General Motors recall: How badly might it hurt GM's nascent turnaround?

After a long run of profitability following its 2009 bankruptcy, General Motors is facing multiple federal investigations and a credibility crisis over its handling of ignition problems that are being linked to at least a dozen deaths.

If the company is found criminally negligent for an alleged coverup dating back over a decade, the terms of its federal bankruptcy, including a provision shielding the company from any liability from lawsuits filed before it went bankrupt, may be called into question. This likely will lead to class-action lawsuits, in addition to the three that are currently making their way through federal court.

One of those lawsuits was filed on behalf of a Michigan man Wednesday. Court documents allege the Detroit automaker was aware of the ignition problems in several of its vehicles, such as the Chevrolet Cobalt and Saturn Ion.

GM is finding itself in the unusual position of trying to defend itself after a good run that has seen the company's nascent recovery from bankruptcy, its emergence from federal control and ownership, and the positive buzz surrounding the January appointment of Mary Barra as the company’s first female CEO.

Those positive changes now are being tested in the face of a worldwide recall in February of 1.62 million vehicles spanning the years 2003 through '07 that are linked to the deaths. At fault are the ignition switches, which are reported to turn off while the car is running, cutting the power steering and air bags. On Monday, GM announced an additional 1.5 million recalls involving air bags, among other parts, in some of its full-size vans and SUV models. The company said it planned to put aside $300 million this year to pay for the combined recalls.

Besides embarrassment, the company faces hearings before two congressional committees and a US Department of Justice investigation, which may potentially link the company to more deaths. The multiple inquiries will look into why the company waited so long before issuing the recalls and whether an earlier disclosure of safety problems could have prevented some of the deaths.

The Motor Vehicle Safety Act requires that companies notify the public of safety problems within five days and correct the defect.

Documents submitted to the National Highway Traffic Safety Administration [NHTSA], which is pursuing its own investigation, show that company engineers knew of the ignition switch problem as early as 2001 but did not take action until this year. If found in violation, the company could owe fines as high as $35 million for failing to report safety defects.

There is precedent that GM will not get off easily. Toyota Motor Corp. agreed on Wednesday to pay $1.2 billion to settle a similar recall investigation involving its admission that it failed to properly notify vehicle owners of problems related to unintended acceleration.

At a press conference, US Attorney General Eric Holder would not discuss the pending GM probe, but said his “hope and expectation is that [the Toyota] resolution will serve as a model for how to approach future cases involving similarly situated companies." The federal prosecutors that handled the Toyota investigation are the same tasked with looking into the GM recall.

GM’s strategy so far is to be proactive: In a video statement released on its website this week, Ms. Barra pledged to cooperate with all the investigations and said the company will be conducting an “intense review” of its “internal processes” to catch any potential recalls. She admitted that “something went wrong” and “terrible things happened,” but she did not admit liability. The company is working with dealerships in establishing the recall process, and has added more than 50 workers to its call centers outside Detroit.

“We are completely focused on the problem from the highest level of the company. How we handle the recall will be an important test of that commitment.… We all have to own it,” she said.

Barra told reporters Tuesday it is likely she will testify before Congress in hearings scheduled for April, but did not reveal any details as to why the company had waited so long to flag the defective parts.

Indeed, the government is pushing to “connect the dots,” according to a statement released by US Rep. Fred Upton (R) of Michigan, who chairs the House Energy and Commerce Committee. GM officials met with Chairman Upton’s staff on Tuesday. The current focus is obtaining more documents from GM and its suppliers, which “will provide a better understanding” of the problems and subsequent decision process, he says.

If the investigations prove the company was negligent, the 2009 bankruptcy will likely come under scrutiny over whether GM misrepresented itself at the time. Under terms of the agreement, GM had to show it was not aware of any pending product liability cases. The agreement also stipulates that the “new” GM is not liable for accidents that took place prior to the bankruptcy filing.

In court documents involving Adnan Jawad, a 2007 Cobalt owner from Dearborn, Mich., attorney Kassem Dakhlallah wrote that “GM had information that the defective GM vehicles were involved in crashes leading to fatalities and did nothing to correct the problems or even to warn the public.”

Mr. Jawad is seeking more than $5 million in his suit charging GM with negligence and breach of warranty.