Caterpillar Board Sued Over ERA Mining Machinery Acquisition for failure to heed “red flags” that should have alerted them the company was overpaying for a Chinese mine-equipment maker

Caterpillar Board Sued Over ERA Mining Machinery Merger

Caterpillar Inc. (CAT) Chairman Douglas R. Oberhelman and 13 directors failed to heed “red flags” that should have alerted them the company was overpaying for a Chinese mine-equipment maker, a shareholder said in a lawsuit. New Jersey investor Michael D. Wolin accused Oberhelman, the directors and Chief Financial Officer Edward J. Rapp of breaching their fiduciary duties to the company in a complaint filed yesterday in federal court in Chicago. Caterpillar, the world’s biggest maker of construction and mining machinery, took a $580 million writedown in January on its 2012 acquisition of Hong Kong-based ERA Mining Machinery Ltd. and its Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co. “The red flags clearly show that Siwei was being overvalued by Caterpillar senior management, including Rapp and Oberhelman,” Wolin said in the complaint. The board “blindly acceded” to the acquisition, he said. Among the factors Caterpillar executives should have considered were the Chinese company’s aging receivables and its need for “an immediate $50 million cash infusion” to continue operating before the deal was closed, Wolin said.The allegations are based on documents Caterpillar provided to Wolin after his lawyers demanded on Jan. 23 to inspect the company’s books and records, according to the complaint.

Jim Dugan, a spokesman for the Peoria, Illinois-based company, declined to comment on the complaint, saying the company doesn’t comment on pending litigation.

Caterpillar acquired ERA for about HK$6.15 billion ($790 million) to gain factories that make underground coal-mining equipment in China, the world’s biggest producer of coal.

Accounting Misconduct

In a Jan. 18 statement by the company announcing the writedown, it was attributed to “goodwill impairment.” Caterpillar said it determined several Siwei senior managers engaged in deliberate accounting misconduct for several years before its acquisition.

Wolin seeks a court finding that the individual defendants failed to protect the company’s interests and an award of damages payable to Caterpillar.

Among those board members named as individual defendants are San Francisco Giants baseball team owner Peter A. Magowan, Abbott Laboratories Chairman Miles D. White and former Republican Party presidential candidate and Utah Governor Jon Huntsman.

The case is Wolin v. Oberhelman, 13-cv-05561, U.S. District Court, Northern District of Illinois (Chicago).

To contact the reporter on this story: Andrew Harris in the Chicago federal courthouse at aharris16@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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