Will General Motors Be Charged With Crimes?

Federal prosecutors are looking hard at GM's recall mess.

Jul 23, 2014 at 1:45PM

Barra Before Senate

GM CEO Mary Barra faced the wrath of angry U.S. Senators back in April, but Congress may be the least of GM's troubles if Federal prosecutors file charges against the company. Source: General Motors Co.

How much will this massive recall mess end up costing General Motors (NYSE:GM)?

It's still hard to say. While we do know enough to make a very general estimate, there's still one big wildcard: potential criminal liability.

If GM is found guilty of federal crimes related to a coverup, it could face huge fines. As Motley Fool senior auto specialist John Rosevear notes in this video, there are no upper limits on the fines that could be assessed -- and a jury is not likely to be sympathetic to GM here.

Will this be yet another multibillion-dollar boondoggle for the General? Watch the short video below to get John's take.  

A transcript of the video is below.

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John Rosevear:  Hey Fools, it's John Rosevear, senior auto specialist for Fool.com. Is General Motors in danger of facing criminal charges over its recall mess? Reuters reported last week that Federal prosecutors are looking at whether GM made misleading statements about the flawed ignition switches that are implicated in over a dozen accident deaths. If the evidence is solid, GM could face federal charges of mail and wire fraud.

That's very similar to how the U.S. Justice Department went after Toyota (NYSE:TM) in the wake of its own recall scandal in 2009 and 2010. Toyota ended up paying $1.2 billion dollars to settle those charges, and it seems likely that GM could end up paying a similar settlement, or maybe even more given how fired up Congress and federal regulators are over the company's long long delay in recalling those ignition switches.

Now we do need to be clear about something. You may have heard that GM's bankruptcy makes it legally immune to civil claims arising from accidents that happened before it entered bankruptcy in 2009. That's true, although it hasn't really been put to the test in court yet. Of course CEO Mary Barra has said that GM does have some moral obligations, and that's why GM is putting together a settlement fund to compensate victims of accidents that happened before then.

But that immunity to lawsuits for things that happened before the bankruptcy does not protect GM from criminal charges for things that happened back then. And it's also important to note that there are no caps on the penalties that can be imposed if a company is found guilty of mail fraud or wire fraud. GM could be hit with an absolutely massive fine here.

According to the Reuters report, Federal prosecutors will try to show that there were GM employees who knew the switches were defective while they were telling regulators that the problem was under control. GM is also facing investigations from attorneys general in several states, and those ar likely to result in consumer fraud charges, or violations of consumer-protection laws.

Again if we look at the example of Toyota, Toyota ended up settling similar charges with a group of 29 states for $29 million dollars last year, so GM could be on the hook for something like that as well before all is said and done. And again, I wouldn't be surprised if GM ends up getting hit with bigger fines than Toyota, or having to pay bigger settlements to end these cases, because of all of the publicity and outrage over what has happened.

So this is another aspect of the recall mess that GM shareholders need to keep an eye on, the $2.5 billion dollars that GM has said it will take in charges to cover the costs of repairing all of these cars is just the beginning of what GM is going to have to pay to resolve this mess. Thanks for watching.

John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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