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Two Former Celadon Executives Charged With Securities Fraud

Two Former Celadon Executives Charged With Securities Fraud

Two former executives of Celadon Group Inc. (OTCMKTS: CGIP) have been indicted in an alleged complex securities and accounting fraud scheme that cost the truckload and logistics company's shareholders more than $60 million, federal prosecutors said Dec. 5.

Former Chief Operating Officer William Eric Meek, 39, and former Chief Financial Officer Bobby Lee Peavler, 40, both of Indianapolis, were charged with nine counts each, including one count of conspiracy to commit wire fraud, bank fraud and securities fraud; five counts of wire fraud; two counts of securities fraud; one count of conspiracy to make false statements to a public company's accountants and to falsify books, records and accounts of a public company; and one count of making false statements to a public company's accountants.

Peavler faces two additional counts of making false statements to a public company's accountants.

Indianapolis-based Celadon and its subsidiaries have been rocked by a financial scandal since May 2017, when the alleged yearlong scheme was first discovered. At that time, Meek resigned as COO.

Celadon had to restate several years of its financial results, its stock crashed, and it was delisted from the New York Stock Exchange in April 2018. Celadon (OTC: CGIP) stock is traded on the OTC "pink sheets" market. 

"These senior corporate executives at Celadon allegedly orchestrated a securities and accounting fraud scheme that misled shareholders, banks, accountants and the investing public," said Assistant Attorney General Brian A. Benczkowski of the Justice Department's Criminal Division.

Paul Svindland took over as the new chief executive of Celadon in July 2017. He did not respond to FreightWaves' telephone or email request for comment regarding the indictment of Meek and Peavler.

In April, Danny Williams, 36, of New Palestine, Indiana, former president of Quality Companies, a subsidiary of Celadon, pleaded guilty to conspiracy to commit securities fraud, make false statements to a public company's accountants, and falsify books, records, and accounts of a public company.

Court documents claim that from 2013 to 2016, Celadon expanded its Quality truck leasing company, which Williams ran, from approximately 750 to more than 11,000 trucks. 

However, in 2016, the value of many of Celadon's trucks, including those owned through Quality, had dropped significantly in value, in part due to an economic downturn in the used truck market.

In its truck fleet, Celadon and Quality had hundreds of 2012 International ProStar tractors with defective MaxxForce engines, which drastically decreased their value as drivers were unwilling to lease or drive them.

While the market value for the 2012 ProStars owned by Quality was estimated at $15,000 apiece, Celadon's accounting records listed them as high as $60,000, according to the indictment.

Also alleged in the court filing is that by 2016, Meek, Peavler, Williams and others knew the real value of a substantial portion of Celadon's trucks had declined significantly. Instead of accounting for the decline in truck values, the former executives allegedly devised a scheme to conceal millions of dollars in losses from Celadon shareholders, banks and the investing public.

The indictment claims the former executives schemed with an Indianapolis-based truck dealer to trade hundreds of its older and unused trucks, including the ProStars, for newer used trucks.

The trades were listed as independent "purchases" and "sales," and the invoices were inflated in order to avoid scrutiny.

According to the indictment, Meek emailed Williams in June 2016, stating that Celadon "really need[ed] to sell the $70M or so in excess," which the company's accounting records showed the trucks were worth. In an email, Williams allegedly responded back to Meek that "we aren't in the money on hardly any of the $70M." The indictment said that if the overvalued trucks were sold at their fair market value, the company would suffer losses.

From June to September 2016, the executives at Celadon and Quality traded approximately 1,000 trucks to the truck dealer at inflated prices and received more than 600 trucks in return, concealing tens of millions of dollars in losses from shareholders, banks and the investing public, according to the indictment.

Celadon financed many of its operations through a revolving line of credit from a collection of banks. In September 2016, Meek, Peavler and their co-conspirators realized Celadon was in jeopardy of violating the bank covenant that limited its debt-to-earnings ratio, the indictment states.

In an effort to conceal this information from the banks and investors, Meek, Peavler and others allegedly convinced the truck dealer to pay Celadon approximately $25 million prior to the quarter ending on Sept. 30, 2016, according to the indictment. In exchange, the former Celadon executives and Williams allegedly agreed to pay back the truck dealer "a similar amount of money" three days after quarter-end.

Celadon's quarterly financial statements did not reflect the secret arrangement with the truck dealer, and the former executives allegedly used the money to pay down part of its debt owed to its banks prior to the close of the quarter on Sept. 30, 2016.

Celadon's independent auditors began asking questions about the truck trades in late 2016 and early 2017, the indictment states.

In response to the auditors' questions, the court document claims Meek, Peavler, Williams and others made "false and misleading statements to the auditors about the nature of the truck trades and concealed the agreement Quality made to repay the truck dealer shortly after the end of the quarter."

Peavler also allegedly directed senior executives and others to delete emails after the auditor requested the relevant documents.

Meek and Peavler were arrested Dec. 5 and appeared before U.S. Magistrate Judge Mark J. Dinsmore of the Southern District of Indiana. Both were later released on bail. Chief Judge Jane E. Magnus-Stinson for the U.S. District Court of the Southern District of Indiana was assigned the case.

"Through their scheme of lies, fraud and misrepresentations as alleged in the indictment, Meek and Peavler damaged the integrity of the market, the corporation, its shareholders and public investors," said U.S. Attorney Josh J. Minkler of the Southern District of Indiana.

In April, federal officials ordered Celadon to pay shareholders $44.2 million in restitution after the company's stock plummeted following a company announcement in May 2017 that its financial statements for the fiscal year 2016, which ended June 30, as well as the quarters ending in September and December 2016 "could not be relied on" as well as the related reports of the independent auditor for the same time period.

Also in April, Celadon reached a $7.5 million settlement with the U.S. Securities and Exchange Commission (SEC) on a final judgment that permanently prohibits the carrier from violating certain SEC regulations.

FreightWaves' Mark Solomon contributed to this report

Read more articles by FreightWaves' Clarissa Hawes

Image by succo from Pixabay


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