GM to pay $900 million to end U.S. criminal ignition switch probe

GM to pay $900 million to end U.S. criminal ignition switch probe

© Jeff Kowalsky / Reuters

NEW YORK (Reuters) - General Motors Co will pay the U.S. Justice Department $900 million to settle criminal charges, admitting it hid a lethal defect in its vehicle ignition switches that has been linked to 124 deaths.

The settlement announced on Thursday caps a two-year probe that tainted GM's reputation and transformed the Detroit-based automaker's relationship with the federal government, which had bailed it out during the recent financial crisis.

GM also agreed to a partial settlement of private litigation with drivers, passengers and families over the switches, and a settlement of related shareholder litigation.

The largest U.S. automaker will take a $1.475 billion third-quarter charge in connection with the settlements, including $575 million for the private litigation.

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

Prosecutors charged GM with wire fraud and scheming to conceal material facts from a U.S. regulator. No individuals were charged, drawing objections from some lawmakers and industry critics who had pressed for stiffer penalties.

GM admitted to failing to disclose a potentially lethal safety defect with the switches that kept some air bags from deploying. It also admitted to misleading consumers about the safety of affected vehicles.

"The mistakes that led to the ignition switch recall should never have happened," GM Chief Executive Officer Mary Barra said in a statement. "We have apologized and we do so again today.

She also called the company's response "unprecedented in terms of candor, cooperation, transparency and compassion."

In settling with the government, GM entered into a three-year deferred prosecution agreement that requires an independent monitor to oversee its recall and safety-related practices. The criminal charges will be dropped if GM meets its obligations.

CRITICS SPEAK OUT

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

Negotiations predated a new U.S. Department of Justice policy, announced last week, that requires companies seeking credit for cooperating to identify people who may have committed wrongdoing.

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."

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

Democratic Senators Richard Blumenthal of Connecticut and Edward Markey of Massachusetts called the agreement "extremely disappointing," and said victims deserved "individual criminal accountability, as well as a larger monetary penalty."

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."

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. District Judge Alison Nathan in Manhattan will consider approval of the accord at a Thursday afternoon hearing.

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

The settlement could permit GM to return more cash to shareholders. GM in March agreed to return $10 billion through 2016 under an agreement with an investor group.

GM's $900 million payment will be treated as a penalty, and the automaker cannot treat it as a deductible expense.

It is less than the $1.2 billion that Toyota Motor Corp agreed in March 2014 to pay to resolve a similar case alleging that its vehicles accelerated without warning.

GM shares were up 1 percent at $31.51 on Thursday afternoon.

PRE-BANKRUPTCY SHIELD

The ignition switch defect publicly surfaced in early 2014, when GM began recalling Chevrolet Cobalts, Saturn Ions and other smaller vehicles.

The defect caused some vehicles to stall, preventing air bags from deploying during crashes.

It also disabled vehicles' power steering and power brakes when the ignition switches slipped out of the run position.

A scathing June 2014 internal report by former federal prosecutor Anton Valukas portrayed GM as a haven of dysfunction, where signs pointing to the defect were ignored for years. Top executives were not accused of wrongdoing.

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.

Robert Hilliard, one of the lawyers leading the private litigation by drivers and passengers, said about 84 death cases and 370 injury cases would remain unresolved.

(Reporting by Nate Raymond, Jessica Dye and Jonathan Stempel in New York, and Joseph White in Detroit; Additional reporting by David Ingram in New York; Writing by Jonathan Stempel and Joseph Ax; Editing by Lisa Von Ahn and Matthew Lewis)

TOP READS FROM THE FISCAL TIMES