The U.S. Justice Department has opened a criminal investigation into Fiat Chrysler Automobiles' (NYSE:FCAU) alleged failure to disclose diesel-engine software that violated emissions standards, according to a Bloomberg report published on Friday.
An investigation doesn't mean guilt, of course, and right now it's not even clear exactly what the Justice Department is investigating. But if the investigators find something related to the diesel allegations that leads to criminal charges against FCA or any of its employees, it will be almost certainly be a huge and expensive mess for the Italian-American automaker.
The EPA is asking hard questions about FCA's diesel engines
Bloomberg's report came just a day after the U.S. Environmental Protection Agency (EPA) and California Air Resources Board (CARB) hit FCA with notices of violation, alleging that it used software that allowed increased emissions in about 104,000 diesel-powered vehicles built for the 2014, 2015, and 2016 model years.
Specifically, FCA is accused of failing to disclose some parts of the engine-management software it installed in Jeep Grand Cherokees and Ram 1500 pickups powered by its 3.0 liter V6 "EcoDiesel" engine. The EPA and CARB also allege that the software allowed increased emissions of nitrogen oxides from the vehicles. (Nitrogen oxides, or NOx, are pollutants that cause smog.)
Those are civil violations of the Clean Air Act and of similar California laws. They're punishable by fines and various forms of regulatory action, but -- and this is important -- they're not crimes. As of right now, FCA is not accused of any crimes related to these engines, or to diesel emissions generally.
So what might the Justice Department be investigating?
The EPA's announcement on Thursday noted that it's currently investigating whether some aspects of FCA's engine-management software might constitute a "defeat device." Under the Clean Air Act, a "defeat device" is something that deliberately allows a vehicle's emissions to exceed regulatory limits in regular driving.
Incorporating a defeat device into a vehicle is also a civil violation. But if FCA officials lied about it or concealed it, those could be crimes depending on the circumstances.
It's also possible that the feds are just exercising due diligence in the wake of Volkswagen AG's (NASDAQOTH:VWAGY) massive scandal, in which it admitted to incorporating defeat devices into millions of vehicles over several years. That admission led to a $4.3 billion settlement of criminal charges last week, along with many other repercussions.
Are they likely to find something on FCA?
What we know is that FCA has consistently and emphatically maintained that it didn't install defeat devices in any of its vehicles. That point was reiterated most recently by CEO Sergio Marchionne in a conference call with reporters on Thursday. Given the recent example of VW, it would be poor strategy to be saying that if Marchionne and other senior FCA executives didn't sincerely believe it to be true.
If it is true, if no secret efforts to install defeat devices turns up, it's likely that this will end with no more than some modest fines for FCA and probably a relatively inexpensive recall to tweak the engine-management software in the affected vehicles. For investors, that would be no big deal.
But if there's more to the story, then this small mess could turn into a much bigger problem. Stay tuned.