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GM Sues Fiat Chrysler, Alleging Corruption Undermined Its UAW Deals

GM filed suit in federal court in Michigan on Wednesday seeking to recoup unspecified damages from its rival, known as FCA.

GM Sues Fiat Chrysler, Alleging Corruption Undermined Its UAW Deals
Mary Barra and Sergio Marchionne during a news conference after a meeting with U.S. President Donald Trump on Jan. 24, 2017. (Photographer: Andrew Harrer/Bloomberg)

(Bloomberg) -- General Motors Co. surprised Fiat Chrysler Automobiles NV with a racketeering lawsuit that for the first time implicates late Chief Executive Officer Sergio Marchionne in a years-long corruption scheme that already has landed car executives and labor leaders in jail.

The suit filed in federal court alleges Fiat Chrysler inflicted billions of dollars in damages by bribing United Auto Workers’ brass for competitive advantages that the union denied to GM. The illicit payments benefited Fiat Chrysler starting in 2009, when the two companies were emerging from government-backed bankruptcies, through 2015, when Marchionne conspired with the UAW to attempt a takeover, according to the suit.

Fiat Chrysler denied the allegations and said it assumed GM was trying to undermine active negotiations to clinch two deals the Italian-American company is eager to get done: a merger with France’s PSA Group and new contract with the UAW. Whether it’s correct about GM’s intent or not, Fiat Chrysler’s response is a tacit acknowledgment that the lawsuit could pose a threat to both sets of talks.

Fiat Chrysler fell as much as 5% in Milan on Thursday, the stock’s biggest intraday drop in almost four months. While GM isn’t suing the UAW, it’s risking relations with the union by airing more allegations of wrongdoing on top of what federal prosecutors have already made public. GM dipped 3% in New York on Wednesday.

GM Sues Fiat Chrysler, Alleging Corruption Undermined Its UAW Deals

The suit is remarkable both in terms of precedence and irony. Big automakers are accustomed to dealing with major litigation brought by regulators and consumers, but not by one another -- especially not with so much as a courtesy call beforehand.

And if arguments both sides are making against each other are true -- that Marchionne was using the UAW to bully GM’s Mary Barra, and that she’s now trying to undercut Fiat Chrysler’s combination with PSA -- the chess moves will go down as among the most dramatic by Detroit executives in decades.

GM alleges Marchionne, who died last year, and three Fiat Chrysler executives who have pleaded guilty and been sentenced to prison, corrupted the collective bargaining process between the UAW and Detroit’s automakers, including when contracts were negotiated in 2011 and 2015. That resulted in unfairly high labor costs for GM, Craig Glidden, the automaker’s general counsel, told reporters during a briefing Wednesday.

“The multiyear bribery scheme FCA led undermined the integrity of the collective bargaining process and caused GM substantial damages,” Glidden said, referring to Fiat Chrysler Automobiles. The attempted merger with PSA has no bearing on GM’s complaint, he said.

Fiat Chrysler said it’s “astonished” by the suit. “We intend to vigorously defend against this meritless lawsuit and pursue all legal remedies in response to it,” the company said in a statement.

Slow Down a Deal?

Analysts already have questioned the terms of Fiat Chrysler’s planned deal with Peugeot owner PSA, with Deutsche Bank’s Gaetan Toulemonde writing earlier this week that the French carmaker’s shareholders were “taking all the risks.” Earlier this month, RBC Capital Markets said PSA is overpaying, and Citigroup said the proposal is heavily skewed in Fiat Chrysler’s favor.

“That merger is not as easy as a lot of people think, in any case,” Erik Gordon, a professor at the University of Michigan’s Ross School of Business, said by phone. GM’s lawsuit might slow down the deal, he said, since “PSA will have to conduct some pretty deep investigation before they go forward.”

GM refers to former UAW President Dennis Williams as Marchionne’s “wingman” for his attempt to take over GM, and that the two knew each other since the 2000s, when they negotiated contracts at a Fiat-affiliated truck and tractor company. The code name for Fiat Chrysler’s efforts to combine with GM was “Operation Cylinder.”

GM Sues Fiat Chrysler, Alleging Corruption Undermined Its UAW Deals

The competitive advantages GM says Fiat Chrysler secured from the UAW include a higher portion of workers paid lower wages, a streamlined grievance process and looser limits on use of temporary employees, according to GM. As of 2015, 42% of Fiat Chrysler’s union membership were earning second-tier pay, compared with about 20% for GM.

In a statement, the UAW denied that past contracts were tainted, saying there were “multiple layers of checks and balances” to ensure their integrity. Hours after responding to GM’s suit, the union announced its executive board brought charges to remove Gary Jones, who succeeded Williams as president last year. He resigned Wednesday, according to his lawyer.

Surprise Target

Williams made the surprise choice in 2015 to target Fiat Chrysler as the first company the UAW would negotiate a new contract with, despite it being the smallest and least-profitable of the Detroit automakers. The union traditionally seeks to deal first with the strongest automaker to set a pattern for the others to follow.

GM alleges that Fiat Chrysler and the UAW ended up reaching a deal designed in part to force a merger Barra had publicly resisted by raising expenses for her company.

In a speech announcing Fiat Chrysler’s 2015 agreement, Marchionne said that the costs of the UAW contract “pale in comparison given the magnitude of the potential synergies and benefits” he was pursuing through consolidation, according to the suit. GM claims he was referring to his proposed merger with GM.

Fiat Chrysler CEO Mike Manley sent an email to employees late Wednesday calling GM’s suit a “collage of salacious public allegations.”

“I will end by thanking you again for the work you have done and are continuing to do to create an amazing company,” he said. “Let’s keep the performance up as it has clearly got some of our competitors worried.”

The case is General Motors LLC v FCA US LLC, 19-cv-13429, U.S. District Court, Eastern District of Michigan.

--With assistance from Chris Dolmetsch, Daniele Lepido, Chester Dawson, Melinda Grenier and David Welch.

To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editors responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, Kevin Miller

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