The U.S. Department of Justice has charged two former Roadrunner Transportation Systems Inc. executives for their alleged participation in an accounting and securities fraud scheme that resulted in a loss of more than $245 million in shareholder value.
In January 2017, the then-Cudahy, Wis.-based roll-up transportation and logistics provider, which has since relocated its corporate headquarters to Downers Grove, Ill., announced it had uncovered some costly financial accounting errors after an internal investigation found it overstated earnings dating back to 2014 by as much as $25 million.
Mark R. Wogsland, the former controller for Roadrunner’s truckload operating segment, and Bret S. Naggs, the former controller and director of accounting for the truckload division, were charged in an indictment filed in the Eastern District of Wisconsin with one count of conspiracy to make false statements to a public company’s accountants and to falsify a public company’s books, records and accounts; one count of conspiracy to commit securities fraud and wire fraud; three counts of securities fraud; and four counts of wire fraud, DOJ said in a statement.
According to the indictment, Naggs, Wogsland and their co-conspirators from 2014 to 2017 “carried out a complex scheme to mislead Roadrunner’s shareholders, independent auditors, regulators and the investing public about Roadrunner’s true financial condition.”
The indictment alleges that beginning in 2014, the defendants “identified at least $7 million in overstated accounts on the balance sheet of one of Roadrunner’s largest operating companies, Roadrunner Intermodal Services Inc. (RRIS), which included old, uncollectable customer debts with static balances; understated and increasing liabilities for historic debt owed by terminated drivers; and overstated accounts for licenses and other ‘prepaid assets’ that no longer had any actual value.”
Rather than address the misstated accounts directly by writing them off, however, Naggs, Wogsland and co-conspirators “purposefully left the vast majority of the misstated accounts on Roadrunner’s books in order to fraudulently boost Roadrunner’s financial performance and mislead Roadrunner’s shareholders, independent auditors, regulators and the investing public about Roadrunner’s true financial condition.”
In order to accomplish this, the former executives in late 2014 hatched a plan to have RRIS finance employees adjust the company’s balance sheet by a small amount each month, as opposed to immediately writing off the full amount, “in order to conceal … the true nature and extent of the misstated accounts.”
After the company’s performance began to deteriorate, the conspirators ditched that plan, in some cases even reversing write-offs that had already been booked, according to the indictment.
The indictment further alleges that starting in May 2015, Naggs and other Roadrunner employees began receiving monthly financial reports from RRIS that included profit and loss figures both with and without the planned monthly write-off.
As a result of the scheme, nearly all of the misstated accounts remained on RRIS’ balance sheet from 2014 until the company announced the restatement of previously reported results in early 2017.
In the three trading days immediately following the announcement, the price of Roadrunner’s shares dropped from $11.74 to $7.54 per share, causing a loss in shareholder value of more than $160 million, according to the DOJ.
Roadrunner in early 2018 issued restated financial results for 2014 through the third quarter of 2016, after which the company’s share price fell again, this time from $7.14 to $4.90 per share, a loss of more than $85 million in shareholder value.
The investigation into Naggs’ and Wogsland’s alleged involvement in the scheme is being carried out by the Department of Transportation Office of Inspector General’s Chicago office and the FBI’s Milwaukee and Atlanta field offices. Assistant Chief Henry Van Dyck and trial attorneys Caitlin Cottingham and David Stier of the Criminal Division’s Fraud Section are prosecuting the case, with assistance from the U.S. Attorney’s Office for the Eastern District of Wisconsin and the Securities and Exchange Commission.
“According to the allegations in the indictment, Mark Wogsland and Bret Naggs engaged in a massive securities and accounting fraud scheme that misled shareholders, regulators and the investing public, and ultimately caused a loss of more than $245 million in shareholder value,” John P. Cronan, acting assistant attorney general of the Justice Department’s Criminal Division, said of the charges. “The Criminal Division is committed to protecting investors and the integrity of U.S. securities exchanges, and we will vigorously pursue corporate executives who engage in deceptive and fraudulent accounting practices.”
Thomas J. Ullom, DOT-OIG regional special agent in charge, added, “Working with our law enforcement and prosecutorial partners, the U.S. Department of Transportation Office of Inspector General is committed to preventing and detecting corporate fraud and corruption schemes within transportation-related companies intent on providing false or misleading information to the federal government. Today’s indictment helps reinforce the message that executives involved in all modes of transportation must uphold the public’s trust and maintain the highest levels of integrity.”