Toyota Settlement Blazes Path for GM

The New York Times Blogs (DealBook)

March 21, 2014

Toyota's settlement with the Justice Department on vehicle defects is yet another example of how covering up misconduct results in far greater penalties than the underlying violation. For General Motors, the settlement provides a template for resolving a burgeoning investigation into faulty ignition switches that caused a number of deaths.

Although the Toyota case centers on defects that drivers say caused sudden acceleration in its cars, the criminal charge is for violating the federal wire fraud statute. The Justice Department focused not so much on the defects themselves, which are not subject to criminal prosecution in most cases, as it did on how Toyota lied to the National Highway Traffic Safety Administration (NHTSA), Congress and the general public about how it was addressing problems in its cars.

For example, the statement of facts, which the company acknowledged as true, notes that Toyota announced in November 2009 that it was "very, very confident that we have addressed" problems caused by floor mats interfering with accelerators in vehicles it had recalled. But the next day, it canceled a design improvement in vehicles that had the same problem but were not subject to the recall because it would "most likely mislead the concerned authorities and consumers and such to believe that we have admitted having defective vehicles."

Unlike the typical fraud in which the perpetrator steals property from the victim, the government's theory is that Toyota bought good public relations by making misleading statements about how it was addressing the defects so that it could continue to sell cars without nagging questions about their safety. That is a creative theory of fraud and one that might not have prevailed if Toyota had chosen to fight the case in court.

But it did not, and as is the norm in most corporate criminal cases these days, the company agreed to a deferred prosecution agreement rather than plead guilty. The statement of facts goes into great detail about how Toyota repeatedly issued misleading information to protect its image in the face of significant design defects in several models.

Toyota agreed to pay $1.2 billion and install an outside monitor for three years to ensure that it properly follows up on any reports of accidents caused by vehicle defects. In exchange, the government agreed to suspend prosecution on the criminal charge, which will be dismissed if Toyota complies with the terms of the agreement.

Vehicle defects are rarely the subject of a criminal prosecution. One of the most famous cases was in 1978, when Ford was accused of manslaughter in the death of three teenagers in Indiana who were driving a Pinto that exploded because of a defect that the company refused to fix. Ford was acquitted, although information about its decision not to correct the problem because it would have cost too much money was a serious embarrassment.

By charging wire fraud in the Toyota case, the Justice Department obtained a much larger financial penalty than would have been available to NHTSA in a regulatory proceeding, which is capped at $35 million under the Moving Ahead for Progress in the 21st Century Act passed by Congress in 2012. The $1.2 billion payment is structured as a civil asset forfeiture based on the wire fraud, which authorizes the government to obtain any ill-gotten gains the company received from the criminal violation and not just an arbitrary civil penalty.

A criminal fine simply goes into the United States Treasury as a form of punishment, but property forfeited by a defendant can be used by the government to set up a fund to compensate victims of the vehicle defects. So the agreement gives the Justice Department much greater flexibility in how it will handle the money.

Toyota also agreed not to deduct the $1.2 billion from its taxes, an increasingly common provision in deferred prosecution agreements. This allows the Justice Department to avoid the criticism that the government is effectively financing part of a settlement if a company can simply write it off.

As for the monitor, companies don't care for prying eyes, but the extent of Toyota's dissembling in response to reported defects calls out for some form of outside supervision that will most likely cost it millions of dollars more.

The parallels between Toyota and GM are striking. Eric H. Holder Jr., the attorney general, made it quite clear in a statement that "Other car companies should not repeat Toyota's mistake; a recall may damage a company's reputation, but deceiving your customers makes that damage far more lasting."

The use of the wire fraud statute means that any GM statements regarding ignition switch problems that were less than truthful can be the basis for a criminal charge. And those statements are not limited to what was said to NHTSA or in an official filing but can include statements issued by the public relations department or interviews given to the news media.

An interesting question is whether the Justice Department will go a step further and pursue cases against individuals based on their statements. No one at Toyota was charged, and the fact that many of the employees involved may be in Japan could be a deterrent to pursuing a case further. Pursuing a case against individuals from GM would not face the same hurdle.

But in recent years foreign executives have been brought to this country to fact antitrust and tax evasion charges, so it is possible foreigners could be singled out in the Toyota case.

GM is still in the early stages of its internal investigation, which will take months to complete. The company knows now what it is likely facing once that process is complete: a hefty financial penalty and an outside monitor in exchange for avoiding a criminal conviction.

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