Criminal Probe Into Recalls Complicates GM’s Turnaround

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APBy Jeff Plungis, Jeff Green and Del Quentin Wilber

The criminal investigation that opened Wednesday into General Motors’ handling of an ignition flaw linked to 13 deaths adds to legal challenges that threaten to overshadow the company’s turnaround.

GM (GM), the largest U.S. automaker, is now at the beginning of a potentially years-long road dotted with inquiries, lawsuits, government fines and public skepticism. Besides the U.S. Justice Department probe, GM must answer to Congress, the Transportation Department and lawyers the company hired to investigate itself.

Toyota Motor (TM) is still being examined over recalls in 2009-10 related to reports of unintended acceleration in some cars. GM similarly faces repercussions for waiting to recall 1.6 million vehicles last month, even though records show it was aware as far back as 2004 of ignition switches that could slip out of position, cutting off power and deactivating air bags. The crisis arrives weeks after Mary Barra took over as chief executive officer amid rising investor and consumer optimism as GM shook off the last vestiges of its 2009 bankruptcy.

“Barra is getting her feet thrown right into the fire,” Dave Sullivan, an industry analyst with Southfield, Mich.-based AutoPacific, said in an interview. “There’s no way she is going to come out of this looking like some kind of hero. The best thing is to be honest and upfront and hopefully put this to bed as quickly as possible.”

A spokesman for Detroit-based GM, Greg Martin, declined to comment. Martin said March 10 the company was cooperating with regulators and lawmakers and that it welcomed the opportunity to help “parties have a full understanding of the facts.”

Consumer Lawsuits

GM tumbled 5.1 percent to $35.18 Wednesday, its worst one-day share drop at the close since March 2012.

While the immediate financial impact of GM’s recall of Chevrolet Cobalts, Pontiac G5s and other vehicles is “insignificant,” some hard-to-quantify reputational risk is emerging, Joseph Spak, an RBC Capital Markets analyst, said in a note to investors Wednesday.

“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.”

New legal activity is already bubbling. Todd Walburg, a personal-injury lawyer with Lieff Cabraser Heimann & Bernstein, said his firm began looking into GM’s ignition switches in mid-February. Walburg said the firm has been contacted by more than 200 people about the issue in the past week.

Higher Stakes

It wasn’t possible to verify that number and Walburg declined to say whether GM’s initial recall announcement on Feb. 13 initiated the firm’s investigation or how it generated inquiries. A Google (GOOG) search for “GM recall” and “GM ignition switch” pulls up a sponsored ad that links to Lieff Cabraser, which also represented plaintiffs in some of the Toyota incidents.

The Justice Department’s preliminary investigation raises the stakes considerably. Federal prosecutors will look at how the company handled the recalls, focusing on whether GM violated criminal or civil laws by failing to notify regulators in a timely fashion about the switch failures, according to a person familiar with the investigation who asked not to be identified discussing an open inquiry.

The chaos from the recall and the multiple investigations hits just as GM had finished shaking off the “Government Motors” stigma tied to the $49.5 billion U.S. bailout that saved the automaker from liquidation.

The same week in mid-December that the government sold its last shares in the automaker, GM said it would promote Barra to CEO, the first woman to lead a major automaker. GM shares reached a post-bankruptcy high of $41.53 on Dec. 17. Since then the shares have tumbled 15 percent through Wednesday.

Improving Reputation

GM’s reputation with consumers had also been improving as it brought to market 18 new or updated cars and trucks, transforming its lineup into one of the freshest in the industry from one of the oldest. It also boosted quality to record levels, according to reviewers including J.D. Power & Associates and Consumer Reports magazine.

Its latest version of the Chevrolet Impala was the first U.S. car chosen as the best sedan on the market by Consumer Reports, a first in at least 20 years, and the Cadillac CTS was picked as Motor Trend’s Car of the Year for 2014.

The Justice Department investigation is now stealing some of that spotlight. Federal prosecutors decided to start its GM probe after discussions with officials at the Transportation Department, according to another person familiar with the inquiry who asked not to be identified.

Congressional Probe

“We are in communication with the Department of Justice but have not asked Justice to investigate because we are still in the midst of our own investigation regarding the timing of GM’s recall,” said Ryan Daniels, a Transportation Department spokesman. “Our timeliness investigation and our efforts to ensure GM makes consumers aware of the steps they should take in response to the recall are currently our top priorities.”

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.

GM has hired Jenner & Block Chairman Anton Valukas, who probed Lehman Brothers Holdings’s 2008 downfall, to help lead an internal investigation.

Members of the House Energy and Commerce Committee on Wednesday asked Barra for documents and field reports related to the recall. Committee Chairman Fred Upton, a Michigan Republican, said March 10 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.”

2004 Complaints

The initial recall on Feb. 13 covered 778,562 Chevrolet Cobalts and Pontiac G5s. It was widened less than two weeks later by 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. 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.

$35 Million Fine

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.

Sean Kane, president of Safety Research & Strategies, who researches product hazards and frequently works with plaintiffs’ attorneys, said the ignition-switch defect wasn’t obvious enough to trigger early-on, widespread investigations by trial lawyers.

“Unless there’s some reason to examine that further, a lot of crashes just go as unremarkable events,” said Kane, who testified during 2010 congressional hearings on Toyota. “With the product recall, now everyone’s taking a look back.”

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