Volkswagen faces billions in fines as US sues for environmental violations

The U.S. Justice Department has sued Volkswagen for up to $90 billion for allegedly violating environmental laws -- five times regulators' initial estimate and a reminder of the carmaker's problems nearly four months after its emissions scandal broke.

Although such U.S. lawsuits are typically settled at a fraction of the theoretical maximum penalty, analysts said the size of the claim meant Volkswagen (VW) could face a larger bill than previously anticipated.

"The announcement serves as a reminder/reality check of VW's still unresolved emissions issues," Goldman Sachs analysts wrote in a note, maintaining their "sell" recommendation on the stock.

VW shares fell as much as 6 percent to a six-week low in early Tuesday trade, the biggest drop on Germany's blue-chip DAX index.

The civil lawsuit, announced on Monday, reflects the growing number of allegations against VW since the German company admitted in September to installing devices to cheat emissions tests in several 2.0 liter diesel vehicle models.

VW could face fines of as much as $37,500 per vehicle for each of four violations of the law, based on the complaint, which says illegal devices to impair emission control systems were installed in nearly 600,000 vehicles in the United States.

In September, U.S. regulators initially said Europe's biggest carmaker could face fines in excess of $18 billion.

The lawsuit had been expected, and analysts believe any fine will be far below the theoretical maximum. Although U.S. authorities sued Toyota for up to $58 billion for environmental violations around the turn of the century, they agreed a settlement that cost the Japanese carmaker about $34 million.

Equinet analyst Holger Schmidt cut his rating on VW shares to "reduce" from "neutral."

"We continue to believe that no one is able to make anything else than a wild guess on potential fines," he said.

During December, VW's shares had been recovering as the carmaker announced incrementally positive news such as simple fixes for about 8.5 million affected cars in Europe.

The stock is now 22 percent below pre-scandal levels, with analysts particularly concerned about the impact on VW in the United States, where the firm has long struggled to make inroads and tougher regulations mean it faces bigger potential fines.

The lawsuit, filed on behalf of the U.S. Environmental Protection Agency (EPA), accuses VW of four counts of violating the U.S. Clean Air Act, including tampering with the emissions control system and failing to report violations.

"The United States will pursue all appropriate remedies against Volkswagen to redress the violations of our nation's clean air laws," said Assistant Attorney General John Cruden, head of the Justice Department's environment and natural resources division.

The lawsuit is being filed in the Eastern District of Michigan and then transferred to northern California, where class-action lawsuits against VW are pending.

"We're alleging that they knew what they were doing, they intentionally violated the law and that the consequences were significant to health," said a senior Justice Department official.

VW's cheating of diesel emissions tests allowed it to avoid a costly revamp of engines to meet new U.S. standards.

The Justice Department has also been investigating criminal fraud allegations against VW for misleading U.S. consumers and regulators. Criminal charges would require a higher burden of proof than the civil lawsuit.

The U.S. lawsuit also alleges VW gamed emissions controls in many of its 3.0 liter diesel models, including the Audi Q7, and the Porsche Cayenne.

VW's earlier admissions eliminate almost any possibility that the automaker could defend itself in court, Daniel Riesel of Sive, Paget & Riesel P.C, who defends companies accused of environmental crimes, said.

To win the civil case, the government does not need to prove the degree of intentional deception at VW – just that the cheating occurred, Riesel said. "I don't think there is any defense in a civil suit," he said.

Instead, the automaker will seek to negotiate a lower penalty by arguing that the maximum would be "crippling to the company and lead to massive layoffs", Riesel said.

Even after VW first admitted to using cheat devices in certain models, the automaker "failed to come forward and reveal" that other vehicles contained such devices, the government said.

To cheat the emissions controls, VW installed software that allowed the vehicles to detect when they were being tested on a flatbed. When the vehicles detected they were actually on the road, the software caused the emissions control systems to underperform or shutdown, the government said, allowing the cars to emit dangerous levels of air pollution.

The civil lawsuit does not preclude the Justice Department from pursuing criminal charges against VW, said the Justice Department official.

VW said in a statement: "Volkswagen will continue to work cooperatively with the EPA on developing remedies."

"We will continue to cooperate with all government agencies investigating these matters."

(Reporting by Julia Edwards and Georgina Prodhan; Additional reporting by David Shepardson,; Editing by Bernard Orr and Mark Potter)