When Corporate Fraud Kills: DOJ Settles with Toyota for Record $1.2 Billion, Sets Stage for GM Probe

By: Jason Bailey

In United States v. Toyota Motor Corp., the U.S. Department of Justice (“DOJ”) filed a Deferred Prosecution Agreement (“Agreement”) last Wednesday, March 19, ending a four-year investigation of Toyota with a settlement totaling $1.2 billion, the largest financial penalty against an automotive company in U.S. history.[1] Per the Agreement, DOJ will defer the prosecution of one count of wire fraud[2] for three years before seeking dismissal of the case with no additional charges against Toyota (except for criminal tax violations) assuming Toyota’s commitment to “accept and acknowledge responsibility for its conduct; cooperate with the Office . . . ; make the payments specified . . . comply with Federal criminal laws,” and obey all other portions of the Agreement.[3] In addition to the payment of $1.2 billion toward DOJ’s asset forfeiture fund intended for victim compensation, Toyota must retain an independent monitor, approved by DOJ, with the powers, rights, and responsibility to oversee future actions of Toyota.[4] The Agreement, however, does not provide protection against prosecution of individuals or entities other than Toyota and its subsidiaries.[5]

The stipulated facts attached to the Agreement, filed in the U.S. District Court for the Southern District of New York, feature two separate problems in various Toyota and Lexus models that led to unintended acceleration in certain cars and at least five known deaths.[6] The first issue, which Toyota became aware of as early as 2007, was a design defect that resulted in floor mats trapping the gas pedal, and the other, originating in Europe and known to Toyota by August 2009, involved the inclusion of certain plastic that would “cause the accelerator pedal to become mechanically stuck in a partially depressed position.”[7] These facts supplementing the Agreement detail Toyota’s deceptive statements, instances of concealment, and failure to publicly recognize safety issues of extreme danger.[8] The company admits that it misled U.S. consumers in addition to misstating facts to Congress.[9] This settlement with DOJ is amongst record civil penalties issued by the National Highway Traffic Safety Administration of more than $66 million and hundreds of wrongful death and personal injury lawsuits in which Toyota never admits any wrongdoing.[10]

Refusing to notify the public upon discovery of automobile safety problems is not just morally reprehensible, but it is illegal. One peculiarity of this settlement is the severity of the financial penalty relative to previous, non-criminal suits the federal government has brought against car companies. The 1966 Motor Vehicle Safety Act was the first piece of federal legislation that required vehicle manufacturers to notify the public of safety problems and act accordingly.[11] A 2000 amendment to the 1966 Act made refusing to notify the public upon discovery of automobile safety problems cause for criminal action.[12] Still, even after the amendment, holding a large company responsible under this Act is difficult because the criminal penalties only extend to individuals and not the corporate entity.[13]

For DOJ to sternly prosecute Toyota, then, required creative lawyering, and DOJ was able to bring the case under a federal wire fraud law.[14] This statute, which has been used in cases from securities fraud to political corruption,[15] requires only that someone obtain money in interstate or foreign commerce through some scheme to defraud or fraudulent pretenses or misrepresentations.[16] One federal law enforcement official, speaking to the New York Times on the condition of anonymity, said that once investigators discovered and compared internal Toyota documents that acknowledged serious problems with the company’s consistent public statements downplaying the issues associated with its vehicles, DOJ knew it could succeed in a criminal case under the wire fraud law.[17]

While the Agreement states that it is “not intended as precedent for other cases,”[18] all eyes are turning now from Toyota to General Motors. The Justice Department has begun a similar investigation against GM over its failure to recall vehicles with a defect linked so far to twelve deaths.[19] After gaining constructive knowledge of the problem, GM continued to manufacture certain car models equipped with ignition switches that could shut off engines and disable air bags, sending cars off the road with no airbags to inflate upon impact. In fact, GM employees knew about the defect for thirteen years before last month’s recall of 1.6 million vehicles.[20] Since the government’s intervention, GM has closely followed Toyota’s response of “apologizing, appointing a safety czar[,] and bringing in outside help to recommend changes.”[21] It has admitted in filings that it proposed fixes for the problem twice but never followed through.[22] Furthermore, its own investigation has yet to yield answers as to how the problem was allowed to continue,[23] but DOJ will not let that stop it in its pursuit for answers to protect U.S. consumers and hold corporations responsible.

The Toyota case indicates a shift by the federal government toward handling vehicle safety issues as criminal matters. DOJ will most likely continue to be more forceful when instances of death are involved as in both the Toyota and GM cases. While a similar deal to Toyota’s may take years, the criminal wire fraud route taken by prosecutors in the Toyota investigation may serve as a path for prosecutors to use in any future deal made with GM. Lawyers seem to live and die by precedents, and a simple phrase in the Toyota Agreement indicating it is “not intended as a precedent for other cases”[24] is not enough to prevent that outcome.

As Attorney General Eric Holder noted, “Other car companies should not repeat Toyota’s mistake.”[25] GM should be as transparent as possible with federal investigators while continuing to dig through past material for inconsistencies before DOJ finds them first. GM has already admitted what Toyota never did, but its efforts of transparency and subsequent recall took far too long. Preet Bharara, the chief U.S. prosecutor in Manhattan on the Toyota case, made an unscripted gaffe at a news conference last week and referred to Toyota case as one against GM.[26] Whether this was a Freudian slip is yet to be seen, but GM should ready itself as DOJ closes the door on one historic deal with another in its line of sight.

[1] See generally Deferred Prosecution Agreement, United States v. Toyota Motor Corp., 2014 WL 1043909, at *1 (S.D.N.Y. Mar. 19, 2014).

[2] See 18 U.S.C. § 1343 (2008).

[3] Deferred Prosecution Agreement, 2014 WL 1043909, at *3-4.

[4] Id. at *6.

[5] Id. at *4.

[6] Aruna Viswanatha et al., Toyota’s $1.2 Billion Settlement May Be Model for U.S. Probe into GM, Reuters (Mar. 19, 2014), https://www.reuters.com.

[7] Statement of Facts, Toyota Motor Corp., 2014 WL 1043909, at ¶ 24.

[8] See id. at ¶¶ 2-3.

[9] See Press Release, U.S. Dep’t of Justice Office of Pub. Affairs, Justice Department Announces Criminal Charge Against Toyota Motor Corporation and Deferred Prosecution Agreement with $1.2 Billion Financial Penalty (Mar. 19, 2014), available at https://www.justice.gov/opa/pr/2014/March/14-ag-286.html.

[10] Id. See Viwanatha et al., supra note 6; see also Bill Vlasic & Matt Apuzzo, Toyota Is Fined $1.2 Billion for Concealing Safety Defects, N.Y. Times, Mar. 19, 2014, at B1.

[11] See generally 15 U.S.C. § 1381 (1967), replaced by 49 U.S.C. § 30101 (1994).

[12] See 49 U.S.C.A. § 30170 (2000).

[13] See § 30170(a)(1).

[14] § 1343.

[15] Viwanatha et al., supra note 6.

[16] § 1343.

[17] See Vlasic & Apuzzo, supra note 10.

[18] Deferred Prosecution Agreement, United States v. Toyota Motor Corp., 2014 WL 1043909, at *10 (S.D.N.Y. Mar. 19, 2014).

[19] Vlasic & Apuzzo, supra note 10.

[20] Charles Levinson et al., Toyota to Pay $1.2 Billion to Settle U.S. Probe, Wall St. J. (Mar. 19, 2014), https://online.wsj.com.

[21] Id.

[22] Vlasic & Apuzzo, supra note 10.