The investigation into Volkswagen‘s emissions scandal has for the first time reached the top echelon of management, threatening to undermine the company’s claim that wrongdoing was limited to a handful of lower-ranking managers and potentially increasing the already enormous financial damage.
German prosecutors said on Monday that the former Volkswagen chief, Martin Winterkorn, is suspected of market manipulation for having waited too long to disclose that the company faced an inquiry. They are looking into another member of the management board as well for potential violations of securities laws.
By expanding the investigation into the executive suite, prosecutors signaled that they had begun focusing on a possible cover-up after Volkswagen learned that it was suspected of violating clean air rules in the United States.
American regulators first began asking Volkswagen questions about suspicious emissions data in mid-2014. It was more than a year later when the company admitted to installing illegal software in 11 million cars worldwide to cheat pollution tests. All along the carmaker has insisted that top management was not aware of cheating software, known as a defeat device, until shortly before the disclosure of the deception in September. Instead, the company has cast the blame on a small group of middle managers suspected of installing the software, starting with the 2009 models.
The investigation comes at an especially awkward time for Volkswagen. On Wednesday, top managers will face shareholders at the company’s annual meeting. Next week, there is a court deadline for Volkswagen to hash out a settlement with authorities and car owners in the United States. The agreement is expected to cost the company well over $10 billion. The decision by prosecutors to pursue Winterkorn could further increase the financial fallout from the deception, providing ammunition to investors who have filed suits claiming the company violated its duty to keep them abreast of risks to the share price. Volkswagen will be more vulnerable to shareholder lawsuits if it turns out top managers failed to disclose crucial information. “I think this is very good for shareholders,” said Christopher Rother, a Berlin lawyer who represents some of the investors.
Volkswagen said Monday it was surprised by the prosecutors’ decision to investigate Winterkorn. The company said it had engaged outside law firms to examine the circumstances, and they concluded that no current or former members of the management board had violated their responsibility to shareholders.
“No serious and manifest breaches of duty on the part of any serving or former members of the board of management have been established,” Volkswagen said in a statement.
Prosecutors in the city of Braunschweig did not identify the second board member, citing German privacy laws. Prosecutors said only that the second suspect was not Hans Dieter Pötsch, who was Volkswagen’s chief financial officer when the scandal came to light and is now chairman of the supervisory board.
A person with knowledge of the case confirmed widespread news reports in Germany that the second executive was Herbert Diess, whose duties included sales of Volkswagen brand cars in the United States. Volkswagen declined to comment. Lawyers for Mr. Winterkorn did not respond to requests for comment.
The expansion of the investigation means that prosecutors will focus more intensely on the year leading up to the disclosure of the deception, a period when Volkswagen executives tried to deflect questions about emissions by its diesel cars.
Mr. Winterkorn resigned in September, several days after American regulators publicly accused the company of manipulating results of emissions tests. At the time, Mr. Winterkorn said he learned about the defeat devices only shortly before that point. “I am not aware of any wrongdoing on my part,” he said.
But American regulators at the Environmental Protection Agency started asking Volkswagen about suspicious emissions data in mid-2014. Court documents, internal memos and emails suggest that Mr. Winterkorn and other executives were informed about possible cheating around that time.
The company has acknowledged that a lower-ranking executive sent Mr. Winterkorn a memo in May 2014 informing him about a private study that raised questions about Volkswagen diesel cars sold in the United States. The memo mentioned the risk that Volkswagen would be accused of using a defeat device. Volkswagen said in March that it was not clear whether Mr. Winterkorn took note of the memo.
Michael Horn, the chief executive of Volkswagen’s United States unit, testified to Congress in October that he was also informed in May 2014 of the possibility that the E.P.A. would test for defeat devices. Mr. Horn, who has since resigned, said he was told that Volkswagen technicians had a plan to make the cars compliant with clean air rules.
In the months that followed, according to a civil suit filed by the United States Justice Department, Volkswagen provided misleading information and impeded attempts by American officials to understand why diesel vehicles emitted more on the road than in lab tests.
In late 2014, Volkswagen even recalled diesel vehicles in the United States. But an update to the engine software did not repair the problem.
The management board, led by Mr. Winterkorn, also repeatedly pushed back against technical proposals for upgrading the emissions controls, according to two people who attended meetings where the proposals were discussed. The management board rejected the proposals because of cost, the people said.
Volkswagen did not issue a formal statement to shareholders about the problem until Sept. 22, four days after the E.P.A. had formally cited the company. Volkswagen said then that it was setting aside 6.5 billion euros to cover the cost of recalls. It has since raised the amount to €16.2 billion.
Prosecutors said they opened the inquiry into the former Volkswagen chief at the behest of Germany’s financial watchdog, which conducted an inquiry into possible violations of securities laws.
The deception has been a drag on the company’s profit and share price. Last year, the company reported its first loss since 1993. Since the admission, shares of the stock are off more than 20 percent.
One investors group said on Monday that it would demand that Volkswagen conduct a special inquiry into top management’s role. “Volkswagen not only made fraudulent cars,” Henning Wegener, a former German diplomat who is head of a shareholders group, said at a news conference in Frankfurt Monday. “It also defrauded shareholders.”