LUBBOCK, Texas (KCBD) - Attorneys for the Reagor-Dykes Auto Group estate filed a motion late Monday morning claiming former CFO Shane Smith “cooked the books,” allowing him to take $527,076.81 commission payments he was not owed.
This latest filing says Smith did not steal vehicles or computers, but willingly recorded bogus accounting entries on the official accounts of the company that resulted in the inflated commissions.
The motion also says the bogus accounting entries were added to substantially increase the reported net profits of the company and thereby increasing Smith’s compensation.
Smith pleaded guilty to one count of wire fraud in June 2019. His sentencing date has been rescheduled multiple times and a new date has not been set. He faces up to 20 years in prison, probation and pay a restitution of more than $50 million. He was the first person to receive a criminal conviction since RDAG filed for bankruptcy and was sued by Ford Motor Credit in August of 2018.
The documents filed on June 15, 2020 say Smith’s salary was a base salary of $180,000 per year plus entitlement to an 8 percent commission on the net profits of all eight dealerships.
In December 2019, the group submitted a proof of loss to The Travelers Companies, Inc., an insurance company providing RDAG with a “crime” policy covering a broad range of employee misdeeds, including theft from the company.
Documents show Smith received a monthly commission check ranging from more than $42,000 to $79,000 from January 2017 through December 2017 totaling more than $642,000. His legitimate bonus payments should have totaled $115,456.63 for the same period, resulting in the “falsely inflated” overpayment of more than $527,000.
Travelers agreed to pay the policy limit of $500,000 plus out of pocket expenses of $4,452.50, according to the motion.
RDAG is requesting the federal judge grant the motion so they can receive and use such funds in the ordinary course of business.
The claim states:
Summary of Claim
Reagor Dykes Auto Group (RDAG) is hereby submitting an insurance claim under the Travelers Crime policy in the amount of $527,076.81. The claim is based on the over payment of Managers Commissions to Mr. Shane A. Smith during the calendar year 2017. Mr. Smith knowingly and willingly recorded bogus accounting entries on the official accounts of the company in order to substantially increase the reported net profits of the company and thereby increase his personal income through his official Managers Commission compensation package. The amount of the overpayment is $527,076.81.
RDAG is made up of eight new and used car dealerships in and around Lubbock, Texas. The company grew tremendously over the past few years and recorded revenue of approximately $600 million in 2016. Mr. Smith, as Chief Financial Officer of the company, was paid handsomely for his executive position. Mr. Smith’s base salary was $180,000 per years and he was entitled to an 8 percent commission on the net profits of all eight dealerships.
On August 1, 2018, RDAG filed Chapter 11 bankruptcy after being sued by Ford Motor Credit Company for various violations of its floor plan financing agreements. During the bankruptcy, it was discovered that Mr. Smith was also the mastermind behind a check kiting scheme that defrauded numerous bank[sic}.
Also during the bankruptcy the Chief Restructuring Officer (CFO) discovered that Mr. Smith had routinely and consistently recorded bogus accounting entries to improve the reported profits of the company. For example, during 2017 the bogus entries improved reported profits by over $11 million thereby improving profits from a $3.5 million loss to a $7.8 million profit. The improvement resulted from the reclassification of much of the company’s operating costs to various asset or inter-company accounts. In other words, Smith took costs off the books to improve profits.
In 2019, Mr. Smith pled[sic] guilty in Federal court to a number of felony offenses.
Description of Claim
As a part of the CRO’s accounting work during the bankruptcy in early 2019, the CRO team restated the company’s financial statements for the year 2017 in order to provide federal tax information to the outside CPA responsible for filing the owner’s tax returns. The restatement involved identifying the bogus accounting entries and reversing them to the correct accounts.
A few weeks ago in November 2019, the CRO team was reviewing the accounting work for tax reporting purposes and was informed by two senior RDAG employees that the bogus entries had likely resulted in large unearned Managers Commissions for Mr. Smith. Based on that revelation, the CRO team began to investigate the extent of the overpayments. This claim is a reflection of the calculate overpayment.