SEC charges Volkswagen, former CEO with defrauding bonds, ABS investors

by Ike Obudulu Posted on March 15th, 2019

Washington: The Securities and Exchange Commission today charged Volkswagen AG, two of its subsidiaries, and its former CEO, Martin Winterkorn, for defrauding U.S. investors, raising billions of dollars through the corporate bond and fixed income markets while making a series of deceptive claims about the environmental impact of the company’s “clean diesel” fleet.

According to the SEC’s complaint, from April 2014 to May 2015, Volkswagen issued more than $13 billion in bonds and asset-backed securities in the U.S. markets at a time when senior executives knew that more than 500,000 vehicles in the United States grossly exceeded legal vehicle emissions limits, exposing the company to massive financial and reputational harm. The complaint alleges that Volkswagen made false and misleading statements to investors and underwriters about vehicle quality, environmental compliance, and VW’s financial standing. By concealing the emissions scheme, Volkswagen reaped hundreds of millions of dollars in benefit by issuing the securities at more attractive rates for the company, according to the complaint.

“Issuers availing themselves of American capital markets must provide investors with accurate and complete information,” said Stephanie Avakian, Co-Director of the Division of Enforcement. “As we allege, Volkswagen hid its decade-long emissions scheme while it was selling billions of dollars of its bonds to investors at inflated prices.”

The SEC’s complaint, filed in the U.S. District Court for the Northern District of California, charges Volkswagen AG, its subsidiaries Volkswagen Group of America Finance, LLC and VW Credit, Inc., and Winterkorn with violating the antifraud provisions of the federal securities laws. The SEC complaint seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties. The complaint also seeks an officer and director bar against Winterkorn.

The company said it would contest the SEC lawsuit vigorously.

VW first admitted in September 2015 that it had used illegal software to cheat US emissions tests. But between April 2014 and May 2015 the carmaker sold $13bn (£10bn) of bonds and securities to US investors, at a time when executives were already aware that illegal software had been installed to manipulate emissions tests, according to the SEC’s suit.

The suit seeks to bar Mr Winterkorn, who resigned when the scandal became public, from serving as an officer or director of a public US company. He has been charged in the US with conspiring to cover up the emissions cheating scandal. However Germany does not extradite its own citizens.

The suit also seeks to recover “ill-gotten gains” along with civil penalties and interest.

“We’re not yet through the diesel scandal, it will probably still take years… and it’s a burden for us.” That is what VW’s chief executive Herbert Diess had to say at the Geneva Motor Show last week.

We were discussing the raft of legal cases which VW is still facing around the world – and to which it is still having to dedicate substantial resources

It has already paid out more than $30bn in the US alone, in fines and other penalties, and to buy back affected vehicles.

The SEC’s lawsuit shows that the US authorities are not prepared to let the company off the hook just yet.

It remains under pressure in Europe too – where it is still facing a wave of consumer lawsuits over its refusal to pay compensation.

Ironically, as Mr Diess acknowledged, the scandal forced Volkswagen down a path which may help it become a leader in more environmentally-friendly technologies.

Volkswagen has already agreed to pay more than $25bn in the US over the emissions scandal including criminal and civil fines.

The firm said in a statement the SEC complaint was “legally and factually flawed”.

It said the securities in question had been sold “only to sophisticated investors who were not harmed and received all payments of interest and principal in full and on time” and said that Mr Winterkorn had played no part in the sales of those securities.

The carmaker is already defending its actions in court in Germany, where investors are pursuing €9.26bn (£8.2bn) in damages, arguing the company should have come clean earlier about the emissions tests cheating. That case is expected to last until later this year.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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