Credit Acceptance Corporation - PlainSite

ident and COO Richard Beckman. Investors sued after the company “shocked themarket by reporting [its] first ever quarterly loss for the quarter ended September30, 1997 of 27,708,000, or 0.59 per share, as the result of the company taking anextraordinary 60 million charge for additional credit losses.” The complaint is rifewith accusations of fraud and deceit.2 Among other issues, the plaintiffs in the caseaccused Foss and Credit Acceptance of “utilizing misleading accounting practices andartificially inflat[ing] CAC’s reported financial results” and touting “illusory” dealerholdback. The lawsuit also alleged that the company had “knowingly permitted substantial deviations for reasonable underwriting standards, and willfully exposed itselfto the risk of substandard collateral.”Foss’s dealerships were cited as examples of those earning high advances by sellingcars of inferior quality, the exact opposite of what Credit Acceptance claimed to berewarding through dealer holdback payments. The second amended complaint3 citesa deposition of Akron, Ohio car dealership owner Larry Leudeman, who was a partowner of Larry Lees Auto Finance Center, Inc. Leudeman described Foss’s tendencyto overlook poor quality:“From time to time, being involved in seeing things, I would indicate to [Foss] that someof this merchandise shouldn’t be sold or shouldn’t be on the lot and we had conversations in that respect.”“[I]f you pointed something out to Don and he didn’t like it, the subject was changed,or I’ll call you back type of thing, and the phone would hang up, or if you’re [sic] inperson he just didn’t want to discuss certain things.”Foss encouraged the managers of his dealerships to purchase “junk” and “cheater”cars and did not have the mechanics on staff to recondition vehicles even though theywere sold as reconditioned, according to the complaint.Foss also used various tricks to overprice vehicles sold through his dealerships, suchas assigning prices to vehicles sold in cold climates using Blue Book values intendedfor vehicles operated in mild climates. Credit Acceptance financed these vehicles,though they were clearly overpriced given the additional wear and tear. These allegations echoed those expressed in an ABC 20/20 hidden camera segment on DonFoss Auto World that aired on June 30, 1995, entitled “Taken For A Ride: Used CarFrauds and Scams.”Credit Acceptance’s “grossly reckless underwriting standards” allowed Foss’s “junkcars” to be priced and financed as if they were of significantly higher value, according233Miller v. Credit Acceptance, et al, Michigan Eastern District Court, Case No. edit-acceptance-et-al/Miller v. Credit Acceptance, et al, Michigan Eastern District Court, Case No. 2:98-cv-70417, Document ?id 19440831&z ad16c3b5Credit Acceptance Corporation: Part III

to the second amended complaint, which cited the following example from litigationin Akron, Ohio:“On December 21,1995, Christopher Lauderdale purchased a 1984 Oldsmobile Firenza, two-door, from Larry Lee’s Auto Center in Akron, Ohio, an affiliated dealer ownedby Don Foss. Larry Lee’s Auto purchased the vehicle for 650. Lauderdale purchasedthe vehicle for 5,751.36, including taxes, warranty fees, and finance charges for whichMr. Lauderdale and his wife paid a down payment of 390 (6.78%). CAC advanced 1,406.17 based on 50% of the selling price (including taxes, license, and documentfees) of the vehicle less the down payment. Besides the initial 1,406.17 advanced,CAC provided additional advances in the amount of 395.99 for service contract related advances, for a total dealer advance of 1,801.17. CAC advanced these sumsto Larry Lee’s Auto notwithstanding the fact that Larry Lee’s Auto had a Dealer Ratingof 5 in December of 1995, a category rating reserved for those dealers with poor loanpool performance.”If anyone should have known how to work the Credit Acceptance dealer incentivesystem, it was Foss. Yet, the founder of Credit Acceptance, when overseeing theoperation of his own dealerships, was described as selling clunkers at inflated priceswhile collecting “inordinately high advances.” Foss’s approach and that of another topvolume dealership, as described in the filings, are completely at odds with Credit Acceptance’s purported alignment between borrowers, dealers and the company—apillar of Credit Acceptance’s investor disclosures, which include statements such asthe following:“Our business model allows us to share the risk and reward of collecting on the Consumer Loans with the Dealers. Such sharing is intended to motivate the Dealer toassign better quality Consumer Loans, follow our underwriting guidelines, comply withvarious legal regulations, meet our credit compliance requirements and provide appropriate service and support to the consumer after the sale. In addition, our Dealer Service Center works closely with Dealers to assist them in resolving any documentationdeficiencies or funding stipulations. We believe this arrangement causes the interestsof the Dealer, the consumer and us to all be aligned.”4Dealers are theoretically supposed to forgo some upfront profits in exchange forearning more later on, once loans are shown to be high quality.Foss’s Financing Operation Behind the CurtainDespite the allegations raised in the securities case, which was settled in 2001, CreditAcceptance continued to do business with Foss-related dealerships. By the mid2000s, Foss had created a complex network of companies to channel funds to deal4Reality CheckSEC Form 10-K, December 31, 2016, Page 7. 31.10-k.pdf4

Don Foss’s Dealer NetworkMelissa AppleMaria Lopez Irrevocable Trust UTD March 29, 2004Craig WaltzerHorvath Holdings, LLC et al v. Aventura Holdings, Inc. et alAventura Holdings, Inc.Alan SiskindNAF CorporationKeith Bullard Auto Liquidation Center, Inc.Ohio Funding Group, Inc.Anthony CianoKey Auto Liquidation Center, Inc.Horvath Holdings, LLCKALC Partners, LLCAmerican Dealer Enterprise Group, LLCAuto Finance Center of America, Inc.Karol A. Foss Dealer Enterprise Group I, Ltd.Donald A. Foss Revocable TrustDetroit II Automobiles, Inc.Mark R. HorvathLarry Lee's Auto Finance Center, Inc.Longstock, LLCAllan V. AppleLarry LeudemanDonald A. FossAuto Liquidation Center of Waterford, Inc.Lee P. WellsAmerican Dealer Funding Group, Inc.Auto Liquidation Center, Inc.Longstock III, LLCCleveland Auto Liquidation Center, Inc.DII Development, LLCCarite, Inc.Thomas CiattiCARite Capital, LLCHalberd Holdings, LLCCiatti et al v. Carite, Inc. et alCARite Corporate, LLCWilliam HackelCARite of KalamazooSteven BaileyIndividualsAccountantsDealership Finance CompaniesCar DealershipsLawsuitsTrustsReal EstateConvicted Felonserships working with Credit Acceptance.On January 12, 2006, the Secretary of State of Michigan approved the articles of incorporation of American Dealer Funding Group, Inc. (ADFG), which would later listits business purpose as “FINANCE.” The company was originally set up by Mark R.Horvath and Allan V. Apple—Don Foss’s accountant and Credit Acceptance’s CFO5Credit Acceptance Corporation: Part III

from 1987-1991, as well as its Executive Vice President from 1992-1995, as well as thecorporate Secretary—in order to provide funding to car dealerships.ADFG was not the only dealer funding vehicle Apple was involved with at 25505West Twelve Mile Road in Southfield, Michigan. Ten years earlier, Don Foss’s ex-wife,Karol A. Foss, had incorporated American Dealer Enterprise Group, LLC (ADEG),also in Michigan.5 By late 2006, Allan V. Apple was listed as ADEG’s registered agentas well.With the help of Apple,6 Foss set about creating new companies and enlisting his olddealership-related companies until he had a veritable army of dealer financing entities7 that one lawyer likened to General Motors Acceptance Corporation (GMAC),now known as Ally Financial:“This type of financing arrangement is common in the automotive industry. For example, General Motors Company has a ‘captive’ financing company, General MotorsAcceptance Corporation, which provides financing directly to consumers through itsdealerships.”8However, the analogy likening Foss’s network to GMAC only goes so far, for severalreasons. While GMAC was one large entity connected to a bank, Foss used manydifferent seemingly unrelated entities, none of which ever had a banking charter. Andwhile GMAC existed to further the interests of General Motors Corporation, Foss’sdealer funding businesses were not intended to help Credit Acceptance or any particular car brand. In fact, just the opposite was true: they were designed to exploitCredit Acceptance for Foss’s personal gain.Stabilizing PoolsWe interviewed a dealer who worked for one of the Foss-connected dealerships inthe mid-2000s. He explained how the dealership was expected to operate.Foss-controlled dealerships operated under stringent rules, according to dealers we5678Reality CheckRichard Vanderport, listed as a “Member” of ADEG, signed incorporation papers for Vero Enterprises, LLC in Michiganalso in 1996. It is not clear what the company was used for, but its Registered Agent was later listed as Allan V. Apple.In addition to his history with Credit Acceptance, Allan V. Apple is the trustee for multiple trusts that benefit Foss’schildren and other relatives. According to a SEC Schedule 13G filed February 14, 2018, “Mr. Apple is the trustee of TheDonald A. Foss 2009 Remainder Trust, The Donald A. Foss 2010 Remainder Trust, The Donald A. Foss 2010 RemainderTrust #2, and The Donald A. Foss 2011 Remainder Trust FBO Robert S. Foss and Descendants. Mr. Apple disclaimsbeneficial ownership of the 1,906,647 of these shares owned by such trusts.” At a stock price of 320 per share, thoseshares are worth 610 million. Robert S. Foss is Don Foss’s son. Additional documents concerning Foss’s companiesrefer to a Donald A. Foss Revocable Trust.Several of these entities changed names and were re-structured over time. For example, Ohio Funding Group, Inc.was previously called Dealer Enterprise Group I, Ltd. Numerous Foss entities reference the phrase “Detroit II,” such as“Detroit II Automobiles, Inc.,” “Detroit II Auto Finance Center” and “DII Development, LLC.”OHIO FUNDING GROUP INC et al v. KEY AUTO LIQUIDATION CENTER INC et al, Florida Northern District Court, CaseNo. 3:07-cv-00209-MCR-MD, Document 11, Pages l?id 250315601&z f5d7babd6

interviewed. First, the dealerships were not allowed to use any source of fundingother than Credit Acceptance and one other entity that was part of the Foss network: Ohio Funding Group, Inc.Dealers were instructed to utilize Credit Acceptance financing for borrowers withstrong credit, rather than direct these customers to credit unions or prime lenders. Inthis way, the least risky borrowers would boost the forecasted collection rate on thedealer’s Credit Acceptance loan pool. Meanwhile, high-risk borrowers were channeled into Ohio Funding Group’s and kept out of a dealer’s Credit Acceptance pools.Adding strong borrowers and eliminating weak borrowers from a dealer’s pool wasessential for maintaining a strong dealer ranking (in turn based on the dealer’s forecasted collect rate), the dealer explained. He said that when working with Foss, thestrategy worked well, resulting in lots of closed pools and holdback payments—atleast for a while.Deal Volume and Speed CountWorking with Foss taught the dealer that it was crucial to do high volumes and tokeep pushing loans through. “They were sold on the hype,” he said.In order to earn holdback, dealers also needed to close pools rapidly, he explained.Without constant new business, the collection rate on each dealer pools deterioratesover time. They only way to keep up the performance of outstanding pools is to addnew paying loans, he said.“You have to be a big dealership. You have to keep adding loans or your pools won’twork.” Most dealerships were convinced that they were going to earn large backendpayments, but in the end they couldn’t make the system work, he explained.“Warranty A Deliverable Deal”Dealers were also expected to add Vehicle Service Contracts (VSCs) to every deal.“You were forced to put in warranties. A warranty equaled a deliverable deal,” theformer dealer told us, referring to VSCs.As explained in Part I of this report, VSCs provide little or no value to the consumer.The policies are often sold without consumers receiving a copy of the actual contract,making it difficult to know how to go about filing a claim or what is even covered. Inaddition, dealers often reject claims made under the warranty and are incentivizednot to make repairs as doing so may cause their Credit Acceptance dealer rankingto decline. These rankings are one of many factors used to determine the size of advances that dealers receive from Credit Acceptance on every Portfolio Program loan.7Credit Acceptance Corporation: Part III

The description of how Foss-overseen dealerships operated (and perhaps still do)is far different from Credit Acceptance’s description of how it aligns dealer interestswith those of the consumer. The focus appears to have been on pushing throughvolume while avoiding precisely the kinds of borrowers Credit Acceptance claims ithas developed a system to lend to.Requiring a dealer to add an arguably worthless VSC to a loan, inflating the size of thetotal amount financed and creating inevitable frustration in the event of a mechanicalproblem—not to mention a strongly decreased likelihood that the borrower will continue paying off the loan—does not align a dealer’s interest in making a responsibleloan with Credit Acceptance’s supposed goal of financing them.A Plan to Go Public,AgainBy the mid-2000s, Foss’s dealer network was at the center of a plan to create a newpublicly traded company. Foss set out to combine a number of successful CreditAcceptance partner dealerships into a single company that also provided financing.Unlike Credit Acceptance, which partnered with independent dealerships, Foss’s newcompany would bring the dealers in-house. The anticipated business model wasmuch like that of JD Byrider, according to one dealer involved in the business.Foss began financing and working closely with a number of dealerships across thecountry in Florida, Connecticut, Ohio and elsewhere. According to people familiarwith the venture, Foss would “lend” around 1 million to a dealership and in exchange receive a percentage of anticipated dealer holdback payments from CreditAcceptance.Foss’s strategy of investing in dealerships and then getting repaid via Credit Acceptance dealer holdback was described in an agreement filed with the Securities andExchange Commission between Keith Bullard’s Auto Liquidation Center, Inc., a Pennsylvania car dealership, and Horvath Holdings, LLC, one of Foss’s companies. Underthat agreement, the dealer assigned to Horvath Holdings its rights to receive “allproceeds under the Credit Acceptance Corporation (6X6 Pool) payments” as well ascertain Ohio Funding payments and proceeds from other vehicle sales.9These loans, according to two individuals involved in the business, were more like equity investments than debt. “Foss has this need to keep his ownership disguised,” onedealer said. The idea was that Foss’s loans would be repaid through his percentagestake in dealer holdback. In other words, Foss would be on both sides of every transaction as a de facto owner of the dealer and a major stakeholder in its funding source.In preparation for the public offering, Horvath Holdings also took a stake in an exist9Reality 2/000119312507134199/dex103.htm8

ing publicly traded company called Aventura Holdings, Inc., “a Florida-based holdingcompany formerly involved in the voice over IP space and now involved in digitalvideo recording and remote storage”10 that could serve as a corporate shell for amerger that would avoid the hassle and expense of a full initial public offering.The Plan Falls ApartFoss first landed in federal court when Aventura Holdings, Inc. got into a dispute withseveral dealership funding entities controlled by ADFG founder Mark Horvath overcompany ownership.11 The dispute spilled out into a Fort Lauderdale courtroom onlya year and a half after ADFG was founded, though technically ADEG and Horvarth’sumbrella company, Horvath Holdings, LLC, werethe plaintiffs. Eventually, Don Foss and Allan Applewere named as third-party defendants.Case 3:07-cv-00209-MCR-MD Document 11-5 Filed 05/25/07 Page 1 of 2Around the same time, another dealership funding issue involving some of the same companiestied to Mark Horvath landed in federal court, thistime in the District of Northern Florida.12 Fourof Foss’s and Horvath’s dealer financing companies had provided loans to Key Auto LiquidationCenter, Inc., a dealership in the Florida panhandlenear Pensacola. Key Auto went out of business inMarch 2007 and ultimately declared bankruptcy,leaving the loans unpaid. Litigation between thecompany’s four creditors, (Ohio Funding Group,Inc., NAF Corporation, Auto Finance Center ofAmerica, Inc. and Detroit II Automobiles, Inc.) andthe dealership’s shareholders ensued.The Key Auto litigation in Northern Florida wasunusual for its staggering complexity given theA central document from the Key Auto litigation reveals a largefairly straightforward nature of the claims involved.but partial list of dealership funding companies with connectionsto Don Foss.The complaint, which the angry creditors originated in Florida s

Acceptance offering dealer financing to thousands of dealerships nationwide, and eventually internationally. Meanwhile, Foss kept a hand in running his own dealerships. In this way, Foss was both the head of Credit Acceptance—now a multi-billion-dollar publicly traded com - A sign