Toyota's Second Shoe Drops: Shareholders Sue


In the wake of one of the most devastating recalls in auto history, Toyota Motor (TM) now has another problem on its hands: Angry shareholders.

Toyota faces several pending class actions that allege it publicly dismissed the seriousness of several design flaws while knowing that the problems might have caused a dramatic sell-off of Toyota shares.

Bernard M. Gross, one of the law firms that filed a shareholder suit against Toyota, claims the company continually blamed acceleration problems on floor mats, leading shareholders and car owners to believe that the design problems weren't as fundamental or serious as they actually turned out to be.

As a result of Toyota's public brush-off of the issue, its shares were artificially inflated, the lawsuit claims. Toyota's stock peaked at $91.78 on Jan. 10, before steadily sliding after the company ultimately did acknowledge that the acceleration problem existed even without floor mats. American Depositary Receipts (ADRs) of Toyota were most recently trading at $79.56.

"Unremarkable" Number of Complaints

Securities lawyers most likely smelled blood after reading a Los Angeles Times report that suggested unintended acceleration in Toyota vehicles has resulted in some 800 accidents over the last decade. Still, the U.S. National Highway Traffic Safety Administration defended its less-than-rigorous investigation into Toyota's ongoing problems, arguing that the rate of complaints against Toyota was "unremarkable" compared to the number of complaints filed against other automakers. Similarly, an analysis reportedly found that Toyota ranked 17th in the number of complaints filed per vehicles sold from 2001 through 2010.

But saying its comparable to or better than other carmakers won't make Toyota's legal problems go away. And it's not just shareholders that Toyota has to worry about. Car owners are a separate and likely more expensive headache. By some estimates, the cost of the pending class actions filed on behalf of Toyota owners could total more than $3 billion. Some claims have even included racketeering charges, which might make the lawsuits even more expensive. Under RICO (Racketeer Influenced and Corrupt Organization Act), a company could pay triple damages as a result of fraudulent activities.

In one suit filed Friday, law firm Hagens Berman argues that the recall was so badly "botched" that the only real solution is for car owners to return their vehicles to Toyota for a full refund.

"From the moment Toyota learned about the safety flaws, they lurched from misstep to misstep, first claiming problems didn't exist and then blaming everything from floor mats to consumers to subcontractors, all the while leaving consumers confused and concerned," said Steve Berman, the attorney who filed the suit.

Regardless of how Toyota resolves its legal woes, one thing is clear: It's not going to be cheap.

Originally published