Fiat Chrysler shares hit by report of U.S. lawsuit

MILAN/DETROIT (Reuters) - Shares in Fiat Chrysler Automobiles (FCA) fell by more than 10 percent in Milan on Thursday after the owner of two Chicago-area dealerships filed a lawsuit accusing the company of inflating sales, adding to the legal woes hitting the sector.

A new Fiat Chrysler Automobiles sign is pictured after being unveiled at Chrysler Group World Headquarters in Auburn Hills, Michigan May 6, 2014. REUTERS/Rebecca Cook/Files

The lawsuit filed on Tuesday alleges that FCA had offered financial incentives to dealers to report unsold vehicles as sold and then reverse those sales the following month. The suit was reported earlier by Automotive News following a story in the local press.

FCA said in a statement the claim was “without merit” and that it had been “discussing with the dealer group the need to meet its obligations under some of its dealer agreements”.

The carmaker, which said it has not yet been served the lawsuit, said it had confidence in the integrity of its dealer arrangement and would “defend this action vigorously”.

David Kelleher, who has a Philadelphia-area FCA dealership and is the former head of the company’s national dealer council, said, “When the dust clears there will be nothing to this. The sales are real.”

Kelleher said it is likely that the two dealers are losers in a strategy that rewards meeting sales quotas, and that the company’s internal system for reporting sales safeguards against making false claims.

FCA shares fell as much as 11 percent during the session and were down 7.8 percent at 6.86 euros by 1604 GMT after being suspended from trading twice for excessive volatility. Shares traded in New York at 1604 GMT were down 5.5 percent at $7.43.

The European car sector index was down 3.3 percent, after also being hit on Thursday by news that police had searched the offices of Renault last week in an unrelated investigation.

“Investors are nervous on auto stocks,” Italian broker Mediobanca Securities said in a note. “For those reasons share price reaction is difficult to estimate and probably irrational.”

The lawsuit alleges that FCA benefited from the practice “as it results in the inflation of the number of year-over-year sales which, in turn, create the appearance that FCA’s performance is better than, in reality, it actually is”.

An analyst who spoke on condition of anonymity said FCA’s Investor Relations office had told him the allegations were unrealistic and that FCA calculates its revenue on shipments, not sales.

The analyst said FCA emphasised it was not the Chrysler U.S. dealers’ association that made the accusations, “but only a couple of dealers”.

Separately, shares in Renault tumbled more than 20 percent after the carmaker said fraud investigators had inspected three of its sites to look into its vehicle emissions technology.

The news follows nearly four months of headlines over a scandal involving rival Volkswagen, which admitted cheating on U.S. emissions tests. Shares in VW are down about a fifth since.

Reporting by Valentina Za, Silvia Aloisi and Agnieszka Flak in Milan, Bernie Woodall in Detroit, Jonathan Stempel in New York; Editing by Katharine Houreld