Engineer tells court auto maker cheated because vehicles could not meet U.S. rules

By Aruna Viswanatha and Christina Rogers 

A Volkswagen engineer pleaded guilty to helping the auto maker's admitted efforts to cheat on emissions tests, becoming the first person criminally convicted in the U.S. in a wide-ranging scandal that has cost the German giant billions of dollars.

The engineer, James Liang, who has been with the company since 1983, agreed to cooperate in the continuing U.S. investigation, according to his plea agreement filed in federal court in Detroit. That cooperation suggests prosecutors are preparing cases against others at the company.

Mr. Liang was charged with conspiring to defraud the U.S., commit wire fraud and violate the Clean Air Act. He is scheduled to be sentenced in January, and faces up to five years in prison and a fine of up to $250,000. He also has been mentioned in a civil suit as being a developer of devices that helped certain models appear to burn cleaner in emissions tests than they did on the road.

The plea marks the first time an individual has faced sanctions in the sprawling U.S. investigation into the emissions scandal. Volkswagen AG remains in discussions with the U.S. on a criminal settlement and is expected to face a financial penalty as part of that investigation, people familiar with the matter have said.

A company spokeswoman said Volkswagen is continuing to cooperate in the investigation but wouldn't comment on Mr. Liang's case.

Mr. Liang, 62 years old, said in a Detroit courtroom on Friday that he knew Volkswagen had not disclosed the "defeat devices" to regulators. Those omissions enabled the company to obtain approval to sell the cars in the U.S.

"That is why I am guilty," Mr. Liang told U.S. District Judge Sean Cox. The defendant wore a gray suit and red tie. He declined to comment later to reporters.

"This will certainly have an impact on proceedings in Europe," said Christopher Rother, a Berlin attorney representing European plaintiffs suing Volkswagen in Germany.

According to the plea agreement, Mr. Liang and colleagues began designing a new engine around 2006 but "soon realized...that the engine could not meet both customer expectations as well as new, stricter U.S. emissions standards." Instead, the plea said, they designed software to recognize when the car was undergoing a test and turn on emissions controls.

The Justice Department said the conspiracy began in November 2006, involved Jetta, Golf and other vehicles with model years between 2009 and 2015, and continued until the cheating was revealed in September 2015.

Mr. Liang moved to the U.S. from Germany in May 2008 to help Volkswagen launch its "clean diesel" vehicles in the U.S. and now lives in Newbury Park, Calif., the Justice Department said.

Investigators began looking at Mr. Liang early on, confiscating his passport in November 2015, according to a person familiar with the matter.

"He is one of many at Volkswagen who got caught up in this emissions scandal, and he is very remorseful for what took place," Daniel Nixon, Mr. Liang's lawyer, said after the hearing.

The Justice Department last year publicly stepped up efforts to charge individuals in corporate investigations, after facing criticism that it heavily penalized firms for corporate wrongdoing but prosecuted few executives for the same conduct.

Friday's plea deal suggests the Justice Department envisions a different approach this time, with Mr. Liang helping prosecutors pursue other individuals at Volkswagen.

"Defendant agrees to assist the government in the investigation and prosecution of others," the agreement says, including potentially testifying before a grand jury or at trial. The deal also requires Mr. Liang to cooperate with German law enforcement.

The document says that if the government determines that Mr. Liang's cooperation "amounts to substantial assistance in the investigation or prosecution of others," it will seek a reduced sentence against him.

Volkswagen last year admitted to misleading environmental regulators and consumers by installing illegal emissions-cheating software on nearly 600,000 diesel-powered vehicles in the U.S. Volkswagen has said the software is on some 11 million vehicles world-wide.

Questions about Volkswagen emissions first arose in 2014, when West Virginia University researchers identified discrepancies between what the cars emitted on the road and in testing situations.

Volkswagen didn't admit to the software at the time, and Mr. Liang and his colleagues "pursued a strategy to disclose as little as possible," prosecutors said in the indictment.

The Volkswagen employees misled regulators at the Environmental Protection Agency and the California Air Resources Board about testing results and tried to blame "innocent mechanical and technological problems," according to the indictment.

In April 2015, one Volkswagen employee wrote an email in German to Mr. Liang and other colleagues, saying in part "we 'only just need a plausible explanation' as to why the emissions are still high!!!" In another email the next month, an unidentified employee wrote, "We need a story for this situation!"

The indictment said an employee in June wrote, "If the Gen 1 goes onto the roller at the CARB, then we'll have nothing more to laugh about!!!!!" The Gen 1 was a new diesel engine for the U.S. market, and CARB is the California Air Resources Board.

The indictment describes meetings dating to 2006 between Mr. Liang, other unidentified Volkswagen employees and regulators, during which the auto maker presented the new diesel engine without mentioning it didn't meet emissions standards.

In June, the company agreed to a separate civil settlement paying regulators and consumers up to $15 billion. In August, it reached an additional $1.2 billion settlement to compensate dealers. Those are separate from any criminal investigations.

Corrections & Amplifications: Mr. Liang is 62 years old and remains an employee of Volkswagen. An earlier version of this article incorrectly said he was 63, and the headline described him as a former Volkswagen engineer.

--William Boston contributed to this article.

Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com and Christina Rogers at christina.rogers@wsj.com

(END) Dow Jones Newswires

September 10, 2016 02:47 ET (06:47 GMT)