The CEO and former CFO of Navistar International have agreed to return more than $2.3 million as part of a broad settlement between the company and the Securities and Exchange Commission stemming from Navistar's massive restatement covering 2002 to 2005.
The SEC also settled with five other current and former Navistar employees, including four former finance executives.
In addition, Navistar's former Controller agreed to a one-year bar and to pay $37,500 in civil penalties.
The regulator issued a cease and desist order against the maker of trucks, school buses, diesel engines, and related parts as well as chairman, chief executive and president Daniel C. Ustian, former CFO Robert C. Lannert, Thomas M. Akers, Jr., James W. McIntosh, James J. Stanaway, Ernest A. Stinsa and Michael J. Schultz. The company and each individual consented to the issuance of the Order without admitting or denying the Commission's findings.
The Order finds that at times from 2001 through 2005, Navistar overstated its pre-tax income by a total of $137 million as the result of various instances of misconduct. Fraud by certain individuals at a Wisconsin foundry and in connection with certain vendor rebates and vendor tooling transactions accounted for $58 million of that total, it added. The remaining $79 million resulted from improper accounting for certain warranty reserves and deferred expenses.
McIntosh was Vice President of Finance for the Engine Division throughout the entire period of the complaint. The SEC said he was directly responsible for its accounting, financial reporting, and internal controls.
Stanaway was Director of Finance for the Engine Division through June 2004, when he retired from the company. He reported directly to McIntosh.
Stinsa replaced Stanaway as Director of Finance for the Engine Division in 2004. He left Navistar in January 2006, but rejoined the company in May 2010 in its Global Product Development division. In his new capacity, Stinsa has no direct accounting or financial reporting responsibilities.
Schultz was the Plant Controller at Navistar's foundry in Waukesha, Wisc. He was terminated in April 2005.
According to the SEC's Order, Navistar had numerous deficiencies throughout its system of internal controls, including 15 material weaknesses from 2005 to 2006 that were attributable, in part, to the company's failure to dedicate sufficient resources to those controls.
The regulator added that from 2001 through 2004, Navistar improperly booked as many as 30 vendor rebates and related receivables from its suppliers. All were improperly booked as income in their entirety upfront, even though, in whole or in part, they were earned in future periods.
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 SEC said. The company continued to utilize this improper accounting treatment in 2004 to record 60 days of amortization from the buyback agreements as income, despite employees' warnings that doing so would be inconsistent with the outside auditor's guidance, according to the SEC.
From 2001 to 2005, Schultz engaged in various fraudulent accounting practices that collectively caused income during that period to be overstated by a total of $38 million, according to the Order.
Beginning in fiscal year 1999, Navistar inappropriately included various "below-the-line" items in the company's warranty reserve calculation, which caused the warranty reserve expense to be understated by $17 million in fiscal year 2002 and by $18.5 million in fiscal year 2003.
Under the Order, Ustian agreed to tender to the company shares of Navistar stock currently owned by Ustian valued at $1.32 million. Lannert agreed to pay more than $1 million to the company. The dollar amounts reflect bonuses that each received during the restatement period.
In a parallel civil action, Akers, McIntosh, Stanaway, Stinsa and Schultz each consented to pay the following civil penalties: Akers - $100,000; McIntosh - $150,000; Stanaway - $50,000; and Stinsa - $25,000.
The SEC said a civil penalty was not imposed against Schultz because of a demonstrated inability to pay.
In addition, the Commission issued a separate settled order concerning Navistar's former Controller, Mark T. Schwetschenau. The Order directs Schwetschenau to cease and desist from causing any future violations and suspends him from appearing or practicing before the Commission for at least one year. He also agreed to pay $37,500 in civil penalties. Schwetschenau neither admitted nor denied the Commission's findings and allegations.
In December 2007, the company filed a delayed annual report for fiscal 2005 that included a restatement of its financial statements for fiscal years 2002 through 2004 and the first three quarters of 2005. For the year ended October 31, 2004, Navistar restated its previously-reported pre-tax profit of $311 million to a pre-tax loss of $35 million. For the year ended October 31, 2003, the previously-reported pre-tax loss of $49 million was restated to a pre-tax loss of $316 million. The previously-reported accumulated deficit as of November 1, 2002 of $731 million was restated to an accumulated deficit of $2.4 billion.
Altogether, Navistar restated or reclassified 16 different items.The Order retails a series of internal controls breakdowns and the company's failure to update
Its accounting policies and procedures despite warnings from the company's internal audit department.