Bloomberg News

GM Hearings Revive Debate on Corporate-Fraud Penalties

April 03, 2014

Mary Barra

Mary Barra, chief executive officer of General Motors Co. (GM), speaks during a Senate Consumer Protection, Product Safety, and Insurance subcommittee hearing in Washington, D.C., U.S., on Wednesday, April 2, 2014. Photographer: Andrew Harrer/Bloomberg

Higher fines and jail time are being considered by U.S. lawmakers who grilled General Motors Co. (GM:US) Chief Executive Officer Mary Barra over why it took years to recall 2.6 million cars for faulty ignition switches.

The questions of what GM and regulators knew and when are bringing together members of Congress who, while agreeing on little else, are rallying around images of constituents who died in the defective cars. Congress passed laws in 2000 and 2010 after the Firestone-tire and Toyota Motor Corp. unintended-acceleration recalls that toughened sanctions while stopping short of broad criminal penalties.

“Is $35 million enough?” asked U.S. Senator Claire McCaskill, a Missouri Democrat, referring during a hearing she led yesterday to the largest civil fine allowed for not reporting defects. “I mean, is that really a deterrent to companies like General Motors or Toyota or Chrysler, or any of the companies?”

Henry Waxman, the top Democrat on the U.S. House Energy and Commerce Committee, introduced legislation that would increase penalties for failing to disclose defects. It would impose new fees on automakers starting at $3 per vehicle to boost funding for the U.S. National Highway Traffic Safety Administration.

Senate legislation introduced by Democrats Edward Markey of Massachusetts and Richard Blumenthal of Connecticut, who said yesterday that GM could face “criminal liability,” would also mandate greater disclosures of industry data.

Updating Law

Senator Jay Rockefeller, chairman of the committee of which McCaskill’s panel is part, said he will probably propose an update of the 2000 law, the Transportation Recall Enhancement, Accountability and Documentation Act.

The West Virginia Democrat said he will probably work with Waxman and other lawmakers after Congress gets more information about what went wrong. Companies like GM should face higher criminal penalties for failing to disclose defects, Rockefeller said, declining to elaborate.

“It won’t be driven just by what happened at GM, but also NHTSA,” Rockefeller said. “It’s going to happen. There will be a bill.”

Criminal Penalties

The prospects for criminal penalties increased after the Justice Department last month got Toyota to agree to pay $1.2 billion to settle a four-year criminal probe into whether it hid safety defects related to uncontrolled acceleration.

“There needs to be a change in the NHTSA statute so the failure to do a recall on a knowing and willful basis is a criminal violation,” said Joan Claybrook, a former agency administrator who is now a consumer-safety advocate. “If you’re responsible for that, you go to jail.”

While some criminal penalties were included in the 2000 Tread Act, so many loopholes and conditions were added in the final law that NHTSA has never used its authority to refer a car company to the Justice Department, according to Claybrook.

Senate Judiciary Committee Chairman Patrick Leahy, a Vermont Democrat, said today it’s too early to say whether criminal penalties should be raised. GM will face some liability under current law, he said.

$35 Million

The dominant questions among lawmakers are why GM, the largest U.S. automaker, allowed a substandard ignition switch into production and then passed up opportunities to fix or recall the part after consumers and dealers complained about cars stalling when they bumped keys or went over rough roads.

“From where I sit, it looks like GM is not forthcoming with the American people, who bailed them out,” Senator Dean Heller, a Nevada Republican, said at the subcommittee hearing yesterday referring to the $50 billion government bailout and bankruptcy reorganization for GM in 2009.

Barra has pledged to appear before the panel again once GM’s internal probe is complete, Heller and McCaskill said.

“She committed to it yesterday,” McCaskill said in an interview today. While she said Barra was sincere in her testimony, “I think she was clearly unwilling or unable to answer a lot of the specific questions that came up.”

Legal Loopholes

Congress is also targeting NHTSA, which chose not to open a formal defect investigation in 2007 after reviewing air-bag data, and again in 2010 after a special crash investigation report was filed.

Acting Administrator David Friedman told House and Senate committees this week that the agency would have acted decisively if GM had provided then some facts that are now just coming out.

NHTSA’s primary weapon under current law is the ability to issue a civil fine of as much as $35 million. That would be less than 1 percent of GM’s $5.4 billion in net income (GM:US) last year.

“Whether it’s a question of is $35 million regarded by some automakers as simply a cost of doing business -- that can certainly be a conclusion that some may draw,” Transportation Department Inspector General Calvin Scovel told a Senate panel yesterday.

Regulators supported previous legislation that would have increased the maximum fine to $300 million, Friedman told the same panel.

“When we find evidence that automakers have not acted in a timely manner we will fine them to the maximum extent allowed by law,” Friedman said.

Engineering Decision

While congressional aides agree $35 million isn’t enough, lawmakers are more likely to raise civil fines to the $50 million range than something dramatically larger, said Henrietta Treyz, an analyst at Washington-based Height Analytics who tracks legislation.

“Nobody in D.C. really wants to hurt the auto manufacturers,” Treyz said. “You want them to take their responsibilities seriously, but you want them to be successful.”

With the Toyota sanction available to U.S. prosecutors under current law, “it might be unclear as to why the government would need new authority to seek increased penalties,” said Wade Newton, spokesman for the Alliance of Automobile Manufacturers, a Washington-based trade group representing 12 companies including Toyota, GM and Ford Motor Co.

Costs, Benefits

House Speaker John Boehner, an Ohio Republican, yesterday urged caution with GM, saying the congressional committees need time to complete their investigations. So far, the House Energy and Commerce Committee has collected more than 200,000 pages of documents from GM and 6,000 pages from NHTSA.

Most of the cars involved in this year’s recall, including the Chevrolet Cobalt and Saturn Ion, were designed more than a decade ago mainly as entry-level models. Soon after the cars reached the market, GM dealers began receiving complaints about unintentional engine shut-offs.

It would later be determined that the ignition switches, when jostled out of position, led to the stalling cars, as well as disabled air bags.

Engineers in 2004 and 2005 came up with solutions to fix the flaw, yet decisions were made to close the investigations without taking any action, according to a timeline supplied by GM and documents released by congressional staff. The automaker came up with a third fix in 2006, yet didn’t believe the new switch design had been implemented because the part number from its supplier, Delphi Mechatronics, didn’t change.

Culture Change

Senator Kelly Ayotte, a New Hampshire Republican, said changing the ignition-switch design without changing the part number was more than a bad engineering practice.

“This to me is criminal deception,” she said yesterday. “Someone made the decision, and it was approved by GM.”

Barra, who was promoted to CEO in January, spent both days of hearings trying to highlight the differences between the “new GM” and the former company that existed before the 2009 bankruptcy.

“Today, if there is a safety issue, we take action,” she told the House committee. “We’ve moved from a cost culture to a customer culture.”

New legislation will certainly be drawn up, and the Justice Department probably will tell lawmakers there’s a real need for a culture change in the industry, said Glen Donath, a former federal prosecutor who is now a partner with the law firm Katten Muchin Rosenman LLP in Washington.

Consumer protection is one of the major responsibilities of Congress, and lawmakers are eager to show constituents they can make the system better able to prevent deadly defects, Treyz of Height Analytics said.

“When the only realistic sanction is a financial one, corporations will have an incentive to engage in cost-benefit analysis,” Donath said. “These companies have been willing to roll the dice.”

To contact the reporter on this story: Jeff Plungis in Washington at jplungis@bloomberg.net

To contact the editors responsible for this story: Bernard Kohn at bkohn2@bloomberg.net Romaine Bostick


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