Why New Allegations Could Make Things Worse for Volkswagen

Image source: Volkswagen.

Volkswagen (NASDAQOTH: VLKAY) had help in developing its emissions-cheating system, say lawyers representing VW owners -- and that help came from one of the auto industry's most important suppliers. If the allegations pan out, VW could find itself in yet more hot water with U.S. prosecutors.

What's happening

In a Federal court filing this week, lawyers representing U.S. owners of diesel-powered VWs said that giant German auto supplier Robert Bosch GmbH was an "active participant in a massive, decade-long conspiracy with VW" to violate U.S. clean-air laws.

Privately held Bosch is one of the most important of what the auto industry calls "Tier 1" suppliers, the giant firms that make many of the components and systems that go into new vehicles.

Bosch is already a defendant in the case, but the new allegations are serious. The filing says the owners have evidence that Bosch participated both in the development of the cheating software, and in the ensuing coverup that aimed to keep regulators from figuring out the true purpose of the software.

Volkswagen eventually admitted to U.S. and California regulators that it had deliberately cheated, and was charged with several offenses under the Clean Air Act last September.

VW has already agreed to pay billions, and it's not done

The allegations bring more pressure against Bosch. But the decision to program millions of diesel-powered cars to cheat on emissions tests has already cost VW billions, and seems likely to cost it billions more in the near future.

VW agreed in June to a settlement of civil claims made by regulators and car owners. It included over $5 billion in fines and compulsory "investments," along with an offer to buy back nearly 500,000 vehicles. If most or all of the affected owners opt for the buyback, the settlement will cost VW over $15 billion.

That won't be the end of it. Earlier this week, The Wall Street Journal reported that VW has held discussions with Federal prosecutors aiming to settle potential criminal charges related to the diesel scandal. It looks likely that VW will be obliged to sign a "deferred prosecution agreement" similar to those signed by General Motors (NYSE: GM) and Toyota (NYSE: TM) after their recent scandals, in which the government will agree to drop criminal charges if VW follows through on agreements to reform.

Such an agreement will almost certainly come with a ten-figure fine: GM paid $900 million, Toyota paid $1.2 billion -- and it's a safe bet that VW, which had clear criminal intent that the others didn't, will be paying more.

Remember also that these cars were sold all over the world. While most other governments are unlikely to hit VW with billion-dollar fines and serious criminal charges, there could be one exception: Investigations are ongoing in VW's home country, Germany.

What the Bosch allegations mean for VW now

Clearly, if the allegations can be substantiated, it's bad news for Bosch. But it's less clear right now what, if anything, the news means for Volkswagen.

If the allegations hold up and draw Federal prosecutors' attention, it's not out of the question that Bosch will agree to provide information in exchange for leniency. That could make things worse for VW as it tries to negotiate a settlement with the Feds. VW shareholders -- and bargain-hunters eyeing beaten-up VW shares -- would be wise to watch this carefully.

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