Indiana trucking company Celadon has agreed to a $42.2 million settlement after the Department of Justice and the Securities and Exchange Commission launched an investigation regarding misleading investors about its financials.
On Thursday, April 25, the DOJ, SEC and Celadon all announced that the Indianapolis-based trucking company has agreed to pay more than $42.2 million in restitution. After accounting for administrative costs, a total of $38.5 million will be the expected and final restitution amount.
Earlier in the week, the U.S. government had filed a criminal information in an Indiana federal court. According to court documents, Danny Ray Williams, former president of Celadon-owned Quality Companies, and others misled shareholders, regulators and independent auditors about the true financial condition of the company.
“Celadon executives misled the investing public for a simple reason: profit,” Assistant Attorney General Benczkowski said in a statement. “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.”
Defective trucks scheme
From 2016, Quality Companies owned hundred of trucks that were overvalued on its books by tens of millions of dollars. Quality Companies was unable to find drivers interested in leasing certain trucks due to prior defects. Those defects had caused a significant fall in the trucks’ value. However, Williams and co-conspirators failed to disclose the millions of dollars lost as a result of the diminished market value of these assets.
Rather, Williams and high-ranking Celadon executives pursued a series of transactions designed to get rid of the trucks without publicly reporting the loss. The scheme involved Quality Companies trading hundreds of its older, less desirable trucks to a dealer in exchange for the dealer’s newer, more desirable trucks. Quality Companies then engaged in simultaneous “sales” and “purchases” of trucks with the dealer at inflated prices, which avoided disclosing the fact that the trucks were worth far less.
More specifically, Williams provided the dealership with a list of trucks Quality wanted to sell with the company’s overinflated book value for each truck. The dealership would then calculate how much the trucks were overvalued by then inflating its invoices to Quality Companies. The net effect was to create trades with values on both sides inflated by millions of dollars.
In a span of three months in 2016. Quality Companies traded approximately 900 overvalued trucks for approximately 650 newer used trucks, according to court documents. Two emails reveal that the value of 862 Quality Companies trucks were inflated by more than $33 million. Two invoices from Quality Companies to the dealership totaled to approximately $43 million.
According to a DOJ news release, Celadon provided trucking and transportation services in the United States, Mexico and Canada. Between 2013 and 2016, Quality’s inventory grew rapidly, from approximately 750 tractors and trucks to more than 11,000. Quality began to struggle financially in 2016 as a result of a slowdown in the trucking market.
Under the terms of the agreement, Celadon is required to pay full restitution of $42.2 million to shareholder victims harmed as a result of the crimes, which will be paid over several years. Furthermore, Celadon agreed to implement rigorous internal controls and cooperate fully with the DOJ’s ongoing investigation, including its investigation of individuals. Prosecution of the company for securities fraud will be deferred for an initial period of approximately five years to allow Celadon to demonstrate good conduct.
Since the crimes were exposed, Celadon has fired all of the executives involved in the scheme. The company also created a new position of chief accounting officer and hired an experienced internal audit staff member.
Williams made a plea agreement after being charged with one count of conspiracy to commit securities fraud, 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.
Celadon CEO Paul Svindland released the following statement:
"The settlements with DOJ and SEC mark an important milestone. We have now settled the governmental investigations and other legal proceedings related to the events that arose under prior management. We appreciate the government's recognition of the significant changes we have made, our ongoing commitment to legal and regulatory compliance, and our significant cooperation in the investigations. 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."
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