An Illinois federal judge on Wednesday dismissed a proposed securities fraud class action against the Caterpillar construction equipment maker, finding no indication that executives were trying to pull a fast one by diverting a portion of its profits to a Swiss subsidiary in an attempt to save money.
U.S. District Court Judge Sharon Johnson Coleman agreed with Caterpillar’s defense arguments that it was open and above-board with investors in its attempt to save taxes and was confident — if admittedly not 100 percent certain — that the financial strategy would pass muster with tax authorities.
It was equally open when tax authorities launched an investigation into the company’s finances, which after a substantial amount of time has found no wrongdoing, the judge noted in her opinion.
“The statements relating to Caterpillar’s belief about the outcome of the investigations and the disposition of the tax dispute express what Caterpillar ‘believes’ about their tax position and its implications in the future. Further, those statements are all accompanied by meaningful cautionary language," Judge Coleman stated.
“Not only does Caterpillar disclose that there are ongoing investigations into their tax position, but Caterpillar repeatedly states that it believes there has not been any wrongdoing but there may be adverse effects and they may incur additional tax expenses,” the opinion added.
Thus, there was no deliberate fraud or misleading of investors, nor did the company hide its financial policies, the court found.
Lead plaintiff Société Générale Securities Services, on behalf of class investors, sued the company shortly after it was reported that the Internal Revenue Service, the Federal Deposit Insurance Corp. and agents of the U.S. Department of Commerce had executed a search warrant at Caterpillar's headquarters in Peoria, Illinois, in March 2017.
The lawsuit targets Caterpillar’s creation of a Swiss subsidiary, Caterpillar S.A.R.L. (CSARL), in 1999, through which Caterpillar paid an effective tax rate of 4 percent to 6 percent to the Swiss government. Société Générale argued that CSARL was not a legitimate tax reduction plan because it lacked a proper business purpose, according to the opinion.
A former employee filed a whistleblower lawsuit about the tax plan that reached a settlement but triggered the federal investigation. Société Générale maintained that Caterpillar made false and misleading statements regarding the risk of Caterpillar’s tax position and the seriousness of the investigation.
In its motion to dismiss the case, Caterpillar argued that “a search warrant is merely an investigatory tool ... It is not probative of whether Caterpillar’s tax position regarding its restructured supply chain is unlawful, much less whether Caterpillar knew as much at the time it expressed optimism regarding the outcome of the various government proceedings.”
Counsel for the parties did not immediately respond to requests for comment Wednesday.
A representative of Caterpillar could not be reached.
Caterpillar is represented by Mark Robert Filip, Kenneth Winn Allen and James P. Gillespie of Kirkland & Ellis LLP.
The plaintiffs are represented by Christopher F. Moriarty, James M. Hughes and Gregg S. Levin of Motley Rice LLC, James E. Barz and Frank Anthony Richter of Robbins Geller Rudman & Dowd LLP.
The case is In re Caterpillar Inc. Securities Litigation, case number 1:17-cv-01713, in U.S. District Court for the Northern District of Illinois.
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