Baierl Acura in Wexford, Pa., showered its loyal controller, Patricia K. Smith, with rewards few dealership employees could imagine. Smith enjoyed a $5,000 private tour of the Vatican, a $32,500 private luncheon prepared by Food Network star Ina Garten and a $62,500 VIP trip to the Super Bowl, among other perks. But none of those expenses were part of her compensation plan. In fact, nobody else at the dealership knew she had earned them.
“I turned myself in, and it was not because they were ‘close’ to finding out — far from close to anything,” Smith tells Auto Dealer Monthly. She wrote to the magazine from the Federal Correctional Institution in Aliceville, Ala., where she’s serving a six-and-a-half-year sentence for embezzling $10.2 million from her former employer.
Authorities, though, dispute whether her confession was completely voluntarily — with prosecutors claiming she “left work on July 28, 2011 after she received an e-mail from the chief financial officer of Baierl, which caused her to believe that she would soon be confronted about the embezzlement.” Regardless, Smith took the blame by pleading guilty to more than 800 occasions of wire fraud.
Although the amount attached to Smith’s transgressions is rare, the same cannot be said of embezzlement cases involving dealerships. This year, Marquet International’s annual report on industrial embezzlement listed automotive as the 12th most popular industry for such crimes, with 61 reported cases in the past five years. At the top of the list is the financial services industry, which recorded 276 incidents in the same period and accounts for 13 percent of all embezzlement cases recorded during that period.
Auto retail may pale in comparison, but those 61 reported cases account for a collective loss of $64.3 million — more than $1 million for each incident. (The list includes cases from other segments of the auto industry, including manufacturers and repair shops.)
“The automotive slice is modest, but in those cases, the consequences have been somewhat devastating for dealerships,” says Christopher T. Marquet, founder and CEO of Marquet International. He notes that Smith fits the profile of the quintessential embezzler: She is female, an employee of more than five years, and she walked away with more than $800,000. She also lived in Pennsylvania, one of the most likely states to report embezzlement.
Marquet says her age skews slightly higher than the typical perpetrator, which is often between the ages of 40 and 49 years old. Smith would have been about 50 years old when she started stealing from the dealership in 2004.
FIVE FEET TALL
One recent case puts another dent in Marquet’s embezzler profile. Sonic Automotive is a Fortune 500 company with more than 100 dealerships in 14 states. Despite being one of the most financially successful dealer groups in the country, it lost a quarter of a million dollars to a 19-year old girl who stands just over five feet tall.
Ashley K. Coffey, now 25, was hired about four years prior to her arrest in January. She had worked her way up to an office manager position where she was permitted routine access and signing privileges on the accounts for Sonic’s BMW, Honda, Mercedes-Benz and Volkswagen stores. Coffey was responsible for processing wholesale bills, filing documentation and clean schedules, processing warranty payments and cancellations, and issuing tag refund checks and after-sale products. That’s how prosecutors say she was able to perpetrate her embezzlement scheme, which allegedly went on for more than three and a half years and affected four of Sonic’s Florida stores.
The scheme came to an abrupt halt when Coffey left for her lunch break one day and never returned.
About six weeks before Coffey walked out, Sonic’s comptroller, Carol Wood, “observed strange behavior,” prompting management to step in to review Coffey’s work. That’s when they discovered the first of 172 fraudulently issued warranty refunds payable to Coffey or her mother, Wood later reported to authorities. Coffey was arrested and sentenced to three years in state prison and 27 years of probation.
Coffey’s primary tool was simple forgery. That’s not all that unusual, according to Marquet, who reports that forged or unauthorized checks account for 36 percent of the embezzlement his firm recorded in the last five years. Coffey made a habit of using an old customer number on the accounts she oversaw. The dealership requires the endorsing signatures of two managers to issue a check; Coffey forged the signatures of any combination of two of her four supervising managers, including Wood.
“When Sonic Automotive recorded the transactions on its books and schedules, actual customer numbers and names appeared rather than the information that was overwritten, so Ms. Coffey’s name never appeared anywhere,” Wood told a detective assigned to the investigation, according to an affidavit filed in the case. “This essentially facilitated the unauthorized and fraudulent refunds to go undetected for a period of time.”
In addition to Coffey’s prison term and probation, the Florida judge ordered restitution of the full $256,482.53 to Sonic Automotive with a minimum payment of $500 a month, according to the Florida state attorney’s office. Sonic’s senior vice president and general counsel, Stephen K. Coss, declined to comment on the case or whether the group expects to recover the full amount.
ROAD TO RECOVERY
Marquet says the chances of Sonic receiving full payment are slim. “You rarely see a case where [dealers] recover 100 percent,” he explains. “The motivation for these cases is not because somebody can’t pay their mortgage; they want to live a life they otherwise wouldn’t be able to enjoy.
They will buy second homes or buy nice cars. All these can be seized and controlled,” he notes. “But they’re also paying off kids’ colleges, throwing parties, going on junkets, so a lot of that is lost.”
Such was the case for Baierl Acura. The court found that its former controller was “cooperative in the asset recovery process.” But according to court filings, “The government [made] every effort to recover assets of the victim automobile dealership; however, some of these expenditures are unrecoverable and these include first[-class], extensive worldwide travel to seven countries in Europe and four Caribbean islands.”
Lee Baierl, CEO of Baierl Automotive, sent a statement to media outlets after Smith’s sentencing last year. It reads, in part: “Despite the amount of funds taken over time, there were no adverse impacts to our daily operations. Our business is doing well and we have adopted stronger measures to prevent such a crime from ever occurring again.”
Even dealers who are insured against such losses can come up short in the recovery process. Piles Chevrolet Buick of Williamstown, Ky., was defrauded by a married couple, both former employees, who were convicted in 2010 of stealing more than $570,000 from the store. But after spending three years wrapped up in a legal battle with Auto Owners Insurance Co., the dealer was entitled to only $35,000 in reimbursement from the insurance firm because of coverage limits in his policy, court records show.
Some dealers might decide the risk of not seeing that money again isn’t worth the time spent on litigation; to others, the stigma of falling victim to fraud deters them from taking their employees to court. Lori Haley, a certified public accountant with Dixon Hughes Goodman Dealer Services, says most of her clients who have caught employees embezzling declined to press charges.
“Number one, it’s because they don’t want the negative publicity. We really try to encourage them [to take legal action], because when they don’t, it sends a message that, ‘You can do this and you might get fired, but there won’t be a financial impact or you won’t go to jail over this,’” Haley explains.
“Sometimes it’s an embarrassment issue: ‘How can this go on? How can someone who’s my trusted friend, worked in my store for 30 years, how can she possibly steal half of a million dollars?’”
Danny McKenna of the Norwalk, Calif.-based McKenna Automotive Group discovered that two longtime employees had allegedly stolen more than $600,000 from his company. He fired both but chose not to turn them in to authorities. In an interview with Automotive News, McKenna did not explain why, but he did say that the fraud was detected when one of the employees took a medical leave.
That would come as no surprise to most fraud experts. Embezzlers must work constantly to cover their tracks, often refusing to take sick days or extended vacations. The more time a rogue employee spends away from work, the closer they are to being found out. But many times, fraud isn’t discovered until the perpetrators are long gone.
In September 2011, Kathryn Stayton was fired from her position as controller with Fletcher Ford in Joplin, Mo. Her termination had nothing to do with embezzlement, but her replacement soon began to notice discrepancies in Stayton’s financial reports. A total of about $88,000 was missing from the dealership’s bottom line, according to Stayton’s plea agreement, which was entered into on July 31, 2013.
This discovery prompted an internal audit of the company’s financial records. Analysts found that Stayton carried out each of her crimes using one of three methods: The first involved Stayton generating checks from Fletcher Auto Group’s Bank of America account, made payable to herself or her mother.
Stayton also reportedly stole cash “by receiving payments from vendors, keeping the cash payments and falsifying entries in the company’s accounting system.” In the end, “Vendors were able to provide proof that their payment to the dealership was made in full as their checks had cleared the vendor’s bank account. Further review indicated that the vendors’ checks were transposed for cash from the daily receipts and subsequently not recorded as paid in full on the vendors’ outstanding balances.”
Stayton’s alternative artifice was stealing cash “via a single cash transaction from a customer intending to use the cash as a down payment. Stayton took the cash and never reported having received it.”
While the investigation continued at Fletcher Ford, Stayton took a job at Credit Cars of Joplin, where she allegedly used similar tactics to steal an additional $13,000, increasing her total take to more than $100,000. Court filings indicate that Credit Cars’ owner learned of an accounting issue after a monthly bank reconciliation and called a meeting among managers, including Stayton. An hour after the meeting, she left the building and never returned.
In February 2012, a seizure warrant was issued to retrieve a vehicle Stayton had fraudulently obtained from Fletcher Ford. According to a report from U.S. Secret Service agent Dan Allgeyer, Stayton admitted that the fraudulent activity “was all me.” She cited “out-of-control personal bills” as her motive for stealing from the companies. Stayton refers to her last three years as “a dark place I’ve been living in.” She is awaiting a trial date and, as of August, she was undergoing a court-ordered mental health assessment.
“Once the doctor is confident that I am properly diagnosed and on the correct medication, I think I will be ready to deal with what I have done,” Stayton wrote in an e-mail to Auto Dealer Monthly. “And hopefully I will be able to see that there is a chance that my life won’t end because of this. As of today, I feel like there is no hope of ever fixing anything.”
All sides agree that Stayton admitted fault early in the investigation and cooperated with law enforcement. Others who face embezzlement charges take longer to confess.
In April, Manon Cote pleaded not guilty to pocketing more than $400,000 — “to make payments on personal obligations, including car loans” and “to purchase a laptop computer” — from DeLaBruere’s Auto Sales, a car dealership in Vermont. After attorneys collected “large amounts of discovery” against Cote this summer, prosecutors piled on the evidence implicating Cote, consisting of “financial affidavits and records alleging fraud totaling 4,057 pages,” and “an additional four disks of financial records.”
Cote changed her plea to guilty in late October during a pre-trial hearing. Her trial is scheduled to begin in February 2014.
WOMEN IN DEALERSHIPS
The clear majority of automotive embezzlement cases involve female perpetrators, which mirrors what Marquet International has found among all industries. By Marquet’s count, two-thirds of all embezzlers are women. Among lower-level managers charged with embezzling funds from car dealerships this year, only one noteworthy case involves a male employee. (One other incident involves a male dealer who owned the business and allegedly stole funds directly from consumers.)
One reason for the disparity is that, according to the National Automobile Dealers Association (NADA)’s 2013 Dealership Workforce Study, female dealership employees hold 92 percent of all office and administrative roles. That’s a relatively high amount considering only 18 percent of all dealership positions are held by women.
One exception is Ralph L. Schippers, the former office manager of Iowa’s Granger Motors. In January, Schippers received a sentence of 41 months in federal prison for defrauding the company of about $1.4 million. Interestingly, Schippers’ scheme extended over a far longer time period than any of his female counterparts. He spent 14 years “manipulating the dealership’s accounting system and causing money to be wired or deposited to his personal bank account, making fraudulent journal entries in order to conceal the fraud,” according to the FBI.
Schippers’ $1.4 million haul was the highest among dealership embezzlers who made headlines in 2013, which is slight compared to Smith’s $10.2 million scheme the year prior. Marquet’s data indicates that, although males embezzle less frequently, the amounts they steal tend to be significantly higher — $1.9 million vs. $801,000 across all industries.
But, Marquet says, Smith’s scheme is clearly considered an “outlier,” at least in the automotive segment. “Anything over $10 million is a massive case, in my view,” he says. “I’m still surprised by the sheer magnitude and number of cases this year, upward of 500 instances. It happens more than every single day — about 10 occurrences in a week — in the United States. It’s mind-boggling.”
Smith’s former employer, Lee Baierl, declined to comment on this article, explaining he is finished discussing the case, adding, “We’ve moved on.”
It sounds like Smith is ready to return to normalcy as well. In her letter, she writes, “At this point in my life, I want to do the time imposed and return home to my family with a clear conscience.”
Smith is set to be released on March 16, 2018.[PAGEBREAK]
EASY TO PREVENT. EASY TO DETECT.
Accounting experts offer recommendations on how dealers can protect their operations from fraud. Much of their advice is simple and easy to implement. They also make clear that prevention must start at the top.
Lori Haley, CPA, Dixon Hughes Goodman
If you do one thing, set up a tip hotline. It sounds so silly, but it gives employees a way to anonymously let someone know there is something going on that doesn’t look right. Employee communications and hotline tips are the way most of these frauds end up getting discovered.
A lot of dealers are at almost pre-Recession volumes and they’re still sitting in recessionary staffing levels. We know dealers are hesitant to bring those staffing levels back up, but make sure you’ve got accountability.
If dealers live under a rock, they’re going to be susceptible to one of these frauds someday. It’s recognizing what’s going on out there and that you’re in a cash extensive business, because there is a lot of fraud that goes on in dealerships. If you’re not looking and you don’t have controls in place, people are going to steal from you.
Dave Keller, Certified Fraud Examiner, CPA, CliftonLarsonAllen
Separate duties so one person isn’t doing the bank reconciliation, handling checks or cash, and going to the bank to make deposits. And be aware and make sure bank deposits get to the bank.
Every now and then, get the bank statement in whole and look through it. Look through electronic fund transfers, because they are a big way to steal now. That’s because there’s no paperwork to it.
Dealers also need to have proper insurance like employee dishonesty insurance. I recommend car dealerships have $300,000 to $500,000 minimal insurance.
Ron Sompels, CPA, Crowe Horwath
Tone at the top is important, because it gives the dealership team the idea that top management is of high integrity, that they do take all of this fraud to heart, that they look at the risks, that they are putting good controls in place, are not afraid to spend the money necessary to do that, and that any kind of fraud is not going to be tolerated.
In the embezzlement workshop I present, I can tell people get a little fearful thinking about their trusted employees and knowing what controls they have over them. I certainly don’t mean to do that, but at the same time, that is pretty healthy for them to start thinking about that and what controls they need to put in place.