12 August 2016 – FiatChrysler Automobiles NV (FCA) is under investigation of the US Securities and Exchange Commission (SEC) and the Department of Justice (DoJ) for alleged sales-padding by dealers. European Investors monitors developments at FCA, listed at Borsa Italiana, very closely.
The criminal investigation into potential securities fraud by SEC and DOJ follows a civil lawsuit filed in January this year by two Chicago dealers that operate under the Napleton brand name. They claim the company inflated its U.S. car sales by paying dealers to report selling more vehicles than they actually did. Edward Napleton, President of the Napleton Auto Group, says his company was offered 20,000 USD to falsely report sales of 40 FCA vehicles.
The news did cause some brief panic among investors. At NYSE, the price of the American Depositary Receipt (ADR) of the Italian-American company initially dropped 5,2% (462,8 million USD of the market capitalization vaporized). At closing, however, the decline was brought back to 2,5% (217,8 million USD loss of market capitalization). The Borsa Italiana in Milan, where the carmaker has its primary listing, was closed when the news came out.
The investigation could cast a shadow over FCA’s impressive 75-month streak of positive year-over-year sales increases which the car maker has aggressively promoted to attract investors.
FCA however denies the allegations and calls them “baseless” and “the product of two disgruntled dealers who have failed to perform their obligations within their dealer agreements”. Also, “on its annual and quarterly financial statements, FCA records revenues based on shipments to dealers and customers and not on reported vehicle unit sales to end customers”, the company said in a statement.
It is indeed common practice in the U.S. car industry to book revenues once cars are shipped to the dealer. Although this means reported monthly sales by dealers have no impact on the revenue reported in financial statements, car makers might provide incentives for “punching” or “pushing” by giving more desirable cars or discounts to dealers that agree to take more inventory. If car makers mark that offloaded inventory as sales, it could falsely inflate the financial figures the company communicates to investors.
Little is known about the details of the investigation launched by the SEC and DoJ. The investigation is said to be in a very early stage. If the investigation shows that dealers have indeed been paid to falsify sales figures, then there is a clear case of securities fraud. It is reasonable for an investor to consider (the development of) sales numbers and to take this information into account in his decision to buy or sell shares.
Interestingly, FCA already reviewed its monthly sales reporting method beginning of this year, mainly to account for “unwinds” in which a dealer reverses sales transactions after reporting it to FCA as sold. When FCA ran the numbers again accounting for these extra non-sales, it admitted that the company’s consecutive monthly year-over-year increases should have stopped in September 2013 instead of February 2016.
So regardless of whether the fraud allegations are justified, it is advisable to take the monthly sales figures provided by FCA and the U.S. car industry in general with a grain of salt.