Lawsuit alleging Cat tax scheme misled shareholders dismissed

Updated Sep 28, 2018

Caterpillar Heavy Equipment

On Wednesday a judge dismissed a lawsuit brought on behalf of shareholders against Caterpillar tied to tax evasion penalties brought earlier this year by the federal government.

According to a report from Reuters, U.S. District Judge Sharon Johnson Coleman in Chicago dismissed the suit, brought by plaintiffs led by Société Générale Securities Services, alleging that Cat misled shareholders about the risks it took in an alleged tax scheme.

In February, Cat was hit with $2.3 billion in back taxes and penalties as the result of Internal Revenue Service audits of its 2007-2012 tax returns, including a loss carryback to 2005. The penalties came nearly one year after three of the company’s Illinois-based facilities were raided by federal agencies. In the raids, law enforcement officials seized documents and electronics records as part of an investigation into the company’s tax strategy.

The lawsuit dismissed Wednesday was filed on March 3, 2017, Reuters reports, one day after the raids. It sought class action status and was dismissed without prejudice, meaning it could be brought back to court. The judge said that Société Générale Securities Services “failed to show that Caterpillar intended to defraud (shareholders), or knowingly made false statements about criminal and civil probes into its tax practices.”

“Citing the grand jury subpoena and execution of search warrants, Société Générale essentially argues that Caterpillar should have admitted a securities or tax law violation while the investigations were ongoing,” the judge wrote. “This court finds such a position untenable. If every investigation or executed search warrant was evidence of wrongdoing then what purpose do hearings and trials have.”

The cited “tax practices,” brought to light by accusations made by whistleblower and former Cat accountant Daniel Schlicksup in a 2009 wrongful termination lawsuit, allegedly involved Cat moving select profits to foreign subsidiaries in Switzerland and Bermuda in order to avoid U.S. taxes. Cat allegedly attributed 85 percent of its parts sales to Caterpillar SARL, the Swiss-based operation, even though the vast majority of those sales happen in the U.S. where they would be taxed at a higher rate.

Cat has denied any wrongdoing from the start of the government’s investigation into its accounting practices and says it is still “vigorously contesting” the IRS penalties handed down earlier this year.