At the beginning of March Caterpillar admitted that US law enforcement authorities had entered three of its buildings, including its company headquarters, with a warrant allowing it to search for and seize documents and electronic information. Caterpillar said it was cooperating with law enforcement.
The raids are believed to be related to an investigation that began in 2015 relating to off-shore tax schemes set up by the company. In its 2016 annual report, Caterpillar said it had received a subpoena from the US District Court for the Central District of Illinois in January 2015 requesting documents relating to financial information concerning a number of US and non-US subsidiaries. More subpoenas have since been received with the requests for information focusing on the dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL, based in Switzerland.
Caterpillar announced this week that it had appointed former US Attorney General William Barr as an independent legal adviser. Jim Umpleby, who became chief executive of Caterpillar at the beginning of the year, has asked Barr, currently a counsel to the law firm Kirkland & Ellis, to review the matters that led to the raids and ensure that the company deals with them properly.
CTW Investment Group, which works with pension funds sponsored by US trades unions to enhance shareholder value through active ownership, has written to Caterpillar arguing that the investigations raise questions about the company’s ability to oversee risk as well as its internal compliance and audit functions. The letter also indicates that it also raised concerns over the accuracy of the company’s stated profitability.
The investor group called on the company to establish a special committee of independent directors not currently or previously involved in approving the company’s tax strategy to investigate, evaluate, and disclose changes to reduce noncompliance and risks related to the company’s tax scheme. If the company is unable to establish a special committee, the letter suggested that it should reconstitute the audit committee. CTW also suggested that the company’s auditors, PricewaterhouseCoopers, which it said also developed the tax schemes, should be replaced.
CTW has also put forward a shareholder resolution to be discussed at Caterpillar’s annual general meeting which proposes a change in the company’s clawback policy for directors. During an earlier Senate investigation into the company in 2014 CTW said documents were found that showed executives were well aware of the risks associated with the tax scheme. However, they agreed to the arrangement, improperly reporting profits and enriching themselves in the process through their equity compensation awards.
Following the raids there was a drop in the company’s share price. This has led to US law firms announcing that investors in Caterpillar that purchased shares between February 2013 and March 2017 can contact them by May to join in a class action law suit against the company.