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Can Participating Dealers Be Implicated if Sales Punching Results in a Fraud Investigation?

WSJ: SEC Probing BMW Sales Reports

Last month, The Wall Street Journal reported the U.S. Securities and Exchange Commission opened an investigation into BMW’s sales reporting practices. Unnamed sources said the factory and U.S. dealers conspired to inflate monthly sale figures through a practice known as sales punching.

Read: WSJ: SEC Probing BMW Sales Reports

Sales punching typically involves the dealership selling some number of vehicles to itself but reporting them as delivered. Those vehicles can be put into demo, loaner, or rental service, then cycled out and sold as low-mileage pre-owned units.

You may recall Fiat Chrysler Automobiles was accused of systematically punching sales in an attempt to show several consecutive years of monthly gains. A dealer lawsuit and press releases included in SEC filings led to a federal investigation and, ultimately, a staggering $40 million penalty for FCA. (The factory agreed to pay the fine but declined to answer the SEC’s accusations.)

Read: FCA to Pay $40M Fine for ‘Cookie Jar’ Sales Reports

All evidence indicates sales punching is a fairly common practice. You may recall all the dust kicked up in 2016, when the prior year’s final sales report showed a 286,832-unit discrepancy between deliveries and DMV registrations. That’s about 1.6% off all 2015 new vehicle sales.

It is illegal to defraud investors. Filing falsified sales reports clearly qualifies. But what does that mean for dealers and dealership personnel? If you punch sales, and the scheme is uncovered, will you face criminal charges?

Not likely, says attorney and dealer advocate Leonard Bellavia, who represented Chicago-area dealer Ed Napleton in the aforementioned FCA lawsuit, which ultimately included seven dealers. Napleton claimed the factory offered him $20,000 to add 40 units to a monthly sales report. He refused, but later learned his competitors had not, leading to an antitrust claim that resulted in a settlement; amounts paid to the plaintiffs were not disclosed.

“Dealers become unwitting participants, but not to the point of criminal implication.”

“The way to approach this question is to look at the imbalance of power vis-à-vis the manufacturer and dealer,” Bellavia tells F&I and Showroom. “These programs are designed to benefit manufacturers. But they don’t come out and say they want to defraud investors with some diabolical plan. … They might tie it to some incentive program or even tweak the system so it becomes impractical not to buy 20 or 30 demos. Dealers become unwitting participants, but not to the point of criminal implication.”

And what if a dealer whose store belongs to a publicly traded group takes it upon themselves to punch sales?

“Is the investor really being hurt if one dealer does it? Probably not,” Bellavia says. “The dealer is only hurting himself. Now, dealers could falsify sales records to qualify for incentives. In that context, the argument could be made the manufacturer is being victimized by falsely engineering sales.”

Bellavia adds the “tentacles” of sales punching reach even further, affecting floorplan costs, warranty coverage, and recall notices.

“All of these things have consequences down the line,” the attorney says. “General rule? Report these transactions accurately.”


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