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From Banking and Finance Law Daily, September 18, 2015

GM to pay $900 million penalty over ignition defect

By Colleen M. Svelnis, J.D.

General Motors Company has agreed to pay $900 million under a deferred prosecution agreement over charges that the auto company concealed a safety defect affecting two million cars, leading to 15 deaths. Under the agreement, the government will defer prosecution for three years and then seek to dismiss the charges as long as GM abides by the terms. According to a release by the Office of the Special Inspector General for the Troubled Asset Relief Program, GM, a $50 billion dollar TARP recipient, concealed the potentially deadly safety defect from its regulator, the National Highway Traffic Safety Administration from the spring of 2012 through February 2014 and misled consumers concerning the safety of certain of GM’s cars.

“For nearly two years, GM failed to disclose a deadly safety defect to the public and its regulator,” said Manhattan U.S. Attorney Preet Bharara. “By doing so, GM put its customers and the driving public at serious risk. Justice requires the filing of criminal charges, detailed admissions, a significant financial penalty, and the appointment of a federal monitor. These measures are designed to make sure that this never happens again.”

Criminal charges. The criminal charges, filed jointly by SIGTARP, the U.S. Department of Justice, the U.S. Attorney’s Office for the Southern District of New York, the Inspector General of the United States Department of Transportation, and the Federal Bureau of Investigation, allege one count of engaging in a scheme to conceal material facts from NHTSA and one count of wire fraud. The ignition switch defect could disable the affected car’s front airbags—increasing the risk of death and serious injury in certain types of crashes in which airbags were otherwise designed to deploy. GM has acknowledged a total of 15 deaths, in addition to “a number of serious injuries” caused by the defective switch.

Christy Goldsmith Romero, Special Inspector General for SIGTARP, released a statement saying that “General Motors’ criminal conduct found by SIGTARP and our law enforcement partners defies comprehension. The worst part about this tragedy is that it was entirely avoidable. GM could have significantly reduced the risk of this deadly defect by improving the key design for less than one dollar per vehicle, but GM chose not to because of the cost. Americans stepped-up and bailed out General Motors with $50 billion. General Motors must step up and make substantial corporate changes designed to prevent anything like this from happening again.”

Deferred prosecution agreement. Under the deferred prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York, GM admitted that it failed to disclose the safety defect to NHTSA and misled U.S. consumers about that same defect. GM must pay the penalty by Sept. 24, 2015. The agreement also imposes on GM an independent monitor to review and assess policies, practices, and procedures relating to GM’s safety-related public statements, sharing of engineering data, and recall processes.

GM knowledge, concealment. GM engineers knew before the defective switch even went into production in 2002 that it was prone to easy movement out of the “run” position, but approved production anyway. According to the release, GM decided that the switch did not pose a safety concern and, citing cost and other factors, engineers opted to leave the defective switch as it was and simply provide an advisory to dealerships with tips on how to minimize the risk of unexpected movement out of the “run” position, according to the release.

GM first notified NHTSA and the public in February 2014, 20 months later, of the connection it had identified between the defective switch and airbag non-deployment incidents. During that time, GM actively touted the reliability and safety of cars equipped with the defective switch, with a view to promoting sales of used GM cars. In February 2014, GM finally conducted a recall of approximately 700,000 vehicles affected by the defective switch. By March 2014, the recall population had grown to more than two million vehicles.

Settlement not justice. Public Citizen released a statement by its president, Robert Weissman, condemning the deferred prosecution agreement, saying in part “Instead of advancing justice, they have compounded the damage inflicted on those injured and killed by GM’s wrongdoing, and on their families. This deal will not deter future corporate wrongdoers, it will not hold GM accountable and it sets back the demand for justice by the family members of victims of GM’s horrible actions.”

Companies: GM; Public Citizen

MainStory: TopStory CrimesOffenses FinancialStability

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