By George Wilson
On August 28, 2023, the SEC announced an Order of Suspension Pursuant to Rule 102(e) barring Peter Armbruster, CPA, former CFO of Roadrunner Transportation Systems, Inc. (“Roadrunner”), from appearing or practicing before the Commission. The bar was based on Armbruster’s 2021 conviction for committing:
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One count of acts to fraudulently influence accountants;
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Two counts of false entries in a public company’s books, records, and accounts; and
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One count of securities fraud.
He was sentenced to 24 months imprisonment in a federal penitentiary to be followed by one year of supervised release and ordered to pay restitution of $1,142,597.50. All of this, of course, in addition to his permanent bar from appearing before the SEC.
While this announcement about a single individual seems like a discrete event, a deeper look into the events at Roadrunner leading up to Armbruster’s bar provides insight into the dramatic costs and consequences of manipulating financial statements and reporting fraudulent information.
Roadrunner, a trucking and transportation company, had grown dramatically between 2010 and 2017, largely through acquisitions. As a NYSE listed company, there was pressure to show successful results from this strategy. Unfortunately, Roadrunner’s results were falling short of expectations, and this pressure caused people and the company to break financial reporting rules. The chronology of events and related consequences in this case are long and complicated.
January 30, 2017 – First Public Announcement
The first publicly disclosed information about financial reporting problems was this January 30, 2017 Form 8-K. In the Form 8-K, the company stated:
Item 4.02(a). Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
In November 2016, we were made aware of various potential accounting discrepancies at our Morgan Southern and Bruenger operating subsidiaries. In response, our Board of Directors immediately commenced an investigation of the discrepancies with the assistance of Greenberg Traurig, LLP, as outside counsel, and RubinBrown LLP, as forensic accountants. Our investigation into these discrepancies is still ongoing; however, based on the investigation to date, and as described in further detail below, we have identified various accounting errors that we currently estimate will require prior period adjustments to our results of operations of between $20 million and $25 million. These errors principally relate to unrecorded expenses from unreconciled balance sheet accounts including cash, driver and other receivables, and linehaul and other driver payables. As the investigation is ongoing, the estimated amount is preliminary and could change materially.
The Form 8-K also included details indicating that several years of financial statements would likely be restated.
March 29, 2017 – Termination of CFO
In this Form 8-K, filed on April 3, 2017, Roadrunner announced:
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On March 29, 2017, Mr. Peter Armbruster was terminated from his positions as the Company’s principal financial officer and principal accounting officer.
Interestingly, just a few weeks earlier, on February 28, 2017, the CFO was included in the company’s incentive compensation plans announced in this Form 8-K.
January 31, 2018 – Form 10-K/A Filing
A year after the initial announcement Roadrunner filed a Form 10-K/A to restate several years of financial statements. In the Form 10-K/A, the company stated:
Restatement Background
In November 2016, we commenced an internal investigation into certain accounting discrepancies at our Morgan Southern and Bruenger operating companies. Subsequently, an independent internal investigation was undertaken by the Audit Committee of our Board of Directors (the “Audit Committee”), with assistance from outside counsel and outside consultants to provide forensic and investigative support (the “Audit Committee Investigation”). The expanded Audit Committee Investigation included detailed reviews of financial records at other operating companies and at our corporate headquarters. The Audit Committee Investigation identified material accounting errors that impacted substantially all financial statement line items and disclosures.
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Based on the Audit Committee Investigation, current management determined that there were deficiencies in the design and/or execution of internal controls that constituted material weaknesses. Current management determined that structural and environmental factors, including the increased size and complexity arising from the acquisition of 25 non-public companies between February 2011 and September 2015, the inconsistency of our accounting systems, policies and procedures, and management override of internal controls contributed to the material weaknesses and resulting material accounting errors. Our internal controls failed to prevent or were overridden by management in certain instances to allow recording accounting entries without appropriate support, recording accounting entries that were inconsistent with information known by management at the time, not communicating relevant information within our organization and, in some cases, withholding information from our independent directors, our Audit Committee, and our independent auditors, which resulted in material accounting errors.
March 12, 2018 – Consolidated Amended Class Action Complaint Filed
As expected in cases like this, class action litigation resulted. You can find a detailed list of developments at Roadrunner and related assertions by the plaintiffs in this Consolidated Amended Class Action Complaint. The time and costs involved in this kind of litigation are substantial.
April 1, 2019 – Stipulation and Agreement of Settlement Filed for Class Action Litigation
In a step towards ending the class action litigation, plaintiffs and defendants entered into this Stipulation and Agreement of Settlement. As you review the details you will find the amount of the Settlement was $20 Million. There were several steps in the process to have the agreement approved by the court. The company announced preliminary approval on this June 26, 2019 Form 8-K.
April 6, 2020 – Roadrunner Delists from the NYSE and Withdraws its 1934 Act Registration
On April 6, 2020, Roadrunner filed a Form 25 to end its listing on the NYSE, and on April 17, 2020, the company filed a Form 15-12B to terminate its 1934 Act registration.
February 14, 2023 – SEC Announces Cease and Desist Order Against Roadrunner
As you can read in this AAER, the company entered into a Cease and Desist Order with the SEC in February 2023, well after the end of its 1934 Act registration. The Order includes a summary of the various accounting misstatements that impacted the company’s reported results. Interestingly, the settlement that Roadrunner paid in the related class action litigation was deemed to satisfy the SEC’s disgorgement principles.
August 28, 2023 – Former CFO Is Barred by the SEC
As described above and as you can read in this AAER, the former CFO, based on his conviction, was barred from SEC practice.
September 7, 2023 – Former Segment Controller and Director of Accounting Barred by the SEC
As you can read in this AAER, a former controller of the Truckload Logistics segment of Roadrunner was also barred by the SEC.
In addition, as you can read in this AAER, the Director of Accounting for Truckload was also barred.
These cases, if we are drawn into them, have a long and complex path with dramatic costs, financial and otherwise, for individuals and companies. The above summary does not include several officer and director changes, including two CFO changes. Nor does it include the details of how the company ended up delisting and going dark, or a settled action against a former officer for insider trading charges during the period of the financial reporting fraud.
As always, your thoughts and comments are welcome.