Toyota's $1.2 billion settlement may be model for U.S. probe into GM

Holder's warning to industry: Don't repeat 'Toyota's mistake'

U.S. Attorney General Eric Holder: "Other car companies should not repeat Toyota's mistake."

UPDATED: 3/19/14 4:17 pm ET -- adds Rockefeller statement

WASHINGTON/DETROIT (Reuters) -- Toyota Motor Corp. will pay a record $1.2 billion to resolve a criminal probe in to safety issues, in a deal that could serve as a template for how U.S. authorities approach a similar investigation into General Motors Co.

The settlement between the Justice Department and Toyota includes an admission by the auto manufacturer that it misled American consumers about two different problems that caused cars to accelerate even as drivers tried to slow them down.

The agreement comes as GM is also under investigation over its handling of an ignition switch failure linked to a dozen deaths. GM recalled more than 1.6 million vehicles more than a decade after first noticing the issue. Top officials said the Toyota settlement could serve as a template for similar cases.

"My hope and expectation is that this resolution will serve a model for how to approach future cases involving similarly situated companies," U.S. Attorney General Eric Holder told a news conference on Wednesday, though he declined to discuss GM specifically.

"Other car companies should not repeat Toyota’s mistake," he said. "A recall may damage a company’s reputation, but deceiving your customers makes that damage far more lasting."

The deal with Toyota was led by the U.S. Attorney's office in Manhattan, the same prosecutors investigating GM's handling of its ignition-switch recall. GM also faces probes by Congress and safety regulators at the National Highway Traffic Safety Administration, as well as at least three proposed class-action lawsuits related to economic losses suffered by consumers.

U.S. Sen. Jay Rockefeller, D-W.Va, who chairs the Senate Committee on Commerce, Science and Transportation, said the settlement puts all automakers on notice.

"There is absolutely no excuse for misleading the public or concealing information from the National Highway Traffic Safety Administration," according to a statement from Rockefeller, who recruited the Toyota to build an engine plant in his district 20 years ago. "Lives are at risk when this happens. Safety must always be the first priority for manufacturers, regardless of how it affects profit margins.”

GM CEO Mary Barra has been credited for apologizing quickly for the slow recall and promising to focus on consumer safety, something Toyota failed to do initially when its unintended acceleration issue first arose.

However, GM is still coming under fire for not addressing the defective switches when they were discovered.

The Toyota deal, which had been expected for more than a month, resolves issues that have dogged the company since at least 2007 and have been linked to at least 5 deaths. The automaker still faces hundreds of private lawsuits over the problems.

Prosecutors filed criminal charges against the company but agreed to defer and drop them if the company allows an independent monitor to review its safety practices and if it abides by the terms of the deal (see attached documents).

Toyota is "effectively on probation for three years," U.S. Attorney Preet Bharara, whose office conducted the investigation, said at the news conference.

"It cared more about savings than safety and more about its own brand and bottom line than the truth," Bharara said.

Toyota said it would take a $1.2 billion after-tax charge for the settlement in the fiscal year ending March 31.

"Entering this agreement, while difficult, is a major step toward putting this unfortunate chapter behind us," Toyota's North American legal chief Christopher Reynolds said in a statement.

4-year investigation

The settlement resolves a four-year investigation by U.S. authorities, but the problems date back to at least 2007, when the National Highway Traffic Safety Administration opened an inquiry into the Lexus ES350 model after reports of unintended acceleration by the vehicle, which is made by Toyota.

The problems gained public attention in 2009, when a highway patrolman and his family were killed in a Lexus ES350 in San Diego.

A 911 emergency call made from the car recounts the family's last minutes: "We're in a Lexus ... and we're going north on 125 and our accelerator is stuck ... there's no brakes ... hold on and pray ..." The call ends with the sound of it crashing, prosecutors said.

The problem prompted Toyota to recall millions of vehicles, beginning in 2009.

But Toyota's statements about the recall misled the public because it didn't recall all the cars susceptible to the problems, caused by faulty floor mats, prosecutors said.

'Someone will go to jail'

A Toyota engineer concluded that the top-selling Corolla was among the worst vehicles for potential floor-mat entrapment, but the model wasn't included in the recall.

The company also concealed from the public and regulators another type of unintended acceleration caused by pedals getting stuck, officials said.

The company had canceled a design change to address the issue in the wake of the San Diego accident, prosecutors said.

"Idiots! Someone will go to jail if lies are repeatedly told. I can't support this," one Toyota employee said after a meeting with regulators, according to a statement of facts filed with the settlement.

No individuals were charged as part of the settlement.

Last year, Toyota received approval on a settlement valued at $1.6 billion to resolve claims from Toyota owners that the value of their cars dropped after the problems came to light. It is also negotiating with hundreds of customers who say they have been injured.

Toyota agreed to pay the penalty by March 25 through a parallel civil action filed today in U.S. District Court for the Southern District of New York.

Company reputation

The recalls blemished Toyota’s reputation for quality that spurred its rise to become the world’s top-selling automaker, a title it relinquished for one year to GM.

Toyota recalled more than 10 million vehicles worldwide in 2009 and 2010 for unintended acceleration issues. The company made modifications to gas pedals and floor mats that were prone to shifting around and jamming the accelerator. Toyota also installed brake override software on recalled models and began making the systems standard on new vehicles.

Toyota has also paid more than $66 million in civil penalties to the National Highway Traffic Safety Administration for not recalling the affected vehicles in a timely manner.

Gabe Nelson, Philip Nussel and Bloomberg contributed to this report.

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