Financial fraud cases were at one time a staple of the Enforcement Division. Cases alleging financial fraud were regularly uncovered and filed. In recent years, however, the Commission has had difficulty in bringing such cases despite significant initiatives. Nevertheless, the agency has persisted and had some success. Its most recent financial fraud action is In the Matter of Roadrunner Transportation Systems, Inc., Adm. Proc. File No. 3-21301 (February 14, 2023).
The scheme began when Roadrunner acquired Operating Company. The deal papers called for Roadrunner to pay the sellers an earnout that was contingent on the acquired firm’s future performance. The impact of the calculation depended on the performance of the acquired firm. Under GAAP Roadrunner was required to remeasure the fair value of the earnout at each reporting date. If the Operating Company could not meet the annual EBITDA thresholds to trigger the payment of the full earnout amount there were two effects: a) it provided a short term boost to net income but b) signaled investors the acquired firm was not meeting the EBITDA projections required by the deal. To avoid the latter, the numbers were manipulated.
Over the next four years, Roadrunner continued to alter certain financial metrics to avoid revealing that some properties were not performing as expected. At various times the firm hid major expenses, concealed poor performance and avoided required write offs.
Source: Roadrunner Settles Financial Fraud Claims – SEC ACTIONS