It has been known for some time that there has been a grand jury investigation in the Central District of Illinois, which encompasses Caterpillar's home offices. The precise nature and scope of the grand jury investigation is not known, although the assumption was that it was related to Caterpillar's tax issues discussed in the Senate report. On Thursday, March 2, federal agents executed a search warrant on certain Caterpillar premises, According to the news sources, the search warrant execution was led by the US Attorney and carried out by three agencies -- IRS Criminal Investigation ("CI"), the FDIC office of inspector general, and the Department of Commerce office of export enforcement. (I list some news sources at the bottom of this blog.)
Rule 6(e), FRCrP, requires secrecy about grand grand jury activity, including search warrants; so the Government is extremely limited as to what it can say publicly. Caterpillar, a pubic company, had to say more. Caterpillar issued a cryptic press release, here:
Caterpillar Continues to Cooperate with Law Enforcement
PEORIA, Ill. – On March 2, 2017, law enforcement authorities entered three Peoria-area Caterpillar Inc. (NYSE: CAT) facilities, including the corporate headquarters, to execute a search and seizure warrant. The warrant is focused on the collection of documents and electronic information. Caterpillar is cooperating with law enforcement.
While the warrant is broadly drafted, we believe the execution of this search warrant is regarding, among other things, export filings that relate to the CSARL matter first disclosed in Caterpillar’s Form 10-K filed on February 17, 2015, and updated in Caterpillar’s most recent Form 10-K filed with the SEC on February 15, 2017.The two 10-Ks referenced are the 2015, here, and the 2017, here. Excerpts from the 10-Ks are:
On January 8, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL and related structures. The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.2015
On January 8, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.Notice that the company claims in each of these reports is cooperating with the investigation. If that is true, I wonder why the need for a search warrant. A simple request or a grand jury subpoena should have been sufficient. Background on this issue may be gleaned from the 1991 edition of the DOJ Antitrust Division Grand Jury Practice Manual, here, says (III-174 - II-177, footnotes omitted):
A search warrant is, in most cases, preferable to a subpoena where there is a reasonable likelihood that documents will be destroyed, concealed or fabricated. A search warrant allows a direct search for documents, while a subpoena depends on the recipient or its agents to conduct the search and to produce the documents before the grand jury. Given that the basis for issuing the warrant would be the likelihood of document destruction, concealment or fabrication, a direct, warranted search is more likely to achieve the desired result of safeguarding documents than merely relying on the subpoena recipient to produce the documents himself.
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Factors to consider in using warrants
In a limited set of circumstances, attorneys should consider the use of a search warrant to obtain evidence of criminal activity. Generally, warrants should be viewed as an extraordinary method of criminal discovery, and should be sought only when an attorney has a substantial basis for doing so. Moreover, because of differing standards governing their issuance, search warrants cannot be viewed as substitutes for grand jury subpoenas duces tecum. Rather, warrants are useful as complements to subpoenas in cases in which the investigation develops proof either: (a) that material responsive to a previously-issued subpoena was not produced in response to the subpoena; or (b) that there is already probable cause to charge a criminal offense (such as price-fixing) and that evidence not already under subpoena which helps prove that offense can be found at a specified location. In antitrust investigations, the former situation is the more likely one in which a search warrant would be sought.
Where the prosecuting attorney can establish that the recipient of a grand jury subpoena duces tecum has not complied fully with the subpoena, either by deliberately withholding responsive documents or by recklessly searching for responsive materials, the prosecutor could proceed either by search warrant or by follow-up subpoena. The search warrant may be the superior alternative, for the following reasons.
First, if an individual deliberately or recklessly withheld documents responsive to an earlier grand jury subpoena, it is unlikely that the same individual will produce the required documents in response to a subsequent subpoena. The security of the documents is of paramount importance to the prosecution, as the withheld materials are likely to be proof of both the original offense under investigation (e.g., price-fixing or bid-rigging) and the separate offense (e.g., obstruction of justice or criminal contempt) which was committed when the documents were withheld from production under the original subpoena. Use of a search warrant in these circumstances may be essential to prevent the further concealment or the possible destruction of this evidence. Warrants are issued without notice to the person whose premises are to be searched and they are executed by law enforcement officers who immediately take the evidence into their possession, eliminating the opportunity for destruction of evidence.
Second, a search warrant is executed by law enforcement officers without any participation by the owner or custodian of the seized property. Thus, the owner or custodian is not being compelled to do anything which might be deemed "testimonial" and, for that reason, he has no right to assert a 5th Amendment privilege to block execution of the warrant. On the other hand, the courts have held under some circumstances that if the act of producing documents in response to a subpoena can, itself (i.e., independent of the content of the documents), be said to establish an element of a criminal offense, the act of production is deemed "testimonial," and 5th Amendment self-incrimination interests are implicated.News sources:
- Claire Bushey, Feds search Caterpillar HQ (Crain's Chicago Business 3/2/17), here.
- Claire Bushey, Cat raid raises key question: Will Team Trump be tough on tax shelters? (Crain's Chicago Business 3/3/17), here.
- Timothy Mclaughlin, U.S. authorities raid Caterpillar's Illinois facilities (Reuters 3/3/17), here.
Addendum 3/8/17 9:00pm:
The New York Times has this article: Jesse Drucker, Caterpillar Is Accused in Report to Federal Investigators of Tax Fraud (NYT 3/7/17), here. I will let readers review the article as they will, but it is an odd article reporting on an odd report.
1. It is unclear which agency commissioned the report? And for what purpos? I doubt that the IRS commissioned the report. The IRS already knows how to review records and reach appropriate conclusions as to tax matters. And, I would suspect that the other agencies involved have their own internal expertise that would make seeking such outside expertise redundant and meaningless.
2. The reported conclusions are oddly worded. Here is the key quote from the article:
“Caterpillar did not comply with either U.S. tax law or U.S. financial reporting rules,” wrote Leslie A. Robinson, an accounting professor at the Tuck School of Business at Dartmouth College and the author of the report. “I believe that the company’s noncompliance with these rules was deliberate and primarily with the intention of maintaining a higher share price. These actions were fraudulent rather than negligent.”My initial reaction is whether what she "believes" is meaningful?
More importantly, I have looked over her web site bio, here. She appears to be very smart and very accomplished. The web site indicates: "her expertise centers on the tax and accounting issues associated with multinational operations." That certainly is the right expertise to understand the Caterpillar operations described in the Senate report. But there is nothing on the web site that suggests to me that she has experience sufficient to declare conduct fraudulent in the criminal sense which I gather is the purport of the quote. Fraud is a legal conclusion with particular meanings in the criminal law and particular element and proof requirements. A seasoned white collar crime prosecutor might be in a position to make such conclusions after marshaling the facts that support the conclusions. And which type of fraud is she referring to -- tax fraud, securities fraud, some other fraud, perhaps some type of unspecified general fraud of unstated elements and proof requirements?
There are simply too many questions that are unanswered for the report to be meaningful.
I will raise one possibility, though, and I caution that this is entirely speculation. I wonder whether her report could have been submitted along with a whistleblower claim? I have no idea, but given the numbers involved, a whistleblower is likely to be very lucrative indeed. But, I certainly have no idea whether that is the case.