The U.S. Justice Department is weighing charging General Motors
Co. with criminal wire fraud stemming from the auto maker's failure
to recall millions of vehicles equipped with a defective ignition
switch, said people familiar with the matter.
Federal prosecutors in New York are focusing on the charge after
determining GM likely made misleading statements and concealed
information about the faulty switch, now linked to more than 100
deaths, the people said. They are hoping to reach a settlement with
the company by the end of summer or early fall, though the timing
could slip, they said.
Prosecutors also could explore other kinds of possible criminal
wrongdoing in the GM case, the people familiar with the matter
said. They haven't made any final decisions on which charges to
bring, if any, they said.
"We are cooperating fully with all requests from the [Justice
Department], as we have from the beginning," a GM spokesman said in
a statement.
In the GM probe, Manhattan U.S. Attorney Preet Bharara is
building on an unprecedented settlement with Toyota Motor Corp. in
March of last year.
Prosecutors charged Toyota with wire fraud under a unique legal
theory that effectively punished the Japanese company not for
producing defective products, but for defrauding their customers by
making misleading statements about their products' safety.
"The Toyota case was a watershed moment for people who make
cars," Mr. Bharara said in a recent interview with The Wall Street
Journal. "From time to time, it's important for there to be
systemic reform not only in a company but throughout an
industry."
Prosecutors in Mr. Bharara's office view their case against GM
as similar to the one they brought against Toyota, the people
familiar with the matter said.
GM commissioned a report last year written by former U.S.
Attorney Anton Valukas that found the company failed for more than
a decade to recall millions of vehicles with the defective ignition
switch even though it had internal evidence of the safety problem.
The Detroit auto maker in early 2014 recalled roughly 2.6 million
older Chevrolet Cobalts and other cars with the switch, which can
slip out of the run position and disable safety features including
air bags, power steering and power brakes.
GM Chief Executive Mary Barra met with Justice Department
officials last year, she said ahead of the auto maker's annual
shareholders meeting in Detroit Tuesday. She declined to comment on
the possible wire-fraud charge.
The company in 2014 paid a record $35 million regulatory fine
and signed a consent order acknowledging the company failed to
alert the National Highway Traffic Safety Administration to the
ignition-switch safety defect in a timely manner as required under
federal law.
"Our approach with the recall has been to be as open and
transparent as possible—and that has certainly been the case with
this investigation," the GM spokesman said Monday, referring to the
Justice Department probe. "We need to let the process play out, and
see no benefit to speculating about potential outcomes."
Toyota agreed to pay a $1.2 billion penalty in its case, the
largest ever for an automotive company, and entered a three-year
deferred prosecution agreement, under which the government will
eventually seek to dismiss the charge if the company abides by the
deal's terms.
"Over the past five years, Toyota has been working hard to
communicate even faster, better and more transparently with our
customers and regulators—and we are committed to continuous
improvement," said a Toyota spokesman.
Last year saw the most car recalls ever, totaling some 64
million vehicles more than 800 separate recalls, according to data
from the National Highway Traffic Safety Administration. That
figure is more than double the number of vehicles recalled a year
earlier, a jump some experts attribute directly to the Toyota
case.
"There's no question the recalls are result of the federal
prosecution," said Joan Claybrook, head of NHTSA under the Carter
Administration. "It's absolutely a game changer."
The size of any possible financial penalty against GM is far
from finalized, though it would likely exceed $1 billion, the
people said. Prosecutors haven't decided whether to offer GM a
deferred prosecution agreement or ask the auto maker to plead
guilty to a crime, people familiar with the matter have said.
Prosecutors haven't decided whether to charge individual employees,
according to people familiar with the matter.
Legal experts say the mail and wire fraud statutes are the
catchall tool in prosecutors' bag, covering the intentional use of
interstate communications in furtherance of a fraud. But prior to
Toyota's settlement, they hadn't been used in cases involving car
defects.
While it isn't clear what specific evidence prosecutors are
focused on in the GM case, Mr. Valukas's report pointed to
instances where the auto maker wasn't forthcoming about its
defective switch. The company in 2006 avoided describing a problem
with cars as a "stall" amid concerns the term could suggest safety
problems, and for years didn't alert regulators to a defect despite
dealing with litigation where people died and their air bags failed
to deploy, according to Mr. Valukas's report.
The wire fraud approach was novel and far from certain when
prosecutors began their investigation into Toyota in 2010. Toyota's
lawyers at Debevoise & Plimpton LLP pushed back hard, arguing
that prosecutors shouldn't charge the company if they were
unwilling to also charge individuals and prove their case in court,
people familiar with the matter said.
Prosecutors countered that they were unable to interview Toyota
employees in Japan suspected of wrongdoing because the company
refused to make them available, the people said.
"To this day, I don't know that Toyota accepts this theory, or
that they think they did anything wrong," Mr. Bharara's top deputy,
Richard Zabel, said in an interview. "They did not like that they
were the first ones being put on the hook."
Despite the legal battle, Toyota was credited for cooperating
with the investigation in settlement documents.
Mr. Bharara said companies can earn credit by cooperating from
the outset of an investigation. He also said his office would
continue to pursue cases similar to the Toyota settlement against
auto makers.
"The truth is this industry only had to deal with regulators
who, through no fault of their own, had no teeth," Mr. Bharara
said. "The largest fine ever…was a pittance. We were in the best
position to bring that case, given the legal tools at our
disposal."
Write to Christopher M. Matthews at christopher.matthews@wsj.com
and Mike Spector at mike.spector@wsj.com
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