Fraud Is Expensive

Unscrupulous parties mistakenly believe that fraudulent misrepresentations can help them close deals and consummate financing, but recent cases reinforce the fallacy in this thinking. Fraud generally consists of an intentional act (as opposed to a merely negligent one) which is performed to create an unfair advantage over another party or cause him or her a loss. A shorthand definition might be “an intent to deceive plus an action.” 

How much can fraud cost your dealership clients? Two recent cases are instructive. 

Warnings Ignored

In November 2016, Hamid Adeli contacted Mercedes-Benz of Northwest Arkansas to ask about a used 2007 Ferrari F430. There were back-and-forth phone calls and text messages, which culminated in Adeli buying the Ferrari for $90,000. 

Prior to the sale, Mercedes-Benz of Northwest Arkansas hired a third party to perform a pre-purchase inspection of the car. After performing the PPI, the third party provided the dealership with a list of “recommended services.” The dealership approved some of the repairs on the list but declined others, including an exhaust header repair. In addition to the list of recommended services, the third party performing the PPI provided the dealership with an itemized receipt, but the receipt did not mention any declined repairs. 

After the PPI, but before the sale to Adeli, a different prospective customer asked Mercedes-Benz of Northwest Arkansas about the used 2007 Ferrari F430. The dealership provided this prospective customer with the list of recommended services from the third party performing the PPI aswell as theitemized receipt. This prospective customer advised the dealership that he would not purchase the Ferrari because he did not believe it would meet California’s strict emissions requirements. More importantly, he notified the dealership that the exhaust header issue was identified as a potential safety issue in a Ferrari forum. 

During the text message discussions with Adeli, a dealership employee sent a text message describing the Ferrari as being in “turnkey, excellent condition.” Mercedes-Benz of Northwest Arkansas said that a PPI had been performed and all necessary repairs had been completed, but there was no mention of the exhaust headers. Adeli did sign a buyer’s guide acknowledging that the car was purchased “as is,” and he also signed the invoice, which included a disclaimer of “all warranties, either express or implied.” 

Shortly after the car purchase, Adeli began to smell gasoline emitting from the car. He had the car towed to a mechanic who repaired the leaky exhaust manifold. When Adeli called Mercedes-Benz of Northwest Arkansas, they claimed anything that would have been a concern for the vehicle had been fixed. Adeli then filed suit in federal court in Virginia for fraud, breach of warranty, and violation of consumer-protection laws.

A jury awarded Adeli $6,835 in compensatory damages, $13,666 in additional incidental damages and $5.8 million in punitive damages. Presumably, the jury focused on the notice and knowledge of the exhaust header issue, which was not disclosed, as well as the text message saying all necessary repairs had been completed. This judgment is on appeal, but, regardless of the result, a $5.8 million award — and significant attorneys’ fees and resources to attend trial and pursue an appeal — will be spent defending what is essentially a fraud claim. 

Coad Toyota of Cape Girardeau, Mo., was recently in the news as the defendant in a suit brought by Capital One Auto Finance. In the Coad case, the fraud alleged was “powerbooking” as well as misrepresenting the existence or amount of cash down payments and the correct amount of sales tax, which was financed in the loan. The powerbooking alleged was misrepresenting the features and options on a vehicle to inflate the value of the vehicle and manipulate Capital One’s risk analysis. 

The Capital One claim set forth 33 specific examples, which included seven instances of powerbooking; the balance consisted of misrepresentations regarding cash down payments and the amount of taxes. Capital One is seeking over $600,000 in compensatory damages, as well as punitive damages and attorney’s fees. 

Every Dealer Needs a CMS

So what is the takeaway here? What can or should be done from a compliance perspective? 

For starters, the written policies and procedures should set forth specific conduct and behavior expectations and compliance training should reinforce these requirements. Keep in mind, the cornerstone of fraud is deceit, e.g. concealing or misrepresenting facts. In Adeli’s case, the deceit was concealing or not disclosing the exhaust header issue; in the Coad case, the deceit was misrepresenting vehicle’s features, misrepresenting cash down payments and misrepresenting sales tax. 

What actions were taken by the dealer, general manager, chief compliance officer, or general sales manager in these two cases? In the case of Adeli, was there a process in place, similar to complaint management, to escalate safety concerns, once flagged? In the Coad case, what review was done in the accounting office or by management when deals were written up? After the deals were written, were any deal jackets audited to check on car features, actual amounts of cash down payments or sales tax? In both cases, the reputation damage alone is incalculable. How will the Coad dealership obtain a financing source in the future? 

The failure to have robust compliance procedures can spell disaster for your dealer clients. Fraud can turn a $90,000 sale — a small portion of which was profit — into a $6 million liability. A full compliance management system is their best defense since, as can be seen above, fraud is expensive. 

DISCLAIMER: Content provided in this article is intended for informational purposes only and should not be construed as legal advice and should not be relied upon or acted upon without retaining counsel to provide specific legal advice based upon your particular situation, jurisdiction and circumstances. No duties are assumed, intended or created by this communication. No attorney- clientrelationship is being created by your review or use of this material.

© 2019 Robert J. Wilson, All Rights Reserved

Robert J. Wilson, Esquire (Bob) is a Philadelphia lawyer and is General Counsel for ARMD Resource Group. Bob is the principal of Wilson Law Firm and has over 30 years of experience both as a counselor and as a litigator in State and Federal Courts. Risk management, problem solving and dispute resolution are his core competencies. Bob’s practice is largely in the consumer finance space and he regularly consults with Lenders and contributes articles on various compliance related issues.