>>> Asian Update

Asia Mid-Session Market Update: USD extends post-Trump conference decline; S&P urges more governance in China bond market; Brazil cuts more than expected

***US Session Highlights***
- (US) MBA MORTGAGE APPLICATIONS W/E JAN 6TH: 5.8% V 0.1% PRIOR
- (US) Jan IBD/TIPP Economic Optimism: 55.6 v 54.8 prior
- (US) DOE CRUDE: +4.1M V +0.5ME; GASOLINE: +5.0M V +1.5ME; DISTILLATE: +8.4M V +0.5ME; US production jumped 176K barrels on the week to 8.95M bpd, highest since April 2016
- British Pound falls to lowest levels since Oct Brexit
- President-elect Trump addresses Russian intelligence report, drug pricing, defense spending, bringing jobs back to US, repealing Obama care and steps taken to separate from business dealings in first press conf since election

***US markets on close: Dow +0.5%, S&P500 +0.3%, Nasdaq +0.2%***
- Best Sector in S&P500: Materials
- Worst Sector in S&P500: Healthcare
- Biggest gainers: FSLR +4.8%, CF +4.5%, RIG +4.0%, AES +3.9%, ALB +3.8%
- Biggest losers: ENDP -8.5%, PRGO -6.9%, MNK -6.2%, BMY -5.3%, ALXN -4.9%
- At the close: VIX 11.3 (-0.2pts); Treasuries: 2-yr 1.17% (-1bps), 10-yr 2.37% (-1bps), 30-yr 2.96% (-1bps)

***US movers afterhours***
- HSGX: Announces publication of MRI data from NeoCart phase 1 and phase 2 clinical trials in the American Journal of Sports MedicineHistogenics announces the online publication in the January 2017 issue of the American Journal of Sports Medicine; +44.7% afterhours
- AAOI: Reports prelim Q4 $0.77-0.82 v $0.50e, R$84.5-84.8M v $77.4e (prior $0.46-0.51, $75-$79M); +19.7% afterhours
- KBH: Reports Q4 $0.40 v $0.37e, R$1.19B v $1.16Be; +2.4% afterhours
- ELY: Acquires OGIO International, Inc. for $75.5M all cash transaction' +1.4% afterhours

***Politics***
- (HK) Hong Kong Chief Sec Lam resigns - local media
- (US) Pharma lobby spokesperson: committed to working with Pres-elect Trump and Congress to boost US competitiveness and protect jobs - press

***Asia Key economic data:***
- (BR) BRAZIL CENTRAL BANK (BCB) CUTS SELIC TARGET RATE BY 75BPS TO 13.00%; MORE THAN EXPECTED (Largest cut since Apr 2012)
- (JP) JAPAN NOV CURRENT ACCOUNT BALANCE: ¥1.42T V ¥1.46TE; ADJUSTED CURRENT ACCOUNT: ¥1.80T V ¥1.87TE; TRADE BALANCE: ¥313.4B V ¥254BE
- (JP) JAPAN DEC BANK LENDING (INC TRUSTS) Y/Y: 2.6% V 2.4% PRIOR; BANK LENDING (EX- TRUSTS) Y/Y: 2.6% V 2.5%E
- (NZ) NEW ZEALAND DEC ANZ COMMODITY PRICE M/M: 0.7% v 3.2% PRIOR
- (KR) South Korea Nov Bank Lending to Households (KRW): 708.0T v 704.5T prior

***Asia Session Notable Observations, Speakers and Press***
- Asian equity markets are mixed, but the sentiment may be turning more bearish as evidenced by a 7pt slide in S&P emini futures and a rally in JPY, leading to outsized declines in Tokyo stocks. Shanghai Composite is still marginally positive, though S&P/ASX200 is slightly lower.
- In FX majors, USD/JPY is down some 100pips from the highs below ¥114.50, GBP/JPY is at 6-week lows below ¥140, and EUR/JPY down 80pips below ¥121.40. USD has been on the defensive in general amid disappointment that President-elect Trump's news conference had more to do with deflecting damaging press speculation related to his history with Russia rather than offering more detail about his fiscal priorities. Gold tracked USD weakness to the upside, approaching $1,200/oz level.
- Brazil central Bank cut rates by a wider than expected 75bps (50bp expected) to 13.00% - the largest cut since 2012. BCB also lowered its 2017 and 2018 inflation projections as it signalled an intensification of monetary easing to address disinflation, weak economic growth, and expectations of more uncertainty in global economy.
- Outside that rate decision, economic data were limited to Japan showing slightly narrower Current Account surplus and bank lending topping expectations/prior growth.
- S&P reflected on the turbulence in the China bond market, expressing the need for better governance to prevent "inconspicuous trading practices and aggressive risk-taking." Also of note in China, PBoC was set modestly firmer, NDRC chairman reiterated economy is stable but facing increasing risks, and top developer Vanke was halted on speculation a shareholder may disclose an amended stake.

China:
- (CN) China to raise fuel prices: gasoline price by CNY70/ton; diesel prices by CNY70/ton; effective tomorrow - financial press citing ICIS
- (CN) S&P: Ineffective risk governance may impede China bond market
- (CN) China Commerce Ministry (MOFCOM) spokesman Sun Jiwen: China faces big trade downward pressure this year
- (CN) US-China Business Council: Trade with China supports about 2.6M US jobs, including jobs created directly in the US - Chinese press
- (CN) China NDRC Head: Economy is generally stable, continuing momentum from H2 2016

***Asian Equity Indices/Futures (23:00ET)***
- Nikkei -1.2%, Hang Seng -0.3%, Shanghai Composite +0.2%, ASX200 -0.2%, Kospi +0.1%
- Equity Futures: S&P500 -0.2%; Nasdaq -0.2%, Dax -0.2%, FTSE100 -0.1%

***FX ranges/Commodities/Fixed Income (23:00ET)***
- EUR 1.0570-1.0610; JPY 114.50-115.50; AUD 0.7430-0.7465; NZD 0.7045-0.7080
- Feb Gold +0.5% at 1,197/oz; Feb Crude Oil -0.4% at $52.18/brl; Mar Copper flat at $2.60/lb
- SLV: iShares Silver Trust ETF daily holdings fall to 10,524 tonnes from 10,612 tonnes prior; lowest since July 5th
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.9141 V 6.9235 PRIOR; strongest Yuan setting since Jan 6th
- (CN) PBOC to inject combined CNY110B in 7-day and 28-day reverse repos v CNY120B prior
- (JP) BOJ offers to buy ¥410B in 5-10yr JGBs, ¥190B in 10-25yr JGBs and ¥110B in JGBs with maturity over 25-yr

***Asia equities / Notables / movers by sector***
- Consumer discretionary: Nexon Co 3659.JP -1.9% (Credit Suisse cuts to neutral); Kewpie Corp.2809.JP +6.0% (annual result); FamilyMart Uny Holdings 8028.JP -5.7% (Mizuho cuts rating)
- Consumer staples: Bellamy's Australia BAL.AU -16.8% (analysts expect turnaround may take time)
- Financials: Central China Real Estate 832.HK +1.9%, Everbright Securities Co 6178.HK -0.7%, China Overseas 688.HK +1.6% (Dec result); Steadfast SDF.AU +6.1% (Credit Suisse raises rating); China South City Holdings 1668.HK +5.5% (shareholder to sell stake)
- Industrials: Hanjin Shipping Co 117930.KR +25.5% (trading resumes); Hyundai Glovis Co 086280.KR +4.5% (Nomura raises rating)
- Materials: BC Iron BCI.AU +20.0% (raises guidance); Energy Resources of Australia ERA.AU +16.2% (Q4 result); Medusa Mining MML.AU -10.4% (cuts guidance)
- Energy: Tonengeneral Sekiyu 5012.JP +2.3% (Daiwa raised to outperform); Cosmo Energy Holdings Co 5021.JP +6.4% (Daiwa raises rating); JX Holdings 5020.JP +1.9% (Daiwa raises rating)
- Healthcare: Blackmores BKL.AU +3.2% (positive on China sales); Takeda Pharmaceutical Co 4502.JP -2.6% (S&P revised outlook to Watch Negative)

>>> US Close Dow +0.50% S&P +0.28% Nasdaq +0.21% Russell +0.17%

Closing Market Summary: Stock Market Closes Wednesday Modestly Higher

The major averages closed Wednesday's session in the green with the S&P 500 adding 0.3%. The Dow outperformed the benchmark index with a 0.5% gain.

The stock market held a modest gain going into President-elect Trump's first news conference since winning the presidential election. However, the market gave back all of its gains and more after Mr. Trump expressed a desire to bring back pharmaceutical operations to the United States and voiced support for competitive drug price bidding. The biotechnology industry plunged immediately, with the iShares Nasdaq Biotechnology ETF (IBB 278.04, -8.31) closing lower by 3.0%. Most sectors returned to or above their pre-conference levels in the afternoon, but health care (-1.0%) could not overcome biotechnology's sizable blow. Investors hoping to hear about President-elect's infrastructure spending plans came away empty handed.

Telecom services (-0.5%) and real estate (-0.5%) also finished in negative territory, while the remaining eight spaces closed in the green. Energy (+1.2%) topped the day's leaderboard, piggybacking on crude oil's climb. The commodity finished higher by 2.7% at 52.20/bbl amid reports that Saudi Arabia, the world's top exporter, plans to cut supply to Asia. Crude extended its gain despite a big inventory build that was revealed by the latest stockpile data.

The top-weighted technology space (+0.7%) also finished near the top of the standings after an afternoon push from some of its top components. For instance, Apple (AAPL 119.75, +0.64), Facebook (FB 126.09, +1.74), and IBM (IBM 167.75, +2.23) advanced between 0.6% and 2.2%. Chipmakers also provided a boost as the PHLX semiconductor Index closed up 0.4%.

Financials (+0.5%) erased their week-to-date loss that was carried into Wednesday's session. The sector rallied to a session high during late afternoon action.

Cyclical sectors have a commanding lead for the week, as five of the six are in positive territory. Materials and technology set the pace with week-to-date gains of 0.9% and 0.7%, respectively. Conversely, all five defensive sectors are posting week-to-date losses with real estate (-2.4%) leading the retreat.

U.S. Treasuries finished the trading day modestly higher after the Treasury's $20 billion 10-year reopening auction drew a high yield of 2.342% on a bid-to-cover of 2.58x. The 10-yr yield closed one basis point lower at 2.37%.

Wednesday's lone economic report was the MBA Mortgage Index, which increased 5.8%.

Tomorrow's economic data will include December Import/Export Prices and Initial Claims (consensus 235k) at 8:30 am ET, followed by the Treasury Budget at 2:00 pm ET.

  • Russell 2000 +1.2% YTD
  • Dow Jones Industrial Average +1.0% YTD
  • S&P 500 +1.6% YTD
  • Nasdaq Composite +3.4% YTD

(Gavekal) VIX Flirting with Pre-GFC Lows, Uncertainty at All-Time Highs. Huh?

VIX Flirting with Pre-GFC Lows, Uncertainty at All-Time Highs. Huh? - http://bit.ly/2j8VwJ5
Recently, we have highlighted a number of divergent trends between ‘soft’ data and ‘hard’ data in both Europe and the US. For the most part, improving survey responses remain unconfirmed by the quantifiable information currently available. The surge in the economic policy uncertainty index is no exception.
In 2016, uncertainty rose around the world, led by the UK (unsurprisingly).
With that rise in policy uncertainty, we would have expected to see an increase in market volatility. After all, through 2015, major spikes in the simple average of the above policy uncertainty indexes coincided with a significant (above 30) rise in the VIX.
Last year, with the exception of a Brexit-related spike to 26 and an even smaller surge in reaction to the US election in November, the VIX averaged just under 16 (about 25% lower than its ten-year average of more than 21).
While the average level of economic policy uncertainty fell somewhat from November to December, it remains quite elevated versus the VIX at 11.49 today (about one point above its low near 10 back in early 2007).
In a reversal of the trends we have observed elsewhere (positive survey data, unconfirmed by the numbers themselves), the ‘hard’ data here seems to be telling us everything is a-ok while the policy uncertainty data would indicate cause for concern.

(ZH) BlackRock's Robo-Quants Are On Pace To Post Record Losses

BlackRock's Robo-Quants Are On Pace To Post Record Losses


With active managers losing billions in assets under management weekly, in many cases regardless of performance, as the great tsunami sweep funds away from the "2 and 20" (or even 0.5% and nothing) crowd to passive management, funds have become increasingly desperate to figure out how to preserve this dying business model, with its high fees and generous margins, in a time when the asset management - whether passive or active - industry can barely outperform the stock market. In the case of Blackrock, that has meant fusing active management with robotic quants, and the result has been... a debacle.
According to Bloomberg, BlackRock’s main quantitative hedge-fund strategies, which like RenTec but only with far less success, use computer models to sort through vast amounts of data to pick out patterns, were on track for losses in 2016, and of the strats, four were set for their worst returns on record, data through November showed. A separate investor presentation with a broader quant lineup showed that almost two-thirds underperformed.
Blackrock joined many other traditional hedge fund managers in the shift to quant investing last year in hopes of scooping up that elusive extra alpha; Fink combined the group, which previously had been one of the asset manager's top performers, with the stock-picking unit early last year to lift returns and lure clients to higher-fee products. Demand for low-cost exchange-traded funds helped BlackRock maintain its position as the world’s biggest asset manager, but also has led to record withdrawals from its U.S. active funds business and chipped away at revenue.
Kyle Sanders, an analyst at Edward Jones, told Bloomberg that "quant is key to salvaging BlackRock’s active business. This is one way to improve their performance and distinguish themselves from the pack. Unfortunately, they have yet to deliver.” The silver lining is that with much of the rest of Wall Street's quants also "failing to distinguish" themselves, at least Blackrock does not stand out.
As Bloomberg accurately notes, BlackRock’s quant push reflects the broader pressures convulsing the money management industry. High costs and middling returns (thanks central bankers) have caused investors to spurn active managers in favor of ETFs. To cope, many managers have turned to computer-driven strategies to gain an edge. That even includes some of the most storied names in the hedge-fund world, like Paul Tudor Jones and Ray Dalio, who have jumped on the quant bandwagon to bolster performance - and justify their hefty fees. The only problem is that many, if not all, of these quants systems use the same signals, which leads to not only massive crowding and a reduction in liquidity, it makes outperformance virtually impossible as everyone chases the same trades.
Putting the company's attempt to revive its active-quant business in context, at $282 billion, BlackRock’s active equity business constitutes just a small part of the $5.1 trillion behemoth. Still, it’s an important one for BlackRock because the funds carry much higher fees than its ETFs. For example, the $21.7 billion BlackRock Equity Dividend Fund has an expense ratio of 0.69 percent, data compiled by Bloomberg show. That’s 17 times higher than its $92.1 billion iShares Core S&P 500 ETF, which has an expense ratio of just 0.04 percent. This means that in the first nine months of 2016, its active equity business alone accounted for 16 percent of BlackRock’s base fees, even though it made up 6 percent of AUM. Over the years, it has also been one of Fink’s biggest headaches.
And this is where the robotic rescue team arrives.
With returns for the group’s fundamental active equity funds consistently lagging behind many of its rivals, even after improving in 2016, it suffered broad redemptions, which contributed to a record $19.3 billion of outflows from its U.S.-based active fund business last year. The $78 billion quant team, which BlackRock dubbed Scientific Active Equity, or SAE, was supposed to help fix that. In addition to combining SAE with its stock pickers, BlackRock armed them with the team’s analytical tools.


“As people get the data and learn how to use the data, I think that there is going to be alpha generated and, therefore, will give active managers more opportunity than they’ve had in the past to actually create returns,” BlackRock President Rob Kapito said at a Barclays conference in September.
Unfortunately, as more have turned to the same strategies, it means the "robotic" returns have dwindled: BlackRock inherited the three-decade-old quant business with its purchase of Barclays Global Investors in 2009. Initially, the group was a big success under new management, delivering outsize returns. More recently, things haven’t panned out quite as well. According to BlackRock’s most recent publicly available figures contained in its third-quarter earnings report from October, the strategies beat 31 percent of its peers or a benchmark over a one-year period. That’s slightly worse than its traditional stock pickers, who exceeded their yardsticks half the time.
Worse, according to Bloomberg, at least three of the quant strategies used by BlackRock’s global hedge fund platform have suffered losses greater than 10 percent in the year through November. That compares with an average return of 3.6 percent for quant funds, One would think that massive size, in the case of the world's biggest asset manager Blackrock, would also mean scale.
It has not. Some examples:


The biggest decline was in BlackRock’s $768 million 32 Capital fund, a global long-short equity fund run by Raffaele Savi that has seen its assets decrease by 34 percent in the one-year period ended October. The fund lost 12.2 percent through November, the worst year-to-date performance in its 15-year history.

Some of the quant group’s deepest losses came in the first few months of the year, when markets plunged before bouncing back sharply in late February. Many quant shops stumbled, but a big reason SAE missed the rebound had to do with BlackRock’s own investment policy. It instructs the team to sell when losses become sizable, regardless of what its mathematical models say, according to a person with direct knowledge of the matter.
Of course, Wall Street is notorious for never taking blame for bad investments, and so it was the "timing's" fault:


“They had the worst timing possible,” Morningstar’s Jason Kephart, who called into question BlackRock’s ability to shift factor weightings on the fly, said in an interview. Whatever the case, performance suffered. The fund class for institutional investors fell 6.9 percent in 2016 and beat only 9 percent of funds in its category, data compiled by Bloomberg show.

To make matters worse, SAE has lost some of its top talent. The departures included Bill MacCartney, a former Google scientist that BlackRock hired in 2015 to help build out machine-learning, and Ryan LaFond, a head researcher and one of the brains behind the firm’s socially responsible funds.

Of course, SAE could rebound from its lackluster performance and plenty of bold-faced quant names had a tough time in 2016. The main computer-driven fund at Leda Braga’s Systematica Investments lost 11 percent last year. Three such funds run by Man Group Plc’s AHL division had losses through September.

And regardless of the industry’s ups and downs, few firms anywhere can match BlackRock’s wherewithal. SAE is made up of more than 90 investment professionals, including 28 Ph.D.s and numerous data scientists. In September, Mark Wiseman, the former head of the Canada Pension Plan Investment Board, was brought in to run the group.
Meanwhile, the withdrawals continue: even as the promise of computer-driven investing helped quant funds amass almost $16 billion in new money in the first 11 months of 2016, BlackRock was largely left out. After getting $1.7 billion in fresh capital in 2015 (and snapping six straight years of multibillion-dollar outflows), SAE once again suffered investor withdrawals last year. Fink hasn’t been shy about his disappointment over the inability of SAE to bring in money in the past.


“The one area where we’ve done quite well is in the model-based equities and we’re still not seeing really any flows,” he said on a fourth-quarter earnings call in 2014. “I am very bullish on building this out as a component of our active equity area and I’m quite frustrated, to be frank, that we haven’t seen the momentum that I would thought we would.”
For now, however, this particular fusion of robots and humans is slowly turning out to be a disaster. While Blackrock has other options, such as its massive "passive" ETF platform to fall back on, other active managers, all of whom are suffering the same withdrawals as investors demand performance or yank their funds, are nowhere near so lucky, and absent big changes in 2017, extrapolating current trends would mean the extinction of the carbon-based asset managers sometime over the next 20 years.
For now, unfortunately, 2017 is ot starting off so well.

    WSJ : U.S. Indicts Six Volkswagen Executives in Emissions Scandal

    U.S. Indicts Six Volkswagen Executives in Emissions Scandal
    German auto maker admits to criminal wrongdoing, to pay $4.3 billion penalty

    Six Volkswagen AG executives were indicted by a grand jury on Wednesday as the German auto maker formally admitted to criminal wrongdoing in its diesel-emissions cheating case.

    The company agreed to pay a $2.8 billion criminal fine and an additional $1.5 billion in civil penalties to resolve the last significant U.S. government action expected against the company over its cheating, which became public in September 2015.

    Volkswagen has acknowledged that it rigged nearly 11 million diesel vehicles world-wide to cheat on emissions tests, including some 600,000 in the U.S. The vehicles produced toxic tailpipe emissions up to 40 times more than allowable limits during normal road use.

    In the plea agreement, which was filed in federal court in Detroit and needs to be approved by a judge, the company agreed to “cooperate fully” in ongoing investigations into Volkswagen employees and executives.

    “Volkswagen deeply regrets the behavior that gave rise to the diesel crisis,” Volkswagen Chief Executive Matthias Mueller said.

    Volkswagen’s management and supervisory boards met Wednesday to approve the settlement.

    “The trust of our customers, our shareholders, partners, employees and the general public is our most important asset. The Supervisory Board will spare no effort to ensure that Volkswagen fully restores their confidence,” said Hans Dieter Poetsch, Volkswagen chairman.

    The Justice Department also said six Volkswagen executives had been indicted Wednesday by a federal grand jury for participating in the conspiracy.

    Oliver Schmidt, who was once in charge of ensuring that Volkswagen vehicles complied with U.S. emissions, was arrested in Miami on Saturday and remanded to prison on Monday. The Justice Department said the other indicted executives not yet arrested are Heinz-Jakob Neusser, Jens Hadler, Richard Dorenkamp, Bernd Gottweis and Jürgen Peter. They are believed to be in Germany.


    Jens Hadler, a former executive who was head of engine development before becoming chief of powertrain development in 2007, was surprised by the news that he had been charged, when informed by a reporter. Mr. Hadler declined to comment. Other executives couldn’t be reached for comment.

    All were charged with one count of conspiring to defraud the U.S., defraud Volkswagen’s U.S. customers and violate the Clean Air Act by lying to regulators and the public about the ability of VW’s “clean diesel” technology to comply with U.S. emissions requirements.

    Volkswagen admitted in the plea agreement that its supervisors and employees agreed to deceive regulators and customers between 2006 and 2015 about its cheating software, and that some of them tried to delete relevant documents after regulators were asking questions about the issue.

    According to the plea agreement, several supervisors in the Volkswagen-brand engine development department realized the company couldn’t design a diesel engine to meet regulatory standards and attract U.S. demand, so they directed employees to create a software function to detect, evade and defeat U.S. emissions standards as early as 2006.

    Some of the supervisors encouraged employees to hide their efforts, and in 2014 and 2015, misled regulators about the reasons for the discrepancy in road emissions and controlled tests, according to the agreement.

    The obstruction of justice charge stems from efforts by a Volkswagen supervisor to delete a folder on a computer in August 2015, after a meeting to prepare for a presentation to a regulator.

    Prosecutors said the penalty against the company was calculated based on an assessment that Volkswagen’s misconduct caused $8.5 billion in losses. Prosecutors said Volkswagen earned credit for its previous civil agreements to compensate customers and remediate the pollution, and for cooperating in the investigation, including its work in gathering “substantial amounts” of evidence and interviewing hundreds of witnesses.

    “To be clear, Volkswagen knew of these problems, and when regulators expressed concerns, [executives] obfuscated…and they ultimately lied,” said U.S. Attorney General Loretta Lynch. Volkswagen will be placed on three years probation, she said, and must hire an independent monitor to audit the auto maker’s compliance practices.

    Volkswagen’s sale of vehicles containing illegal defeat-device software allowing them to evade emissions tests “is a violation that cannot go unnoticed or unanswered,” said Environmental Protection Agency Administrator Gina McCarthy.

    The charges resulted from a 16-month criminal investigation, said Federal Bureau of Investigation Deputy Director Andrew McCabe. “It’s now clear that Volkswagen’s top executives knew about this illegal activity,” Mr. McCabe said, adding they then purposefully kept stakeholders “in the dark.”

    The Justice Department’s approach to the Volkswagen case comes after criticism prosecutors weren’t tough enough in previous corporate probes.

    Deputy U.S. Attorney General Sally Yates in 2015 urged prosecutors to pursue individuals in corporate investigations amid criticism the Justice Department penalized companies without pursuing employees involved in alleged misconduct. A guilty plea from Volkswagen to criminal charges represented a further toughening still, after other auto makers avoided such corporate stains to resolve criminal cases stemming from safety transgressions.

    “The fact that we are announcing charges today against six high ranking executives at Volkswagen…demonstrates that this is not just a paper policy,” Ms. Yates said. “Faceless multinational corporations don’t commit crimes, flesh and blood people commit crimes.”

    Five of the six executives currently reside in Germany. Ms. Lynch said “it’s too early” to know whether those Volkswagen executives would travel to the U.S. to face charges.

    Ms. Lynch said the Justice Department probe of Volkswagen employees is ongoing, suggesting others could be ensnared by prosecutors. “We will continue to look at individuals,” she said.

    FT : VW admits guilt and pays $4.3bn emissions scandal penalty

    VW admits guilt and pays $4.3bn emissions scandal penalty
    Six executives based in Germany indicted following cheating probe

    Volkswagen will plead guilty to three felonies and pay $4.3bn in penalties to settle a US Department of Justice investigation into the diesel emissions scandal that has engulfed the German carmaker for the past 15 months. 

    Six VW executives based in Germany have also been indicted in connection with the case, including Oliver Schmidt who was arrested in the US on Monday, said Loretta Lynch, US attorney-general.

    “For years, Volkswagen advertised its vehicles calling them ‘clean diesel’. Our investigation has revealed they were anything but,” Ms Lynch said.

    The settlement announced on Wednesday comes more than a decade after VW first opted to design special software to outwit Environmental Protection Agency tests rather than sacrifice power in a new diesel engine. 

    Up to 11m vehicles worldwide were fitted with the “defeat devices” to reduce their nitrogen oxide emissions in laboratory tests. When government regulators grew suspicious, its executives then lied and destroyed documents.

    “Volkswagen’s top executives knew about this illegal activity and deliberately kept regulators, shareholders and consumers in the dark — and they did this for years,” said Andrew McCabe, deputy director of the Federal Bureau of Investigation.

    The penalty, which includes a criminal fine of $2.8bn, is the second-largest criminal environmental settlement in US history behind BP’s Deepwater Horizon case. It represents an attempt by one of the world’s largest carmakers to resolve a scandal that ranks as the worst crisis in the company’s history. 

    VW pleaded guilty to charges of conspiracy to violate the Clean Air Act and commit wire fraud, obstruction of justice and making false statements in order to import goods. The six indictments represented a validation of a DoJ strategy to target individual executives in corporate crime prosecutions.

    Launched by deputy attorney-general Sally Yates in September 2015, the policy has been criticised as ineffectual.

    But prosecutors said that those indicted on Wednesday held positions of authority, with one of the men managing about 10,000 employees. “The fact that we are announcing charges today against six high-ranking executives at Volkswagen — not just six employees but six high-ranking executives at Volkswagen — demonstrates this is not a paper policy,” Ms Yates said.

    Along with Mr Schmidt, a federal grand jury has indicted for their roles in the scheme Heinz-Jacob Neusser, 56, a member of the management board for VW Brand; Jens Hadler, 50, former head of engine development; Richard Dorenkamp, 68, another former engine development executive; Bernd Gottweis, 69, a former quality management supervisor; and Jurgen Peter, 59, an executive in VW’s quality management and product safety group.

    Other than Mr Schmidt, all of the men are in Germany, which generally does not extradite its citizens.

    The company will pay $1.5bn to settle civil claims by the EPA and US Customs as well as $50m for violations of the Financial Institutions Reform, Recovery and Enforcement Act related to the pooling of car leases into asset-backed securities.

    David Uhlmann, former head of the DoJ’s environmental crimes unit, noted that the government did not agree to a deferred prosecution agreement, a more lenient way of dealing with corporate lawbreaking. 

    “It was essential that the justice department insist on a guilty plea given the egregiousness of Volkswagen’s misconduct and the fact it reached very high in the company,” he said.

    VW shares rose 3.3 per cent on Wednesday, after the company announced late on Tuesday that it was in “advanced discussions” to settle for $4.3bn. 

    Wednesday’s penalties come on top of the $15.3bn that VW agreed in June to pay in a partial civil settlement with federal and state governments and owners of cars fitted with two-litre engines, plus an additional $1bn announced last month related to three-litre engine models. VW said in October that it had set aside €18.2bn ($19.2bn) to cover the costs of the scandal.

    VW must also accept and pay for an independent monitor of its compliance programmes for three years. The company has agreed to independent audits, establishment of an internal committee and additional vehicle testing.

    The plea agreement filed in federal court in Detroit shows that the decision to cheat the emissions tests was contentious within VW. 

    Six supervisors, often over their subordinates’ objections, and one company attorney directed specific acts to design the defeat device or conceal its existence from regulators, according to the plea agreement. 

    VW employees destroyed documents as part of a broad cover-up of the engines used in 590,000 cars sold in the US.

    On August 31 2015, as the cover-up was unravelling, a VW supervisor deleted files containing the term “acoustic function”, a reference to the cheating software, and instructed subordinates to do likewise. 

    A second supervisor instructed his assistant to throw away a computer hard drive containing potentially incriminating files, according to court documents. Inside VW and Audi, “thousands of documents were deleted by approximately 40” employees. 

    After the EPA publicly disclosed VW’s emissions cheating in September 2015, the company’s internal investigation recovered many of the deleted files and turned them over to prosecutors. 

    That co-operation earned the company a 20 per cent reduction in the minimum financial penalty it might have faced, the DoJ said. VW also received $11bn in credit for its settlements with customers and payments into an environmental remediation trust.

    FT : Shire agrees $350m settlement in US ‘kickback’ case

    Shire agrees $350m settlement in US ‘kickback’ case
    UK-listed group accused of ‘lavish inducements’ for doctors to use skin treatment

    Shire, the London-listed pharmaceuticals group, has agreed a $350m settlement over US claims that it used “kickbacks and other unlawful methods” to induce doctors to prescribe one of its drugs.

    The US Department of Justice said Shire staff had unlawfully “induced clinics and physicians with lavish dinners, drinks, entertainment and travel” as well as “unwarranted payments” for speaking engagements and cash credits and rebates to boost sales of Dermagraft, a bioengineered human skin substitute.

    Shares in the company fell more than 3 per cent after a DoJ announcement that came as president-elect Donald Trump attacked pharmaceutical companies for “getting away with murder” over drug pricing. Mr Trump’s comments caused pharma stocks to tumble — the Nasdaq biotechnology index was down as much as 3.7 per cent while larger drugmakers such as Pfizer fell 2.2 per cent.

    Deputy US attorney-general Benjamin Mizer, head of the justice department’s civil division, said the settlement was “the largest False Claims Act recovery” in a kickback case involving a medical product.

    “Kickbacks by suppliers of healthcare goods and services cast a pall over the integrity of our healthcare system. Patients deserve the unfettered, independent judgment of their healthcare professionals,” Mr Mizer said.

    The DoJ said Shire had also “made false statements to inflate the price of Dermagraft”. The allegations were brought in six lawsuits filed by a whistleblower in a process that allows private parties to sue on behalf of the government.

    Shire announced in August last year that it would settle the Dermagraft case for the specified amount during publication of its second-quarter results and made a provision for the charge.

    It said it had not “admitted wrongdoing of any kind” in the finalised settlement.

    The US prohibits payments to induce the use of medical services covered by Medicare, Medicaid and other federal healthcare programmes. The Anti-Bribery statute and the Federal Acquisition Regulations also prohibit bribes to government officials or employees.

    In a statement the DoJ alleged that, as a result of these violations, Shire submitted “hundreds of millions of dollars of false claims for Dermagraft”.

    Shire suffered a loss in the third quarter as the group missed revenue expectations and absorbed the costs of its $32bn takeover of Baxalta.