The Beltway
An occasional column by Gabe Nelson, Automotive News' D.C. correspondent, analyzing the auto industry's relationship with Washington.
THE BELTWAY

How the feds might take aim at General Motors

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WASHINGTON -- When federal prosecutors reached a settlement with Toyota Motor Corp. to resolve its unintended acceleration case, it seemed like they had found a legal template for General Motors' ignition switch case as well.

The settlement reached in March was built around a single criminal charge of wire fraud, which the U.S. Department of Justice agreed to drop in exchange for a $1.2 billion penalty. "My hope and expectation is that this resolution will serve a model for how to approach future cases involving similarly situated companies," Attorney General Eric Holder said, in what was widely perceived to be a veiled reference to GM.

But judging by the investigative findings former U.S. attorney Anton Valukas released this month, the Toyota model may not work with GM.

The Valukas report savages GM and its employees for profound incompetence and a culture of unaccountability that allowed the ignition switch defect to go unfixed for more than a decade. But its 325 pages give no evidence of a cover-up. That makes GM an unsuitable candidate for the Toyota treatment, legal experts say, unless prosecutors find their own evidence showing that GM lied.

"If the problem is negligence and incompetence, you can't really bring a wire fraud case," said Peter Henning, a criminal law professor at Wayne State University in Detroit. Even if the Valukas report suggested that "GM was ignorant, and maybe stupid," he added, "stupidity's not a crime."

Selling a defective car, on its own, isn't a crime either. It is illegal for a car company to move slowly to fix a defect once it spots the problem. For that, Transportation Secretary Anthony Foxx has slapped GM with a $35 million fine, the maximum penalty allowable. But beyond that, the law ties Foxx's hands.

One possible avenue is the Securities and Exchange Commission. The agency has already opened a probe into GM, as the company has disclosed. The commission could argue that a failure to disclose a material risk -- or a failure to have employees follow proper reporting procedures -- cost GM's investors.

"You're talking about more than a billion dollars already," Henning said, referring to the $1.3 billion first-quarter charge GM took to cover recall costs.

GM told its investors nothing about the defective switch, even in the waning days of 2013, when it became clear to GM's lawyers that they had a potential safety crisis on their hands.

"From time to time we recall our products to address performance, compliance or safety-related issues," GM wrote in its annual report to the SEC on Feb. 6, one week before the Cobalt recall was announced. "The costs and effect on our reputation of product recalls," the report added, "could materially adversely affect our business."

That vague line of legal boilerplate gave investors no indication of what was about to come. But it may give the prosecutors what they need to allege that GM didn't say enough.

Ultimately, it doesn't matter which blunt instrument the feds pick up to hit GM with. CEO Mary Barra has essentially admitted that the company messed up, so it would be hard for GM to resist paying a penalty.

But for other companies, this should serve as a lesson: Stupidity may not be a crime, but it's not a defense either. Regulators will find a way to punish you. 

You can reach Gabe Nelson at gnelson@crain.com.

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