A Chicago federal judge will allow the Securities and Exchange Commission to continue the bulk of its legal action against the former president and CEO of Navistar for allegedly misleading investors and the federal government by lying about Navistar’s development of a new diesel engine that met heightened emissions standards. 

On Jan. 24, U.S. District Judge Sara L. Ellis weighed in on the SEC’s complaint against Daniel C. Ustian, who leads the Lisle-based manufacturer of truck and bus diesel engines. 

According to court documents, Navistar made several years of promises to investors that it would roll out a new truck engine, referred to as the Advanced Exhaust Gas Recirculation (EGR) model. The announcements boosted Navistar’s stock price to as much as $70 per share in 2011. But in 2012 Navistar formally announced efforts to build the Advanced EGR had failed, and it would adopt the same technology competitors use to ensure its trucks met the emissions requirements. The news came after the company had announced losses in the preceding quarter. 

Ustian sought to have the SEC’s complaint dismissed and asked the court to consider 40 documents he submitted as evidence. While Ellis granted the request regarding the documents, she declined to dismiss the case, finding the SEC sufficiently alleged he intentionally made misleading statements material to investors. 

She also said the SEC made a solid case that Navistar itself violated securities law and Ustian is liable for those violations. 

Ellis highlighted a November 2010 press release the SEC called misleading. In that release, Navistar announced certification of one engine while announcing plans to certify an EGR model gave the false impression Navistar would and could develop a viable EGR. 

Ustian argued the release was simply an announcement of future plans, but Ellis said contemporary industry events and analysis made the SEC’s claim plausible.   

She also looked at a December 2010 call with analysts regarding EGR development. While Ustian argued he carefully used “future tense in order to make sure that he did not represent that Navistar had a competitive, market-ready engine at the time,” the SEC maintained he knew his statements would not come true within the timeline he established, because in late 2010 “engineers and executives had already told Ustian” the company could not produce a competing engine until the end of 2012, the judge wrote. 

In a March 2011 analyst call, the SEC alleged Ustian knew - but did not disclose - that a prototype engine submitted for review a month earlier “could not be driven in the real world, so he misled investors” by stating it met EPA rules and “contained all necessary performance features for the market.” 

Ellis also said the SEC plausibly alleged fraud by detailing “an entire narrative where Ustian engaged in acts that furthered his alleged overarching scheme, making it look like Navistar developed and would release” an EGR engine. Included in that claim are allegations “Navistar filed applications with the EPA for certificates of conformity for engines that Navistar knew it could not sell or knew that the EPA would not certify.” 

In considering many of the communications between Ustian and market analysts, as well as Navistar’s contact with EPA officials, Ellis said she could not, while considering only a motion to dismiss, resolve the importance of the statements as it relates to whether Navistar simply failed to deliver on Ustian’s projections, or whether he intentionally made promises he knew his company could not keep. 

Ustian was successful in arguing for dismissal of a count claiming he aided and abetted Navistar’s SEC violations with regards to filing of annual and quarterly reports because it did not mention that count in its response. Ellis agreed with Ustian’s assertion the omission constitutes a waiver of its right to pursue that claim. The same failure to challenge applies to Ustian’s arguments about his statements in a February 2012 call with analysts, the judge said. 

Ustian is represented in the action by a team of attorneys, including lawyers from the firms of Latham & Watkins, of Chicago; Cooley LLP, of San Francisco; and Cooley & Godward, of Palo Alto, Calif. He is also represented by attorney Laurence Harvey Levine, of Chicago.  

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Organizations in this Story

Cooley LLP
700 1299 Pennsylvania Avenue Northwest
Washington, DC - 20004

Latham and Watkins LLP
330 N Wabash Ave
Chicago, IL - 60601

U.S. Securities and Exchange Commission
100 F Street Northwest
Washington, DC - 20001

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