September 17, 2015 / 1:34 PM / 4 years ago

GM to pay $900 mln to end U.S. criminal ignition switch probe

(Reuters) - General Motors Co admitted it hid from the government and the public a lethal defect in its vehicle ignition switches, and agreed to pay $900 million to end a U.S. criminal probe over its problem, which has been linked to 124 deaths.

The settlement announced on Thursday caps a two-year probe that tainted GM’s reputation and transformed the Detroit-based automaker’s relationship with the federal government, which had bailed it out during the recent financial crisis.

GM also agreed to a partial settlement of private litigation with drivers, passengers and families over the switches, and a settlement of related shareholder litigation.

The largest U.S. automaker will take a $575 million third-quarter charge for the private accords. It was not immediately clear how it will account for the $900 million criminal penalty.

In the criminal case, prosecutors accused GM of scheming to conceal material facts from a U.S. regulator, and wire fraud.

GM admitted to failing to disclose a potentially lethal safety defect with the switches that kept some air bags from deploying. It also admitted to misleading consumers about the safety of vehicles affected by the defect.

In settling with the government, GM entered into a three-year deferred prosecution agreement that requires an independent monitor to oversee its practices, including its ability to fix defects and handle recalls. The criminal charges will be dropped if GM meets its obligations under that agreement.

No individuals were expected to be charged. Negotiations predated a new U.S. Department of Justice policy that requires companies to identify people who may have committed wrongdoing if they want credit for cooperating.

CRITICS SPEAK OUT

The criminal penalty was less than some analysts had predicted, and the settlement quickly drew fire from lawmakers and industry critics demanding tougher penalties for misconduct.

Clarence Ditlow, head of the watchdog Center for Auto Safety in Washington, D.C., lamented that the accord lets GM officials “walk off scot-free while its customers are six feet under.”

Democratic Senators Richard Blumenthal of Connecticut and Edward Markey of Massachusetts called the agreement “extremely disappointing,” and said victims deserved “individual criminal accountability, as well as a larger monetary penalty.”

GM Chief Executive Officer Mary Barra has taken many steps to address problems linked to the defects, including appointing a new safety czar and pushing out 15 executives.

U.S. District Judge Alison Nathan in Manhattan will consider approval of the accord at a Thursday afternoon hearing.

The settlement could permit GM to return more cash to shareholders. GM in March agreed to return $10 billion through 2016 under an agreement with an investor group.

GM’s $900 million payment will be treated as a penalty, and the automaker cannot treat it as a deductible expense.

It is less than the $1.2 billion that Toyota Motor Corp agreed in March 2014 to pay to resolve a similar case alleging that its vehicles accelerated without warning.

GM shares were up 0.5 percent at $31.36 on Thursday afternoon.

PRE-BANKRUPTCY SHIELD

The ignition switch defect publicly surfaced in early 2014, when GM began recalling Chevrolet Cobalts, Saturn Ions and other smaller vehicles.

The defect caused some vehicles to stall, preventing air bags from deploying during crashes.

It also disabled vehicles’ power steering and power brakes when the ignition switches slipped out of the run position.

A scathing June 2014 internal report by former federal prosecutor Anton Valukas portrayed GM as a haven of dysfunction, where signs pointing to the defect were ignored for years. Top executives were not accused of wrongdoing.

GM has faced more than 200 civil lawsuits over the ignition switch and other recalls from 2014. It set up a special fund last year to compensate victims of the switch defect.

In an important victory for GM, the Justice Department agreed to shield the automaker from claims arising from wrongful conduct that predated its 2009 bankruptcy.

That shield could help GM avoid even higher payouts, or the prospect that its emergence from Chapter 11 might even be called into question.

Bob Hilliard, one of the lawyers leading the private litigation by drivers and passengers, said about 84 death cases and 370 injury cases would remain unresolved.

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