Volkswagen CEO Targeted in Emissions Cheating Probe -- Update

By William Boston Features Dow Jones Newswires

German prosecutors are investigating whether Volkswagen AG Chief Executive Matthias Müller and other key board members and executives at the company's biggest shareholder adequately disclosed financial liabilities related to the car maker's emissions-cheating scandal.

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The move is the first time Mr. Müller has been named in a criminal probe tied to the U.S. determination that Volkswagen had used "cheat devices" in its diesel-engine cars. Mr. Müller has presided over Volkswagen's operational and financial recovery, but the newly disclosed investigation threatens to complicate the auto maker's efforts to move forward.

State prosecutors said Wednesday that Mr. Müller, his predecessor Martin Winterkorn, and current Porsche SE Chairman Hans Dieter Poetsch are under investigation on suspicion they intentionally withheld information from investors of Porsche SE ahead of a public "notice of violation" by the U.S., stemming from the emission issue, on Sept. 18, 2015.

At the time, all the three executives were on the management board of Volkswagen and supervisory board of Porsche SE, a listed company in Germany that manages the 52% stake in Volkswagen owned by the heirs of Beetle inventor Ferdinand Porsche. Mr. Müller also was the CEO of sports car maker Porsche AG, a unit of Volkswagen, at that time.

Various Volkswagen executives and board members were briefed months before the notice that U.S. environmental regulators had raised questions about the auto maker's diesel-emissions level. Neither Volkswagen nor Porsche SE disclosed that to investors, nor did they disclose any potential liabilities should the U.S. decide to pursue a formal probe.

The Stuttgart probe isn't looking at whether Mr. Müller is suspected of playing a role in the diesel scandal itself. Volkswagen has admitted to a broad conspiracy to mislead regulators about the level of emissions produced by the car maker's diesel engines over several years.

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Volkswagen has tried to draw a line under the scandal, in part by handing management to an untainted team led by Mr. Müller. The new probe could also add momentum to thousands of investor lawsuits in Germany that are seeking more than EUR8 billion ($8.9 billion) in damages from car maker.

The U.S. notice of violation sent shares in both Volkswagen and Porsche SE sharply lower. By Sept. 22, 2015, when Volkswagen published a warning to shareholders and took a EUR6.5 billion charge against earnings, its shares had fallen 38%. German prosecutors also could allege stock-market manipulation if they found management disclosure to be inadequate.

The opening of an investigation by a prosecutor doesn't indicate that the people affected will be charged or convicted.

A spokesman for Porsche SE said the charge was unfounded and that the company fulfilled its obligations to inform financial markets in a timely fashion. The spokesman said Messrs. Müller and Pötsch won't comment on the investigation. Mr. Winterkorn's attorney didn't immediately respond to requests for comment.

Prosecutors have opened a similar probe into stock-market disclosures at Volkswagen itself. Volkswagen officials have argued repeatedly that until U.S. authorities issued their formal notice, management wasn't aware of the substantial fines and penalties that might come with that -- and thus couldn't disclose any accurate estimate of liabilities.

Volkswagen has since pleaded guilty in the U.S. to conspiracy to commit fraud in connection with the emissions cheating and has agreed to pay nearly $25 billion in fines, penalties, legal fees and compensation for customers. Volkswagen admitted it installed software that tricked testing equipment into picking up less emissions from its diesel-powered cars in the U.S. than they were actually spewing out.

The Stuttgart prosecutor declined to elaborate on the justification for its investigation of Mr. Müller and other Porsche SE executives, but said: "There is cause to believe that the accused were intentionally late to inform shareholders about the financial consequences, especially for shareholders of Porsche SE, of the software manipulation of diesel vehicles," the Stuttgart state's attorney said in a statement.

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

May 17, 2017 16:45 ET (20:45 GMT)