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GM agrees to pay $900 million in U.S. criminal settlement over ignition switches

New York U.S. Attorney Preet Bharara, speaking today: "They let the public down, and it's as simple as that."
UPDATED: 9/17/15 3:31 pm ET - adds judicial approval

NEW YORK (Reuters) -- General Motors admitted it hid from the government and the public a lethal defect in its vehicle ignition switches, and agreed to pay $900 million to end a U.S. criminal probe over its problem, which has been linked to 124 deaths.

The settlement and charges, which were detailed in papers filed today in a federal court in Manhattan, have transformed the relationship between the automaker and the U.S. government, which had bailed out GM during the financial crisis.

GM admitted to failing to disclose to the National Highway Traffic Safety Administration and the public a potentially lethal safety defect with the switches that kept airbags from deploying in some vehicles.

The automaker also admitted to misleading consumers about the safety of vehicles affected by the defect.

"They let the public down, and it's as simple as that," Manhattan U.S. Attorney Preet Bharara told a news conference.

Under a three-year deferred-prosecution agreement, GM must hire an independent monitor to oversee its safety practices, including its ability to fix defects and handle recalls.

“The mistakes that led to the ignition switch recall should never have happened. We have apologized and we do so again today,” GM CEO Mary Barra said in a statement. “We have faced our issues with a clear determination to do the right thing both for the short term and the long term. I believe that our response has been unprecedented in terms of candor, cooperation, transparency and compassion.”

Said GM Chairman Theodore Solso: “GM’s Board of Directors took swift action to investigate the ignition switch issue and we have fully supported management’s efforts to regain the trust and confidence of customers and regulators, and to resolve the Justice Department’s investigation.

"GM’s Board and leadership recognize that safety is a foundational commitment, and the changes the company has made in the last 15 months have made it much stronger.”

A federal judge in New York later today signed off on the agreement. U.S. District Judge Alison Nathan said she would approve the automaker's deferred prosecution agreement.

The criminal charges will be dropped if GM adheres to its obligations under that agreement.

The Justice Department did not charge any individuals, though it credited GM in the deferred prosecution agreement with "terminating wrongdoers."

Bharara did not rule out charging individual GM employees, but said there are "legal and factual" challenges to prosecuting them. "The law does not always let us do what we wish we could do," he said.

Negotiations pre-dated a new U.S. Department of Justice policy that requires companies to identify people who may have committed wrongdoing if they want credit for cooperating.

GM's $900 million payment will be treated as a penalty, including for tax purposes. It is less than the $1.2 billion Toyota Motor Corp. agreed to pay to resolve a similar case last year. That penalty remains the largest ever levied by the U.S. government on an auto company.

The ignition switch defect caused some Chevrolet Cobalts, Saturn Ions and other GM vehicles to stall, preventing airbags from deploying during crashes. It also prevented power steering and power brakes from operating in some vehicles.

Barra has taken many steps to address problems linked to the defects, including appointing a safety czar and pushing out 15 employees.

The company faced more than 200 civil lawsuits over the ignition switch and other recalls from 2014. It set up a special fund last year to compensate victims of the ignition switch defect.

GM separately announced it would take a $575 million charge in the third quarter to settle various civil suits stemming from 2014 product recalls. The company said it also reached a "memorandum of understanding potentially covering approximately 1,380 individual death and personal injury claimants."

“The parties to these agreements have resolved difficult claims without the burden, expense, and uncertainty of litigation,” said Craig Glidden, GM general counsel.

Barra and Mark Reuss, GM's executive vice president overseeing product and safety, have scheduled a town hall meeting with employees today at 2 p.m. to discuss the criminal case settlement. 

GM took charges totaling $4.2 billion in 2014 to reflect costs associated with recalls, and a special fund was established to compensate victims of the ignition switch defect. It was not immediately clear whether GM would take additional charges to account for a settlement of the criminal probe.

Critics speak out 

The criminal penalty was less than some analysts had predicted, and the settlement quickly drew fire from lawmakers and industry critics demanding tougher penalties for misconduct.

Clarence Ditlow, head of the watchdog Center for Auto Safety in Washington, D.C., lamented that the accord lets GM officials "walk off scot-free while its customers are six feet under."

Laura Christian, the birth mother of 16-year-old Amber Rose, who died in a 2005 crash, lamented the lack of individual accountability in the agreement.

"We buried our loved ones because GM buried a deadly defect," she said. "And yet today all GM has to do is write another check to escape."

Christian called on Congress to pass laws making it easier to hold individual employees criminally responsible.

"If a person kills someone because he decided to drive drunk, he will go to jail," she said. "Yet the GM employees who caused 124 deaths are able to hide behind a corporation because our laws are insufficient."

U.S. Sens. Richard Blumenthal, D-Conn., and Edward Markey, D-Mass., called the agreement "extremely disappointing," and said victims deserved "individual criminal accountability, as well as a larger monetary penalty."

Milestone settlement

The settlement is a milestone in a case that over the past two years drove a transformation in the once cozy relationship between the auto industry and regulators in the U.S. government.

Outrage over the GM ignition switch case prompted a much tougher approach by Washington toward auto safety issues and compelled automakers to act more quickly and comprehensively to recall vehicles with potentially dangerous defects.

Barra in 2014 undertook a series of actions to atone for the ignition switch failure, including appointing a new safety czar, overhauling GM's product engineering organization, and pushing out 15 executives connected to the mishandling of the switch defects in a scathing report prepared by former federal prosecutor Anton Valukas, now a senior partner at the law firm Jenner & Block.

GM also recalled more than 30 million vehicles in North America in 2014 to fix a wide array of defects.

GM's approach contrasted with Toyota, which was slower to cooperate with regulators in response to defects related to incidents of sudden acceleration.

Probed since 2014

Federal prosecutors based in New York have been investigating GM since at least March 2014 over the company's disclosures to regulators about vehicles equipped with the faulty ignition switches.

The ignition switches on Chevrolet Cobalts, Saturn Ions and other GM vehicles could cause their engines to stall, which in turn prevented air bags from deploying during crashes. Also, power steering and power brakes did not operate when the ignition switch unexpectedly moved from the "on" position.

Engineers and managers at GM learned of problems with the ignition switch more than a decade ago, but the first recalls began only in February 2014, despite years of consumer complaints.

GM agreed with the U.S. Transportation Department in May 2014 to pay a $35 million fine over its delayed response to the defect. Separate from the action by the Justice Department, the fine was the maximum the Transportation Department could impose.

Sources told Reuters in 2014 that Bharara's office in Manhattan was interviewing present and former GM employees as part of a criminal probe, and prosecutors were working on a set of mail and wire fraud charges similar to the criminal case that Toyota settled.

Barra said in June that the automaker was cooperating fully with prosecutors and that any settlement would be on their timeline.

The automaker said in securities filing in July that it was facing related investigations by the U.S. Securities and Exchange Commission, 50 state attorneys general and the Canadian government.

Bankruptcy shield

Valukas' scathing internal report, released in June 2014, portrayed GM as a haven of dysfunction, where signs pointing to the defect were ignored or not pursued for years.

GM has faced more than 200 civil lawsuits over the ignition switch and other recalls from 2014. It set up a special fund last year to compensate victims of the switch defect.

In an important victory for GM, the Justice Department agreed to shield the automaker from claims arising from wrongful conduct that predated its 2009 bankruptcy.

That shield could help GM avoid even higher payouts, or the prospect that its emergence from Chapter 11 might even be called into question.

Bob Hilliard, one of the lawyers leading the private litigation by drivers and passengers, said about 84 death cases and 370 injury cases would still be litigated if the partial accord is approved.

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