Navistar Settles with SEC: Where Were the Whistleblowers?

April 12, 2016
Harini Srinivasan

Navistar International Corp., a maker of international trucks, has reached a settlement with the Securities and Exchange Commission over allegations that the company misled investors about its development of engine technology that could meet U.S. emissions standards.

Struggling to Receive Certification

On March 31, Illinois-based Navistar reached a settlement to pay the SEC a $7.5 million penalty. The SEC levied the charge against Navistar because the company did not fully disclose to investors that the engine it had developed was having difficulty meeting tough federal emission standards. For years, Navistar insisted that its diesel truck engines could meet the standards for smog-causing emissions set by the U.S. Environmental Protection Agency (EPA) by relying on technology that the rest of the truck industry had rejected. Behind closed doors, Navistar struggled to achieve EPA certification for a truck engine, while it told the public in its annual reports, press releases and calls that the certification was proceeding normally and lauded the company’s supposed achievement in creating the engine.

Misleading Investors

Under the Clean Air Act, the EPA regulates air emissions of hazardous pollutants to protect public health. EPA staff told Navistar after it applied for certification in 2011 that the proposed engine did not appear to meet requirements. However, just four days later, Navistar filed its annual reporting that stated it believed it would meet certification requirements. Navistar filed three applications with the EPA; with each, the EPA told Navistar it was unlikely to be approved. Despite the clear message from the EPA that Navistar needed to improve its product, Navistar continued to tell the public that it was unaware of any concerns by the EPA and that it was on track for certification.

Telling the Whole Truth

The settlement is an important reminder to potential whistleblowers that companies do not have to lie outright to be liable for fraud against their shareholders; withholding vital information about products and costly expenditures may also constitute fraud.

The SEC Whistleblower Program is an incentive program to reward and protect individuals who report violations of the laws that govern a wide range of activities in the financial markets. The SEC Whistleblower Office provides awards of 10 to 30 percent of the amount of sanctions and penalties the SEC imposes on wrongdoers as a result of a whistleblower’s information.

Perhaps Navistar employees who knew that the company was struggling to receive certification were reluctant to report the discrepancy between the truth and Navistar’s reports to shareholders because the company could possibly still receive certification if it improved the engine model. However, as Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, stated, “When public companies and top executives discuss important regulatory developments with investors, they must tell the whole truth.”

While Navistar has closed the door on this component of the SEC’s investigation, it still has a long road ahead. The SEC also has filed a complaint in federal court in Illinois alleging that former Navistar CEO Daniel Ustian misled investors by not disclosing the company’s difficulty in securing certification to meet emission standards from the EPA. The SEC’s actions against Navistar demonstrate the agency’s commitment to protecting the investing public, not just from falsehoods, but also material misstatements of companies’ financial stability.

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