Roadrunner Settles Financial Fraud Claims

Financial fraud cases were at one time a staple of the Enforcement Division. Cases alleging financial fraud were regularly uncovered and filed. In recent years, however, the Commission has had difficulty in bringing such cases despite significant initiatives. Nevertheless, the agency has persisted and had some success. Its most recent financial fraud action is In the Matter of Roadrunner Transportation Systems, Inc., Adm. Proc. File No. 3-21301 (February 14, 2023).

Respondent is a shipping and logistics firm based in Cudahy, Wisconsin. Roadrunner’s stock was listed on the NYSE and registered with the Commission. In 2020 the company filed a Form 25 withdrawing its common stock from listing. Subsequently, Roadrunner terminated its registration.

Roadrunner acquired over twenty transportations firms over a seven year period, beginning in 2010. Each company was consolidated into Roadrunner. The financial results of all the firms were consolidated into Roadrunner’s financial statements.

The company manipulated its financial results over a four-year period, beginning in mid-2013, according to the OIP. Roadrunner engaged in a fraudulent scheme to conceal major expenses, hide poor performance and avoid write-offs of impaired assets. The focus of the scheme was to meet earnings goals.

The scheme began when Roadrunner acquired Operating Company. The deal papers called for Roadrunner to pay the sellers an earnout that was contingent on the acquired firm’s future performance. The impact of the calculation depended on the performance of the acquired firm. Under GAAP Roadrunner was required to remeasure the fair value of the earnout at each reporting date. If the Operating Company could not meet the annual EBITDA thresholds to trigger the payment of the full earnout amount there were two effects: a) it provided a short term boost to net income but b) signaled investors the acquired firm was not meeting the EBITDA projections required by the deal. To avoid the latter, the numbers were manipulated.

Over the next four years, Roadrunner continued to alter certain financial metrics to avoid revealing that some properties were not performing as expected. At various times the firm hid major expenses, concealed poor performance and avoided required write offs.

In early 2017 Roadrunner announced in a Form 8-K that it had commenced an investigation. Discrepancies were uncovered and reported to the audit committee. The next year the firm announced the conclusions of the inquiry. Roadrunner terminated those responsible for the scheme, installed new controls and shared the findings from the investigation with the Commission.

The Order alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on the Sections cited. The firm also agreed to pay disgorgement of $7,096,092 and prejudgment interest of $2,539,819.71. Payment was satisfied by paying $20 million to a parallel class action, $16 million of which was distributed to the shareholders.

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