VW Stock: Here’s Why Shares of Volkswagen AG Are Going Crazy This Morning

VW Stock: Here’s Why Shares of Volkswagen AG Are Going Crazy This MorningVW Stock Under Pressure

The government of the United States is suing Volkswagen AG (ADR) (OTC:VLKAY). Indeed, VW stock fell almost seven percent since the start of the week after the Justice Department filed an official complaint with the court in Detroit over the company’s violations of the Clean Air Act. As it stands, VW could face a fine of up to $20.0 billion over the emissions scandal, which has come to be known as “Dieselgate.” (Source: “BREAKING: EPA and DOJ sue Volkswagen over emissions cheating scandal in diesel vehicles,” New York Daily News, January 4, 2016.)

The lawsuit against Volkswagen, while not sufficiently large to bring VW stock to its proverbial knees (Volkswagen stock has a market cap of some $80.0 billion), does open an unpleasant chapter in U.S.-German relations, at least those of the economic variety. Bloomberg has confirmed that the U.S. Department of Justice has actually filed a suit to initiate a lawsuit against Volkswagen in Detroit. (Source: “Volkswagen Faces Billions of Dollars in Penalties From U.S. Suit,” Bloomberg, January 4, 2016.)

VW stock will face pressure, as Attorney General John Cruden, head of the Department of Justice’s Environment and Natural Resources unit, has filed the lawsuit in the Eastern District of Michigan and then moved to Northern California, where Volkswagen is already facing a class-action lawsuit. Volkswagen stock will come under increasing pressure as the German automotive group goes on trial on suspicion of having rigged millions of vehicles in the U.S. and around the world.

VW Stock Under Pressure Following Emission Tests

VW allegedly rigged the cars such that, under laboratory conditions, the engines produced lower emissions than would have been noted on the road. According to reports from Thomson Financial, the complaint, filed by the Justice Department on behalf of the Environmental Protection Agency (EPA), claims that almost 600,000 vehicles with two- and three-liter diesel engines were equipped with so-called “defeat devices” that rig emission control systems in order to perform below EPA standards and deliver better dynamic performance.

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In fact, the German group has sold and imported used vehicles whose design diverged from what the EPA and the California Air Resources Board expected. According to the Clean Air Act, a carmaker needs to inform regulators about the use of any auxiliary emissions control device in order for this to be considered legal. This is essentially what Volkswagen is accused of not doing and why VW stock is at risk of further losses.

The Justice Department holds auto manufacturers that make mistakes in certifying their cars and emission control systems guilty of violating public trust, endangering public health, and cheating competitors.

Cynthia Giles, from the EPA, explained that the lawsuit is an important step toward protecting public health by ensuring Volkswagen is held responsible for any illegal actions causing concerning pollution. (Source: “BREAKING: EPA and DOJ sue Volkswagen over emissions cheating scandal in diesel vehicles,” New York Daily News, January 4, 2016.)

According to Giles, talks with VW have failed to produce an acceptable solution until now and these discussions will continue in parallel with the legal process, which will keep VW stock under pressure.

Nevertheless, VW stock could benefit from a plan to introduce 20 new electric and hybrid plug-in models by 2020 as part of a strategy that the company hopes might partly improve its image in the United States, avoiding the worst. (Source: “VW teases electric concept for CES,” Autoblog, December 11, 2015.)