(Bloomberg) — Germany’s embattled car industry suffered a one-two blow after prosecutors charged Volkswagen AG’s two top executives with market manipulation in the four-year-old diesel scandal and Daimler AG was fined in a separate probe for rigging vehicles.
The charge against VW’s leaders was brought by prosecutors in Braunschweig, near the company’s Wolfsburg headquarters, alleging that Chief Executive Officer Herbert Diess, Chairman Hans Dieter Poetsch and former CEO Martin Winterkorn were too slow to inform investors about their diesel findings.
Within hours, a separate decision by Stuttgart prosecutors fined Daimler 870 million euros ($957 million) in a probe into their diesel cars. While the decision closes this case, the Mercedes-Benz maker still faces lawsuits in the U.S.
Responding to the charges, Volkswagen said the allegations are groundless and any trial would prove them to be unfounded. A lawyer for Diess denied the charges, and said the CEO plans to stay on. Lawyers for Poetsch and Winterkorn also denied the allegations.
VW’s 20-member supervisory board will meet on Wednesday to review the situation, after its top panel, representing key stakeholders, backed the executives’ actions in a statement Tuesday.
With their top managers now in the firing line, Volkswagen was dealt a dramatic setback in the scandal that has been haunting the carmaker since September 2015, when it admitted using software in 11 million diesel vehicles to cheat on emissions tests. At the time, Diess had just joined the company. The toll has so far reached 30 billion euros ($33 billion) in fines and other expenses for the firm and the proceedings could drag on during a period when it’s facing a shift to electric cars and slower sales in some key markets.
The prosecutor’s decision would not be the first time that the head of one of Germany’s most prominent companies had to stand trial while running a global enterprise. Deutsche Bank AG has lived through it more than once. When Josef Ackermann was CEO of the lender, he was tried in 2004 in relation to his role in the Vodafone Group Plc takeover of Mannesmann AG. The case was settled after an initial acquittal was overturned on appeal. About a decade later, his successor Juergen Fitschen was tried in Munich over the collapse of the Kirch media company and was acquitted in 2015 together with four other accused, including Ackermann.
In Volkswagen’s case, the potential risks are “limited at the moment,” Evercore ISI analyst Arndt Ellinghorst said in a note. These include material claims from investors and the possibility that Diess would be weakened or even forced to leave the company. VW shares fell 3% in Frankfurt, while Daimler slumped 1.7%.
The Volkswagen market-manipulation probe was prompted by Germany’s financial regulator Bafin, which in mid-2016 asked prosecutors to investigate Winterkorn and Diess. Three months later, Poetsch was added as a suspect. Diess was chief of the VW brand at the time, having joined the company from BMW AG in July 2015, just months before the rigging became public.
During the investigation, authorities have sought to uncover who inside Volkswagen knew what and when. On Tuesday, prosecutors said that Winterkorn knew no later than May 2015 of the illegal manipulation, and that Poetsch was in the know from June 29 of that year. Diess had complete knowledge of the matter from July 27, less than a month after he had joined the company. The scandal wasn’t brought to the public’s attention until Sept. 18, via a so-called “notice of violation” by U.S. authorities.
“Winterkorn and Poetsch face a certain risk” from the lawsuit, according to Juergen Pieper, an analyst at Bankhaus Metzler, though he cautioned that proving a formal break of rules will be harder, and even more so for Diess. “In Diess’ case I find it absurd to bring him to court,” Pieper said.
Winterkorn, who swiftly stepped down amid the unfolding scandal, maintained early on that this was the deed of a small group of rogue engineers. That view contradicts Winterkorn’s legendary attention to detail, a reputation he built over more than a decade of overseeing the sprawling company.
The criminal case may dim VW’s prospects in a related suit by shareholders seeking more than 9 billion euros in damages over the same allegations. VW has earmarked 5.5 billion euros in contingent liabilities for diesel-scandal matters and 3.4 billion euros are related to the investor lawsuits, Chief Financial Officer Frank Witter told analysts on May 2. At the same time, VW added a 1 billion-euro provision for legal costs.
The Braunschweig Regional Court now has to review the indictment and decide whether to try the men on the charges. In a complex matter like this one, the review usually takes months and the lawyers for the accused will get the opportunity to comment on the indictment before the three judges rule. That means any trial could take place next year at the earliest.
Market-manipulation cases are rare in Germany and prosecutors haven’t been particularly lucky with them. Former Porsche Automobil Holding SE CEO Wendelin Wiedeking and ex-CFO Holger Haerter were acquitted in 2016 from such allegations. At the time, Porsche’s defense was orchestrated by its General Counsel Manfred Doess, who later moved to its board when it became VW’s majority shareholder. He’s now VW’s head lawyer and will use his Stuttgart trial experience in the battle ahead.
Braunschweig investigators in July opened an administrative proceeding against VW in the market-manipulation probe. VW settled an earlier regulatory probe related to the investigation into the software rigging in June for 1 billion euros.
Poetsch, Winterkorn and former CEO Matthias Mueller are facing a similar investigation in Stuttgart into allegations the three didn’t properly inform the markets about the consequences VW’s diesel scandal might have for Porsche SE, its main shareholder. The three were on Porsche’s board in September 2015.
It’s the second indictment by Braunschweig prosecutors over the diesel scandal. Winterkorn and three other VW managers were charged in April for defrauding customers by selling rigged cars.