Detroit — For the second time in less than three days, U.S. Attorney Barbara McQuade made clear misbehavior by international auto companies or their executives will not be tolerated in Detroit.
On Friday, McQuade announced Takata Corp. has agreed to plead guilty to wire fraud and pay $1 billion in criminal penalties stemming from the company’s fraudulent conduct related to sales of defective air bag inflators.
“Automotive suppliers who sell products that are supposed to protect consumers from injury or death must put safety ahead of profits,” McQuade said. “If they choose instead to engage in fraud, we will hold accountable the individuals and business entities who are responsible.”
Federal prosecutors in Detroit reached a settlement with Takata — one of the world’s largest suppliers of automotive safety equipment — after a 25-month international investigation into the Tokyo-based company’s faulty air bags that have been linked to at least 17 deaths.
On Wednesday, McQuade was part of a broader justice department announcement that Oliver Schmidt, a veteran Volkswagen AG engineer, was arrested by the U.S. government for his alleged role in the company’s scheme to cheat federal emission standards for its diesel cars.
The developments cast a shadow over the auto industry while the North American International Auto Show is held at Cobo Center and days before a new presidential administration takes control of the Justice Department.
“This case is an ongoing investigation that will go into the next administration,” McQuade said of the Takata case.
Asked whether she could give any assurances to automakers under investigation their executives won’t be arrested if they come to Detroit’s auto show, McQuade responded with one word: “No.”
Also on Friday, McQuade announced the indictment of three former Takata executives on wire fraud charges. Shinichi Tanaka, 59; Hideo Nakajima, 65; and Tsuneo Chikaraishi, 61, all Japanese citizens, were indicted by a grand jury on Dec. 7 in the U.S. District Court in Detroit.
Tanaka, executive vice president of inflator global operations; Nakajima, director of engineering at Automotive Systems Laboratory; and Chikaraishi, chief of Japan/Asia airbag inflator operations, were all suspended from Takata in 2015, McQuade said.
‘A key milestone’
Asked to describe what Takata did from a consumer’s point of view, McQuade put the cases into personal terms.
“They falsified and manipulated data to make profits on their air bags knowing they were creating a risk for the end user, which is soccer moms like me, who drives around in my Ford Edge with my kids, who could at any moment could get involved in a fender-bender and send a metal projectile into my face, which could potentially kill me. The risk they allowed to happen is really reprehensible.”
The indictments are part of a criminal resolution between U.S. regulators and the Japanese air bag make, the Justice Department said Friday.
Closure with the Justice Department wraps up the criminal portion of Takata’s auto safety recall, which was the largest in history, and allows it to proceed with its hunt for a buyer.
Takata has agreed to implement rigorous internal controls, retain a compliance monitor for a term of three years and cooperate fully with the department’s ongoing investigation, including its investigation of individuals.
Flying shrapnel from exploding Takata air bag inflators have led to a recall of nearly 70 million inflators.
“Reaching this agreement is a major step towards resolving the airbag inflator issue and a key milestone in the ongoing process to secure investment in Takata,” said Shigehisa Takada, chairman and CEO of Takata.
“Takata deeply regrets the circumstances that have led to this situation and remains fully committed to being part of the solution. We have taken aggressive actions to address past reporting lapses and will continue to work closely with regulators and our automotive customers to address the ongoing recalls and implement new technologies that advance vehicle safety, prevent injuries and save lives.”
Under the terms of the agreement, $125 million of the fine will be used for injured individuals who haven’t reached separate settlements while $850 million will be made available to automakers for air bag recall and replacement costs. The remaining $25 million is a fine in the case.
A court-appointed special master will oversee administration of the $975 million in restitution funds, federal officials said. Both sides agreed to recommend Ken Feinberg to serve as special master. That appointment will need judicial approval.
Volkswagen has hired Feinberg to figure out a way to compensate owners of diesel-powered cars that the company rigged to cheat on emissions tests. Feinberg is among the nation’s top compensation experts and has been praised for handling victims’ compensation programs in the General Motors Co.’s ignition switch scandal, the BP Gulf oil spill, and the Boston Marathon bombing among other cases.
According to prosecutors, from around 2000, Takata knew its inflators weren’t performing to specifications required by automakers. It knew certain inflators had sustained failures, including ruptures during testing.
Takata still encouraged customers to purchase air bag systems by submitting false and fraudulent reports that concealed the true condition of its inflators, prosecutors said.
This fraudulent data made the performance of the company’s air bag inflators appear better than it actually was, including by omitting that, in some instances, inflators ruptured during testing, McQuade said.
Takata employees, including a number of key executives, routinely discussed the false test reports being provided to Takata’s customers in email and in verbal communications, she said.
Even after the inflators began to experience repeated problems in the field — including ruptures causing injuries and deaths — Takata executives continued to withhold the accurate inflator test information and data from their customers, McQuade said.
Takata took no disciplinary actions against those involved in the falsification of test data until 2015, despite the fact that senior executives had been made aware of the fraudulent conduct years earlier, prosecutors said.
McQuade said the United States has an extradition treaty with Japan, but it’s no guarantee the Takata employees will be extradited soon. McQuade acknowledged the process could take months or years.
“We want them to face trial in the United States,” she said.
Recall in phases
In the case against the corporation, McQuade said she expects a plea to be entered and sentencing to be set in the next 30 days in Detroit. The case is assigned to U.S. District Judge George Caram Steeh.
On Friday, a plea agreement was entered into the court record and signed by Takada.
Takata is required to pay $125 million of the fine immediately and another $25 million in 30 days. The remainder of the restitution will be paid over one year, she said, or if the company is sold, McQuade said.
Takata’s recall is being conducted in phases that target the most vulnerable cars that are located in humid climates. Approximately 46 million Takata air bags in 29 million cars were already subject to recall as of December 2016, with another 20 to 25 million additional air bags set to be recalled within the next couple of years.
Takata has been ordered to recall all of the faulty air bags by the end of 2019. The recall is being implemented in a phased approach that prioritizes cars that were sold in states with high temperature and humidity. Michigan is among the lowest-priority states in the recall.
Takata has publicly apologized for the faulty air bags amid congressional inquiries into its handling of the defective parts. It reached a $70 million settlement with the National Highway Traffic Safety Administration over the recalls.
The Justice Department started investigating Takata after propellant in its air bag inflators were found to degrade over time and sometimes explode with such force that they threw shrapnel at vehicle occupants. The manufacturer also has been accused by government transportation regulators and Honda Motor Co. of manipulating test data and playing down the gravity of the problem after the first victim was reported in 2008.
A settlement would help Takata proceed with its search for a buyer because it would give bidders more clarity about the company’s legal challenges. Takata has been negotiating with several bidders for months, but the process has been hampered because buyers are trying to gauge exposure to legal risk and costly civil lawsuits.
Takata and its financial adviser, Lazard Ltd., have asked prospective buyers to complete their due diligence around February, with a successful bidder targeted to be announced in the quarter ending in March, people familiar with the matter said last month.
Takata faces a cascade of recall costs, compensation and penalties after regulators ordered recalls scheduled through at least 2019 that could eventually exceed 100 million air bags used by more than a dozen automakers, including Honda, Volkswagen and General Motors. The recalls would phase out the use of ammonium nitrate as a propellant, a chemical that other inflator makers don’t use.
The recall costs alone could amount to more than 1 trillion yen, or $8.8 billion, according to Takaki Nakanishi, an analyst at Jefferies Group LLC. Takata, the third-biggest air bag maker in the world, started its search for a buyer last year.
Critics of Takata praised prosecutors and regulators for enacting tough penalties against the auto part manufacturer.
“Companies have a responsibility to ensure the products they make are safe for consumers,” said U.S. Sen. Bill Nelson, the top Democrat on the U.S. Senate Commerce Committee, in a statement. “These indictments send a strong message that if company executives knowingly put deadly products on the market, they will held accountable for their actions.”