White Collar and Securities: Investigations of Toyota Begin

Reports are beginning to surface that Toyota has received a grand jury subpoena from a federal grand jury considering possible criminal charges and a document request from the Securities and Exchange Commission. The investigations apparently revolve around safety issues, including sudden acceleration, leading to the company's recall of more than 8 million vehicles. Among the issues addressed in the recall is the sudden acceleration and problems with the braking systems. The company is also the subject of congressional investigations.

The Wall Street Journal is reporting that the grand jury subpoena was issued from the United States Attorney's Office in Manhattan. The securities fraud unit of that office is active in cases involving public companies. The paper is also reporting that the request for documents from the SEC was a voluntary request that came from the Commission's Los Angeles office

Toyota Motor Corporation is the world's largest automaker. It is a publicly traded company, and its stock is traded on the Tokyo, London, and New York stock exchanges.

It is likely that the United States Attorney and the SEC are both considering similar possible charges. The question under investigation is whether Toyota officials were aware of mechanical deficiencies in the company's products and failed to disclose these deficiencies to the investing public and in its periodic filings to the SEC. If 1) such deficiencies existed, 2) corporate personnel were aware of the deficiencies, and 3) the information about the deficiencies rises to the level of material information, the company had a duty to disclose the information. Under securities laws material information is that which a reasonable investor would need to make an informed decision of whether or not to execute a securities transaction. In short, if there were significant problems with sudden acceleration, brakes, and other systems about which Toyota management knew and withheld disclosure, Toyota and its knowledgeable officials could be legally liable both criminally and civilly.

The existence of the potential factual situation above could serve as the basis for criminal charges of wire fraud, mail fraud, and securities fraud among others. Also, the facts could support a civil Section 10(b), Rule 10b-5 Securities Exchange Act and rules charge by the SEC. It will be interesting to see if and how these investigations develop.

For more about the investigations please see The Wall Street Journal, "Subpoenas Hit Toyota on the Eve of Hearing," February 23, 2010, http://online.wsj.com/article/SB20001424052748704454304575081363213478420.html?mod=WSJ-hpp-LEFTWhatsNewsCollection.