Takata, U.S. Justice Department announce $1 billion plea

Jan. 26, 2017
Three Takata Corp. executives have been charged with wire fraud and conspiracy, and the company has agreed to pay $1 billion in criminal penalties as part of a plea agreement with federal prosecutors in the U.S.

Three Takata Corp. executives have been charged with wire fraud and conspiracy, and the company has agreed to pay $1 billion in criminal penalties as part of a plea agreement with federal prosecutors in the U.S.

Takata’s guilty plea, stemming from fraudulent conduct related to faulty airbag inflators that have killed 16 people worldwide (11 in the U.S.), came as 13 automakers recalled more than 652,00 vehicles in the United States to replace the Takata products.

The plea also acted as a bit of an exclamation point on the two-year tenure of former National Highway Traffic Safety Administration (NHTSA) head Mark Rosekind, who left his post as part of the transition to a new presidential administration. President Donald Trump has yet to name his successor.

Takata pleaded guilty to a one-count criminal information filed in the Eastern District of Michigan that charged the company with one count of wire fraud. Under the terms of the agreement, Takata will pay a total criminal penalty of $1 billion, including $975 million in restitution and a $25 million fine. The company will establish a $125 million fund for individuals who have been physically injured by the airbags (but who have not reached a settlement with the company) and another $850 million fund for airbag recall and replacement costs incurred by auto manufacturers.

Takata also agreed to implement “rigorous internal controls, retain a compliance monitor for a term of three years and cooperate fully with the [justice] department’s ongoing investigation, including its investigation of individuals,” according to a press release issued by the U.S. Department of Justice.

As part of the plea deal, a federal grand jury indicted three former Takata executives in Japan (Shinichi Tanaka, Hideo Nakajima, and Tsuneo Chikaraishi) with one count of conspiracy to commit wire fraud and five counts of wire fraud.

According to the indictment, three executives knew that the inflators ruptured during testing, and routinely fabricated or scrubbed the test data they supplied to manufacturers. They continued to do so even after 2008 when the inflators began malfunctioning in vehicles on the road.

“Automotive suppliers who sell products that are supposed to protect consumers from injury or death must put safety ahead of profits,” said U.S. Attorney U.S. Attorney Barbara McQuade of the Eastern District of Michigan. “If they choose instead to engage in fraud, we will hold accountable the individuals and business entities who are responsible.”

“For more than a decade, Takata repeatedly and systematically falsified critical test data related to the safety of its products, putting profits and production schedules ahead of safety,” said Chief Andrew Weissmann of the Fraud Section of the Justice Department’s Criminal Division. “This announcement is the latest in the automotive industry enforcement actions the Fraud Section has taken to protect U.S. consumers against fraud.”

Takata began manufacturing airbag inflators that used ammonium nitrate as a propellant in the late 1990s, and by 2000 the company knew that the inflators did not perform to auto manufacturer specifications. The inflators also ruptured during testing.

The company provided falsified data to automakers, and (according to the company’s admissions to the Justice Department) executives routinely discussed falsification of the test reports.

Takata executives also took no action against those involved in falsifying the test data until 2015, even after being aware of the problems.

NHTSA’s future direction cloudy
The Takata indictments close out a stormy chapter for both NHTSA and the auto industry. Outgoing agency chief Rosekind took over NHTSA in the wake of the General Motors ignition switch controversy, and at a time when the agency was seen as being too lax with its oversite and too friendly to automakers. Then-Transportation Secretary Ray LaHood and NHTSA administrator David Strickland resigned in 2014 after crafting a deal with Chrysler to fix a dangerous safety issue with its Jeep Cherokee SUVs. Both joined D.C.-based lobbying firms. The agency was also criticized for the initially limited approach taken with the Takata recall.

Under Rosekind, the agency took a much tougher stance on safety and recalls, and recent rulemaking activity related to technologies like self-driving cars indicate NHTSA was shifting toward pre-market approval of vehicle systems to head off future safety problems.

NHTSA took a more aggressive approach to the Takata case under Rosekind’s watch. He also emphasized that he wanted the agency to be more proactive, rather than waiting for drivers to be injured or killed before responding to safety issues.

It’s unclear exactly what NHTSA’s priorities will be under the new administration. Moving forward, former Labor Secretary Elaine Chao will take over as Transportation Secretary, but there has been no indication of who might take the reigns at NHTSA. While the Department of Transportation has traditionally been relatively free of partisan disputes over safety issues, the incoming administration has signaled that its overall approach is to reduce regulatory activity.

For Takata, the company’s plea could potentially help boost its flagging financial fortunes. With the investigation closed, Takata might be able to attract investors to help restructure and pay off its liabilities.

"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 chief executive 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.”

Takata shares fell significantly in January. The company may file for bankruptcy, which would mean its new creditors would be responsible for paying its fines and setting up the compensation funds.

According to a statement released by U.S. Senators Richard Blumenthal (D-CT) and Edward J. Markey (D-MA), any such restructuring could impact both the settlement and the quality of new Takata products.

“It is vital that any such restructuring protect consumers, the company’s ability to develop and deploy safe replacement airbags, and deter future similar wrongdoing,” the Senators said. “Since bankrupt corporations pay criminal fines out of the pockets of their new creditors—not their executives or shareholders—we are concerned that a settlement that does not hold individual executives accountable will not effectively halt wrongdoing and deter future misconduct. Rather, it would just transfer the punishment.”

It will take many years to replace all of the affected airbags, which were installed in millions of vehicles worldwide. In the U.S. alone, the recall is expected to eventually affect up to 42 million vehicles (the largest in the country’s history).

So far, only around one-third have been replaced (in part as a result of a shortage of replacement units), and NHTSA was working with the auto industry to accelerate that process. As of January, former NHTSA chief Rosekind was still waiting for an airbag in one of his personal vehicles to be replaced, according to an interview with the Associated Press.

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