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GM to pay $900m, to settle case over ignition switches

Sep 20 2015 20:59

New York - General Motors (GM) has agreed to pay $900m and sign a deferred-prosecution agreement to end a US government investigation into its handling of an ignition-switch defect linked to 124 deaths, two sources told Reuters.

The deal means GM will be charged criminally with hiding the defect from regulators and in the process defrauding consumers, but the case will be put on hold while GM fulfils terms of the deal, one source said.

No individuals would be charged in the criminal case, one of the sources said.

The company's expected $900m payment, confirmed by a second source, is less than the $1.2bn that Toyota Motor Corp paid to resolve a similar case.

GM declined to comment. Spokespeople for US prosecutors in New York and in Washington also declined to comment.

The terms of GM's deal with the government were not immediately known, including how many counts the automaker would be charged with, whether the automaker agreed to hire an independent monitor, or how long it would need to abide by the agreement before the case may be dropped.

The agreement was expected to be announced on Thursday, the sources said. Any deferred-prosecution agreement would require court approval.

"I am very hopeful the Department of Justice will hold GM fully accountable and presses for an acknowledgement of responsibility as well as monetary penalties," Democratic Senator Richard Blumenthal of Connecticut said in a telephone interview with Reuters.

Shares of GM were up 31 cents to $31.51 in after-hours trading.

GM, the No. 1 US automaker, took charges totalling $4.2bn 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.

Milestone settlement

The settlement is a milestone in a case that over the past two years drove a transformation in the once cosy relationship between the auto industry and regulators in the US 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.

GM chief executive Mary 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.

Toyota in March 2014 agreed to pay $1.2bn to settle a charge that it concealed a problem in its vehicles that caused them to accelerate suddenly. That penalty remains the largest ever levied by the United States on an auto company.

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 Detroit-based 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 US Transportation Department in May 2014 to pay a $35m 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 the office of US Attorney Preet Bharara 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.

GM's 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 US Securities and Exchange Commission, 50 state attorneys general and the Canadian government.

Over 200 civil lawsuits

GM is facing more than 200 civil lawsuits over the ignition switch and other safety recalls from 2014, although the judge who oversaw GM's 2009 bankruptcy has ruled that claims related to the company's pre-bankruptcy conduct were barred.

Plaintiffs are seeking damages for deaths and injuries blamed on vehicle defects, as well as economic losses such as lost vehicle value. The first of the civil cases is slated for trial in January 2016.

GM funnelled many of the injury and death claims linked to the ignition switch into an out-of-court settlement program run by Washington lawyer Kenneth Feinberg, who also oversaw compensation programs for victims of high-profile incidents such as the September 11, 2001, attacks and the Deepwater Horizon oil spill.

The program received more than 4 300 claims and has found nearly 400 of those eligible for compensation, according to an August report from the program.

general motors  |  industrial  |  lawsuits


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