Celadon Group Inc. has agreed to pay $42.2 million to settle a federal investigation into allegations that a prior management team and a subsidiary company filed false and misleading statements to investors regarding tractors and trailers leased to owner-operators.
The settlement, announced by the U.S. Department of Justice on April 25, was in response to parallel ongoing federal investigations by the DOJ and the U.S. Securities and Exchange Commission that so far have charged that Indianapolis-based Celadon and Quality Companies misled investors and falsified books in four trade transactions in which asset values were recorded at inflated levels and not at fair market rates, according to a DOJ statement.
DOJ said Celadon has agreed to deferred prosecution in the criminal investigation, which was filed in the Southern District of Indiana. The Justice Department and SEC worked together on the case.
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Celadon said the investigations related to conduct that occurred prior to the hiring of the company’s current CEO, chief financial officer and chief accounting officer. The publicly owned motor carrier operates in the United States, Mexico and Canada. The company ranks No. 35 on the Transport Topics Top 100 list of the largest for-hire carriers in North America.
In a statement, Celadon CEO Paul Svindland said the settlement agreement marks “an important milestone.”
“We have now settled the governmental investigations and other legal proceedings related to the events that arose under prior management,” Svindland said. “With these legal issues resolved, we will focus on continuing to strengthen our corporate controls and procedures, and pursuing a long-term capital structure and the operational turnaround of our core, asset-based truckload transportation business.”
According to prosecutors, Quality’s inventory between 2013 and 2016 grew 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,” the DOJ said. “In addition, Quality owned a significant number of 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.”
Court records show that instead of properly reporting Quality’s financial difficulties to investors, senior management at Celadon and Quality participated in a scheme that resulted in Celadon falsely reporting inflated profits and inflated assets to investors 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,” the government said. “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.”
Under the terms of the agreement, Celadon is required to pay full restitution of $42.2 million to shareholders directly or proximately harmed as a result of the scheme, to be paid over a period of years consistent with federal law.
Separately, the SEC announced April 25 that it has charged Celadon with an accounting fraud that allowed the company to avoid disclosing substantial losses and misrepresent its financial condition.
According to the SEC complaint, between mid-2016 and April 2017, Celadon avoided recognizing at least $20 million in impairment charges and losses — almost two-thirds of its 2016 pre-tax income — by selling and buying used trucks at inflated prices from third parties. As a result of the alleged scheme, SEC said that Celadon overstated its pre-tax and net income and earnings per share for the period ending June 30, 2016, and in its subsequent public filings for the first two fiscal quarters of 2017.
Celadon has agreed to pay $7 million in disgorgement, which will be deemed satisfied by Celadon’s payment of restitution in the DOJ case.
“Celadon also agreed to implement rigorous internal controls and cooperate fully with the Justice Department’s ongoing investigation, including its investigation of individuals,” prosecutors said.
Under the DOJ agreement, 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.
In addition to the fraud admission agreement, DOJ said it filed an information and plea agreement against Danny Williams, the former president of Quality, who was charged with one count of conspiracy to commit securities fraud, to make false statements to a public company’s accountants, and to falsify books, records and accounts of a public company in connection with Celadon’s crimes.