Caterpillar Inc. (CAT) stocks took a deep dive on Thursday trading after reports emerged that federal officials raided three of the industrial giant’s offices in Illinois. The raids, which have been confirmed by Caterpillar Inc. itself, ultimately caused the firm’s stocks to experience a massive 5 percent drop, allowing the company’s shares to close in at breakeven from the year-to-date.
The three-pronged operation, which was held on Thursday morning, was initiated by a number of government agencies, according to a Reuters report. Though the reasons behind the raids have not been specified by CAT, or the agencies involved, speculations are high that the operation was part of a criminal investigation against the industrial firm’s controversial tax strategies.
Sharon Paul, a spokesperson for the U.S. Attorney’s Office for the District of Illinois, confirmed that the raids were initiated on the company’s Peoria, East Peoria, and Morton offices. The industrial firm also confirmed the raids through Corrie Scott, a Caterpillar Inc. spokesperson, who gave a brief statement on Thursday.
“Law enforcement is present in various Peoria-area Caterpillar facilities executing a search warrant. Caterpillar is cooperating,” Scott stated, according to an Investor Place report.
Caterpillar Inc. found itself on the wrong end of a tax investigation back in 2009, after a wrongful termination lawsuit from former employee Daniel Schlicksup alleged that the company was involved in shady tax strategies. According to the former employee’s lawsuit, CAT Inc. avoided paying about $2 billion in U.S. taxes by shifting its profits to offshore shell companies, specifically the firm’s Swiss parts distribution subsidiary, Caterpillar SARL (CSARL).
For its part, Caterpillar Inc. did admit in its annual 10-K filing with the United States Securities and Exchange Commission that a criminal investigation into the company’s tax strategies was indeed underway. A Peoria Journal Star report provided an excerpt from the industrial giant’s statement regarding the ongoing legal proceedings embroiling the company.
“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.”
Back in 2009, Schlicksup specifically alleged that Caterpillar sold and shipped spare parts to locations worldwide from its warehouse in Morton, Illinois. In official documents, however, the former employee alleged that the company instead attributed around $5.6 billion of the profits from its Geneva subsidiary, Caterpillar SARL. The lawsuit also stated that this strategy is known in the company was the “Swiss Structure.” In response to the case, Caterpillar denied the allegations, according to the Journal Star.
While Schlicksup eventually opted for a settlement in 2012, the former employee’s accusations did result in an inquiry by an investigative panel of the U.S. Senate. Over the course of the investigation, it was found that the “Swiss Structure,” which was primarily in effect from 2000 to 2009, saved the industrial giant as much as $2.4 billion in taxes. As a result, the IRS proposed penalties and a tax increase amounting to $1 billion for 2007-2009.
During the course of Thursday’s raids, reports emerged that some agents who participated in the raids wore jackets emblazoned with the IRS logo. Others seemed to have been deployed from the Federal Deposit Insurance Corporation. Federal agents also took part in the Thursday raids.
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