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GM ignition-switch recall poses first big test for new CEO

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[March 11, 2014]  By Ben Klayman, Paul Lienert and Nick Brown

DETROIT (Reuters)  General Motors Co on Monday said it had hired two outside law firms to probe the company's response to ignition-switch problems on cars that have been linked to 13 deaths, but both firms have done business with GM, raising questions of conflict of interest.

The review will be led by Jenner & Block chairman Anton "Tony" Valukas, who won wide regard for investigating Lehman Brothers after the financial services firm collapsed in 2008. His report alleged that the firm used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy.

But GM has worked with Jenner & Block since 2002, and at least two of the automaker's former top attorneys, Robert Osborne and Elmer Johnson, were partners at the Chicago law firm.

GM said lawyers from the firm King & Spalding, which represented GM during some of its bankruptcy proceedings and some other litigation work since, will also work on the recall review ordered up by CEO Mary Barra. More than 1.6 million older vehicles are affected.

Co-leading the recall investigation with Valukas is GM's current general counsel, Michael Millikin.

"To me, there is a conflict of interest," said Monroe Freedman, a legal ethics expert and law professor at Hofstra University School of Law. "A reasonable person might question whether the firm wants to curry favor with GM, so it can maintain a good relationship or obtain future work."


GM spokesman Selim Bingol said there is no conflict of interest and that Valukas "has been charged to go where the facts take him and give the company an unvarnished report on what happened. He is the ideal person to do that, given his understanding of our business and his reputation for adhering to the highest standards."

Jenner and King may indeed speed things along, said Stephen Gillers, a professor at New York University School of Law. "It makes sense as a matter of efficiency since the firms know the client," Gillers told Reuters.

Barra in a letter to employees last week promised an "unvarnished" look at the recall that is occurring 10 years after the issue first came to light. She has not granted any interviews on the matter.

GM is recalling cars to correct a condition that could allow the engine and other components, including front airbags, to turn off while the vehicle is traveling at high speed.

The failure is believed to be caused when weight on the ignition key, road conditions or some other jarring event causes the ignition switch to move out of the "run" position, turning off the engine and most of the car's electrical components mid-drive, with sometimes catastrophic results. GM has recommended that owners use only the ignition key with nothing else on the key ring.

King & Spalding referred questions to GM. Valukas declined to comment on his appointment by GM, which said late Monday that Jenner & Block is "doing other work for us."

CONTROLLING THE INFORMATION FLOW

GM may be focused on controlling the flow of information from the review.

"If they want to send message to shareholders that they have uncovered everything, they might hire an independent firm," Richard Painter, a professor at University of Minnesota Law School, told Reuters. "But they may want to disclose just enough to keep shareholders informed, and keep other things private to keep legal defenses available to them."

Sources previously said GM's team of investigators had begun interviewing employees involved in the problems surrounding the ignition switch, which first came to the company's attention in 2004.

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GM went through a U.S. government-led bankruptcy in 2009, which is the dividing line between what became known as "old GM" and "new GM."

Valukas served as lead counsel for the U.S. Securities and Exchange Commission's four-year investigation of "old" GM's pension accounting, which concluded with no allegations of fraud or intentional misconduct.

Jenner & Block was the lead outside counsel for GM's initial public offering in 2010 when it returned to the market as a public company following its bankruptcy restructuring, and it has said in filing that it has worked for GM since 2002.

In addition, some partners at the firm have relationships with GM that go back even farther.

A Jenner & Block spokesperson on Monday declined to comment on how much the firm bills GM annually, and on whether there was any concern within the firm of a real or perceived conflict of interest in Valukas leading GM's internal investigation of the ignition-switch recall.

WAITING FOR PARTS

The No. 1 U.S. automaker has said the recall will begin next month when it has the replacement parts. Most of the affected vehicles are in North America.

While recalls are not unusual, the number of fatalities involved and the way GM handled this one stretching over the past decade has the potential to cost the company hundreds of millions of dollars in fines and possible legal damages, in addition to tarnishing its reputation.

U.S. safety regulators have also opened an investigation into whether GM reacted swiftly enough. The National Highway Traffic Safety Administration sent the automaker a list of 107 questions about the recall to answer by April 3.

In addition to ordering up an apology and crafting the letter to employees with Bingol's help, Barra has designated assignments for top executives related to the recall, according to a person familiar with the situation.


Barra placed global product development chief Mark Reuss in charge of working with supplier Delphi Automotive to obtain the replacement parts as quickly as possible and assigned North American head Alan Batey to work with GM dealers on serving the customers, said the person, who asked not to be identified discussing the recall.

She also involved GM quality and customer service chief Alicia Boler-Davis as well as Bingol, who is in charge of GM's governmental affairs in Washington, the person said.

(Additional reporting by Jessica Dye in New York; editing by Matthew Lewis and Peter Henderson)

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