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Wednesday, 23 July 2014

US: settling the GM recall case

The settlement agreement between Toyota Motor Corporation and federal prosecutors in March has been mooted as a model for dealing with the current GM case. In Toyota's case, the Department of Justice agreed to drop a single criminal charge of wire fraud in exchange for a $1.2 billion penalty. Wire fraud was appropriate in the Toyota case because there had been a cover-up, but the GM case is rather about negligence and incompetence, as revealed in the report prepared (at GM’s initiative) by former US Attorney Anton Valukas. So there’s no crime, and nothing to plea-bargain over. Even being slow to mount a recall is not enough: the Transport Secretary has imposed a financial penalty (the maximum permitted, $35 million). But still no crime.
One remaining possibility is for the Securities and Exchange Commission to take action. GM has already revealed that it is under investigation: failing to disclose a material risk, or to have employees follow proper reporting procedures, has caused a loss to investor. GM took a first-quarter charge of $1.3 billion to cover recall costs, which represents a loss to shareholders, and failed to tell shareholders about the problem even when it was clear that there was a potential safety crisis. Instead the company’s annual report blandly told the SEC: ‘From time to time we recall our products in order to address performance, compliance or safety-related issues … The cost and effect on our reputation of product recalls could materially affect our business.’ That statement, carefully crafted as it clearly was by the company’s lawyers to hide the reality of the ignition switch crisis, might yet provide the authorities with what they need.

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