January 14, 2016 — (UPDATED JAN. 15, 2016 7:10 AM — FCA’s Response Below) Hang on to your seats — the latest automotive scandal is beginning to erupt, and this one is going to rock the automotive industry. The news broke yesterday that the Napleton Automotive Group filed a lawsuit in a federal court in Illinois alleging that Fiat Chrysler Automobiles violated federal racketeering laws in an attempt to falsify monthly sales numbers.

Multiple FCA Business Centers engaged in the scheme using FCA’s Volume Growth Program (VGP) to funnel thousands of dollars to dealers who participated by helping to falsify sales, according to the lawsuit. Participating dealers were also in position to obtain allocation of FCA’s best selling vehicles.

It appears the practice may have been widespread throughout several of FCA’s 12 Business Centers. At least two other dealers in recent months separately have complained about the scheme to The Banks Report. The practice involved FCA Business Centers falsifying sales using the names and personal information of people essentially drawn from a phone book. Dealers would be able to back out or void the sales within a couple of weeks. The scheme allowed the vehicles to maintain their “new vehicle” status and thus, keep the factory warranty in place. Furthermore, we have reason to believe senior FCA executives were made aware of the practice several months ago. It is one of the myriad of reasons TBR has written critically about FCA’s future prospects in the past.

Make no mistake, this is an explosive story, and if true, people are going to go to prison. It’s similar to the situation in the mid-nineties in which several Honda executives and dealers engaged in embezzlement and bribery over a 15 year period. Honda ended up paying nearly $400 million in fines while more than two dozen executives and dealers were hit with prison sentences.

The most recent case involves bribery and mail fraud. 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. (Napleton’s Arlington Heights Chrysler Dodge Jeep Ram dealership in Illinois and his North Lake Chrysler Dodge Jeep Ram store in Florida are the plaintiffs in the lawsuit.) According to the suit, Napleton, refused the offer and warned the managers that the practice likely was illegal.

The lawsuit also details how the business centers manipulate certain market areas in an attempt to hide the scheme and used their manipulation to intimidate their dealers to comply with certain action, including spending millions of dollars to move locations or upgrade facilities.

There may be attempts to paint Napleton as a bitter and cranky dealer — but, that is not the case. He did sue Jaguar Land Rover in 2014 after the manufacturer used the practice of Right of First Refusal to prohibit him from acquiring four dealerships in Long Island. The case was settled out of court. But he’s not the first dealer to sue a manufacturer and won’t be the last.

We believe the lawsuit has merit because of we mentioned earlier — we’ve been hearing about these practices for several months from other dealers.

If true, the scandal reflects a culture at FCA that is warped and needs to be fixed. And it’s a culture that has festered for years. In the fall of 2006, when I was an editorial director for Ward’s Dealer Business, we uncovered evidence that Chrysler executives had lied about the automaker’s Sales Bank numbers. Our reporting forced Chrysler to begin reporting those numbers accurately.

And then, during the recession in 2009, as part of its bankruptcy, Chrysler shuttered nearly 900 dealerships. The business centers were responsible for choosing which dealerships to close. As I covered the story for Ward’s, I heard numerous stories in which several of the closures were “revenge closings,” in which business centers picked dealers who at times were perceived to be difficult or unwilling to cooporate.

It’s a culture where it appears truth and ethical behavior are often sacrificed in order to make the company look good. And in some ways, this goes to the top. Sergio Marchionne has worked a near miracle in Chrysler’s survival since the recession. He’s the ultimate deal maker who was dealt a bad hand. But his style of interacting with the press uses misdirection and often is nothing more than smoke and mirrors. In my opinion, there have been way too many instances in which Marchionne’s bold announcements (which often never materialize) serve only to divert the media’s attention away from what are deep and systemic issues with the company.

I get it. In many ways, Chrysler is a brand that has had to scrape and fight for survival through the decades. It’s in a situation today where it has to fight for every sale and every dollar. And often, in those situations, employees will feel presure to play fast and loose at the margins.

MAEVA Group Chairman and CEO Harry Wilson, who played a critical role in President Obama’s automotive task force, began his presentation yesterday at the Automotive News World Congress by asking why the auto industry has had more scandals, bankruptcies, investigations and fines than any other industry over the last 10 years. His answer — failure of corporate governance and an inability to set clear goals.

Unfortunately, the industry is about to witness another example of a corporation gone awry.

UPDATE — FCA’s Response (Below is the statement FCA released January 14)

Fiat Chrysler Says Dealer Allegations Are Baseless

 Fiat Chrysler Automobiles N.V. (“FCA”) (NYSE: FCAU / MTA: FCA) learned late yesterday of the filing of a lawsuit in an Illinois Federal Court by two U.S. dealers located in Illinois and Florida. The named defendants are FCA US LLC (“FCA US”) and FCA Realty LLC. The dealer plaintiffs are two dealerships of the larger Ed Napleton Automotive Group.

The lawsuit makes allegations of false sales reporting by FCA US. Notwithstanding numerous requests to provide evidence of this alleged activity, the plaintiffs have refused to substantiate their claims. FCA US carried out an investigation of the facts, and has determined that these allegations are baseless and plaintiffs were notified of this fact before they filed suit.

This lawsuit is nothing more than the product of two disgruntled dealers who have failed to perform their obligations under the dealer agreements they signed with FCA US. They have consistently failed to perform since at least 2012, and have also used the threats of litigation over the last several months in a wrongful attempt to compel FCA US to reserve special treatment for them, including the allocation of additional open points in the US FCA network.

FCA US will continue to resist these pressures, safeguarding the relationship of trust and openness which governs its relationship with its dealers. FCA finds it unfortunate and disappointing that reputable media would be willing to be used in questionable litigation practices without a full understanding of the facts.