Yahoo Finance Prosecution of GM may let corporate bosses off the hook
Should anybody go to jail?
This is undoubtedly one of the thorny questions federal prosecutors are grappling with as they craft a criminal case against General Motors (GM) in response to the recalls that dominated headlines last year. The New York Times reported recently that the Justice Department has “identified criminal wrongdoing” in a vast safety scandal involving defective ignition switches on 2.6 million vehicles from model years 2003 through 2011. The defect, which led some of the affected cars to power off while moving, is linked with 107 deaths so far, according to GM. In some crashes, airbags failed to deploy because the ignition switch effectively turned them off. Criminal charges or a settlement with GM could come this summer, with fines likely to top the $1.2 billion Toyota (TM) paid for safety infractions last year. That's on top of more than $4 billion the problem has already cost GM.
Legal settlements with big companies seem almost routine these days, with Wall Street banks, as one obvious example, paying well over $100 billion in fines for transgressions related to the 2008 financial meltdown. But prosecutors have become notoriously reluctant to target individual executives, with one documentary on corporate wrongdoing touting business leaders as “the untouchables.” Prosecutors typically say they’re being pragmatic and playing the odds -- it’s much easier to extract fines from deep-pocketed companies than to jail executives defended by top legal talent.
The GM case is different. GM itself identified many of the insiders responsible for allowing a deadly safety flaw into several popular models, concealing the problem, and reacting with little or no urgency even as the death toll mounted. Last year, once GM finally began issuing long-overdue recalls, it fired at least 15 people for their role in the controversy —some for misconduct or incompetence, others for not intervening when they should have.
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A report GM commissioned from Jenner & Block, an outside law firm, began by explaining how, in the fall of 2002, “General Motors personnel made a decision that would lead to catastrophic results—a GM engineer chose to use an ignition switch in certain cars that was so far below GM’s own specifications that it failed to keep the car powered on in circumstances the driver could encounter.” That report, overseen by Jenner & Block chairman Anton Valukas, then identified the engineer, his boss, and many other GM employees who should have done something to fix the problem, but didn’t.
Criminal charges elusive
The Valukas report, made public last June, has no legal bearing but is nonetheless a handy blueprint for prosecutors considering bringing criminal charges against current or former GM employees. Even so, the feds may take a pass. “The DOJ is unlikely to prosecute individuals because GM's top brass seem to have insulated themselves from direct knowledge of allegedly criminal actions, leaving only midlevel targets,” says Erik Morgan, a professor at the University of Michigan schools of business and law. “The government doesn't want to be seen as collaborating with a huge company to focus the blame on midlevel people.”
The Valukas investigation turned up no evidence the board of directors or any GM CEOs, including the current one, Mary Barra, knew about the problem until shortly before GM began issuing recalls last year. It also cleared Michael Millikin, who was GM’s general counsel from 2011 to 2014. Others are less charitable toward Millikin, who retired unexpectedly last fall. Ben Heineman of Harvard Law School, the former top laywer at General Electric, argues that Millikin was accountable for the ignition-switch safety problem and if he didn’t know about it, he should have. At a Congressional hearing last July, Sen. Richard Blumenthal (D-Conn.) told Millikin he should be fired.
The Valukas report is perhaps most condemning of GM engineer Ray DeGiorgio, who was responsible for the development of the ignition switch that ended up causing so much trouble in the Chevrolet Cobalt, Saturn Ion and other models. The report claims DeGiorgio approved the switch while knowing it fell below standards and might have been prone to slipping out of the RUN position if bumped or rattled, which is exactly what happened in dozens of tragic instances. DeGiorgio allegedly bypassed procedures by approving a replacement switch without changing the part number, creating a recordkeeping loophole that threw off others inside GM investigating the problem. The report also says DeGiorgio “misled his colleagues for years” about the flaw, further slowing the hunt for a “root cause” and a solution.
GM fired DeGiorgio last year. Sen. Claire McCaskill (D-Mo.) has said DeGiorgio should face criminal charges for possibly lying under oath about ordering replacement switches in 2006, without documenting the change. But product liability experts think DeGiorgio might escape prosecution. “What good does it do to get DeGiorgio at this point?” says Carl Tobias, a professor at the University of Richmond School of Law. “I just don’t think it has as much of an effect if you don’t get the people at the top.”
DeGiorgio has said little publicly and couldn’t be reached for this article, but in an interview with the New York Times last November, he said “I did my job the best I could.” At the time, cost-cutting pressure was intense inside GM, which we now know was headed for bankruptcy. At one point, DeGiorgio said, he tried to get the faulty switch replaced with a better one, but was overruled by a GM committee. That’s the sort of testimony that could thwart a criminal prosecution. DeGiorgio has also said he bought his own teenage son a Cobalt with the faulty switch, implying he thought it was safe enough for his own family.
GM fired several other people more senior than DeGiorgio, including his boss, Gary Altman. At least five lawyers got the ax, including William Kemp and Laurence Buonomo, senior attorneys who reported to Millikin and oversaw elements of the internal investigation into the ignition-switch problem. And GM sacked several other executives responsible for safety oversight. While the Valukas report doesn’t allege any of them committed crimes, it does depict a culture of buck-passing and neglect that allowed the problem to mushroom.
Neglect isn't necessarily a crime, though GM could be prosecuted if, for example, it failed to report information to the government as required, which GM may have done by not releasing safety information on the ignition problem to regulators. But prosecutors these days seem more inclined to use their leverage behind the scenes, to help negotiate high-dollar-value settlements, than to roll the dice in court. Even if they escape criminal charges, GM employees tarred by the case still face plenty of trouble, including possible civil lawsuits brought by victims, mounting legal fees and reputational damage that could harm their careers. Still, all that would probably beat going to jail.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.
