Something a bit strange is going on in the automotive industry at the moment, at least in terms of some dealerships’ having problems making money. Granted, two small, privately owned dealership chains’ getting into financial trouble with their manufacturers doesn’t seem too significant, considering how many dealerships America holds. But it’s almost impossible to remember the last time numerous dealerships closed at the same time.
First was the Reagor Dykes group based in Lubbock, Texas; it includes, according to the September 24 Automotive News, 12 used car lots and nine franchised dealerships selling Buick, Cadillac, Chevrolet, Ford, GMC, Lincoln, Mitsubishi, and Toyota. All in all 700 people worked at those stores in West Texas. But at some point this summer the Ford Motor Company did a floorplan audit and alleged that $41 million worth of its product had been sold by the dealership and the wholesale loans for those vehicles had not been paid off. If the average selling price of vehicles at those stores was the same as the national average, $33,000, that’s 1,242 cars sold and not paid off at the lender. Ouch.
At first the dealer principals dismissed Ford’s conclusions, pointing out that they had done an inventory audit just a month or two, and found everything fine, before Ford found this massive financial issue. Later they put the blame on their ex-CFO of 11 years, Shane Smith.
That’s a cop-out, as the most important aspect of being a top-flight dealer today is knowing one’s financial statement. Those dealers who understand their balance sheets seem to be able to weather all storms that come their way during down cycles in the auto industry. Then again, that’s why these stories are so remarkable; it’s supposed to be fairly easy to make money when we’re selling over 17 million new cars a year. And ironically, over the previous few weeks the Automotive News had run numerous columns on how dealerships survived the Financial Meltdown a decade ago.
Tragically, when a dealership collapses the damage can never be restricted to just the primary business partners. In this case, Reagor Dykes had also opened an office in Addison; and on their local radio ads, spokesperson Tony Romo mirrored the language from their website that claimed they wanted “to combat the recurring frustrations that accompany the typical car buying experience within this industry. Our promise is that we will work to find you any car you want.” Of course, if the court documents are accurate, that might have been one severe case of over-promising and under-delivering.
The Texas Department of Motor Vehicles has made a demand that title issues be resolved covering at least 100 individuals who have made complaints. For the record, Tony, buying a car and never getting a title or license plate for it is a fairly big frustration for most new car buyers.
In addition to Ford, Vista Bank has sued for recovery of loans, then First Capital Bank filed a motion to dismiss the Vista Bank lawsuit because both financial entities were harmed while the partners were trying to cover a monetary float.
Meanwhile, the U.S. Bankruptcy Court for the Northern District of Texas has authorized a bankruptcy sale of the dealerships’ assets. That provoked Gulf States Toyota, Ford, and GM to file objections with the court before last week’s ruling, saying they have the right to be involved in any bankruptcy sale of their franchises. That’s fair enough.
Typically in these situations, manufacturers line up a favored dealer of exceptional reputation to take over a troubled or failing store. Frank Kent was just such a person six decades ago, then a Fort Worth Ford dealer. He was on a trip to Turkey when he was informed that GM was taking out the local Cadillac dealer and distributor for this region, and if he wanted the store he had three days to get back home to claim it. In a day and age when international airline travel was spotty at best, Kent made it back to Fort Worth in time.
Again according to the Automotive News, the one group possibly wanting to bid on Reagor Dykes’ fallen empire owns only two Fiat, one Alfa Romeo and one Hyundai store in Texas.
Meanwhile, Up North
That wasn’t the only failure happening. Up in Michigan Michael Saporito and his ex-NFL business partners, Jessie Armstead and Antonio Pierce, were also charged with a penalty for roughing their captive finance companies, Hyundai Capital America and Nissan Motor Acceptance. Why? For selling almost 500 vehicles and not paying off those cars once they were delivered to the public.
Again according to Automotive News articles, their Nissan stores failed in Michigan, but the problem was first discovered with their Hyundai and Kia stores in Hazelton, Penn. Their other properties, a Honda and a Cadillac dealership in New Jersey, are still up and operating, as is the Honda dealership in Hazelton. Here’s where the story gets strange: Some of the alleged missing vehicles from the Hyundai and Kia stores seemed to have been titled and floored at one of their Honda dealerships. If true, it’s another case of kiting vehicles between stores for fun and profit.
Worse, some of those vehicles were admittedly sold at auction for quick cash because, as Mr. Saporito himself told a reporter, “The business of Saporito Group entities is a house of cards.” The line would not really work for an ad campaign.
Further, there’s a Tarrant County connection here, because this automotive group is the one that filed incorporation papers for Grapevine Honda last year. As always, Honda refuses to speculate about what impact these northern troubles will have on the future store in Texas. But if Hyundai’s forensic auditors can prove that part of this financial fiasco did include titling and potentially flooring cars at the Honda store in Pennsylvania, it would be hard to imagine this group being allowed to open another Honda franchise. Yet stranger things have happened in the automotive industry in the past.
The Big Sting
None of these stories with Texas connections, however, can hold a candle to that of John McNamara, who managed to scam General Motors out of $6 billion in conversion vans that never existed. It started in the late Seventies, when McNamara took over his father’s dealership in Port Jefferson, New York. Then in 1990 he approached GMAC, then the finance arm of General Motors, about funding his purchases of all the conversion vans from Kay Industries, a van customizer that had never been heard of.
There was a great reason for that. It was just an empty office in Northern Indiana with a phone line that forwarded all calls to McNamara’s Long Island business. McNamara told GMAC he had a buyer for all those vans, operating out of Cyprus and got the OK for both funding to buy those GM vans and 60 days to pay off the interim loans; as he wouldn’t be paid in full, McNamara claimed, until those vehicles arrived in Cyprus for distribution across Asia.
It was a Ponzi scheme, of course. McNamara billed GMAC for $25,000 for each of those vans, the ones that never existed to begin with, and in short order his bogus van conversion company was claiming to have sold half of all of the conversion vans made in America. Finally, one GM accountant questioned the $425 million GMAC had advanced McNamara in just one month for 17,000 converted vans. And apparently the only reason the accountant had a problem with that is because that was more commercial vans than General Motors had built that month.
McNamara claimed that 11,000 of those vans were still at the bogus Kay Industries, but he had already shipped 6,000 of them overseas. Now, finally, GMAC started looking at the serial numbers McNamara had put on his loans and discovered they were bogus. When GM finally sent investigators to Kay Industries, they found only that empty office with one phone.
John McNamara was arrested in early 1992, and all of his assets seized, but somehow he still managed to post his $300 million bail. In the end General Motors recovered enough assets that they claimed a loss of just under a half billion for those vans that never existed. McNamara was allowed to keep a couple million of his assets and continued his life. He was as a witness in federal bribery investigation, which may be why he was treated so leniently, but the bad guys got off in court. GM claimed its operating systems worked just fine and had no systemic failures. Well, other than the $426 million the company lost.
There was one big difference between John McNamara’s Big Sting of GM and All Pro and Reagor Dykes. McNamara started his scam in the middle of a troubled recession compounded by the economic failures of the late eighties in the junk bond market, the S & L Crisis and the collapse of many banks. The other two groups failed, not just at the end of the longest expansion ever for the new car market in America, but right in the middle of the hot summer selling season.
But one thing is certain and troubling: No car shopper would have ever guessed those dealerships were failing from their online reviews; those were exceptional.
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: firstname.lastname@example.org