CFO criminal charges show conspiracy at Reagor Dykes

In March 2018, an unnamed employee of the now-bankrupt Reagor Dykes Auto Group asked former CFO Shane Smith in an email, "Are we fake flooring again on Monday?" Smith, according to the FBI, replied that they would at least prepare for the fake flooring: "Just get them ready and we'll see how we do each day."

The exchange is a snapshot in a fraud and check- kiting scheme that federal prosecutors allege occurred at Reagor Dykes, a 21-store Texas group that imploded last summer after Ford Motor Credit Co., and then other lenders, sued, alleging rampant floorplan fraud.

The allegations have resulted in a fraud charge and possible prison sentence for Smith. They mark a striking turn in the Reagor Dykes collapse as criminal charges are rare in lender fraud cases involving dealerships.

Smith last week pleaded guilty to conspiracy to commit wire fraud and posted $20,000 bond. He will be sentenced Oct. 1 in U.S. District Court for the Northern District of Texas and faces up to 20 years in prison and a fine of up to $250,000.

It's unclear whether others could be charged, but court records note that Smith had several "co-conspirators." He has agreed to cooperate with authorities as part of a plea agreement. Smith's lawyer declined to comment.

Several Reagor Dykes dealerships filed for Chapter 11 bankruptcy protection Aug. 1, a day after Ford Credit sued the group and principals Bart Reagor and Rick Dykes after a surprise audit in June 2018. More stores later joined the bankruptcy proceeding. A court document signed by federal prosecutors and Smith detailing why Smith was charged said the FBI office in Amarillo, Texas, was notified about potential wire fraud around Feb. 1, 2018.

The document said Smith and his co-conspirators provided false information to Ford Credit, received additional financing from the lender and delayed payments to Ford Credit. Reagor Dykes accounting staff referred to components of the floorplan fraud as "re-flooring," "fake-flooring" and "dummy flooring," the document said.

The government puts the loss for floorplan fraud at about $27 million. That total includes loans of $13.8 million for 409 vehicles not in inventory, $11.6 million for 352 vehicles sold by Reagor Dykes and $1.5 million for 37 vehicles that previously had been floored and sold.

The prosecutor's document notes Ford Credit's investigation, which alleged Reagor Dykes sold at least 147 of 150 vehicles examined without repaying loans, known as selling out of trust. In total, Ford Credit has said Reagor Dykes sold more than 1,100 vehicles without repaying $41 million to fund their acquisition. The lender has said it is owed more than $112 million.

Prosecutors allege Smith and co-conspirators also kited checks, which involves checks cross-deposited between two or more accounts to artificially inflate account balances. Nine Reagor Dykes entities were involved, using 19 accounts at several banks, the court document signed by Smith said. The loss to banks holding those 19 accounts totaled $23.1 million.

In the court document, the FBI said it interviewed several witnesses who said Reagor Dykes was "under-capitalized due to its aggressive growth and acquisitions of new dealerships, above-market employee compensation, and unnecessary overhead."

The group ranked No. 131 on Automotive News' 2017 list of the top 150 dealership groups based in the U.S.

Reagor Dykes had seven business days to repay Ford Credit after a vehicle sale but "Smith and the [Reagor Dykes] accounting staff routinely and intentionally failed to make those payoffs," prosecutors said in the court document in Smith's case.

Reagor Dykes staff allegedly pulled VINs from previous sales and submitted them to Ford Credit as though the dealerships had just bought the vehicles, even though they hadn't, court records said. Federal agents examined six vehicles floorplanned with Ford Credit for Reagor Dykes Amarillo last July and found the same six vehicles had been bought and sold by the Amarillo dealership months earlier; registered owners bought the vehicles from the dealership between February 2017 and April 2018.

Although Ford Credit conducted what were supposed to be surprise audits, Reagor Dykes personnel learned audit dates in advance and warned controllers or office managers in the dealerships, the court document said. The controllers and office managers then created false paperwork, sometimes called "dummy shucks," on vehicles sold out of trust, making it look as though they had recently sold, the document alleges.

Reagor Dykes staff also fraudulently acquired new floorplan loans from Ford Credit to pay off large amounts to Ford Credit after an audit, the document said. They then focused on paying off the "dummy flooring" with revenue from regular dealership operations. But there wasn't enough to cover floorplan advances in the required seven-day window.

"Consequently, those vehicles were out of trust, and the whole cycle of overt acts started all over again," the document said.

A list of vehicles floored with one lender was sometimes sent to another store within the group to be floored with Ford Credit, so the same vehicle was pledged as collateral to both lenders, the document said. That's known as double-flooring, and Reagor Dykes staff allegedly referred to it as such.

Dykes agreed in April to a $58.7 million consent judgment in Ford Credit's civil suit. Dykes' lawyer told Automotive News then that details were confidential, but if Dykes follows terms of the agreement, the $58.7 million would be returned. Ford Credit confirmed a confidential agreement but declined to say whether Dykes could recover the money.

Ford Credit is seeking a $45.3 million judgment from Bart Reagor, but Reagor has objected to that amount. A hearing to settle the dispute is set for July 11.

Local media reports have said that with the tax, titling and licensing mess left in the wake of the group's collapse resolved, a plan has been drafted to conclude the bankruptcy. Reagor Dykes lawyer C. Ashley Ellis reportedly told the Texas bankruptcy court that four entities could sponsor reorganization efforts but require Rick Dykes to be an investor in the emerging entity. Ellis noted the group could liquidate assets or restructure to allow the group to continue business in a nontraditional manner, setting aside 10 percent of equity in a trust for lenders, KCBD-TV in Lubbock, Texas, reported. Ellis couldn't be reached for comment late last week.

Mark Johnson, president of dealership advisory firm MD Johnson Inc., has seen plenty of cases in which dealers get into severe financial straits. But he called the criminal charge against Smith "unusual."

"Typically the lender just wants their money back," said Johnson, who has been involved in 25 workouts, or situations in which a lender asks a dealership to find a new lender after selling out of trust.

Johnson said the last time he saw something similar was when Minneapolis dealer Denny Hecker pleaded guilty in 2010 to conspiracy and bankruptcy fraud and was sentenced to 10 years in prison. Hecker was released in 2018.

One thing common in all spiraling loan fraud cases, however, is that dealers seem to dig a hole that gets larger, Johnson said.

"People just take too long to come to terms with the fact that it's over, and they institute extreme measures, thinking, 'This is just another problem; I'm going to work out of it,' " he said. "And it's not."