Donna and Henry Burke of Tomkins Cove, N.Y., say they love their new 2000 Mitsubishi Eclipse, which they bought in April. But they were jolted to learn later that they were not the first owners - at least on paper.
According to Mitsubishi sales records obtained by Automotive News, the Eclipse had been sold more than two months earlier, on Jan. 30. The buyer: 'Supa Mann,' a resident of 'Lois Lane,' phone number unknown.
Similarly, Wayne Houghton, a 45-year-old air conditioning repairman from Bluff City, Tenn., bought a new Eclipse Spyder on June 1. But his Spyder had been reported sold on March 30 to 'Dieter Davenport' - who ostensibly lives at, and has the same phone number as, the dealership that sold him the car.
What's going on here?
The Burkes and Houghton are victims of a practice Mitsubishi insiders call 'burning RDRs' - inflating monthly sales figures by filing false retail delivery records, or RDRs. The usual purpose: to meet sales targets or qualify for bonuses, prizes or incentives that can total thousands of dollars.
The practice, in addition to polluting the industry's sales numbers, also can shortchange consumers on warranty coverage without their knowledge.
Present and past Mitsubishi employees and some dealers say that at least three of the company's five U.S. sales regions inflated sales from mid-1999 until this May or June, and that thousands of vehicles were 'burned.' Indeed, a comparison of Mitsubishi's reported sales to Polk Co. registration data suggests that the pool of fake sales could have totaled as many as 21,000 vehicles at the beginning of the year.
It's not known how such widespread sales padding could have been coordinated. But senior executives of Mitsubishi Motor Sales of America Inc., which aggressively markets itself as 'the fastest growing Japanese automaker in America,' emphatically deny that the practice was significant.
The company's own investigation earlier this year found that only a few rogue dealers and company field employees were involved, they say.
`A CLEAN OPERATION'
'We run a clean operation, and we don't accept any types of behavior that could be construed as hurting a customer,' Pierre Gagnon, COO of Mitsubishi Motor Sales of America, said in an interview late last month.
'We did an investigation, and all our information shows that we are clean - cleaner than most manufacturers. Your information is incorrect ... and appears to be corrupted.'
Gagnon and other senior executives say Mitsubishi's investigation, which was launched in May after a district manager in Atlanta resigned to protest sales falsification, found that burned RDRs accounted for 'less than 1 percent of all sales ... about 100 vehicles.' All have been 'backed out,' or corrected, they say.
But that number, according to 10 current and former Mitsubishi managers and dealers interviewed for this article, is seriously understated.
'We have done thousands (of fake sales) since October just in our region,' says a current employee of Mitsubishi's Southeast region, which has headquarters in Orlando, Fla.
'In some months our regional numbers were inflated by 20 percent,' he said. 'I know the Northeast was keeping up with us,' he said, adding that he knew other regions were inflating sales, too.
'So there's a lot of burned cars out there.'
According to these insiders, the fake sales-counting began winding down only in June.
HOW IT WORKS
The practice of burning an RDR - which can be done without a dealer's knowledge - is similar to kiting a check; it involves taking credit today for a sale that may be made in the future. The practice, which law enforcement officials say may violate fraud statutes, works like this:
Senior dealership employees or Mitsubishi regional sales managers, who have computer listings of the vehicles on dealers' lots, report a vehicle sold by filling out an on-screen RDR and entering it into the company's central database.
Patently fake names or other codes typically are used to help regional and district staff more easily spot burned cars in the central database.
When the vehicle is actually sold, the information in the database is amended to show the real owner's name and address. But the original RDR entry - 'Supa Mann,' in the Burkes' case - cannot be expunged from the database, hence the term 'burning' the RDR into the computer.
POTENTIAL WARRANTY WOES
Although ownership is never in question because the vehicles are not registered to the bogus owners, the practice is not meaningless for consumers. Buyers can lose a portion of their warranty coverage as a result of burning.
Because a vehicle's warranty clock starts ticking the first time an RDR is entered into the computer as a sale - not when it is legitimately sold later - any time between the two events is lost to the buyer unless restored by Mitsubishi.
In the Burkes' case, their Eclipse was first reported sold on Jan. 30 - more than two months before they bought the car. As a result, unless they are made whole by Mitsubishi, the warranty coverage on their Eclipse will end Jan. 30, 2003, nearly 21/2 months short of the 36-month guarantee.
Similarly, Houghton's warranty coverage will expire March 30, 2003, two months shy of his expected term, unless he also is made whole by the company.
Neither the Burkes, Houghton nor any of the six bona fide buyers of burned Mitsubishi vehicles contacted by Automotive News knew their vehicles had been previously reported as sold, or that they faced reduced warranty coverage as a consequence.
Burke, meanwhile, wants to know who to turn to.
'So who do I talk to when my warranty runs out,' he asks. 'I mean, this guy Supa Mann doesn't exist.'
It is a violation of federal and various state laws for a manufacturer or dealer to end a vehicle's warranty period before its advertised term.
A computer scan of 1999 and 2000 Mitsubishi sales documents suggests the company could face hundreds, if not thousands, of disputes over the next two to three years when vehicle owners trying to have repairs done discover that they are out of warranty ahead of their sales anniversary.
How big that pool of vehicles will be in two or three years is impossible to determine because some burned RDRs likely will have been corrected by the factory. And still others won't become an issue because the owners will not need warranty work during the period.
But a former Mitsubishi manager says he has this advice for car buyers:
'I would advise anyone who has bought a Mitsubishi new in the past 18 months or so to go to the dealer and see if their purchase date and the RDR date are one and the same,' he says.
'If they don't match to the day, there's a problem, and the buyer needs to insist that it be fixed.'
BLOWING THE WHISTLE
The counting of bogus sales, which most sources say began in earnest in the summer of 1999, came to a head in late April, when a district sales manager in the Southeast region decided he had had enough.
Bob Muffler says he resigned as Mitsubishi's Atlanta-district sales manager on May 1 rather than continue to falsify sales. Muffler says he filed about 175 bogus retail delivery records into the Mitsubishi Motor Sales of America central computer between January and April under orders from his superiors in the region.
That was small potatoes compared to what had been going on in his region and elsewhere in the network, he says.
Muffler, 41, an eight-year Mitsubishi veteran who had been promoted to district sales manager last October, was in charge of 13 dealerships in Georgia and South Carolina. His sales quota was 11 percent of the region's total volume.
'(The district sales managers) were given a list of cars to burn,' Muffler said. 'If we thought a dealer was going to have a problem with it, we were told to just do it and that (we) would talk to them later if they had problems.'
`READY, AIM, FIRE!'
On the night of Jan. 3 alone, Muffler says, the 13 district managers of Mitsubishi's Southeast region burned more than 500 vehicles in a frenetic, online contest with the Northeast region for 1999 sales bragging rights.
'We were loading them onto our laptops and firing them (into the main Mitsubishi Motor Sales of America computer) 14 and 15 at a time,' Muffler said in an August interview. 'Every time (the Northeast) filed one, we'd go `Ready, Aim, Fire!' and bury them with 15.'
Muffler's account of the contest, which the Southeast won, has been corroborated by two other participants. The Northeast and Southeast regions combined account for 60 percent of Mitsubishi's U.S. sales.
As the Southeast region's district managers gathered on the afternoon of May 1 at headquarters in Orlando to begin tallying and closing out April sales, Muffler says he was asked by Regional Director Joe Delello - Mitsubishi's senior sales executive in the Southeast - to burn some sales to help the region hit its target for the month.
The 44-year-old Delello, widely viewed by his subordinates as a 'good soldier' who was being squeezed to produce results, has since been reassigned to a newly created fleet sales job, an apparent demotion.
After calling Delello's office more than a dozen times over several weeks, Automotive News last week finally reached Delello, who declined to comment.
Gagnon declined to discuss the reasons for Delello's reassignment, saying he could not talk about personnel issues.
'Joe told me I needed to burn some cars to make my number for April,' Muffler recalls, relating an incident corroborated by two district managers working that night.
'I said no, I couldn't do this anymore. He said he wouldn't make me do it, but he couldn't do anything about it; it had to be done somehow. So I decided then and there to resign. I put in my letter the next morning.'
Muffler's letter of resignation, citing widespread falsification of sales in the Southeast region and 'the possible legal ramifications that falsifying these records may have created,' slammed into Mitsubishi's Cypress, Calif., headquarters with the impact of a howitzer round.
'The Muffler letter scared the living hell out of them,' says a current Mitsubishi manager speaking on condition of anonymity. 'Here was someone who could blow the lid off something that had been going on for a long time on a big scale.'
Mitsubishi has denied the substance of Muffler's charges, but Gagnon also refused to discuss his resignation on the grounds that it is 'an H.R. (personnel) issue.'
Nevertheless, the company moved quickly to try to put a seal around the Muffler letter. A week after his resignation, a team of legal and human resource executives flew to Atlanta to plumb the depth of the apparent problem.
In a second-floor suite at the Residence Inn next to Hartsfield Atlanta International Airport, Jackie DeMaria, Mitsubishi's vice president of human resources; Judy Kanoskie, vice president of legal affairs; and personnel boss Linda Stewart grilled the region's staffers one by one on Tuesday, May 9, and Wednesday, May 10.
Who? How many? When? Why? The questions, asked in rapid-fire order against the backdrop of an easel emblazoned with the words 'BURNING RDRs,' suggested 'that they wanted to try and unwind this thing,' one district sales manager recalls.
But he concluded that it was all about 'containment,' trying to make it a small local problem, he says.
'It wasn't pleasant. I walk in the room and the first question I get is, `When was the first time you burned a car?' ' he says. 'It was a real us-against-them thing.'
After ordering the regional staff not to talk to anyone about burning RDRs - an order that since has been extended to the other four regions and throughout the dealer network - the executives flew back to California and briefed Gagnon and other senior executives.
After that, says a Mitsubishi insider close to senior management, the findings were filed away. 'The lid was put on. Everyone just wanted (the issue) to go away,' he says.
In late May, Automotive News began an investigation into Muffler's allegations. On July 11, Mitsubishi issued a new policy barring district managers from filing RDRs.
Effective immediately, the directive says, only dealer principals, their senior dealership management and Mitsubishi Motor Sales of America regional directors will be allowed to enter RDRs into the computer.
The order signed by Senior Vice President Greg O'Neill acknowledges 'some' instances of false sales reporting, but asserts that the number was 'well under 1 percent of total sales year to date.'
Still, 'The filing of even one false RDR is unacceptable,' O'Neill reminds regional staffers in the memo.
Despite the apparent scale on which the RDR burning operated, many dealers say they have never seen evidence of sales falsification.
'Sometimes you have to roll back (a sale) if there's a problem with delivery or if the finance contract bounces, but as far as I know there's no false reporting of RDRs,' said Michael Cohen, Mitsubishi advisory board member and owner of four Mitsubishi stores in the Northeast.
Cohen later wrote a letter to Gagnon complaining about being questioned by Automotive News, and praising Mitsubishi management for running 'the cleanest, most honorable and most honest business that I have ever been associated with.'
But the former general sales manager of another Mitsubishi dealership in the Northeast region said the objective until he left earlier this year was to 'hit your number' for the month. It was his understanding that the 'How' didn't matter, he says.
'Sometimes the district called me and said, `You're this far away from hitting your number. Just make it happen,' ' he said in a telephone interview.
'Other times I had vehicles taken off my inventory list without my knowledge. When I noticed, I'd call the region and they'd tell me they had taken it. But the vehicle was still sitting on my lot.'
Other dealers say they were not aware their inventory had been sold out from under them until they registered a genuine sale. Then they discovered the unit already was listed as sold.
'I am dumbfounded,' said a North Carolina dealer when he was shown evidence that Mitsubishi field staff had burned several RDRs in his inventory. 'Three of my vehicles were reported sold at the regional level without my knowledge. This is so unethical.'
A LOT AT STAKE
The financial reward for such manipulation of sales records could be significant. At a typical incentive of $1,000 or more per car - paid when an RDR is filed - the practice could yield a nice float for dealers to work with.
'In March and April, we had a program where some dealer principals were getting $10,000 for hitting certain targets, and their general managers, $5,000,' Muffler recalls.
Even so, Muffler says, some dealers reacted angrily to the discovery that vehicles in their inventory had been burned, and forced Mitsubishi to back out the fake sale - that is, return the unit to their inventory. That would cancel the fake sale, along with any incentive payment linked to it.
GOING IN THE HOLE
Just like check kiting, a fundamental problem with faking sales is the need to keep escalating the count just to stay ahead. In essence, burning an RDR is the same as pulling a sale forward; that is, the vehicle will sell sometime in the future, but its sale is recorded now.
If 10 false sales had been reported, for example, a dealership would have to sell 10 additional cars in the future just to get back to zero.
'If, as a dealer I sell 50 cars, but 20 were burned earlier, I have to come up with 20 just to stay even at 50,' explains a former district manager. 'Otherwise I would only show sales of 30 cars.'
Because of the snowballing effect, current and former district managers interviewed for this article admit they quickly lost control of the process, taking so many cars from dealers' inventories that the pool of fake RDRs became unmanageable.
'You'd be sitting there at the month-end close trying to make your numbers, and the phone would ring for the 9 p.m. conference call, and it's California saying, `You need another 300.' And we know there's no one at the dealerships at that hour,' the former district manager recalls.
He was speaking in general about a typical month-end close.
'So you have Delello going around the table asking people, `How many can you take?' and ... by 10: 30 or 11, everyone's tired and silly and you may still have 30 or 35 cars to go. So you don't care how you get rid of them. You just want to get out of there.'
As the practice grew, and keeping track of the bogus records became more difficult, Muffler and other sources said, district staffers began resorting to codes - such as the middle initial 'X' in the phony buyer's name, or obviously fictitious names such as Patty O. Furniture, Abraham Lincoln and Betty Boop.
Another device was to fill in data fields, such as the salesman's name and buyer's phone number, with the code 'House Sale,' the number 9 or the letter Z. That was done because the mountain of sales to be burned was so great that it would take too long to come up with new information for each faked sale.
'At some point, someone got serious and said we had to keep track of this stuff,' Muffler recalls. 'You had to know what was real and what was fake, in case the dealer got pissed and wanted the car backed out.'
HARD TO QUANTIFY
But because burned vehicles ultimately get sold and others are added, it is virtually impossible to measure precisely how many sales may have been faked at any one time. But Polk registration data offer one useful yardstick.
Polk data were used to show that Cadillac overstated its sales by about 4,700 units in December, 1998, in an attempt to maintain its lead over Lincoln that year.
In Mitsubishi's case, the difference between reported 1999 sales and Polk registrations - updated as of June 2000, to reflect flawed or tardy data - was 8.5 percent: 261,254 vs. 239,392. That suggests Mitsubishi may have entered the year 2000 with as many as 21,000 fake sales on its books.
For the first six months of 2000, the gap is even larger: 14.1 percent.
Factors such as late-reported fleet deals or sales that fall through can explain a portion of the variance between reported sales and registrations. But no other automaker showed such a wide gap.
In a presentation to Automotive News in early August, Frances Oda, Mitsubishi's vice president of sales, contended that the 8.5 percent discrepancy is within industry norms 'for a fast-growing company.' Mitsubishi reported that its sales surged 37.1 percent last year to a record 261,254 vehicles.
Oda, pointing out that Hyundai, Kia and Daewoo also show large gaps between reported sales and Polk registration data, said both Polk and Experian Co., another firm that tracks registrations, had affirmed that 'registrations will never catch up to sales in a fast-growing company.'
But that assessment was challenged by a senior Polk executive on the operations side of the company.
'Yes, there is a reporting lag for registrations, but once the numbers are finalized, everyone (in the industry) should be in the same range of around 2.5 percent, or less,' sales to registration difference, said the executive, who did not want to be identified.
'Anything greater than that would suggest a problem with the sales numbers.'
Indeed, few other fast growing automakers show such a large variance, either for 1999 or year-to-date 2000.
Jeep, for example, which had 20.7 percent sales growth in 1999, showed only a 2.2 percent difference between reported sales and Polk registrations. And fast-track Volkswagen/Audi, up 44 percent, showed only a 3.8 percent difference.
For the year to date through May, Nissan/Infiniti sales were up 23.5 percent, but registrations trailed by only 1.3 percent. Toyota/Lexus, up 16.4 percent, showed a 4.7 percent variance, while Volkswagen/Audi, up 26.2 percent, showed a 5.5 percent gap.
In a subsequent meeting between Automotive News and Mitsubishi executives on Aug. 30, Oda said Polk had since narrowed Mitsubishi's sales-to-registration variance 'to only 2 percent' by matching 342,010 of 349,798 reported sales for the period January 1999-April 2000 to actual registrations.
The comparison was made at the request of Mitsubishi, which supplied Polk with a tape of 356,132 vehicle identification numbers to match against actual registrations. After dropping 6,334 vehicle identification numbers because of a state reporting problem, Polk compared the remaining 349,798 to arrive at the reported 2 percent variance.
IF, NOT WHEN
But the problem with Mitsubishi's methodology, a former Mitsubishi manager points out, is that they are not asking Polk to confirm when the sales occurred, only if.
'They are just asking Polk to verify that those VINs match what is in the Polk database. And in asking Polk to verify the VINs of claimed sales through April,' he says, burned units could have been backed out of the system.
That's because Polk used its data through June to compare Mitsubishi's sales through April, giving two extra months for any burned sales to back out of the database, he explained.
Polk data also showed that the names and/or addresses for 14 percent - or 47,253 - of the registered owners did not match the names and addresses of Mitsubishi's claimed owners, a mismatch that indicates the likelihood of some burned RDRs.
In an Aug. 29 letter to Oda, though, Polk says:
'Please note that Polk's mismatch processing is presented not as an absolute validation for the accuracy of each RDR, but ... as a means to assist our clients in determining patterns of possible incorrect sales data,' the letter, from Jim Jennings, Polk's West Coast director of customer development, says.
'A `mismatch' indicates that the dealer - for any number of reasons - may have reported customer information different from that which appears on the registration record. Polk does not make a judgment of the veracity of the sales reporting.'
Meanwhile, Muffler, who has gone into business for himself in Orlando, now shakes his head with something like amusement at the house of cards he says Mitsubishi built.
'I used to go to a dealership for a lot count and feel embarrassed,' he recalled in an August interview.
'I mean, the dealer knows we're faking sales, and he knows that we know he knows. And yet here we are in our role as the Mitsubishi police to do an audit. It was such a joke.'