A federal judge in Orlando, Fla., has refused to dismiss a securities fraud suit by investors against Smart Choice Automotive Group Inc., a Florida-based seller of used vehicles.
The investors offered enough evidence for the case to proceed on allegations that Smart Choice and two of its corporate officers at the time violated securities laws, U.S. District Judge John Antoon II ruled.
Crown Group Inc. acquired 70 percent of Smart Choice as of December 1999. Crown Group, of Irving, Texas, is not named as a defendant in the case.
Defense lawyer Keith Olin of Miami, who represents Smart Choice and Gary Smith, who had been president and CEO of Smart Choice and is now a vice president of Crown's Smart Choice subsidiary, said he couldn't discuss the case because the litigation is pending.
Miami lawyer Todd Boyd also said he could not discuss the case on behalf of his client, former CFO Joseph Mohr, who is no longer with the company.
The suit alleges that Smart Choice, Smith and Mohr defrauded investors by falsely reporting positive earnings to the Securities and Exchange Commission through 1998 when, in fact, the company had a net loss.
Not until an April 1999 SEC filing did Smart Choice disclose a $6.87 million net loss rather than the previously reported $4.6 million net profit, investors Brett Zuckerman and Ed Muktarian contend in the suit.
In rejecting the defense motion to dismiss the case, Antoon said, 'The sheer magnitude of the discrepancy suggests that the plaintiffs may be able to prove at trial that the defendants' actions were sufficiently reckless' to show they were aware of the purported wrongdoing.
The judge said there was evidence that Smith and Mohr had the opportunity and the motive to commit fraud. For example, he said the suit alleges that Smith was 'integrally involved in running Smart Choice and evaluating the financial condition of the company ... and knew or should have known that the initial 1998 financial report was inadequate.'
Antoon also cited allegations that Smith knew about falsified and forged documents, phantom down payments to qualify customers for financing and misrepresentations to customers who couldn't speak English well about the true cost of vehicles.
In addition, the investors asserted that Smith was motivated by plans to expand the company aggressively, a move that 'required funding generated through purchases of stock by investors.'
The judge also pointed to the claim that Mohr was motivated to inflate earnings reports 'because his compensation package had incentive provisions tied to the company's financial performance.'
The investors' lawyer, Abraham Rappaport of Boca Raton, Fla., said he has no estimate yet on the amount of damages investors will seek because of the complexity of class-action securities suits, adding, 'There were tens of thousands of trades (of Smart Choice stock) in the class period.'
Rappaport said pretrial discovery will begin soon but the case isn't expected to reach trial until early 2002.