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The Deferred Prosecution Deal the White House Doesn’t Want You To Know About

Morgen on June 9, 2009 at 11:12 am

Late in the day yesterday, the Supreme Court stepped in and at least temporarily halted the sale of Chrysler to Fiat. A handful of creditors, including the pension fund for the State of Indiana, have challenged the legality of the transaction on the basis that unsecured creditors (namely, the UAW) were given preferential treatment over secured creditors. Ironically, it was Justice Ginsberg who at the 11th hour ordered the sale to be put on hold. But it remains unclear her exact reason for doing so and whether the Supreme Court will actually take up this case for review.

Obama’s auto bailout “task force” has been aggressively pushing the Chrysler-Fiat deal through the bankruptcy process, claiming that any delay in finalizing the transaction could cause the deal to fall apart since Fiat has the right to back out if the deal is not closed by June 15. However, according to news reports today, a spokesman for Fiat has said that they “will never walk away” from the deal even if the June 15 deadline passes. 

This struck me as a little odd given the definitive nature of this statement, which seems to clearly contradict the sense of urgency that has been fostered by Chrysler and it’s benefactors in the Administration. Perhaps it can be explained by the fact that Fiat is receiving a 20% equity stake in a restructured Chrysler while contributing nothing (that’s right – $0). But I wondered whether there still might be more to this. Especially in light of a report in the Wall Street Journal over the weekend that claimed that the Obama Administration had forced the Fiat deal on Chrysler. Despite reservations on the part of Chrysler management regarding Fiat’s financial condition, and Fiat’s failure to disclose information that had been requested. According to the WSJ report, an unnamed Chrysler advisor even went so far as to express concern that the perception might ultimately be that they “were in bed with a shady partner”, meaning Fiat.

There is more truth to this statement than perhaps he knew, and it apparently applies not only to Fiat but to those in the Administration behind this deal as well. It turns out that back on December 22, right before Christmas, the U.S. Justice Department reached a settlement of sorts with Fiat and a group of affiliated companies. Fiat apparently had been under DOJ investigation for their participation in the UN “Oil for Food” scandal dating back to the early to mid 90′s (updated: and continuing through 2003). I called this a “settlement of sorts” because in actuality it is a deferred prosecution agreement, where the DOJ filed but deferred prosecution against Fiat on charges including wire fraud, falsification of books and records, and conspiracy.

In exchange for Fiat signing a “Statement of Facts” admitting to and accepting responsibility for these crimes, and remitting a penalty of $7 million to the U.S. Treasury, the DOJ agreed to defer any further prosecution for a period of 3 years. Importantly, during this 3 year period Fiat is required to “cooperate fully with the Department and any other authority or agency, domestic or foreign, designated by the Department” in allowing the U.S government full access to their books and other financial records to verify that no further corrupt or fraudulent activity has taken place. If, and only if, they are deemed to have been in full cooperation with no additional violations has the DOJ agreed to move to actually dismiss the underlying charges.

Gee, do you think this arrangement just might give the U.S Government a little bit of leverage in dealing with Fiat related to the Chrysler transaction? Could it be any more obvious that the DOJ was pressured to reach a settlement agreement with Fiat in order to clear the decks for the Fiat-Chrysler deal? A deal which was first announced in mid-January, just weeks after the Deferred Prosecution Agreement was finalized. Could it be any more obvious that the timing of this settlement, right before Christmas, was intended to draw as little attention as possible? (It was very lightly reported, primarily by the international press. This London Times article was one of the only examples I found in the mainstream news media).

Now I realize that December 2008 was in the waning few weeks of the Bush Administration. So if the inferences I’ve made are correct, this would mean that officials in the Bush Administration were complicit in working out the terms of this deal in order to clear the way for the Chrysler deal. However, given the extent to which the Bush White House was in coordination with the Obama transition team, I very much doubt that this was done without the knowledge of Obama’s economic advisers and likely Obama himself.

And it’s beside the point. The bottom line seems to be that the U.S Justice Department acceded to political pressure to reach an agreement with Fiat, which is an inappropriate administration of justice no matter who was complicit in the arrangement. And as far as I’m concerned, it calls into serious question the legitimacy of the entire Fiat-Chrysler deal itself. We have a U.S. Administration actively pushing for AND FINANCING a transaction between a U.S. auto maker and a foreign auto maker who is under a deferred prosecution arrangement for corruption and fraud. I am tempted to make a joke about the fact that the resulting company would be controlled by a 75% ownership stake between Fiat and the UAW (talk about “shady partners”)…but there is really nothing funny about this given the amount of tax payer dollars that have been spent bailing out Chrysler. Someone has some explaining to do.

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