When the SEC investigated Volkswagen

It’s not often that the public gets a look at the guts of a federal securities investigation. But on Monday, the Securities and Exchange Commission (SEC) set out, in almost painful detail, exactly how it goes about investigating companies — specifically, in this case, Volkswagen.

In some 200-plus pages filed in court in California, Jeffrey Shank, an SEC attorney, explained every step his team took as it investigated whether Volkswagen defrauded bond investors by not telling them it was cheating on its diesel emissions tests.

The aim was to convince the judge overseeing the SEC’s lawsuit against Volkswagen and its former chief executive, Martin Winterkorn, that the agency had not slow-walked its four year probe. It also wanted to demonstrate that it had not just jumped on the bandwagon when other US regulators clobbered the German carmaker with billions of dollars in fines and penalties in 2017.

The result is a fascinating insight into what life is like when you’re an SEC attorney tasked with investigating a big multinational company that, according to the Commission, is not particularly interested in responding quickly to your emails.

Back in March, the SEC sued Volkswagen and Winterkorn, accusing them of “selling billions of dollars of its bonds to investors at inflated prices”. At a hearing in May, Charles Breyer, the district judge overseeing the litigation, was nothing short of incredulous that the lawsuit had not been filed sooner. “I am totally mystified as to why you waited three years before you surfaced,” he said, ordering the SEC to explain what had taken so long.

Hence, Monday’s filings, which included:

A five-page memo explaining the labels the SEC gives to each stage of an investigation, all the way from ‘Matter under inquiry’ to the final vote on taking action.

An 18-page pleading, accusing Volkswagen of “long delays . . . in producing documents and other information”.

A 34-page recitation of every step of the Volkswagen investigation.

— And, a 113-page (!) fisking of the SEC’s own case, explaining exactly when they learned about each and every fact they allege in their complaint.

The 34-page recitation in particular is worth a skim over lunch, or on the train. (I recommend all but the hardiest of souls avoid attempting the 113-page magnum opus.)

Three moments in particular stand out.

See page 11, referencing events about a year after the SEC began investigating Volkswagen, and a few months before the January 2017 settlement between the company and the Department of Justice and Environmental Protection Agency:

On October 7, 2016, a representative from DOJ’s Environment and Natural Resources Division (“ENRD”) emailed VW counsel and requested VW’s consent to permit DOJ to share certain VW financial information with the SEC that was necessary to facilitate global settlement discussions among the federal agencies and to allow all agencies to be in the same room with VW for settlement discussions. On October 7, 2016, VW counsel responded that they wanted to discuss the issue further, and that they had “a different view of the SEC’s claims than those of DOJ ENRD and DOJ Criminal.” On October 14, 2016, ENRD informed the Staff that VW refused to consent to the sharing of financial information with the SEC. As a result, global settlement negotiations between VW and the federal agencies proceeded without the participation of the SEC.

See also page 13, where after more than a year of sending voluntary information requests to Volkswagen, and finding that "the pace of production was unacceptable", the SEC issues its first subpoena.... nearly:

On January 23, 2017, Staff sent VW counsel two subpoenas, one to VW AG and one to VWGoA, and requested that VW counsel accept service and produce by January 30, 2017 all documents that VW translated from German to English and produced to DOJ. On a January 25 call, VW counsel informed the Staff that VW did not want to be served with a subpoena because a subpoena would trigger production obligations to private plaintiffs. The Staff agreed to forego the formal subpoena process on the condition that VW agreed to produce the documents by February 3, 2017 at 3:00 p.m. CT.5 On February 2, 2017, VW produced the translated documents previously produced to DOJ, totaling approximately 298,000 pages.

A footnote adds:

The Staff’s decision to proceed by voluntary request rather than subpoena was not motivated by a desire to accommodate VW’s concerns about its production obligations in other litigation. Rather, the Staff concluded that it would be able to obtain the requested documents more swiftly by securing VW’s commitment to produce the documents within nine days

And finally, see Page 26, where in late 2018 the SEC has asked the Department of Justice for help with an application to German prosecutors for help interviewing witnesses, otherwise known as a Mutual Legal Assistance Treaty [MLAT] request:

From approximately August 2018 through December 2018, the SEC worked with DOJ to submit an MLAT request, but DOJ ultimately declined to submit the request on the SEC’s behalf.

For its part, Volkswagen said Monday that it "cooperated fully" with the SEC and that the filings "confirms that the SEC is now piling on".

"Volkswagen has never missed an interest or principal payment for any of its bonds, which always remained investment grade," added Mark Clothier, a Volkswagen spokesman.

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