Two Fiat Chrysler dealerships that are part of a suburban Chicago auto group filed a civil racketeering suit against FCA, alleging the company offered dealers large amounts of money to report unsold vehicles as sold.
The federal suit, filed Tuesday in Chicago by two dealerships in the Napleton Automotive Group, alleges, among other claims, that FCA conspired with certain dealers to inflate the automaker’s monthly U.S. sales reports. The company has posted 69 consecutive monthly year-over-year gains after recovering from its U.S.-steered bankruptcy.
The suit, filed by Kevin Hyde, an assistant general counsel for the dealerships, alleges that dealers were paid to report the false sales on the last day of the sales month and then “back out” or unwind the sales the following business day “before the factory warranty on the vehicles could be processed and start to run.”
FCA responded to the lawsuit in a statement this morning.
"While the lawsuit has not yet been served on FCA US, the company believes that the claim is without merit and was filed by internal counsel to the dealer group as FCA US has concurrently been discussing with the dealer group the need to meet its obligations under some of its dealer agreements.
"The company is confident in the integrity of its business processes and dealer arrangements and intends to defend this action vigorously."
The suit alleges that FCA officials were aware of the false reporting of sales and rewarded local managers for hitting sales targets -- even though the company knew the sales goals had only been met via false sales reports.
It says FCA directly benefited from the practice “as it results in the inflation of the number of year-over-year sales which, in turn, create the appearance that FCA’s performance is better than, in reality, it actually is.”
FCA officials, including CEO Sergio Marchionne, touted the monthly sales streak at the Detroit auto show this week. It's the longest current U.S. streak of any automaker. Volkswagen's Audi holds the longest streak of any brand: 74 months.
Fiat Chrysler shares at one point fell by nearly 10 percent in Milan today following the Automotive News report of the suit, several news outlets said. The stock finished Milan trading down 8 percent to $6.84. FCA shares later in the day dropped 4 percent on the New York Stock Exchange to close at $7.53 a share.
$20K for 40
The suit cites an example of the alleged practice that involved Napleton’s dealer principal, Edward Napleton, and his dealership, Napleton Arlington Heights Chrysler Jeep Dodge Ram.
It says that one of the automaker’s business center managers at one point offered Edward Napleton $20,000 “to falsely report the sales of 40 new vehicles” at the end of an unspecified month.
The suit goes on to allege that the offer was made to Edward Napleton by the business center manager after one of the dealer’s subordinates had earlier agreed -- and falsely reported -- the sale of 16 new vehicles without Edward Napleton’s knowledge. The 40-vehicle offer was rejected by Napleton, the suit says, but led the dealer principal to discover the earlier 16-vehicle inflated sales report.
The suit says the $20,000 payment from FCA was to be disguised “as a co-op advertising credit to the dealer’s account” so as not to trigger a sales audit and expose the practice.
The suit further alleges that another Chrysler Jeep Dodge Ram dealer that directly competes with Napleton Chrysler Jeep Dodge Ram conspired with FCA and reported 85 false new vehicle delivery reports. As a result, the unnamed second dealership received “tens of thousands of dollars as an illicit reward for their complicity in the scheme.”
Edward Napleton could not be reached for comment on the suit after normal business hours on Wednesday. According to the company's website, the Napleton family operates more than 50 dealerships in Illinois, Florida, Pennsylvania and Missouri representing 32 franchises.
The federal suit also alleges that FCA creates a de facto two-tiered pricing system for dealers through its aggressive use of stair steps in its so-called Volume Growth Program.
Under FCA’s Volume Growth Program, dealers who reach a monthly volume target receive a payment on each new vehicle sold that month. Until very recently, dealers who failed to reach 100 percent of their monthly sales goal received nothing. However, the program was altered beginning this month to allow dealers to receive a reduced payment for hitting at least 90 percent of their monthly goal.
The suit says FCA was “strong-arming its dealers to achieve sales numbers” through its VGP program, and increasing the sales goal even higher in the following month if a dealership failed to achieve its VGP target the month before.
The suit also alleges that FCA rewarded dealers who had falsely reported sales of hot-selling vehicles by allocating more of them to sell in subsequent months -- despite the fact that the vehicles reported as sold were not actually sold.
Napleton’s suit lists the group’s Chrysler Jeep Dodge Ram stores in Arlington Heights, Ill., and its Northlake Chrysler Jeep Dodge Ram store in Lake Park, Fla., as plaintiffs. It also alleges that FCA’s “pattern of conduct towards its dealers has been one of coercion and threats of termination having nothing to do with the actual performance of its dealers.”
The suit alleges that FCA manipulates an internal metric it calls MSR, or minimum sales responsibility, to threaten dealers who do not achieve sales goals. The suit says FCA “has not used MSR so much as a tool to evaluate dealers, but rather to cover up its practice of multi-tier pricing.”
It alleges that FCA also uses its MSR metric “to directly control and otherwise intimidate dealers to bow [to] its will under the constant threat of the termination of their dealerships for contrived defaults in FCA’s Dealer Agreement.”
Napleton Automotive Group, of Westmont, Ill., ranks No. 32 on Automotive News’ 2014 list of the 150 top U.S. dealership groups, with new retail sales of 21,550 vehicles.