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
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
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.