A $1.2 billion message: Be candid

Toyota case is hint of standard for GM

U.S. Attorney General Eric Holder: "Other car companies should not repeat Toyota's mistake. A recall may damage a company's reputation, but deceiving your customers makes that damage far more lasting."

Toyota's $1.2 billion settlement of claims by the Department of Justice that it suppressed what it knew about safety flaws brings it a step closer to closing the door on four years of public humiliation and criticism.

It also provides a window into the government's mind-set toward automakers and their safety responsibilities as federal regulators, lawmakers -- and, possibly, prosecutors -- prepare to dig into General Motors' bungled handling of an ignition-switch defect linked to at least 34 crashes and 12 deaths.

In announcing the settlement last week, federal officials issued a thinly veiled warning to GM and the entire industry that the Toyota case will set the standard by which automakers are measured. Toyota never acknowledged any fault with its cars, other than sticky accelerator pedals and unlatched floor mats that weren't directly linked to crashes. The company continues to deny the existence of electronic glitches that could make cars accelerate on their own.

Toyota's crime was that it deceived the American public about what it knew.

"This resolution will serve as a model for how to approach future cases involving similarly situated companies," U.S. Attorney General Eric Holder said during a news conference announcing the Toyota settlement. "Other car companies should not repeat Toyota's mistake. A recall may damage a company's reputation, but deceiving your customers makes that damage far more lasting."

Robust recovery

The settlement ticks one more box in Toyota's long effort to escape the cloud of the unintended-acceleration crisis, which ultimately led to one of the largest recalls in industry history, covering more than 10 million cars. In terms of sales and profits, the company has mounted a fast and robust recovery, despite the Japanese earthquake and flooding in Thailand that pummeled its supply chain in 2011. Toyota said last month that it's on track to post record net income of ¥1.9 trillion, or about $18.58 billion, for the fiscal year that ends next week.

With Toyota's lawyers deep in negotiations with plaintiffs' lawyers to settle the remaining wrongful-injury class-action suits, the end of a troubled chapter appears near.

But not without a price. In addition to the $1.2 billion penalty and the tongue-lashing from federal officials, Toyota's settlement was contingent on a rare admission of wrongdoing: an acknowledgment "that it misled U.S. consumers by concealing and making deceptive statements about two safety issues affecting its vehicles, each of which caused a type of unintended acceleration," according to a DOJ statement.

Toyota also agreed to submit to scrutiny for the next three years by an independent federal safety monitor overseeing its safety processes and communications with authorities and customers -- an element of the settlement that's potentially ominous for GM, which only recently freed itself from government ownership.

The $1.2 billion penalty will go into the Department of Justice Asset Forfeiture Fund. The government is treating the money as forfeited assets instead of a fine, a distinction that will allow customers to seek compensation from the fund.

In response to the settlement, Toyota issued a brief statement: "At the time of these recalls, we took full responsibility for any concerns our actions may have caused customers, and we rededicated ourselves to earning their trust."

In Tokyo, Toyota President Akio Toyoda said the recalls were a turning point in how the company and the industry view their safety obligations. "The criteria for recalls used to be compliance with laws or whether there are technical problems," Toyoda said during a news conference held by the Japan Automobile Manufacturers Association, of which he is chairman. "Now I think it has become whether the products can assure customers peace of mind."

No favorites

Coming amid lingering resentment over the federal bailouts of GM and Chrysler, the Toyota case took on political dimensions, with some critics accusing regulators in the Obama administration of acting on behalf of government-controlled automakers to damage their most potent foreign rival. Those accusations have resurfaced lately in criticisms of the National Highway Traffic Safety Administration's failure to be more aggressive in its scrutiny of GM.

The administration long has denied playing favorites, and in his public statements last week Holder gave a subtle but clear indication that GM -- whose post-bankruptcy comeback the administration claims as one of its biggest successes -- wouldn't receive preferential treatment.

"No company is above the law," he said, "and we will never tolerate activities like the conduct at issue in this case."

DOJ officials haven't confirmed news reports that the U.S. Attorney's Office in Manhattan is probing GM's response to ignition switch problems. Asked about the reports last week, Holder declined to comment.

The legal path the DOJ took in pursuing Toyota was a novel one, but it could set the pattern for how regulators and prosecutors target wrongdoing by automakers.

Investigators found evidence that Toyota had consciously withheld information from NHTSA. But nowhere in the 12-page statement of fact signed by Toyota is there evidence that the company submitted false information.

Federal law gives NHTSA no authority to impose criminal penalties on car companies unless they are found to have lied to the agency. "Other than for filing a false report, there are no criminal penalties under the laws NHTSA administers," Allan Kam, a former senior enforcement attorney at the agency, said in an interview. "But the Department of Justice has all kinds of tools that NHTSA doesn't have."

To turn what it knew into a criminal case, the DOJ had to charge Toyota with a crime more often associated with crooked telemarketers than car companies: wire fraud. Many of the reassurances Toyota gave its customers were made electronically, including over the Internet. By not properly alerting customers to potential safety flaws in its vehicles, Toyota could have been found guilty of a lie of omission, rather than one of commission.

Preet Bharara, U.S. attorney for the Southern District of New York, called the wire fraud charge "a new and aggressive way of going after these problems." For automakers, this serves as a warning: They can face enormous financial penalties even if they don't lie to NHTSA.

Should GM's case proceed to a criminal prosecution, it likely would take a different path.

Toyota was legally vulnerable because of a relentless public relations campaign intended to protect its reputation for quality, durability and reliability. The company said it had solved a problem -- even as it covered up a problem that the public and regulators didn't know about yet.

It took more than a decade for GM to recall cars with defective ignition switches, a delay that could steer prosecutors toward charges of criminal negligence. But the company has been apologetic, not defensive, in its communications to customers, meaning that a wire fraud case might be less appropriate in GM's case.

'Someone will go to jail...'
During a 4-year investigation that culminated in a $1.2 billion criminal penalty, the Department of Justice found repeated instances of Toyota employees hiding damaging data from regulators. In its settlement last week, Toyota admitted to a 12-page litany of missteps, including the following

September 2007: Toyota negotiates a small floor mat recall with NHTSA while concealing internal reports of deeper problems. In an e-mail, an employee celebrates avoiding a bigger recall — and more than $100 million in costs.

October 2009: Toyota orders a pedal redesign to prevent “sticky pedal” problems and then cancels it within 3 weeks, telling employees to avoid a paper trail that could alert regulators.

November 2009: Toyota tells customers it is confident it has addressed the “root cause” of unwanted acceleration, even as debate rages within the company.

December 2009: Toyota reorders the pedal redesign, but leaves the part number unchanged; employees are ordered to not send dealers a technical service bulletin that Toyota would be legally bound to send to NHTSA as well.

January 2010: Toyota employees debate what to tell regulators. “Idiots! Someone will go to jail if lies are repeatedly told. I can't support this,” one employee says over e-mail. Regulators “might assert we have been hiding something,” another says.

Source: U.S. Department of Justice

Change in law

In Washington, transportation policy experts see the two cases setting in motion the first major change in auto safety laws since the TREAD Act, signed in 2000 after the Ford-Firestone recalls.

Under that law, NHTSA may impose civil penalties on companies that fail to recall defective cars quickly. The maximum penalty recently was increased from $17.35 million per occurrence to $35 million, but safety advocates argue that the cap is not high enough to deter car companies from hiding safety defects to avoid the costs of repairing them. Toyota has paid about $66 million to settle civil charges.

Few bills are passing a deadlocked Congress now, but experts say auto safety reform could be tacked onto a transportation bill now being crafted in Congress. President Barack Obama has proposed a four-year, $302 billion spending package to replace the current transportation bill, which expires Sept. 30.

Congressional Republicans oppose raising taxes on gasoline and diesel to fill the dwindling federal Highway Trust Fund, but the crumbling state of many roads, bridges and tunnels makes a new transportation bill imperative.

"Americans -- if I can put on my political-scientist hat for a minute -- are not in favor of more government just for the sake of more government," said Kam, the former NHTSA official. "When we change the laws to give the government more power, it's usually the result of some abuse. Here, between Toyota's sudden acceleration case and the GM ignition switch recalls, maybe there will be enough of an impetus to do it."

Turning the page
Here are steps Toyota must take to avoid a criminal wire fraud prosecution, which the Department of Justice would dismiss in 3 years if Toyota holds up its end of the deal.

Admit to deceiving customers. If the government catches Toyota contradicting its confession — in court, for example — Toyota has 48 hours to retract its statement.

Pay a $1.2 billion penalty. The government is treating the money as forfeited assets, not a fine, a legal distinction that allows affected customers to seek compensation.

Open its doors to an independent monitor. The monitor will observe Toyota's handling of vehicle safety and submit regular reports to the DOJ.

Source: U.S. Department of Justice

You can reach Mark Rechtin at mrechtin@crain.com

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