A Volkswagen Diesel Engineer Pleads Guilty: What It Means

By Markets Fool.com

Image source: Volkswagen.

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A Volkswagen (NASDAQOTH: VLKAY) engineer who worked on thecompany's diesel engine programs pled guilty to federal charges related to VW's diesel-emissions cheating scandal -- and agreed to cooperate with government investigators in exchange for lenient treatment.

It's the first of what could be many dominos to fall as the U.S. Department of Justice ramps up what looks to be a significant criminal case against the German automaker.

A guilty plea and an agreement to talk

VW engineer James Liang appeared in the U.S. District Court in Detroit on Friday morning and pled guilty to conspiring to defraud the U.S. government, to commit wire fraud, and to violate the Clean Air Act. The charge carries a penalty of up to five years in prison and a $250,000 fine.

Liang was also indicted for violating the Clean Air Act, which carries a penalty of two years in prison and a $250,000 fine, but under a plea agreement with federal prosecutors, he did not enter a plea to that charge.

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Prosecutors said that in exchange for his cooperation, the government agreed not to use new information about Liang's criminal conduct against him at sentencing, and to request a lighter sentence if he provides "substantial assistance" before his sentencing. Liang will return to court to be sentenced on Jan. 11.

Who is this VW engineer?

According to court documents, Liang has worked for VW since 1983. He was part of an engineering team that developed VW's so-called "clean diesel" engines, and he moved from Germany to the U.S. in 2008 to help with their launch.

According to a Detroit News report, when asked by the judge what his crime was on Friday, Liang said, "I knew that VW did not disclose defeat device to regulators in order to get certification."

Liang admitted that during meetings with the U.S. Environmental Protection Agency (EPA) and California Air Resources Board (CARB) in which VW was seeking certifications to sell its diesel-powered models in the U.S., some of his co-workers hid the existence of the so-called "defeat device," software in the cars' systems that turned on certain emissions controls only when a government emissions test was underway.

What does this mean for Volkswagen?

Nothing good. It appears that Liang has already provided government investigations with information that has helped them build a serious criminal case against Volkswagen. Now, he'll be expected to provide more, enough to earn lenient treatment.

As anyone who has ever watched a television crime drama knows, that means the government is after bigger fish. Liang's cooperation is likely to lead to more indictments of VW employees and to criminal charges against the company itself.

It seems like a safe bet that VW, which has already committed up to $15.3 billion to settle a slew of civil claims related to the diesel scandal, will have to cough up another billion dollars or more to settle criminal charges as well. But it's also facing the very uncomfortable possibility that this chain of indictments could lead to its executive suite.

Until this mess is completely resolved, that possibility will linger. It'll obstruct VW CEO Matthias Mueller's efforts to move past the scandal, and it certain won't help Volkswagen's share price.

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