Volkswagen AG has agreed to set aside at least $10 billion to resolve civil claims by the U.S. government and lawsuits by American car owners over diesel vehicles rigged to cheat pollution controls, a person with direct knowledge of the matter said.
The parties reached the accord ahead of a Thursday deadline set by a federal judge for the carmaker to say how it would fix the vehicles. Volkswagen has been negotiating with U.S. environmental regulators on an acceptable solution. Judge Charles Breyer said that fixing the almost 600,000 vehicles or getting them off the road would be the first step to any settlement.
An agreement with U.S. authorities would be a milestone for Volkswagen as it seeks to emerge from the seven-month-old scandal. The German carmaker has been battling to appease regulators and regain customers’ trust after admitting in September that it rigged the exhaust systems of 11 million diesel-powered cars worldwide to pass official emissions tests. The crisis led to the departure of Chief Executive Officer Martin Winterkorn and caused Volkswagen to delay releasing its 2015 earnings due to uncertainty over the costs of the scandal.
“A far-reaching agreement covering the vast majority of potential financial impacts from the U.S. market would clearly be positive news for VW as this would clearly reduce uncertainty for the future,” Marc-Rene Tonn, an analyst with Warburg Research, said in a note.
Volkswagen rose 5.1 percent to 127.05 euros at 11:44 a.m. in Frankfurt. That pared the stock’s losses since scandal became public in September to 22 percent.
The person familiar with the matter asked not to be identified because the discussions are private. Spokesmen for Volkswagen and the Justice Department declined to comment. Elizabeth Cabraser, the lead lawyer for car owners in the lawsuits, and Volkswagen’s attorney Robert Giuffra didn’t respond to requests for comment. Mary Nichols of the California Air Resources Board and U.S. Environmental Protection Agency spokeswoman Laura Allen also declined to comment.
The Justice Department’s criminal investigation into the company continues, a second person said, as do other probes abroad. Germany is looking into who at the company knew of the problem and how high up the deceit went in the corporate ranks.
It’s unclear how much of the $10 billion will be paid out to car owners as compensation or used to buy back or repair vehicles, said the person with knowledge of the settlement. It also uncertain if the amount would resolve all of the U.S. civil claims against Volkswagen.
The broad framework of the agreement is set to include creating national and California funds to make amends for past and future environmental damage and solutions to reduce the pollution from the affected vehicles or remove them from the road, people familiar with the talks said in March.
Volkswagen’s struggle to come to terms with U.S. authorities contrasts with a relatively easy process in Europe, where about 8.5 million vehicles are affected. Less stringent regulation helped VW get initial approval in December for a low-cost fix in its home region that consists mainly of software updates and in some cases a tube that regulates air flow. There’s been no offer to compensate European customers.
Volkswagen, which has already set aside 6.7 billion euros ($7.6 billion) for recalls, said Tuesday in a court filing that it expected to reach a settlement and that there would be no need for a trial this summer after it presents its solution to Breyer.
The figure is well below the theoretical maximum penalty the carmaker could face. The alleged civil violations could cost Volkswagen more than $42 billion. Brandon Barnes, an analyst at Bloomberg Intelligence, estimated the cost of buying back all of the vehicles in the U.S. would cost about $9.4 billion.
Volkswagen may also face financial penalties from the criminal probes. The company’s total cost could reach about 30 billion euros, according to an estimate from Evercore ISI. The carmaker reported net liquidity of 27.8 billion euros at the end of September, when it last announced earnings.
Volkswagen, based in Wolfsburg, Germany, admitted last year that it had manipulated diesel engines with a “defeat device” so emission controls switched on only during pollution tests. The carmaker aims to complete a recall of most of the non-compliant cars in Europe by the end of 2016.
The case is In Re: Volkswagen “Clean Diesel” Marketing, Sales Practices and Products Liability Litigation, MDL 2672, U.S. District Court, Northern District of California (San Francisco)
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- Car Dealers Sue Volkswagen Over Losses Tied to Diesel Cheating
- U.S. Investors Sue Volkswagen Over Diesel Emissions Scandal
- Volkswagen to Recall 11 Million Vehicles for Diesel Fix
- Trying to Put a Price Tag on Volkswagen’s Emission-Fraud Scandal
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