Dealerships as Organized Crime

First, the backstory.

Earlier this year, the Federal Trade Commission charged a group of four car dealerships with a slew of crimes, including falsifying customers’ income and down payment on credit applications and misrepresenting credit-related terms in dealership advertisements. The period investigated covered the past four and a half years. (The statute of limitations for fraud under federal law is five years.)

For the purposes of this article, we will focus on the fraud allegations and leave the advertising claims for another day and another article.

The targets of the investigation included Tate’s Auto Center of Winslow (Ariz.), Tate’s Automotive Inc., doing business as Tate’s Nissan Buick GMC, Tate Ford Lincoln Mercury, Tate’s Auto Center of Gallup (N.M.), as well as their owners, Richard Berry and Linda Tate, and an individual that “received funds that can be traced directly to Defendants’ unlawful acts or practices,” according to a court filing. That distinction will become important in just a little bit.

Although technically four separate corporations, the FTC alleged the four dealership locations “have operated a common enterprise while engaging in the deceptive, unfair, and unlawful acts and practices alleged below.” Again, this distinction will become important in just a little bit.

When the dealerships falsified income and down payment information, they did it in a big way. How big? This big, according to the FTC:

• Tate’s Auto Center of Winslow inflated income on 44.83% of all credit applications.
• Tate’s Nissan Buick GMC inflated income on 38.71% of all credit applications.
• Tate’s Auto Center inflated income on 37.50% of all credit applications.
• Tate’s Auto Center of Gallup inflated income on 17.90% of all credit applications. 

With fraud percentages like that, the FTC had no trouble alleging such violations constituted a “practice” rather than an isolated act.

Last fact: The FTC alleged that “At all times material to this Complaint, Defendants have maintained a substantial course of trade in or affecting commerce …” Note the plural — all the defendants, not just the corporate dealerships. Richard Berry and Linda Tate also fell into the sweep of interstate “commerce.” This, too, becomes very important.

A Civil Matter

The FTC filed its complaint in the United States District Court for the District of Arizona. The Complaint seeks unspecified monetary damages, disgorgement of profits by Linda Tate (who is not alleged to have participated in the illegal activity, but profited from it), and an injunction covering the defendants’ behavior going forward. Such injunctions generally last for 20 years.

All of the foregoing adds up to a “little bit.” Time to unpack the significance of the specific allegations the FTC leveled at the Tate defendants.

The FTC filed a civil suit against the defendants, not criminal. But the allegations in the complaint could support a criminal case, which would ordinarily be filed by the Department of Justice. That it was a civil matter rather than criminal, the Tate defendants should be thankful.

That thankfulness flows from a particularly potent statute known as the Racketeer Influenced and Corrupt Organizations Act, or RICO. If your actions could be charged under RICO but aren’t, you’re thankful.

RICO makes it illegal “for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity … to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate commerce.”

Further, “It shall be unlawful for any person through a pattern of racketeering activity to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate commerce.”

You can see where this is going. Can the activities of the Tate defendants be considered “racketeering activity?” Because if they can, really, really bad things can result.

“Racketeering activity” is defined to cover a long, long list of illegal activities. We shall focus on three: Mail fraud, wire fraud, and bank fraud.

If a dealership knowingly falsifies a credit application and transmits it to a finance source by mail, it can constitute mail fraud.

If a dealership transmits the knowingly falsified credit application electronically, it can constitute wire fraud.

And regardless of how it transmits the knowingly falsified credit application, if the recipient is a bank or other finance source (and who else would it be?), the dealership is wandering into the land of bank fraud.

These three flavors of fraud are “predicate offenses” under RICO. If a dealership commits two or more such predicate offenses within 10 years (remember the Tate Gang’s “pattern?”), it constitutes “racketeering activity.” Congratulations, dealership! You’re now the definition of organized crime.

If convicted under RICO for fraud, a defendant is subject to fines up to $25,000 and sentenced to 20 years in prison per racketeering count. Remember that 44.83% fraud rate alleged at Tate Auto Center of Winslow? Assume 100 units sold per month for 4½ years. That adds up to 5,400 units. Multiply by .4483 and you get 2,421 “racketeering counts.” Times $25,000, the potential fine grows to more than $60 million.

But wait! There’s more. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of “racketeering activity.” This could mean handing over the keys to the dealership, as well as any other investment that can be traced to proceeds of the illegal activity. (Think offshore reinsurance companies.)

Think the defendant can avoid these harsh penalties by transferring assets to family and friends? No such luck. RICO author and Notre Dame Law School professor emeritus G. Robert Blakely is way ahead of you. Any such transfers can be reversed and create potential liability for the recipient.

Oh, and individual defendants can be imprisoned for up to 20 years for each racketeering count. Again, using just the alleged misdeeds of Tate Auto Center of Winslow, 20 years times 2,421 racketeering counts adds up to 48,420 years (though one could expect a few years to be shaved off for good behavior).

The Burden of Proof

Has any vehicle dealership ever been prosecuted under RICO? To my knowledge, no. For one thing, the burden of proof — beyond a reasonable doubt — is high, and difficult to prove.

But that really only takes substantial jail time off the table. RICO remedies may be pursued in a civil action, and the burden of proof in civil actions is the much more attainable “mere preponderance.” Mere preponderance means just slightly more likely than not, or 50.0000000001%. And all the monetary penalties are still in play.

If no dealer has ever been hit with a RICO suit, does that mean it will never happen? Of course not. The reason for this article is precisely that RICO is currently being used in new contexts far removed from the original target group of Mafia families. For example, RICO has been used against the Catholic Church in connection with clergy sexual abuse cases. Using RICO, the assets of the church may be seized as damages.

If the public is comfortable with RICO being used against the Catholic Church, is there any reason to believe it can’t be used against car dealers?

And that’s the point: the law allows for payment packing and credit application fraud to cast dealerships as organized crime and be treated as such. That’s not a risk any dealer should be willing to take.