DETROIT -- Federal prosecutors are investigating allegations that Fiat Chrysler violated securities laws by getting dealers to falsely report sales in order to inflate the company's numbers.
The company confirmed the investigation in a statement Monday and said it's cooperating fully with investigations by the Justice Department and the Securities and Exchange Commission.
The investigation apparently stems from a lawsuit filed in January by the Chicago-area Napleton dealership group alleging that competing dealers were given thousands of dollars to report false sales. The group alleges that a Fiat Chrysler executive offered Napleton $20,000 to falsely report sales of 40 new vehicles. The lawsuit also alleges that the false sales give the appearance that Fiat Chrysler's performance is better than it actually is.
In a Jan. 14 regulatory filing, Fiat Chrysler said an internal investigation concluded that the allegations were baseless and that the lawsuit was "nothing more than the product of two disgruntled dealers."
A federal judge in Chicago is considering Fiat Chrysler's request to dismiss the lawsuit, while a judge in Brooklyn, N.Y., is deciding whether to merge two other cases over similar claims.
"If a company says it ships however many cars and a reasonable investor considers that number important in a decision to buy, sell or hold the stock, that is securities fraud," said Erik Gordon, a professor at University of Michigan Ross School of Business. "It would be very difficult to convince a jury that it's not reasonable to consider sales number material. After all, it was important enough to push the vehicles through the channel. FCA must have thought [sales numbers] were important."
The Italian-American automaker, which bases its U.S. operations in Auburn Hills, Mich., has reported 75 straight months of year-over-year sales increases since it left bankruptcy protection in 2009.
The SEC and Justice Department would not comment on the investigation.
Fiat Chrysler's statement said it records revenue in its quarterly and annual financial statements based on shipments to dealers and customers and not on the dealerships' reported vehicle sales. But the statement doesn't address the company's monthly sales reports.
The Napleton lawsuit alleges that a competing dealership reported 85 false new vehicle sales and got tens of thousands of dollars in return. It also says Fiat Chrysler offered to pay the $20,000 to Napleton disguised as cooperative advertising support.
Fiat Chrysler's U.S. shares fell 2 cents to close Monday at $6.73. In the past year, the shares have traded in a range from $5.45 to $10.93.
Fiat Chrysler isn't the only carmaker accused of padding sales numbers by getting dealers to inflate their figures. Similar claims have also been made against Bayerische Motoren Werke AG, also known as BMW, for paying its dealers as much as $1,750 a vehicle in December to put new models in their service fleets, the cars that people use when their vehicles are being worked on. Dealers booked the sales immediately, and the deliveries helped the company hit its sales target, people familiar with the practice told Bloomberg News in February.
Fiat Chrysler is also fighting investor claims that the automaker played down the economic effect of manufacturing problems that led to expensive recalls. A lawsuit, filed in September in federal court in Manhattan by a group of investors, alleges the company made false and misleading statements about flaws in its manufacturing process and quality control that led to at least 11 million vehicles being recalled.
To back up their claim, the plaintiffs refer to the $105 million penalty imposed in July 2015 by the U.S. National Highway Traffic Safety Administration related to the company's handling of recalls for 23 issues. Fiat Chrysler in October increased its reserves by $866 million to cover future warranty and recall costs.
Fiat Chrysler has asked a judge to dismiss the lawsuit, arguing in part that the company was unable to predict the outcome of the regulator inquiry at the time it put away funds for a possible resolution.
Information for this article was contributed by staff members of The Associated Press; by Tom Schoenberg, Tommaso Ebhardt and Keith Naughton of Bloomberg News; and by Jacob Bogage of The Washington Post.
Business on 07/19/2016