Last week, the SEC charged BMW and subsidiaries with Securities Act violations for disclosing inaccurate and misleading information about the company’s retail sales volume in the U.S.—not as sales in its financial statements, but rather as key performance indicators in its offering memoranda to prospective investors for bond offerings that raised approximately $18 billion. Because of BMW’s “substantial cooperation during the investigation, notwithstanding the challenges presented by the global COVID-19 pandemic,” according to the Order, the SEC determined to impose a reduced penalty of only $18 million.
The SEC found that, to publicly maintain a leading position in the premium automotive market, for about four years, BMW’s U.S. sub used three tried-and-true practices to meet internal sales targets and increase retail vehicle sales volume (a non-financial metric). One of these practices was maintaining the proverbial “cookie jar”—an “excess reserve of unreported retail vehicle sales that it used when necessary to meet internal targets in a given month, without proper regard to when the underlying retail sales actually occurred,” referred to internally as the “bank.” (Not quite as bad as actually calling it the “cookie jar,” as happened in this case).
BMW also manipulated its demonstrator and service loaner programs by offering its independently owned BMW dealers financial incentives to designate vehicles as demonstrators or service loaners, so that they could be counted by BMW as retail sales—even though the dealers had not sold the vehicles to customers. For a two-year period, demonstrator and loaner vehicles accounted for over one quarter of the BMW sub’s reported retail sales. For example, an internal analysis in July 2015 showed that, as a result of an increase in the designation of demonstrators and service loaners compared to the prior year, the BMW sub reported “7% year-over-year growth in retail sales volume between the first half of 2014 and the first half of 2015, [although] it had in fact experienced a ‘[g]rowth rate of 0% vs. 2014’ in consumer retails.” The SEC found that this practice was pursued regardless of “whether dealers had a legitimate business need for additional demonstrators and service loaners, or whether the dealers put those vehicles to use as demonstrators or service loaners.”
Finally, BMW improperly adjusted its retail sales reporting calendar from the industry-standard calendar “to achieve internal retail sales targets or bank excess retail sales for use in future reporting periods.” For example, by extending the industry-standard calendar for a few days at the end of December 2014, the sub allowed an additional three days of retail sales reported in January 2015 to be counted by BMW as 2014 sales. During this period, BMW’s Internal Audit group identified two of the inappropriate reporting practices and recommended that they be discontinued, but the BMW sub failed to do so on a timely basis, according to the SEC.
At the same time, BMW was conducting bond offerings in the United States under Rule 144A, raising approximately $18 billion. To that end, BMW provided information about U.S. retail vehicle sales to bond investors, credit rating agencies and others in offering memoranda and investor presentations. More specifically, the offering memoranda “reported BMW AG’s retail sales volume as a ‘non-financial key performance figure,’” and emphasized BMW’s retail sales history and outlook. In addition, BMW issued monthly press releases that disclosed inaccurate retail sales data from the prior month. Although the offering memoranda “stated that ‘Retail vehicle sales data, which represent estimated sales to customers, including fleets, do not correlate directly to the revenue BMW [AG] recognizes during a given period, and, for example, includes in various jurisdictions, vehicles delivered for dealer use or demonstration and service loaners,’” the SEC concluded that this disclosure did not reflect BMW’s “reliance on these practices to increase retail sales volumes, the magnitude of the improper use of demonstrators and loaners, or the use of the bank and retail sales reporting calendar modifications.” Accordingly, the SEC viewed these retail sales disclosures to be inaccurate and misleading.
The SEC found that BMW violated Section 17(a)(2), which prohibits obtaining “money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading,” as well as Section 17(a)(3), which proscribes engaging “in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.” The SEC observed that these provisions do not require scienter and violations “may rest on a finding of negligence.” However, given BMW’s extensive cooperation, self-reporting and remedial measures, the fine imposed was only $18 million.