Celadon Group Inc. (Celadon) has agreed to pay total restitution of $42.2 million for filing materially false and misleading statements to investors and falsifying books, records and accounts.
Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney Josh Minkler of the Southern District of Indiana, Special Agent in Charge Grant Mendenhall of the FBI’s Indianapolis Field Office and Inspector in Charge Delany De Leon-Colon of the U.S. Postal Inspection Service (USPIS) made the announcement.
Also, the Securities and Exchange Commission charged the truckload freight company with accounting fraud.
Celadon, a transportation company headquartered in Indianapolis, IN, that was listed on the New York Stock Exchange (NYSE), 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 Benczkowski. “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.”
“The fabric of American industry is woven together through innovation, work ethic and integrity,” said U.S. Attorney Josh J. Minkler. “The government is charged with ferreting out misdeeds in corporate America, particularly when these violations of public trust result in financial harm to our citizens as is set forth in this matter. I would like to personally thank and recognize the Justice Department’s Fraud Section, SEC, FBI and USPIS partners whose collaborative work unearthed this criminal activity.”
“The message here is clear, those who commit financial fraud will be held accountable. Investors should expect nothing less than complete candor and truth from companies and their executives,” said Special Agent in Charge Grant Mendenhall. “The FBI and our agency partners will continue to identify, investigate and pursue violations such as this.”
“The Postal Inspection Service has been protecting investors and defending the integrity of the marketplace for many years,” said Inspector in Charge Delany DeLeon-Colon. “Anyone who engages in these deceptive securities practices should know they will not go undetected and they will be held accountable.”
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 LLC (Quality) 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, which will be paid over a period of years consistent with 18 U.S.C. § 3664(f)(2), (3)(A). 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.
The Department reached this resolution based on a number of factors, including Celadon’s ongoing cooperation with the United States and the company’s extensive efforts at remediation. Among other remedial efforts, the company no longer employs the executives involved in wrongdoing, and the company replaced its executive management team with experienced executives who display a commitment to building an ethical corporate culture. Furthermore, Celadon created the new position of Chief Accounting Officer and hired an experienced Internal Audit staff member reporting directly to the Company’s Internal Audit Manager.
In addition, the United States 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.
Trial Attorneys Kyle W. Maurer and L. Rush Atkinson of the Criminal Division’s Fraud Section, Deputy Chief Steven D. DeBrota and Assistant U.S. Attorney Nicholas J. Linder of the Southern District of Indiana prosecuted the case with assistance from the FBI’s Indianapolis Field Office and the USPIS.
This investigation is ongoing.
SEC Charges Truckload Freight Company with Accounting Fraud
The Securities and Exchange Commission charged Indianapolis-based Celadon Group Inc. with an accounting fraud that allowed the truckload freight company to avoid disclosing substantial losses and misrepresent its financial condition.
In a complaint filed in federal court in Indianapolis, the SEC charged that 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. According to the complaint, as a result of the alleged scheme, Celadon overstated its pre-tax and net income and earnings per share in its annual report for the period ending June 30, 2016, and in its subsequent public filings for the first two fiscal quarters of 2017.
“We allege that Celadon knowingly engaged in a multi-faceted scheme to hide at least $20 million in losses from its investors, and lied to its auditors to conceal the scheme,” said Joel R. Levin, Director of the SEC’s Chicago Regional Office. “We will continue to hold issuers accountable for such serious breaches of trust to the investing public.”
The SEC’s complaint charges Celadon with fraud and with reporting, books and records, and internal control violations. Celadon admitted to those violations and agreed to a permanent injunction and to remediate the material weaknesses in its internal control over financial reporting. Celadon has also agreed to pay $7 million in disgorgement, which will be deemed satisfied by Celadon’s payment of restitution in an action announced today by the Department of Justice. The settlement is subject to court approval.
The SEC’s case against Celadon is the latest in a line of actions brought against companies or their executives for committing accounting fraud, by entering into sham agreements with third-parties, suppliers or customers, including SEC v. Tangoe, Inc. et al., 3:18-cv-01479 (D. Conn. 2018); SEC v. Axesstel, Inc., et al., 3:18-cv-01486-L-AGS (S.D. Cal. 2018); SEC v. Bhushan Dandawate, No. 18-cv-4927 (N.D. Ill., 2018); SEC v. Quadrant 4 System Corp., et al., No. 17-cv-4883 (N.D. Ill., 2017).
The SEC’s investigation, which is continuing, is being conducted by Jaclyn Janssen, Trevor Schumacher, Jonathan Polish, Thomas E. Vincus, and Amy S. Cotter of the Chicago Regional Office.
The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of Indiana, the Department of Justice, Fraud Section, Criminal Division, the Federal Bureau of Investigation’s Indianapolis Division, and the U.S. Postal Inspection Service.