GM Recall Woes Mount With Shareholder Lawsuit

General Motors

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In the same week a rival felt the $1.2 billion sting of a recall scandal, General Motors (NYSE:GM) saw the pressure and consequences intensify as its ignition switch recall has become the automaker’s biggest crisis since going bankrupt. The Detroit News reports a GM shareholder has filed a class-action lawsuit alleging the automaker defrauded investors by not disclosing the ignition switch problem in vehicles that has prompted a federal investigation along with a recall of 1.6 million automobiles.

Tied to the lawsuit are the stock market fluctuations that pushed GM down 10 percent between March 10 and March 14, accounting for billions in overall shareholder value. (The stock gained back 3 percent the week following the dip.) Nonetheless, GM’s slow but steady climb in stock value was effectively ended by the investigation that has left the automaker reeling as Chief Executive Mary Barra prepares to testify before the U.S. House of Representatives on April 1.

According to The Detroit News, the shareholder suing GM is seeking reparations for the damages to investments, which has some precedent in the case of Toyota (NYSE:TM) and its massive losses in market value that resulted from the unintended acceleration recall. Following tens of billions in stock losses, the $25 million payout to shareholders by the Japanese automaker was in reality a drop in the bucket.

However, the shareholder burden for GM’s recall and the fines the company will likely face for ignoring defects in vehicles should grow exponentially. On March 19, U.S. Justice Department officials publicly lambasted Toyota Motor Corp. officials for their “shameful” actions during the unintended acceleration recall while announcing a record $1.2 billion fine the automaker must pay. Most industry experts expect GM to bear the brunt as bad or worse.

Depending on how extensive GM’s wrongdoing is revealed to be, the automaker could end up paying more than Toyota’s $1.2 billion penalty. Toyota was forced to admit wrongdoing in the case, though it did not have to plead guilty. U.S. Department of Justice officials will dismiss the charges against Toyota after three years as part of the settlement.

Many observers saw the Toyota fine and public humiliation as a preview of what’s to come for General Motors. In fact, U.S. Attorney Preet Bharara of Manhattan accidentally said “General Motors” instead of “Toyota” at the March 19 press conference announcing the fine. Federal officials smiled at the mistakePolitico reports.

The Toyota case has also brought an old GM nemesis back into the spotlight. Consumer advocate and former candidate for president Ralph Nader told The Detroit News that Toyota got off easy by pleading not guilty to charges and paying only $1 billion, which he considers not punitive enough for a company of that magnitude.

“Even though it sounds like a lot of money – even for a big company — I don’t think GM’s scared of that one,” Nader told The Detroit News. Once the invesitgation is concluded, it’s likely Nader will be making many more public appearances to push federal regulators to come down harder than ever on GM.

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