VW forges U.S. deal arising from diesel emissions scandal

By Alexandria Sage and David Shepardson

SAN FRANCISCO/WASHINGTON (Reuters) - Volkswagen AG, driving to move beyond a scandal that has disrupted its global business and sullied its reputation, announced a sweeping U.S. deal on Thursday to buy back or potentially fix about a half million polluting diesel cars and set up environmental and consumer compensation funds.

The settlement, which sources and analysts said could cost VW (VOWG_p.DE) at least $10 billion, is not likely to end the Dieselgate controversy that began last September when the world's No. 2 automaker admitted using sophisticated secret software in its cars to cheat exhaust emissions tests.

Despite the potentially big price tag, Volkswagen shares rose 6 percent on Thursday after rising nearly 7 percent on Wednesday on news of the agreement, which must be finalized by June 21.

VW shares are still down nearly 20 percent since the emissions cheating was exposed as investors worried not only about large fines and management instability, but the toll the scandal would take on the German automaker's efforts to stay competitive.

VW still faces U.S. Justice Department fines as part of an expected civil settlement, an ongoing Justice Department investigation that could lead to criminal charges and an outcry in Europe to do more for millions of owners of vehicles there that also have illegal software to defeat emissions testing. [nL8N1541VG]

The framework of the deal was hammered out by VW with the Justice Department, state of California, the U.S. Environmental Protection Agency and Federal Trade Commission as well as lawyers for car owners who filed class action civil lawsuits.

It was brokered by former FBI director Robert Mueller, the court-appointed mediator, in marathon talks at a Washington law firm over the past week. It is expected to settle more than 600 class suits in U.S. courts.

U.S. District Judge Charles Breyer, who outlined the agreement during a hearing in San Francisco, said he expects the issues of Justice Department fines and resolving the 3.0 liter engines will be addressed "expeditiously."

Breyer did not disclose the amount of money involved, and ordered lawyers for all parties not to disclose details until they were final. He said there is "definite momentum" toward a final resolution.

The judge set the June 21 deadline for VW and the other parties to nail down the final details before the agreement faces a public comment period. It would need final judicial approval before taking effect.

The judge said the settlement includes VW's offer to buyback 482,000 2.0-liter vehicles, fix them if regulators agree on that step after further testing, or cancel outstanding leases.

Big automakers have shown resiliency once damaging scandals are resolved. Toyota Motor Corp and General Motors Co have been rocked by safety scandals in recent years, paid substantial penalties to regulators, and both are now healthy.

GM on Thursday reported first quarter profits that soundly beat investors’ expectations. [nL2N17O0DQ]

Many questions must be answered. Among them is whether Volkswagen will be allowed to resell repurchased vehicles and how to fix nearly 90,000 Porsche, Audi and VW cars and SUVs also made by the company that are equipped with six-cylinder diesel engines that do not comply with U.S. clean air standards.

The U.S. settlement will include an environmental remediation fund to address excess emissions and a fund to promote green automotive technology, and additional "substantial compensation" to owners to sell back or have their vehicles fixed, Breyer said.

LINGERING QUESTIONS

Many other issues remain, including what happens if vehicles are not deemed fixable and owners opt not to sell them back. A fix could potentially reduce vehicles' road performance and it is not clear if VW would have to compensate owners for that. Also unanswered is when VW can sell thousands of diesel cars sitting in showrooms that are subject a government-ordered stop sale.

One of the key issues of contention in the talks had been whether regulators would accept a remedy that does not eliminate all excess emissions to meet the requirements of the U.S. Clean Air Act. In March, a California Air Resources Board official said only a partial fix may be possible.

Democratic U.S. Senators Edward Markey of Massachusetts and Richard Blumenthal of Connecticut said VW should extend the same buyback offer to owners of 3.0 liter vehicles.

"Volkswagen's offer is a welcome development but too limited in scope and very late," they said.

Republican U.S. Representative Fred Upton of Michigan called the deal "welcome news for the hundreds of thousands of American consumers" but withheld judgment until the agreement is finalized.

Outside the courthouse, Joyce Ertel Hulbert, owner of a 2015 diesel Golf station wagon, held up a sign reading "Invested $30,000, worth $00,000. Buy it Back!"

"They're not doing enough," she said of VW.

VW said in a statement it reached "an agreement on the basic features of a settlement with the class action plaintiffs in the lawsuit in San Francisco. This agreement will be incorporated into a comprehensive settlement in the coming weeks."

VW said the deal "will have no legal bearing on proceedings outside of the United States."

"Volkswagen is committed to winning back the trust of its customers, its dealers, its regulators and all of America," VW lawyer Robert Giuffra said.

Volkswagen has more miles to travel before the scandal is behind it. The Justice Department said its other investigations into VW's conduct "remain active and ongoing." Environmental and consumer groups said they are not convinced the deal goes far enough.

"Without strict penalties, and without fixing or removing the polluting vehicles, people will continue to breathe dirtier air, consumers will lose faith in watchdog agencies, and manufacturers will believe they can endanger our health without feeling the full consequence," the Sierra Club environmental group said.

New York Attorney General Eric Schneiderman said the deal "does not in any way resolve the consumer and environmental penalty claims of the states, or the states' claims for injunctive relief."

Volkswagen spokeswoman Jeannine Ginivan said customers do not need to take any action immediately. Based on the court schedule outlined on Thursday, the earliest buybacks would begin is likely in July.

On Thursday, Germany's justice minister and Europe's industry boss raised the pressure on Volkswagen to compensate European consumers as well.

Reuters reported on Wednesday that owners will get around two years to decide whether to sell their vehicles back including the 2009-2015 diesel Jetta and will be offered the estimated value of the vehicles from September 2015, before the scandal erupted, along with an unspecified premium. [nL2N17N1MU]

(Additional reporting by Jane Lee and Rory Carroll in San Francisco)