In Inwood, N.Y., Dennis Cirillo is still trying to repair his Victory Toyota dealership’s reputation after it was linked to a fraud scheme, which was uncovered during a homicide investigation at a neighboring dealership.

Despite these scenarios, the industry has actually become more compliant since 1999. That was the year the National Association of Attorneys General (NAAG) adopted the “packing resolution,” which put auto dealers on the radars of state and federal regulators. But many legal watchers say how far the industry has improved will be tested by today’s economic crisis.

“Generally speaking, regulators are on alert when there’s a recession or tough economic times,” said Terry O’Loughlin, director of compliance for Reynolds and Reynolds. “Sadly, there is temptation with the credit challenge to falsify a customer’s income or history of employment … In the short term it may pay the bills, but in the long term it could create serious legal action.”

The Douglas Nissan Conspiracy

Short-term profit was the motive for the crimes allegedly committed at the now-defunct Douglas Nissan of Orange, which included the sale of used cars at inflated prices to customers who could not afford their loan payments.

Local authorities began investigating the dealership in April 2007, after a customer filed a complaint with Brannan’s office. The customer had been contacted by the dealership and coached to tell a lender about his car’s phantom features.

“They thought they could get the customer into going along with their string of lies. The consumer didn’t take it that well. He was miffed and looked to law enforcement for help,” recalled Brannan, who was surprised the consumer came directly to his office rather than filing a complaint with the Better Business Bureau (BBB) or the Department of Motor Vehicles (DMV).

Fortunately, the on-duty officer who handled the complaint also happened to be an investigator with the office’s Consumer Protection Unit. The investigator then began looking for similar complaints filed against the dealership.

Authorities soon found that between February 2005 and June 2007, 27 identity theft reports were filed with the Orange Police Department, and more than 100 complaints were filed with the DMV and the BBB about Douglas Nissan and other Douglas dealerships.

The discovery led to the raid of the dealership on July 9, 2007 — a scene that played out across local news broadcasts. Authorities seized two computers, electronic data from four additional computers, and 350 boxes containing 12,000 deal jackets from the dealership.


Employees allegedly submitted false loan information to lenders by overstating the Kelley Blue Book value of vehicles and misrepresenting features of the cars. In the process they defrauded eight banks and lending institutions of an estimated $911,500 in financing.

But lenders were not the only victims, as customers were also hand picked in the scheme. Investigators said the defendants targeted Spanish-speaking customers who did not understand the car-buying process and did not have proper identification. These customers were encouraged to sign incomplete loan and purchase documents, which the defendants would later fill in with information that overstated the victims’ ability to pay. The suspects also allegedly used fake identities and paystubs to inflate customers’ income so they could qualify for loans. As a result, many of these customers were stuck with loan payments they could not afford and lost their cars.

“They should never have been in that car in the first place,” Brannan said. “They’re a casualty in the sense that once they left the dealership the credit application was altered, and they qualified for a loan they shouldn’t have qualified for.”

The far-reaching scheme also included non-customers whose identities were stolen and used to purchase cars. “Some of these victims thought they were acting as a reference for another customer, and instead they became an unwitting cosigner. These victims were left to carry the cost without the car,” authorities said.

On Sept. 24, 2008, more than a year after the investigation started, authorities arrested four suspects, including part-owner and general manager Frank Ignacio Urbano, 54, and desk managers Luz Belem Corral, 26, Kevin Allen DeRosier, 28, and Marwan Abdellatif, 46. Each was charged with multiple counts of forgery, grand theft, and one count of conspiracy to defraud.

Brannan said the charges focused on 31 fraudulent transactions, which represented only a fraction of the evidence authorities collected. “The scope is broader than the charges filed, but we processed all this information and tried to capture a good representation of what was going on,” he said.

The case against the dealership is the first one he’s prosecuted that also involved the ownership. “I think with some certainty we haven’t done an auto dealer case that’s focused on the ownership,” said Brannan. “I’ve been in the unit for many years … and we haven’t done one in at least five years.”

No trial date was set as of press time, but Brannan said he will seek prison time for all four defendants. The maximum prison time is nearly 40 years for fraud and identity theft crimes, but Brannan will not seek the maximum penalty.


The Rise of Consumer Complaints

Consumer complaints against auto dealers in California have increased the last three years, according to the state’s DMV. During the fiscal year July 2006 to June 2007, the department received 7,674 consumer complaints. These increased 24 percent to 9,540 during the following 12-month period. The department’s most recent figure for July to September 2008 was 3,050 complaints, which puts the state on pace for 12,200 complaints, the largest number of grievances in three years.

Given the current economic environment, the increases aren’t surprising. “Because sales are hard to come by, this market will produce some unfortunate results,” Reynolds’ O’Loughlin said.

In the February 2007 issue of F&I magazine, Doug Walsh, former chief of the Consumer Protection Division for the Washington Attorney General’s Office, warned that outside pressures, such as the faltering economy, deteriorating consumer credit and the housing crash, could push dealerships to do things the wrong way.

“The broader conditions can increase pressure among dealerships to allow for deceptive sales,” he said. Misleading sales often lead to an increase in consumer complaints. In Washington there were 1,184 consumer complaints filed in 2007. That number has risen slightly to 1,272 as of November 2008, and is expected to rise under the challenging automotive retail environment.

Mary Lobdell, the assistant attorney general for the state’s Consumer Protection Division, is one of the regulators currently monitoring auto dealerships. “We have been watching them more closely. We have a number of ongoing investigations … focused on dealers in Washington state,” she said.

She expects a lag of 90 days to six months before consumer complaints related to the credit crunch are filed. Her immediate concern with the credit crunch is handling out-of-trust sales from closed dealerships.

“When a dealership closes its doors and does not transfer title on the cars, those complaints come in immediately to our Department of Licensing,” she said. “So we’ve been working on those complaints with them as needed.”

The state of Washington has a history of protecting consumers against dealers. In 1999, the state helped lead the NAAG to adopt the historic “packing” resolution, and convinced Congress, the Federal Trade Commission (FTC), Federal Reserve Board and other federal and state enforcement agencies to add the practices of “packing,” “loading,” “assumptive sales,” and “rolling term” to the Consumer Protection Act.

Today, the state of Washington works alongside other states in what is called the NAAG Auto Working Group. And although the group has worked hard to police the industry, auto sales still ranked No. 2 on the NAAG’s Top 10 Consumer Complaints List in 2007.


Compliance in a Credit Crunch

Dealers can avoid the consequences of fraud by monitoring their staff and implementing compliance procedures. “If dealers don’t already have a protocol of their business activities, they are well advised to have their own business plan addressing compliance issues,” said Reynolds’ O’Loughlin, who once served with the Florida Attorney General’s Office.

He acknowledges that sometimes a dealer’s good-faith efforts at compliance won’t make a dealership bulletproof from criminal activity. But he said that cooperation is crucial if a dealership finds itself at the center of an investigation.

“A small percentage (of people) don’t have a moral compass working in the correct way. They’ll cut corners to make deals work,” he said. “Now, if the dealer made the mistake, correct it immediately and don’t let it linger. Remember, dealers who cooperate can solve the problem before it becomes serious … They create more of a problem when they dig their heels in.”

That’s advice Victory Toyota’s Cirillo followed when he and his brother found out their dealership was entangled in a fraud investigation at a neighboring dealership.

“We met on a number of occasions with the authorities, both with the district attorney and the local police department,” said Cirillo, a former lieutenant with the New York Police Department. He now serves as operations manager for the dealership.

The investigation began with the murder of a 27-year-old salesman at the now-defunct Universal Auto World on Jan. 11, 2007. The subsequent investigation by the Nassau County Police Department, however, would uncover evidence of potential fraud, including the filing of bogus paperwork, identity theft and grand larceny.

The investigation eventually reached the doorstep of Victory Toyota after witnesses in the Universal Auto World case told investigators that similar practices were taking place at Victory. Investigators were also told that salespeople often switched from one dealership to another.

Through the investigation of Victory, authorities found 25 incidents in which the dealership’s former finance director, former sales manager, and a former salesman allegedly adjusted interest rates or financial information, stole cash deposits, or tacked on extra items to increase their sales and pad their commissions. The former employees were arrested in July 2008, along with two former employees of Universal and six other non-employees. Each of them faces up to seven years in prison.

“This investigation started with a murder and eventually led the police department and my office into a tangled web of financial schemes and bogus identities,” said Nassau County District Attorney Kathleen Rice. “Detectives and prosecutors simply followed the money.”


Rebuilding Trust With Consumers and Lenders

The situation put a big hurt on Victory’s reputation. Three prominent lenders dropped the dealership immediately. However, the dealership managed to recover two of them after providing information that absolved it of wrongdoing.

More work was required to mend relationships with Victory’s customers and the local community. The dealership allowed customers to return their cars and pay back the loans, or keep their cars and renegotiate the loans with the lending institutions. Some refunds were also made to customers who were forced to buy products like LoJack or extended warranties. Still, nothing could prepare the dealership for the media coverage that would later come.

“The press report didn’t come out until months afterward because there was an ongoing investigation … to have many months go by and then a splash of news implicating us with Universal. It was devastating,” Cirillo said.

So he and his brother reached out to the public and explained exactly what happened in a news article. Cirillo said he’s not sure what affect the article had on the community, and realizes it will be difficult for the dealership to regain the trust of customers.

To protect the dealership from future crimes, Cirillo said video and audio recording devices were installed in the finance offices. Signs are also posted in the offices notifying customers that their transactions are being recorded.

“It’s worked to help prevent problems for both sides — for the consumers and also for the dealership,” said Cirillo, who added that the dealership also got itself compliant with the FTC’s Red Flags Rule.

The road to recovery was similar for the new owners of Douglas Nissan, which have since changed the name of their outlet to Stadium Nissan. The dealership is now part of the Utah-based Ken Garff Automotive Group, which has 43 stores across six states. The dealer group acquired two of the Douglas group’s dealerships in April 2008.

The new management gave Douglas Nissan a facelift by putting up a sign with the new name, replacing the entire dealership’s staff, renovating the parts department, moving the finance office to another building, and creating a customer lounge. But besides physical changes, management also had to rebuild relationships with lenders and customers.

“When we went in … they only had one lender. We were surprised that it was as deep as it went,” said Jason Frampton, the dealer group’s vice president of sales and finance.

The new management diplomatically handled complaints from Douglas Nissan customers. Some of those complaints were easily resolved, but others were impossible to solve and management was forced to unwind those deals, Frampton said.

Repairing and unwinding deals was easy compared to the new owner’s task of rebranding itself to the community. For three months the dealership rolled out an advertising campaign using television, newspapers and brochures that emphasized the dealer group’s “Back-U-Up” promise, which offers a best price guarantee, roadside assistance and other services to customers.

“This will be our biggest challenge because we’re not starting at zero,” said Frampton. “We had to restore the credibility of the dealership.”

The money and effort spent at both Douglas Nissan and Victory Toyota were necessary to salvage their damaged reputations, an experience Cirillo said dealers should do everything in their power to avoid.

“My advice goes out to salespeople and finance managers who sit down with the customers,” said Cirillo. “Do the right thing by the customer, because if you don’t it’s going to come back to haunt you.”

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