The U.S. Justice Department started a preliminary investigation into how General Motors Co. (GM:US) handled the recall of 1.6 million vehicles with faulty ignition switches linked to at least 13 deaths, said a person familiar with the probe.
The inquiry is focusing on whether GM, the largest U.S. automaker, violated criminal or civil laws by failing to notify regulators in a timely fashion about the switch failures, said the person, who asked not to be named and isn’t authorized to discuss investigations. GM shares fell (GM:US) the most in two years.
The U.S. Attorney’s office in the Southern District of New York is leading the investigation. James Margolin, a spokesman for that office, declined to comment, as did Emily Pierce, a Justice Department spokeswoman in Washington.
House and Senate committees and the U.S. National Highway Traffic Safety Administration are also probing GM’s actions leading to the recall. While the immediate financial impact of the recall is “insignificant,” some hard-to-quantify reputational risk is emerging, Joseph Spak, an RBC Capital Markets LLC analyst, said in a note to investors today.
“Remember while this was old (pre-bankruptcy) GM, the consumer won’t differentiate,” Spak said. “It does appear that GM employees have known about the risk for a while, so it does seem there is a failure to act somewhere along the way.”
GM tumbled 5.2 percent (GM:US) to $35.18 at 4 p.m. New York time, its worst one-day drop at the close since March 2012.
The stock has now slid 14 percent this year, and the recall is emerging as the first major test for new Chief Executive Officer Mary Barra, who was promoted two weeks before GM decided Jan. 31 to implement the recall. GM has hired former U.S. prosecutor Anton Valukas, who probed Lehman Brothers Holdings Inc.’s 2008 downfall, to help lead an internal investigation.
The initial recall on Feb. 13 covered 778,562 Chevrolet Cobalts and Pontiac G5s. It was widened less than two weeks later to more than 800,000 additional vehicles. Those include 2003-2007 Saturn Ions, 2006-2007 Chevrolet HHRs, 2006-2007 Pontiac Solstices and 2006-2007 Saturn Skys. Other models affected are the 2005-06 Pontiac Pursuit sold in Canada and the 2007 Opel GT sold in Europe.
NHTSA, whose decision not to investigate the switch failures years ago is also under scrutiny by Congress, is focusing on what steps GM took to investigate and rectify engineering concerns and consumer complaints dating back to at least 2004. Detroit-based GM has until April 3 to answer questions posed by NHTSA in a 27-page order issued last week.
Company documents show that between 2004 and the decision to initiate the recall, layers of GM engineers and corporate committees analyzed and failed to fix the ignition flaw.
GM has said that heavy key rings or jarring can cause the ignition switches to slip out of position, cutting off power and deactivating air bags. The automaker has linked the defect to at least 23 crashes, including 13 deaths.
NHTSA could fine GM as much as $35 million, which would be the most ever by the U.S., if it finds the automaker didn’t pursue a recall when it knew the cars were defective.
The company first told the public about the recall on Feb. 13 and then more than doubled the scope of the recall on Feb. 25.
GM assured NHTSA it has identified all of the relevant vehicles in the current recalls. The company said in a letter posted on the agency’s website today that it will send letters to affected owners this week. Customers will get a second letter around April 7 with instructions to contact their dealers for repair appointments.
Delphi Automotive Systems, GM’s ignition-switch provider, told NHTSA that GM has correctly identified all affected vehicles. The switch hasn’t been sold to any company other than GM, the Troy, Michigan-based company said in a letter to NHTSA posted on the agency website today.
Barra pledged to personally take control of overseeing the recall in a March 4 Web posting to employees. “We will hold ourselves accountable and improve our processes so our customers do not experience this again,” she wrote.
Members of the House Energy and Commerce Committee today asked Barra for documents and field reports related to the recall. Committee Chairman Fred Upton, a Michigan Republican, said yesterday that a hearing will be held in the coming weeks to explore whether GM or NHTSA missed “something that could have flagged these problems sooner.”
“If the answer is yes, we must learn how and why this happened, and then determine whether this system of reporting and analyzing complaints that Congress created to save lives is being implemented and working as the law intended,” Upton said.
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