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Celadon to pay investors $42.2 million restitution for securities fraud

Photo credit: Jim Allen/FreightWaves

Federal officials have ordered Celadon [OTCPink: CGIP] to pay shareholders $42.2 million in restitution after the company’s stock plummeted in the wake of ongoing investigations into the company’s past accounting practices.

The U.S. Attorney for the Southern District of Indiana announced on April 25 that the Indianapolis-based truckload and cross-border carrier entered into a deferred prosecution agreement (DPA) with the U.S. Department of Justice (DOJ) on April 24, as part of a criminal case charging the company with securities fraud.

Prosecutors also filed a plea agreement with Danny Williams, former president of Celadon subsidiary Quality Companies LLC and the former chief operating officer of carrier payment company FreightRover. Williams 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,” according to the DOJ.

DOJ officials said the case centered on the fact that Celadon had knowingly filed false and misleading statements to investors, and had also falsified books and accounting records to inflate the value of assets involved in four equipment transactions. “Celadon executives misled the investing public for a simple reason: profit,” said Assistant Attorney General Benczkowski in a statement.

Celadon announced on April 25 that it had also agreed to a $7.5 million settlement with the U.S. Securities and Exchange Commission (SEC) on a final judgment that permanently prohibits the company from violating certain SEC regulations. The company said the SEC the settlement is fully satisfied by the DPA.

The DOJ and SEC settlements mark “an important milestone” said Celadon CEO Paul Svindland. “We have now settled the governmental investigations and other legal proceedings related to the events that arose under prior management,” Svindland said in a statement.

“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.”

According to Celadon, the DPA requires an initial payment of $5 million within 90 days and final payment of any remaining balance on June 30, 2024. In addition, on or prior to October 28 in calendar years 2020-2023, Celadon will pay toward the restitution amount 50 percent of any remaining excess cash flow generated during the fiscal year (ended June 30) immediately preceding such dates, “after first paying all expenses and making all required payments to its term loan and revolving lenders,” it stated. The company noted the DPA does not require paying a criminal fine.

Celadon’s stock was down almost 5 percent to $2.30 per share by mid-day April 25 after news of the agreement.

According to the DOJ, Celadon’s equipment leasing subsidiary, Quality Companies (recently divested), which had grown to 11,000 tractors and trucks in 2016, began to struggle that year due to the market slowdown, with much of the equipment sitting idle and overvalued by “tens of millions of dollars.”

Instead of reporting this to investors, however, members of Celadon’s and Quality’s senior management team “participated in a scheme that resulted in Celadon falsely reporting inflated profits and inflated assets to the investing public through Celadon’s financial statements,” the DOJ said.

Between approximately June and October in 2016, company officials made a series of trades to dispose of aging and unused trucks using invoices “purposely inflated well above market value” to avoid disclosing the losses. “Celadon ultimately used these invoices and inflated truck values to hide millions of dollars of losses from investors,” according to the DOJ.

Federal officials also pointed out that beginning in approximately January 2017, in response to an independent audit of financial misconduct, members of the management of Celadon and Quality falsely represented to auditors that the transactions were done at fair market value and weren’t trades. “Celadon’s auditor ultimately withdrew its audit opinion for certain Celadon financial statements,” DOJ stated. The resulting disclosure by Celadon of the auditor’s withdrawal caused Celadon’s stock price to lose approximately $60 million in total value, according to court documents, resulting in investors losing tens of millions of dollars.

The latest development in Celadon’s legal issues comes less than two weeks after the company announced the sale of Celadon Logistics, its freight brokerage and managed transportation business, as part of its ongoing strategy to simplify its business and reduce debt.

John Gallagher

Based in Washington, D.C., John specializes in regulation and legislation affecting all sectors of freight transportation. He has covered rail, trucking and maritime issues since 1993 for a variety of publications based in the U.S. and the U.K. John began business reporting in 1993 at Broadcasting & Cable Magazine. He graduated from Florida State University majoring in English and business.