The Securities and Exchange Commission has asked a federal court judge to sign off on a consent order that would settle a years-long accounting fraud scandal that led to Warrenville-based Navistar’s delisting on the New York Stock Exchange in 2007.
The settlement agreement, first announced last October, was opened to the public for the first time Thursday, and names five former and current Navistar employees who allegedly engaged in fraudulent and improper accounting practices that led the company to overstate its pre-tax income by approximately $137 million from 2001 to 2005. The company manufactures and markets commercial trucks, school buses, diesel engines and related parts.
The employees — who are not admitting or denying the allegations — have agreed to pay fines ranging from $25,000 to $150,000 as part of the settlement. In addition, the company’s CEO Daniel Ustian and CFO Robert Lannert have agreed to clawbacks of $1.3 million and $1 million in bonuses they received during the period in question.
The order names James W. McIntosh, 60, of Naperville, who was vice president of finance for the Engine Division during the time in question; Thomas M. Akers Jr., 58, of Aurora, who was director of purchasing; James J. Stanaway, 64, who was director of finance; Ernest A. Stinsa, 41, of Elmhurst, who succeed Stanaway; and Michael J. Schultz, who was plant controller at Navistar’s foundry in Waukesha, Wisc. until he was fired in 2005.
McIntosh, Akers and Stanaway have since retired, Stinsa left the company and came back this May to a position with no direct accounting or financial reporting responsibilities, according to court documents.
In a separate settlement, filed Thursday, the SEC named Mark T. Schwetschenau, Navistar’s former controller.
The filings would settle loose ends at Navistar, which spent years cleaning up financial inaccuracies that resulted from improper recording of vendor rebates, the company’s warranty reserve, vendor tooling buybacks and other income, found in financial statements dating back to 1999.
In 2006, the accounting statement inaccuracies and auditor issues led the company to delay two years of financial statements and restate earnings from 2002 through most of 2005. The Securities and Exchange Commission began an investigation into the company’s financial reporting.
Navistar was delisted from the NYSE in February 2007 after 99 years trading on the Big Board. It traded on the Pink Sheets — an over-the-counter market typically used for trading the stocks of America’s smallest companies — until June 2008, when it was re-listed under its previous ticket symbol.
In new reports at the time, Navistar CEO and chairman Dan Ustain denied that the company was doing anything improper or deceptive and blamed the failures on new, more complicated rules under the post-Enron scandal Sarbanes-Oxley Act.
“This illustrates the importance that companies need to pay to their internal accounting controls,” said Josh Felker, assistant director at the SEC.
Navistar spokesman Roy Wiley said Thursday that the company has agreed to settle and has not been issued a fine or penalty, as the SEC did not find that there had been a company-wide scheme in place to manipulate reported results. A special committee of Navistar’s board of directors competed an internal investigation into the matter in 2007 and cooperated with the SEC investigation, Wiley said.
“The settlement enables us to move forward, the matter’s behind us,” he said.
The attorneys representing McIntosh (who agreed to pay $150,000), Akers (who agreed to pay $100,000), and Stanaway, (who agreed to pay $50,000) referred comment to Navistar. Stinsa’s attorney said his client (who agreed to $25,000) was “the least involved of all of them,” and simply continued a practice that had been put in place before he came on board. Schultz, who is not being penalized because of a demonstrated inability to pay, could not be reached for comment and has no legal representation. Schwetschenau’s attorney also could not be reached. Schwetschenau has agreed to pay $37,500 in civil penalties without admitting or denying charges that he improperly deferred certain start-up costs in the company’s financial statements. Additionally, under the agreement, he would be barred from practicing before the SEC for one year, a which time he can request to be reinstated.
Allegedly, according to the consent order:
– From 2001 to 2004, Navistar improperly booked as income money it receives in the form of “rebates” from suppliers who profit off their participation in Navistar projects before those rebates had actually been received. In other cases, SEC investigators found “side-letter arrangements” that outlined different terms for the rebates than were in the official record. In the improper letters, suppliers were agreeing to give Navistar rebates in exchange for promises of future business. Approximately 30 cases were improperly book, according to the SEC.
– Internal controls were insufficient, the SEC found, due to the Company’s failure to dedicate sufficient resources.
– In 2003, Navistar improperly accounted for certain tooling buyback agreements by recapturing and booking as income the previously-paid amortization on those agreements and then improperly deferring the related depreciation costs. The practice continued into 2004 even after employees warned that the practice was against auditor guidelines.
– Beginning in 1999, Navistar began making improper adjustments to a calculation the company uses to determine the amount of money needed on reserve for potential warranty claims. The calculations – which took into account improved practices that could (but had not been proven to) reduce those claims – caused them to understate the expense by $18.5 million through 2003.
– The company deferred certain project start-up costs that were to be reimbursed to the company. According to generally accepted accounting principles, a company can only defer such costs if they have a contract in place guaranteeing the reimbursement, but Navistar had no contractual arrangement.
– The company’s annual reports and quarterly statements in 2004 and 2005 failed to provide complete segment information as required by accounting rules.