July 19, 2016 — As news leaked yesteday that the FBI and SEC is investigating Fiat Chrysler Automobiles for possible sales fraud, a key question kept popping up in conversations — how is what FCA allegedly did any different than what other automakers do when it comes to reporting sales?

For years — even decades —  automakers have inflated their monthly sales numbers by “front-dating” their sales in a practice typically called “punching.” It’s simply taking a new vehicle that’s on the lot and classifying it as a sales demo. The practice allows OEMs to mark such vehicles as “sold.”   Often they’ll exert a significant amount of pressure on their dealers to participate by paying them huge “bonuses” for each vehicle punched. At least dealers get paid, but the practice wreaks havoc with their internal operations and makes it harder to provide a consistent customer experience. Furthermore, it skewers their monthly sales numbers, a key metric automakers use to measure a dealer’s sales effectiveness.

Automakers dealers complain about the most are BMW, Nissan, Mercedes Benz and Hyundai. Dealers say they are the most aggressive each month in “forcing” their dealers to participate in some type of “punching” scheme. (Read more TBR analysis of various punching schemes).

So why investigate FCA? And it is a serious investigation. As Automotive News reported earlier today, SEC and FBI investigators last week visited — or raided — the offices and homes of several current and former FCA employees. Locations include Detroit (Auburn Hills headquarters) and business centers in California, Dallas and Orlando.

No one has confirmed what the investigation exactly entails, but insiders have admitted it is because of lawsuits the Napleton Automotive Group filed in January alleging FCA was engaging in racketeering.

Read more:

Lawsuit Alleges FCA Violated Federal Racketeering Laws

FCA’s Response

The problem for FCA is that according to the January lawsuits, allegedly employees in some of its regional offices (also called business centers) went beyond simply punching vehicles to fraudulently recording sales that did not happen. The suit alleges that managers from FCA’s Midwest Business Center offered Ed Napleton $20,000 to falsify at least 40 sales, only after he discovered that the business center had previously attributed 16 falsified sales to one of his dealerships.

According to dealers who informed TBR about the scheme last fall prior to the lawsuit, business center employees were assigning names of real people to retail delivery reports (RDR) — creating false sales records. A few days into the new month, the employees would then back the sales out of the system.

Meanwhile, New York dealer Stuart Hayim filed a lawsuit last year against Maserati (Also owned by FCA) with similar complaints to Napelton’s. Hayim’s case was filed in in the Eastern District Court of New York and may be merged with a second lawsuit in which Hayim is fighting to keep Maserati from putting another dealership in Long Island.

What Napleton — and other dealers who have talked with TBR — are alleging not is a new practice. In 1999 and 2000, Mitsubishi was caught in a similar scheme — primarily in the Northeast and Southeast regions — after one of its employees blew the whistle and resigned.

FCA responded to today’s media reports saying it is cooperating with an SEC investigation into the reporting of vehicle sales to end customers in the U.S. FCA also said it is responding to earlier inquires made by the Department of Justice. It also said in the statement that FCA’s financial results are not tied to sales to end customers, but rather, shipments to its dealers.

Whether the investigation uncovers widespread fraud going on in FCA’s business centers remains to be seen. Our guess is that some rogue employees enacted the scheme in some the business centers to maintain their monthly sales quota.