In The Matter Of Caterpillar, Inc. Admin. Proceeding File No.

3-7692. SEC Rel. No. 34-30532 (1992)

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Nature of the Case

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Facts

D owned a Brazilian subsidiary called CSBA. D had owned the sub since the 1950s. In 1989, CBSA accounted for 23% of D’s profits of $497 million. Revenues from CSBA only accounted for 5% of D’s revenues. During 1989, nonoperating items such as currency translation gains, export subsidies, interest income, and tax loss carryforwards, accounted for the dramatic gains. Many of the gains were caused by hyperinflation and the fact that the dollar-cruzado exchange rate lagged behind that inflation. D decided to present CBSA’s results on a consolidated basis and as such the true picture was not given as to how D’s profits had been achieved. It was typical for D to view and manage its divisions and subs on a consolidated basis as they were very independent. The various divisions and subs were not viewed as profit centers but as cost centers. Profits and results were managed on a consolidated basis. Notice began to be paid to the CSBA results. Management was aware that CSBA results were unpredictable. Board members were told that Brazil was volatile and that the impact on the consolidated balance sheet required explanation. A new election in Brazil brought an administration that was willing to get the hyperinflation under control. D eventually determined that these new policies would result in significant losses for CSBA in 1990 and that those losses would not be balanced or offset by other worldwide operations. The MD&A sections of the 1989 10-K and 10-Q reports for the first quarter were drafted by D employees and reviewed by the Financial Vice President, Controller, Treasurer, and the legal department. The language was then reviewed by the top officers of D. A written opinion was also obtained by its independent auditor, and eventually, the board reviewed the statements. The reports did not reflect the extent to which CSBA impacted the consolidated bottom line. There was no hint of the disproportionate impact of CSBA on D’s bottom line. The SEC began an investigation under 13(a) and Rules 13a-1 and 13a-13. D settled with the SEC, and this is record of the findings.