NEW YORK
(Reuters) - Federal prosecutors are developing a criminal fraud case
hinged on whether General Motors made misleading statements about a
deadly ignition switch flaw, and are examining activity dating back
a decade, before GM's 2009 bankruptcy, according to multiple sources
familiar with the investigation.
At the same time, at least a dozen states are investigating the
automaker. Two state officials said that effort is likely to focus
on whether GM broke consumer protection laws.
Both federal and state investigations into the switch, which is
linked to at least 13 deaths and 54 crashes, are at early stages,
and it is possible that cases may not be brought.
Sources said federal criminal prosecutors are working on a set of
mail and wire fraud charges, similar to the criminal case Toyota
Motor Corp settled earlier this year over misleading statements it
made to American consumers and regulators about two different
problems that caused cars to accelerate even as drivers tried to
slow down.
Delphi Automotive, the maker of the GM switch, is not a target of
criminal charges, the people said, because it did not make
substantial public statements about the safety of the vehicles or
the part. That would make it difficult to build a case under the
main federal fraud laws, the wire and mail fraud statutes.
Greg Martin, a spokesman for GM, said his company continued to work
with investigators, declining to comment further, and a spokeswoman
for Delphi said the company had been told it was not a target of
investigations and was working cooperatively with all government
officials. A spokesman for Manhattan U.S. Attorney Preet Bharara,
who is leading the criminal probe, declined to comment.
Prosecutors are not limiting their inquiries to events that occurred
after GM emerged from bankruptcy in 2009, sources said. Legal
experts said bankruptcy does not release GM from criminal liability
in a fraud case.
It is not clear whether prosecutors will bring cases against any
individuals.
GM has said 15 people were forced out for their roles in the
automaker' s failure to act for more than a decade on signs of the
deadly defective switch, which can be jarred out of the "run"
position and deactivate power steering, power brakes and air bags.
GM Chief Executive Mary Barra has said she was not aware of the
scope of the problem until January of this year.
The National Highway Traffic Safety Administration already fined GM
$35 million in May for its delayed response to the defective part,
and accused company officials of concealing the problem.
FINDING FRAUD
As they did in their case against Toyota, U.S. Attorney Bharara's
team will try to show that people inside GM knew of the deadly
defect even while they were telling regulators the problem was
contained and issuing directions to the public about how to handle a
car that had lost power.
The statement of facts in the Toyota case offers a potential
template for the GM case, and one legal expert said GM could end up
paying more than Toyota, which settled for $1.2 billion. There are
no caps on the penalties that could be imposed on entities guilty of
mail fraud or wire fraud.
"If the General Motors people think - especially with all the
publicity, and the congressional hearings, and all of the public
scrutiny that has been brought to bear on this - that $1.2 billion
is a number that's going to resolve all of this, they may well be
mistaken," said C. Evan Stewart, a defense lawyer at Cohen & Gresser
and former special assistant district attorney for Manhattan.
Prosecutors said Toyota internally acknowledged a "material" problem
in which some vehicles' pedals could get trapped under floor mats or
stuck in a partially depressed position, but that the company
downplayed the problem to NHTSA.
Lawyer Anton Valukas, who was hired by GM to investigate the switch
matter, details what he called a “history of failures” to address
the problem and inform the public of dangers.
His report included numerous examples like a 2005 notice to dealers,
directing them to tell customers to remove unessential items from
their key chains. After internal discussions, GM eliminated the word
"stall" from the notice because of concerns that the word could
worry customers about vehicle safety, the report said.
Two years later, according to a filing this year in a class action
suit against GM, the company told NHTSA it saw "no specific problem
pattern" in crashes of cars it already knew to have an ignition
switch problem, where airbags failed to open.
Furthermore, during GM's bankruptcy proceedings, the company was
required to file disclosures to the court about its potential
liabilities and known creditors. It did not include any of the
people with active legal claims against the company based on
ignition switch problems in its list, according to the court filing.
SALES PRACTICES
The states' investigation is likely to focus on whether state
consumer fraud laws have been violated, targeting unfair and
deceptive acts and practices, said William Brauch, director of the
consumer protection division at the Iowa Department of Justice.
"Multi-state investigations of this kind typically focus on consumer
protection related issues," added Whitney Ray, a spokesman for
Florida Attorney General Pam Bondi.
Arkansas, Connecticut, Florida, Illinois, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Nevada, New York, and South Carolina are all
probing GM, representatives said.
Brauch said the states have conducted similar investigations in the
cases of Firestone tires, Ford SUV rollovers and unintended
acceleration in Toyota vehicles.
Brauch, who is a special assistant attorney general in Iowa, said
the AGs might probe whether the manufacturer misrepresented a facet
of a product in its advertising, or failed to disclose a known
defect.
"Our laws allow us to take action in connection with omissions of
material fact," Brauch said. "Simply putting a defective product in
the stream of commerce can, under certain circumstances, constitute
unfairness in the consumer fraud laws."
He said he did not believe the states had yet sent GM a demand for
information, which is similar to a civil subpoena.
Last year, a group of 29 states struck a $29 million settlement with
Toyota. The states accused Toyota of engaging in unfair and
deceptive practices when it didn't disclose known safety defects
with accelerator pedals.
"Toyota is probably a good model to look at in the context of what
state attorneys general have done in the past in connection with
alleged problems in new vehicles," said Brauch. "Is it directly
parallel? We don't know yet."
(Reporting by Emily Flitter and Karen Freifeld, with additional
reporting by Nick Brown and Tom Hals; Editing by Karey Van Hall and
Peter Henderson)
At the same time, at least a dozen states are investigating the
automaker. Two state officials said that effort is likely to focus
on whether GM broke consumer protection laws.
