VW Settles Diesel Emissions Case in U.S., Clearing Just One Financial Hurdle

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Volkswagen has solved one big problem stemming from its diesel emissions deception, as the carmaker agreed on Tuesday to pay up to $14.7 billion to settle claims in the United States.

But the final financial toll — once the company deals with a long list of fines, lawsuits and criminal investigations around the world — will be far higher. The continuing fallout could leave Volkswagen vulnerable to billions of dollars more in expenses at a time when profit is already under pressure and the industry is facing a period of technological upheaval.

So far, Volkswagen has set aside 16.2 billion euros, or about $17.9 billion, for costs related to its public admission last September that its supposed “clean diesel” cars had been deliberately designed to cheat on air-quality tests. Matthias Müller, the Volkswagen chief executive, said less than two weeks ago that the amount was adequate.

But the American settlement, with the government and car owners, will consume most of that money. And Volkswagen faces more scrutiny in the United States and around the world, most notably as authorities pursue criminal investigations against the company and executives.

The Volkswagen scandal is “one of the most flagrant violations of environmental and consumer laws” ever in the United States, Deputy Attorney General Sally Q. Yates said at a news conference in Washington on Tuesday.

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“We can’t suck the nitrous oxide out of the air,” she said.

The settlement would go toward repairing the damage, she said. The deal includes $10.03 billion to buy back affected cars at their prescandal values and additional cash compensation for owners. Additionally, the company has agreed to pay $2.7 billion into a government fund to compensate for the environmental impact of the cars and to spend $2 billion on cleaner-vehicle projects.

“This is by no means the last step,” Ms. Yates cautioned. “The settlements do not address any potential criminal liability, though I can assure you our criminal investigation is active and ongoing.” She added that the United States was aggressively pursuing a criminal investigation, both of the company and of individuals.
BUSINESS By REUTERS 2:08
U.S. Officials on Volkswagen Settlement
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U.S. Officials on Volkswagen Settlement
Sally Q. Yates, right, the United States deputy attorney general, and Gina McCarthy, the Environmental Protection Agency administrator, spoke on Tuesday about the $14.7 billion Volkswagen emissions settlement. By REUTERS on Publish Date June 28, 2016. Photo by Zach Gibson/The New York Times. Watch in Times Video »
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Volkswagen acknowledged on Tuesday that it may have to raise the amount of money allocated to deal with the scandal. “Due to the complexities and legal uncertainties associated with resolving the diesel matter, a future assessment of the risks may be different,” the company said in a statement.

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One of the biggest risks to the carmaker is in Europe, where the affected Volkswagen diesels vastly outnumber those in the United States.

The American deal focuses on nearly 500,000 Volkswagen vehicles. But the carmaker admitted to installing the cheating device on more than 11 million cars worldwide, with 8.5 million in Europe.

While European legal systems do not favor consumers as much as those in the United States, Volkswagen may still have to pony up. There is an increasing outcry from European owners and politicians who also want compensation.

“Now that this is done, attention should turn to Europe,” said Michael Hausfeld, a Washington lawyer whose firm represents aggrieved owners and shareholders on both sides of the Atlantic. The settlement “is a strong foundation for what Volkswagen needs to do for European owners as well as for the environment.”

In addition, how much Volkswagen will ultimately have to pay to American car owners may not be clear for many months.

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Just over $10 billion has been allocated in the settlement. But the actual cost to Volkswagen will depend on how many owners exercise their option to sell their cars back to the company at the prescandal value, which will vary according to the age and mileage of the cars.

Volkswagen is set to offer buybacks based on prescandal, “clean trade” values, which assume that all cars are in an excellent condition. The Federal Trade Commission said consumers could be expected to get $12,500 for an older-model Jetta to as much as $44,000 for a 2014 Audi. The settlement works out to about $21,000 a car. (Owners can look up their potential payout on a special settlement website.)

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Explaining Volkswagen’s Emissions Scandal
Volkswagen has admitted that 11 million of its vehicles were equipped with software that was used to cheat on emissions tests. The company is now contending with the fallout.
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If Volkswagen is lucky, the total paid to car owners could turn out to be less than $10 billion. Analysts at Kelley Blue Book estimate that the cost of buying back all the offending diesels would be $7.3 billion. Volkswagen also owes owners additional compensation of $5,100 to $10,000, or at least another $2.4 billion.

Then there is the issue of what Volkswagen will do with all the cars it buys back from owners in the United States.

The settlement bars Volkswagen from simply exporting the cars, without fixes, to countries with less stringent emissions standards. Gina McCarthy, the Environmental Protection Agency administrator, said on Tuesday that Volkswagen was required to fix the cars that it bought back or to scrap them, and was encouraged to recycle any scrapped parts.

“These are not going to be shipped elsewhere in their current form,” she said. “We are not shipping the air pollution elsewhere.”

The swell of scrutiny worldwide will only add to the financial pressure.

German prosecutors are looking into whether Volkswagen and top executives, including the former chief executive Martin Winterkorn, waited too long to inform shareholders about the looming scandal. Shareholders are also suing Volkswagen over similar disclosure issues.

Volkswagen faces an inquiry by attorneys general in 42 states, the District of Columbia and Puerto Rico. Attorney General Eric T. Schneiderman of New York, one of the states leading the investigation, announced on Tuesday the states’ own settlement with Volkswagen for $500 million in penalties for defrauding consumers. A separate investigation by the state attorneys general of Volkswagen’s environmental misconduct continues.

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The criminal investigation in the United States also looms large. Democratic Senators Edward J. Markey of Massachusetts and Richard Blumenthal of Connecticut, both members of the Senate Commerce, Science and Transportation Committee, praised the $15 billion settlement but pressed authorities for further action.

“While this settlement is an historic victory for some Volkswagen vehicle owners, the automaker must ensure that owners of vehicles not covered by today’s settlement receive the same compensation options as those announced today,” they said in a joint statement.

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“We continue to call on the Department of Justice to vigorously pursue its criminal investigation against Volkswagen executives who knowingly and intentionally deceived regulators,” they said. “All the facts point to criminal culpability, and officials should be held accountable as appropriate.”

Volkswagen’s credibility with investors, already strained, could deteriorate further if the company is forced to increase the amount of money it has set aside for diesel-related costs. Shares of Volkswagen are down more than 20 percent since the scandal erupted late last year.

And the deception is just adding to the longstanding financial pressure at the company. Never fabulously profitable, the company reported a record loss in 2015, while earnings and sales declined in the first quarter of 2016.

The company has been losing market share in Europe, in part because of the damage to its reputation. And Volkswagen’s dependence on sales of diesel cars, where it was seen as a technology leader, could now be a liability. The scandal has raised serious doubts about claims by Volkswagen and its rivals that diesel is environmentally friendly.

Volkswagen is also trying to quell a potential backlash from dealers in the United States. Without a fix, their lots are filled with diesel cars that they can’t sell.

The carmaker is already facing a lawsuit filed by the owner of three dealerships, seeking compensation for lost sales suffered by the more than 600 dealers in the United States who sell Volkswagen-brand cars. Separately, a group of dealers has been trying to work with Volkswagen to win financial support and possibly compensation.

“I was hoping there would be an imminent fix.” said Rick Mastria, the owner of a Volkswagen franchise in Raynham, Mass.

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“We’ve got cars sitting and waiting to be sold,” Mr. Mastria said, adding, “Is Volkswagen going to buy those back from us?”