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Caterpillar : Railcar Unit to Plead Guilty and Pay $5 Million Fine for Dumping Parts -- Update

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12/07/2017 | 11:11pm CET
By James R. Hagerty and Bob Tita 

A unit of Caterpillar Inc. admitted that it cheated customers by performing unnecessary repairs to their railcars and agreed to plead guilty to dumping brake shoes and other parts into the ocean to hide evidence, according to court documents.

United Industries LLC, part of Caterpillar's Progress Rail Services unit, agreed to pay a criminal fine of $5 million fine as well as a total of $20 million in restitution to three railcar-owning companies: TTX Co., Greenbrier Co. and the Pacer International unit of XPO Logistics Inc.

The fine and restitution are modest for a large company like Caterpillar, but the case represents a blow against its reputation for quality service.

The Illinois-based manufacturing giant was due in U.S. District Court for the Central District of California Thursday afternoon to enter its guilty plea, according to the U.S. Attorney's office in Los Angeles. Caterpillar didn't have an immediate comment.

The Wall Street Journal reported three years ago that some workers at the Caterpillar unit had resorted to smashing brake parts with hammers, gouging wheels with chisels or using chains to yank handles loose, according to current and former employees.

United Industries employees told federal investigators that they were encouraged by certain supervisors to increase revenue by making unneeded repairs.

United at the time operated a repair facility at the Port of Long Beach, a business from which it has since withdrawn. The company's duties included inspecting railcars passing through the port to see whether any parts needed to be repaired or replaced under industry guidelines, according to an exhibit attached to the plea agreement, filed in federal court last month.

Employees sometimes replaced parts on railcars even when those parts didn't show signs of damage sufficient to require replacement under industry standards, according to court documents. They "would also knowingly pick random repairs to make on the railcars without conducting an inspection" meeting those standards, the documents said.

Inspectors from the Federal Railroad Administration and the Association of American Railroads make periodic visits to rail-repair yards to check whether proper procedures are being followed and to inspect parts removed from cars to determine whether they were broken or worn. To conceal evidence from those inspectors, the documents said, employees threw such parts as roof liners, roller bearing adapters and brake shoes into the harbor.

After getting a tip from an unidentified whistleblower, divers working for the port police found those parts on the ocean floor near the repair facilities.

The dumping described in the plea agreement occurred in 2008 and 2009. Mark A. Williams, an assistant U.S. attorney in Los Angeles, said the case dragged on for years because of the complexity of the investigation and calculations regarding restitution to the railcar owners.

Mr. Williams added that the case was particularly serious because the improper repair practices had the potential to cause railroad accidents.

The plea agreement specifies that United Industries violated federal law by dumping refuse in navigable waters.

Caterpillar disclosed in November 2013 that it was subject to a criminal investigation of charges that it made "improper or unnecessary" inspections and repairs of railroad cars but provided few details. The Wall Street Journal described the main thrusts of the investigation in July 2014.

Greenbrier and XPO Logistics had no immediate comment on the railcar case. TTX declined to comment. TTX, which is owned by the major freight railroads, replaced Progress as the railcar service provider at Long Beach and at other West Coast rail hubs.

Caterpillar's guilty plea in the railcar case comes as the manufacturer faces other legal woes.

In a separate criminal probe, federal agents raided its former headquarters in Peoria, Ill., and two other nearby facilities in March in connection with a tax-reduction plan involving a Switzerland-based subsidiary. The raids were conducted by agents with the U.S. Department of Commerce, Internal Revenue Service and Federal Deposit Insurance Corp.'s inspector general's office.

Agents were focused in large part on materials related to Caterpillar's export filings, and people familiar with the matter have said investigators were examining the tax implications of what appeared to be missing Caterpillar filings. Caterpillar has said it "believes its tax position is right" and is cooperating with the government.

--Andrew Tangel contributed to this article.

Write to James R. Hagerty at [email protected] and Bob Tita at [email protected]

Stocks mentioned in the article
ChangeLast1st jan.
XPO LOGISTICS INC 0.89% 104.67 Delayed Quote.14.28%
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Sales 2018 50 893 M
EBIT 2018 7 249 M
Net income 2018 4 918 M
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Yield 2018 2,02%
P/E ratio 2018 18,42
P/E ratio 2019 15,53
EV / Sales 2018 2,30x
EV / Sales 2019 2,11x
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Mean consensus OUTPERFORM
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Average target price 180 $
Spread / Average Target 16%
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Randall B. Gonzales Chief Financial Officer
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