Trucking company Celadon Group agreed to pay total restitution of $42.2 million for filing materially false and misleading statements to investors and falsifying books, records and accounts.
Celadon, a transportation company headquartered in Indianapolis, IN and listed on the New York Stock Exchange, entered into a deferred prosecution agreement (DPA) in connection with a criminal information filed today in the Southern District of Indiana charging the company with securities fraud. The case was primarily focused on the fact that Celadon knowingly filed materially false and misleading statements to investors and falsified books, records and accounts with regard to the values of assets involved in four trade transactions that were recorded at inflated values and not fair market value.
“Celadon executives misled the investing public for a simple reason: profit,” said Assistant Attorney General Benczkowski of the Justice Department’s Criminal Division. “Securities fraud harms all investors — from the most sophisticated to those everyday Americans saving for retirement, and the Criminal Division remains committed to investigating and prosecuting these complex crimes.”
According to court documents filed as part of the DPA, Celadon provided trucking and transportation services in the United States, Mexico and Canada. Quality Companies was a wholly owned subsidiary of Celadon that leased tractors and trailers to owner-operator truck drivers. Between 2013 and 2016, Quality’s inventory grew rapidly, from approximately 750 tractors and trucks to more than 11,000.
Quality’s financial performance began to struggle in 2016 due in part to a slowdown in the trucking market. In addition, Quality owned a significant number of a truck models with mechanical issues, which many drivers did not want to lease. By 2016, many of Quality’s trucks were idle, unleased and overvalued on Quality’s books by tens of millions of dollars.
Instead of properly reporting Quality’s financial difficulties to investors, members of Celadon’s and Quality’s senior management team, all acting within the scope of their employment, participated in a scheme that resulted in Celadon falsely reporting inflated profits and inflated assets to the investing public through Celadon’s financial statements. Between approximately June 2016 and October 2016, Quality engaged in a series of trades as a means to dispose of its aging and unused trucks. In order to avoid disclosing the losses connected to these trucks, executives executed the trades using invoices purposely inflated well above market value. Celadon ultimately used these invoices and inflated truck values to hide millions of dollars of losses from investors.
In December 2016, after allegations of misconduct had arisen publicly, Celadon’s management approved a memorandum that falsely stated the trucks involved in the above-described transactions were purchased and sold at fair market value, and were accounted for properly on Celadon’s books. Further, beginning in approximately January 2017, Celadon’s independent auditors conducted an investigation into the allegations of misconduct. In response, multiple members of Celadon’s and Quality’s management falsely represented to independent auditors that the transactions were done at fair market value and that they were not trades. Celadon’s auditor ultimately withdrew its audit opinion for certain Celadon financial statements. The resulting disclosure by Celadon of the auditor’s withdrawal caused a significant drop in the price of Celadon’s stock, which resulted in investors losing tens of millions of dollars.
Under the terms of the DPA, Celadon is required to pay full restitution of $42.2 million to shareholder victims directly and proximately harmed as a result of the commission of the offense. Celadon also agreed to implement rigorous internal controls and cooperate fully with the Department’s ongoing investigation, including its investigation of individuals. Under the DPA, prosecution of the company for securities fraud will be deferred for an initial period of approximately five years, subject to approval by the court, to allow Celadon to demonstrate good conduct.
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