- Trading halted in Europe after shares fall 11 percent
- Dealers paid to report false sales at month's end, suit says
Fiat Chrysler Automobiles NV investors reacted dramatically to the latest concerns about automotive industry scruples after dealers accused the company’s U.S. unit of offering money to falsify sales.
The U.S. dealers’ allegations add to the claims that are shaking investor confidence in the auto industry, with Volkswagen AG having admitted to rigging emission tests in the U.S. and Renault SA having had its offices raided, raising the specter of a VW-type scandal at the French car company.
“The perception investors have is that the sector has been lying for emissions, for bonuses, targets, whatever you want, therefore, you don’t want to be a shareholder,” said Massimo Vecchio, an analyst with Mediobanca in Milan. Given the Volkswagen scandal and the raid on Renault, “people are obviously scared.”
Chrysler plans to fight the U.S. lawsuit, which the company said in a statement is without merit.
Fiat Chrysler trading was halted in Europe after shares fell as much as 11 percent. The company’s credit default swaps, used by investors as insurance against defaults on company debt, surged.
Dealers were paid to report fake sales on the last day of the month and then cancel the sales the next day, according to the federal lawsuit filed by two related auto dealerships Jan. 12.
“If it’s true, this could mean that volumes at Fiat Chrysler aren’t really what they appeared to be and this could mean that the numbers for revenue could be in question,” said Richard Hilgert, a Morningstar Inc. analyst in Chicago.
“Usually, lawsuits in the automotive industry are just a regular part of the business and the trading isn’t as volatile here when this kind of news breaks,” Hilgert said.
The lawsuit, against the company’s North American unit, FCA US LLC, was brought by Napleton Arlington Heights, based in Illinois, and Napleton Northlake, based in Florida, according to court records.
Fiat Chrysler said in Thursday’s statement that it has been discussing the need for the dealer group to meet its obligations under certain agreements. Kevin Hyde, counsel for the dealers, didn’t immediately answer phone calls to his office in Westmont, Illinois.
FCA US had an incentive program which dealers could join if they met certain sales targets, and would then enable them to get subsidies for each new vehicle sold, according to the suit. The company solicited dealers to falsely report sales and funneled money to conspiring dealers, the dealers allege.
Chief Executive Officer Sergio Marchionne has set high goals for the company, including erasing 7 billion euros ($7.6 billion) in debt and more than tripling net income to about 5 billion euros by 2018. He backed off a target of selling 7 million vehicles in 2018 at the North American International Auto Show in Detroit Jan. 11, saying at the same time that 2015 earnings will be better than expected.
In one instance a competing dealership reported 85 false new reports of vehicles being delivered, resulting in it being paid “tens of thousands of dollars as an illicit reward for their complicity in the scheme,” both dealers said in the lawsuits.
The lawsuit contends the company’s actions “have been arbitrary and capricious, as well as coercive,” by “strong-arming its dealers to achieve sales numbers not clearly defined,” with “non-conspiring dealers” ineligible for bonuses.
Vecchio said he viewed the lawsuit skeptically because dealers wouldn’t be able to keep the ruse up for long.
"It seems a little bit strange," he said in a telephone interview. "The month after, you still have to sell the car. It can probably help you in the month, but it works against you the month after."
They seek unspecified damages and a jury trial, according to court papers.
Automotive News first reported the suits Jan. 13.
The case is Napleton’s Arlington Heights Motors Inc. v. FCA US LLC, formerly known as Chrysler Group Realty Company LLC, 16-cv-00403, U.S. District Court, Northern District of Illinois (Chicago).