Federal authorities were dealt a setback this week in their yearlong crackdown on a growing niche business of buying luxury cars in the United States for quick resale in China at markups of as much as triple the initial purchase price.
A judge in Ohio issued a ruling on Monday that ordered the federal government to return money and cars it seized in September from a Los Angeles-based automotive export business involved in reselling newly purchased Porsches, Range Rovers and other luxury cars to wealthy buyers in overseas markets.
Federal prosecutors contend the company, Automotive Consultants of Hollywood, violated federal wire fraud laws by using foreign money to defraud American car dealers into selling them vehicles that were intended solely for domestic use. The authorities say that the approximately $1.16 million held by the company in a Wells Fargo bank account could be traced to international customers taking part in the scheme, which involved Automotive Consultants using “straw buyers†to purchase vehicles so the cars could then be quickly shipped overseas.
But Judge Sandra S. Beckwith of the Federal District Court for the Southern District of Ohio said that prosecutors had failed to produce sufficient evidence of wrongdoing by the car export company to justify the asset freeze.
“There is nothing inherently illegal about using wire transfers to move money, nor about wires from foreign sources,†Judge Beckwith wrote in a 26-page ruling. “The court must conclude that the United States has not established probable cause to believe the funds seized are the ‘proceeds’ of wire or mail fraud.â€
The ruling in the Ohio case is significant because it is one of the first to challenge the legality of the seizures of vehicles being conducted by agents with the Secret Service and Department of Homeland Security. Judge Beckwith’s ruling applies only to the lawsuit filed by the Justice Department against Automotive Consultants, but it has the potential to complicate similar seizure actions that federal authorities are pursuing in other states including Florida, New York, South Carolina and Texas.
“Being the first ruling of its kind in the auto export sector, it will get attention from other courts,†said Ely Goldin, one of Automotive Consultant’s lawyers who is with the firm Fox Rothschild. “The judge was taken aback by this entire investigation.â€
A year ago, the Secret Service and the Department of Homeland Security began a broad crackdown on this “gray market†export business, which is estimated by some to be responsible for sending as many as 35,000 new luxury cars a year from the United States to China, Russia and other countries. The business has grown because newly purchased Porches, Range Rovers, BMWs and Mercedes can be resold to wealthy buyers in foreign countries for as much as three times the sticker price in the United States, especially for models that are in demand.
Federal authorities suspect some of the money being used by companies in America to purchase cars is coming from foreign buyers looking to launder money. The New York State attorney general, Eric T. Schneiderman, is looking into claims that some car salesmen in New York and New Jersey took kickbacks in return for selling luxury cars to export companies.
The origins of the government’s crackdown on luxury car exporters is unclear. Federal authorities briefed on the matter but not authorized to discuss the situation said the effort was not being coordinated by the Justice Department and was more the case of individual jurisdictions going after a business activity that appeared questionable. Advocates for the automotive export companies have claimed that the federal government is responding to complaints from the auto manufacturers who are looking to defend their turf.
One of those companies, Jaguar Land Rover North America, recently sent a six-page letter to its franchise auto dealerships that imposes a new series of penalties for selling a car to an export firm as of April 1. The six-page letter puts the burden on the dealerships in the United States to police its customers and do adequate due diligence to determine whether a buyer is a “high risk†of working for an export company.
Stuart Schorr, a spokesman for Jaguar Land Rover, said the letter was a response to the increased export activity for luxury cars sold in the country. The export companies counter that these businesses are merely taking advantage of an arbitrage in the difference between the price for luxury cars in the United States and overseas markets. These people contend that if the companies are using deception to purchase vehicles, such as using straw buyers to pretend to buy cars for themselves, it should be the auto manufacturers, and not federal prosecutors, who should pursue litigation.
Judge Beckwith, in her ruling, seemed sympathetic to the argument that these export cases should not concern the federal government. But she declined to dismiss the pending civil forfeiture lawsuit against the export company, even as she ordered the bank account unfrozen and the return of two cars that Automotive Consultants had purchased from dealerships in the Cincinnati area.
A spokesman for the United States attorney’s office for the Southern District of Ohio said the office was reviewing its options after Judge Beckwith’s ruling.
