Daily Times

At the Detroit Auto Show last week, Volkswagen hoped to escape the present with a nod to the past, introducing a revamped version of its iconic flat-faced, boxy Microbus, the vehicle that shepherded the counterculture across the interstates some five decades ago. The bus’s reincarnation is a battery-propelled, self-driving vehicle called ID Buzz. But nostalgic wing-vent windows and chrome trim could not distract from the company’s current predicament. Barely had the auto show kicked off when the Justice Department announced that VW had pleaded guilty to criminal and civil charges related to its efforts to cheat on U.S. emissions standards.

The company agreed to pay $4.3 billion in penalties, the largest fine ever levied by the U.S. government on an auto company, dwarfing both Toyota’s $1.2-billion settlement for vehicle-safety problems involving unintended acceleration and GM’s nine-hundred-million-dollar settlement for ignition-switch defects. This new penalty was on top of the $14.7-billion settlement that VW signed, in July, to cover customers’ class-action suits. In addition, six Volkswagen executives have been charged with running a decade-long scheme to rig VW diesel engines with so-called defeat devices, which made engines appear to satisfy U.S. emission standards when they were actually spewing more pollutants than allowed, and then to hide their actions from regulators. The executives who were charged headed up engine development, quality control, and regulatory affairs. Oliver Schmidt, who led emissions compliance in the U.S., was taken into custody in Miami, earlier this month; the other five are said to be in Germany, where they likely must remain in order to avoid arrest.

The case stems from a strategic shift at VW in 2007, when Martin Winterkorn, who was then the C.E.O., implemented an aggressive growth directive meant to push Volkswagen past General Motors and Toyota as the leader in global auto sales by 2018. This would be accomplished, in part, by selling many more so-called clean-diesel vehicles, which at the time were believed to deliver better fuel economy than gasoline with lower emissions and high performance. The company saw its biggest clean-diesel opportunity in the large U.S. market, where it had minimal penetration at the time.

But when VW executives and other employees realized that their diesel engines would not meet U.S. air-quality standards and that the cars would likely be barred from the market, they created a workaround in the form of software programmed to reduce emissions only when the vehicle was undergoing a standard U.S. emissions test. When on the open road, the car would perform normally-that is, it would emit more pollution but perform better in other respects.

Much of the government’s evidence came from the testimony of James Robert Liang-a VW engine designer who helped write the software fix and pleaded guilty, in September, to conspiring to defraud regulators-as well as from internal documents and memos turned over by Volkswagen. On the face of it, the e-mails and descriptions of interactions among VW executives that prosecutors have released so far are pretty damning. In one example, according to the complaint, in May, 2014, a VW employee included Schmidt, the compliance officer, on a group e-mail saying that the Environmental Protection Agency had apparently found out about the emissions problems. Schmidt’s response to this open discussion about the deceptive device was quick and to the point: “Are you crazy? Recall the email.”

Although the six co-conspirators are upper-tier managers, none is on VW’s board, leading to objections that the company’s top executives are walking away unscathed. However, U.S. prosecutors have said that more indictments are possible as additional evidence is unearthed, and German legislators plan to question Winterkorn, who resigned soon after the scandal came to light. German prosecutors also have a separate investigation under way into the automaker’s activities.

Only about five years ago, Volkswagen was poised to sit atop the global auto market. Although VW is still neck and neck with Toyota in worldwide sales-buoyed largely by its continuing strong presence in China-by most important metrics the automaker is fading. At this point, VW is barely breaking even, and the company’s profit per car is about eight hundred dollars, half what Toyota or Ford earn. Its U.S. growth strategy has been upended by the diesel scandal. Volkswagen’s U.S. sales fell 7.6 per cent in 2016, to three hundred and twenty-two thousand, about where they were in 2011.

Beyond the effect on the company itself, the VW episode is also noteworthy because it reflects a meaningful shift in the way that the Justice Department treats white-collar crime, in light of its widely criticized failure to discipline financial-services executives whose companies contributed to the collapse of the housing and credit markets in 2008. The new approach was put forward by Deputy Attorney General Sally Yates, on September 9, 2015, in what has become known as the Yates Memo. In that document, she laid out a fresh set of rules for handling investigations into corporate misdeeds-and specifically for punishing managers who had their hands in their company’s criminal activities.

The core of the Yates directive is that, from the start, all civil and criminal inquiries must focus on individuals as well as corporations. Companies under investigation must identify all individuals involved in wrongdoing and provide evidence to help the prosecutor’s case. If they do not, they are refused credit for coöperation-which usually comes in the form of a lesser fine or a shorter period under the eye of a government monitor. In a speech, Yates compared the way that corporations should be dealt with to the procedures used in drug prosecutions: if a drug trafficker “has information about the cartel boss and declines to share it, we rip up his coöperation agreement and he serves his full sentence.”

Some corporate attorneys immediately took issue with the Yates Memo, arguing that it would deter companies from coöperating with investigators out of fear that they may spend millions on an internal investigation and still fail to satisfy the Justice Department.

But Linda Hoffa, who was the Criminal Division chief at the Philadelphia U.S. Attorney’s Office and now represents white-collar clients, at the law firm Dilworth Paxson, told me that the Yates Memo has accomplished precisely what it set out to do. She pointed to the VW indictments as a direct result of policies to get tough on executives with the help of corporate coöperation. She noted how unusual this was, despite regular efforts to hold management accountable for malfeasance since the early two-thousands, when executives at Enron, WorldCom, Tyco, Adelphia, and HealthSouth were charged with a variety of misdeeds. From her experience on the white-collar side, Hoffa observed that “companies don’t want to go to trial, so they will coöperate to the extent that they have to. If you make the bar high, they’ll work harder to meet it and avoid a big penalty; if you’re lenient, they’re happy to go that way.”

Two days after the VW case broke, the Yates effect was felt again, when Japan’s Takata Corporation pleaded guilty to criminal wrongdoing involving faulty air-bag inflators that have been linked to at least sixteen deaths around the world. Three Takata executives were indicted on charges of wire fraud and conspiracy, while the company will pay a billion dollars to compensate automakers and victims. Senators Bernie Sanders and Elizabeth Warren have pressed the Obama Justice Department to investigate senior executives at Wells Fargo, too, looking into complicity in compelling employees to set up fake bank accounts under customers’ names, in order to meet sales targets. Whether or not that happens will occur after Yates has left the Justice Department, this week. Yates has said that she believes the Trump Administration will maintain the policies she put in place, and that there are “a significant number of corporate investigations” under way that have yet to be resolved. At his confirmation hearings, last week, Jeff Sessions, who will likely serve as Attorney General under Donald Trump, indicated that he supported disciplining executives for corporate crimes, saying that “sometimes it seems to me . . . that the corporate officers who caused a problem should be subjected to more severe punishment than stockholders of the company who didn’t know anything about it.” Now Sessions will have the chance to rectify that imbalance.