DOJ’s Sputtering Case Against Volkswagen

January 7th, 2016 by Phil Mattera

An activist of the environmental protection organization 'Greenpeace' holds a protest poster in front of a factory gate of the German car manufacturer Volkswagen in Wolfsburg, Germany, Friday, Sept. 25, 2015, where the supervisory board meet to discuss who to name as CEO after Martin Winterkorn quit the job this week over an emissions-rigging scandal that's rocking the world's top-selling automaker. (AP Photo/Michael Sohn)

There’s a scene in “The Wolf of Wall Street” in which a federal prosecutor tells Jordan Belfort (played by Leonardo DiCaprio) that the case against him for securities fraud was a “Grenada,” meaning that it was as unloseable as the 1983 U.S. invasion of that poorly defended Caribbean island.

The Justice Department has had another Grenada in recent months with the case against Volkswagen for systematically cheating on auto emissions tests. As the scope of the deception broadened to include millions of vehicles, VW effectively admitted guilt and put aside the equivalent of about $7 billion to resolve the issue, later acknowledging that sum would not be enough.

After three months of preparation, Justice has filed its case yet is failing to make full use of its leverage against the automaker. As a result, it could end up with only a modest win against one of the most egregious cases of corporate environmental fraud this country has ever seen.

The biggest disappointment is DOJ’s decision to forgo criminal charges and handle this solely as a civil matter. Admittedly, prosecutors were confronted with the fact that a little known loophole in the Clean Air Act exempts the auto industry from criminal penalties. Yet there appeared to be ways to get around this limitation by alleging fraud, for instance, given that there was apparently a deliberate effort to deceive the federal government about emissions. It’s not clear why DOJ rejected this approach and did not even use the frequent gambit of pursuing a criminal case and then offering the company a deferred- or non-prosecution agreement. Those options are problematic, but with them criminal charges are at least part of the picture rather than being left out entirely.

Also frustrating is the failure of Justice to bring charges (civil or criminal) against individual VW executives. This flies in the face of the department’s hyped announcement in September of a new policy of holding individuals accountable for corporate misconduct. Charging senior VW officers was all the more important in light of indications that the company has been seeking ways to place the blame on lower-level engineers.

It is disturbing to think that VW may have intimidated DOJ away from an aggressive prosecution. Although the scope of the scandal has widened, taking in more of the company’s brands in more countries, VW seems to be adopting a less conciliatory posture than it did earlier in the case. In fact, the DOJ complaint accuses the company of impeding and obstructing the investigation through “material omissions and misleading information” — accusations that make the absence of criminal charges all the more bewildering.

It is likely that VW will have to pay billions of dollars to resolve the charges against it. This is right and proper, but is it enough? Corporations from BP to Bank of America have gotten used to buying their way out of legal jeopardy, treating fines and settlements as (often tax deductible) costs of doing business. Those costs have been rising — BP has had to pay out more than $24 billion in connection with its Gulf of Mexico disaster — but there is little evidence that the penalties are having the intended deterrent effect.

Criminal charges are not a panacea. They’ve been brought against BP, several large banks and other companies yet no longer have the same bite. Several banks, for instance, have received waivers from SEC rules barring criminals from the securities business.

Yet at least there is the possibility of applying criminal penalties more aggressively. Going the purely civil route, as Justice is doing with VW, guarantees from the start that the case will be little more than a financial transaction. In a case of deliberate and widespread deception with severe environmental and health impacts, that’s simply not good enough.

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