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Why the Feds Sued Volkswagen Over Cheating Diesels

By John Rosevear - Jan 5, 2016 at 5:05PM

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In what might be a precursor to a criminal case, the U.S. Department of Justice sued VW on Monday, seeking billions in fines for the German automaker's efforts to cheat emissions testing. But the Feds might have a larger goal: Pushing VW to settle sooner rather than later.

Image source: Volkswagen

What's happening: German auto giant Volkswagen (VWAGY -1.43%) was sued by the U.S. Department of Justice (DOJ) on Monday, Jan. 4. The DOJ is seeking to force VW to pay fines for selling nearly 600,000 vehicles in the United States that violated the Clean Air Act.

VW shares fell over 4% in early trading in Europe on Tuesday, Jan. 5. 

The details: VW has already admitted that the vehicles in question, powered by 2.0 liter and 3.0 liter diesel engines, contained software that enabled the cars to pass emissions tests while emitting illegal levels of pollutants in real-world driving. 

The government's complaint (a "complaint" is a formal document filed with a court to initiate a lawsuit) alleges that under the Clean Air Act, that software amounts to a "defeat device." Under the Act, the government can fine VW for every car it sold with a defeat device. The fine is "up to" $32,500 for each car sold before Jan. 13, 2009, and up to $37,500 for every one sold after that date. (Most of the cars in question were sold after that date.) There are additional, smaller fines for each "part or component" that constitutes a defeat device.

The suit also seeks to force VW to fix all of the vehicles in question so that they comply with the Clean Air Act, and to formally and explicitly prohibit VW from ever doing anything like this again. 

What it means: Simply put, it means that the U.S. government isn't inclined to go easy on VW and its cheating diesels. For VW investors, that's not exactly good news. But it's not exactly a surprise, either. 

This complaint is a civil one, a lawsuit. The DOJ hasn't yet brought any criminal charges against VW or any of its executives. But prosecutors left open the possibility that there could be more to come.

It's possible that this complaint might be intended in part to lay the groundwork for a later criminal case. Among other things, it alleges that VW repeated misled U.S. regulators and hid information that could have brought the problem to light much earlier. But it's very likely that the timing of the suit is meant to encourage VW to seek a quick settlement: VW CEO Matthias Mueller is scheduled to visit the U.S. in a few days.

For its part, Volkswagen said in a statement that it will continue to work "cooperatively" with U.S. regulators to bring the vehicles into compliance with the Clean Air Act.

What happens next: VW has about three weeks to formally respond to the complaint in court. But it's very possible that Mueller will begin the process of negotiating a settlement personally, before that, while he's here in the United States.

Mueller has already signaled that he will move to accept the consequences of VW's violations (generally speaking) as quickly as possible. That's smart: The sooner VW settles these charges, in the U.S. and elsewhere, the sooner it can move on. It's possible that the company will agree to a massive fine sooner rather than later, just to get past the scandal.

But appeasing the U.S. government may not be as simple as a multi-billion-dollar payment and an apology. Will VW be willing to admit criminal liability? Will it be willing to cooperate in criminal investigations against former (and possibly current) executives?

We may find out soon.

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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