YRC disputes alleged overcharge scheme in federal appeals court
November 11, 2020
YRC is defending itself in a federal appeals court for allegations of covering up a scheme to overcharge customers and hiding a pending Department of Justice investigation from investors.
On Nov. 9, YRC filed a brief in the Second Circuit Court of Appeals in response to a lawsuit filed by investors. Plaintiffs accuse the LTL carrier of intentionally overcharging customers. Additionally, the complaint alleges that YRC purposely did not disclose a Department of Justice investigation related to the overcharge scheme.
YRC’s alleged overcharge scheme
In a lawsuit initially filed in January 2019, investors accuse YRC and high-level executives, including then CEO James Welch, of violating federal securities laws in a companywide scheme.
According to the amended complaint, YRC overcharged for shipments based on weights that were higher than actual weights. At least $2 million per month was earned in “illicit revenue.”
The freight involved the company reweighing loads that passed through its freight terminals. If the weight of a customer’s freight was heavier than the weight on the invoice or bill of lading, the customer was charged for the higher weight.
However, the process did not go the other way around. If the customer’s freight was lighter than reflected on the invoice or bill of lading, YRC would go with the heavier weight. In other words, YRC corrected the weight when it benefited the company but ignored any corrections when it would result in a discount or credit.
According to the lawsuit, this scheme was implemented from at least 2005.
Department of Justice investigation
In addition to knowing about the scheme, investors claim that YRC intentionally failed to disclose a Department of Justice investigation into the matter.
In December 2018, the Department of Justice filed a complaint in a whistleblower action. The complaint alleges that YRC defrauded the Department of Defense by millions of dollars in the scheme that lasted for more than seven years. The complaint was the result of an investigation that began in 2009.
That investigation found that the reweigh scheme was just one of many ways YRC overcharged customers. Allegedly, YRC overcharged customers like Walmart by charging them for a full shipment when the truck was half empty. Others employees reported they were incentivized to accumulate as many reweighs as possible per day by being offered $25 gift cards to The Home Depot for every 30 reweighs conducted. Some allegedly forged reweighs to hit that target. Other misclassified shipping codes to increase charges. Unwarranted fees, like fuel surcharges, were also added to the bill. Lastly, YRC allegedly had a “hit list” of large customers to overcharge, including Walmart, Sears and General Mills.
During the investigation, YRC and the Department of Justice communicated through several meetings, negotiations and presentations. Among those were several settlement negotiations, according to the investors’ complaint.
YRC denied the allegations.
“These claims are totally without merit,” Jim Fry, YRC general counsel, said in a 2018 statement. “(YRC) made every effort over nearly a decade to address the government’s questions. We are confident that the evidence will demonstrate YRC Freight acted consistently with our contract and all applicable guidelines. We look forward to continuing to provide essential and valuable logistics services to the U.S. government and all our customers.”
YRC’s alleged overcharge scheme inflated revenue
In their complaint, investors claim that the scheme inflated YRC’s reported revenue, earnings and the value of its publicly-traded securities. Additionally, concealing the Department of Justice contributed to the inflated revenue reporting.
During the period of the alleged scheme, YRC executives sold nearly $10 million worth of shares at prices from $15 to $24 per share. After the Department of Justice announced its lawsuit in December 2018, shares of YRC fell from an opening price of $4.41 to $3.17 in one day, a 28% drop on heavier-than-average volume of shares traded.
District court dismisses case
YRC moved to have the case dismissed. In March, a New York federal district court granted the company’s motion for dismissal.
In its motion to dismiss, YRC argued the following:
- YRC never misstated financial results, accounting policies or loss contingencies.
- No proof of conscious misbehavior or recklessness on behalf of the executives.
- No proof of scienter, i.e., intent or knowledge of wrongdoing.
The district court sided with YRC, dismissing the case.
According to judge’s order, the investors’ allegations rely on statements from six confidential witnesses, three of whom did not work for YRC during the period of the alleged scheme in the lawsuit. Other witness accounts were based on hearsay.
Only one witness made sufficient statements that support the investors’ claims. However, one witness account does not prove executives had knowledge of the scheme nor does the account prove the scheme was companywide.
Additionally, the court agreed with YRC that it had no duty to disclose the Department of Justice investigation. Precedent has established that “securities laws do not require a company to hypothesize the worse results of an investigation when those results do not materialize and when the company chooses not to speak about the investigation.”
In this case, there is no evidence that YRC had knowledge of the outcome of the investigation.
“Defendants did not have a duty to disclose the DOJ investigation because the DOJ was in the process of investigating defendants, no lawsuit had been filed, and no court documents had been unsealed at the time defendants filed their various 10-K statements,” the court stated.
Also, the court ruled that YRC never misstated financial reports. Although the investors claim financial results partially derived from “illicit revenues,” the court ruled that those revenues existed nonetheless. Whether or not the revenues were illicit does not change the fact the income did come in. Therefore, YRC’s reporting of that income was not considered misleading.
After the dismissal, the investors filed an appeal. Regarding the witnesses, plaintiffs argued that the district court erred in determining the witnesses’ statements were insufficient. Additionally, the investors claim that Welch approved of the scheme. They also argue that YRC did have a duty to disclose the Department of Justice investigation.
“The complaint alleges facts that demonstrate that the DOJ had manifested an ‘awareness of a possible’ claim and, further, that YRC had sufficient information to conclude that it was probable that a claim would be asserted and that there was a reasonable possibility that the outcome would be unfavorable,” the appeal stated.
On Monday, Nov. 9, YRC filed its brief, which essentially echoed the district court’s ruling.
YRC could not be immediately reached for comment. LL