German judge casts doubt on VW claim that it thought emissions scandal would not hit shares

Volkswagen was dealt a series of setbacks on the second day of hearings in the $10.4-billion investor lawsuit over its diesel emissions scandal as judges questioned some of the German carmaker’s key defenses.

Presiding Judge Christian Jaede took issue with VW’s longstanding claim that it put off disclosure of the U.S. diesel probe because its lawyers had said fines were unlikely to affect the share price, which cratered when the scale of the problem became apparent. The judge cited an August 2015 letter by law firm Kirkland & Ellis, and said the lawyers tried to be vague but discussed the potential penalties.

“By no means could you infer from that memo that VW could expect leniency,” Jaede said on Tuesday, at the trial being held in the city of Braunschweig. “The court leans to the view that you couldn’t expect a fine that’s not material to the stock price, given that VW had concealed the manipulations for more than a year in the talks with the authorities.”

Investors are claiming VW should have released information about its use of a so-called defeat device that rigged emissions tests as early as 2007 and later kept quiet even as regulators looked into the issue. Among the plaintiffs is the giant California Public Employees’ Retirement System.

The scam first became public Sept. 18, 2015, when U.S. authorities disclosed their probe and VW issued formal notification to the markets four days later. The company’s share price fell more than 40% that month. VW has calculated the scandal’s overall financial impact at 27.4 billion euros ($31.8 billion).

VW failed to convince the court that it kept the issue secret to avoid jeopardizing talks with the U.S. authorities, according to the judge. Such a defense is only convincing if the company had fully and swiftly cooperated with the U.S. once the leadership learned about it, Jaede said.

The investors’ argument that former Chief Executive Martin Winterkorn may have known as early as 2008 about the rigging, Jaede said, isn’t fabricated or only fishing for more facts. The judge cited a speech Winterkorn made in Vienna in April 2008 about the prospects of the diesel technology in the U.S. market and said that suggests Winterkorn had at least looked into the details of the engines.

Jaede also referred to a court filing by Quinn Emanuel, a law firm representing a group of investors in the case, which cites a 2007 campaign by German environmental group Deutsche Umwelthilfe. The group back then had already criticized the emissions of diesel cars. Winterkorn at the time replied to the environmental group’s concerns, suggesting the then-CEO had taken a deeper look into the matter, according to the judge.

Another issue for judges concerns a crucial event in July 2015, when Winterkorn and Herbert Diess, now VW’s chief executive, attended a meeting that discussed technological problems. Plaintiffs claim that both were informed about the widening diesel problems at the session, a regularly scheduled event known as the “damage table.”

Although VW has said the discussions can’t be reconstructed because of conflicting accounts of what happened, Jaede complained that the company failed to explain in detail who said what. The judge asked the company to provide more information on the meeting.

“A righteous board member, who is interested in cooperating with the authorities, would have thoroughly investigated the issue and informed them fully right away,” Jaede said. “It seems that didn’t happen.”

The court on Monday had said that claims based on VW actions before July 2012 are likely to be dismissed because of the statute of limitations. Some events after July 10, 2012, may be crucial, though, and investors may be able to invoke them for the suit, the judges said.

Several events after July 2012 may have warranted disclosure of the diesel problems to capital markets, Jaede said Tuesday. The closer to Sept. 18, 2015, the clearer the duty, since the magnitude of the case was becoming hard to ignore. The clearest example was Aug. 19, 2015, when VW admitted to a California regulator that it had cheated and lied, according to the judge.

Hearings will continue on Sept. 17. VW has the opportunity to submit more filings to respond to the court’s concerns, which are preliminary and may change before a final ruling.