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In the Matter of Caterpillar, Inc.

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    Bloomberg Law

    Brief Fact Summary.

    In its annual and quarterly reports, Caterpillar, Inc. Defendant’s failed to sufficiently comply with the disclosure requirements of § 13(a) of the Securities Exchange Act of 1934.

    Synopsis of Rule of Law.

    Disclosure is required when it is likely that a known trend, demand, commitment, event, or uncertainty is likely to occur, and where such a determination cannot be made, an objective evaluation must be made regarding the consequences of such an occurrence assuming that it will occur.

    Facts.

    Caterpillar, Inc. (Defendant) had a wholly owned subsidiary, Caterpillar Brasil, S.A. (CBSA), which accounted for approximately one quarter of Defendant’s net profits.  Prior to  Defendant’s filing of the reports required by § 13(a) of the Securities Exchange Act of 1934, management recognized that the future performance of CBSA would be especially hard to predict.  Brazil was volatile, and the impact was significant enough to reduce Defendant’s projected results for 1990.  There was, however, nothing in the reports of the Management Discussion and Analysis (MD & A) to suggest the disproportionate impact of CBSA’s profits on Defendant’s overall profitability or that adequately noted the uncertainty of management regarding CBSA’s performance for 1990.

    Issue.

    Is disclosure required when it is likely that a known trend, demand, commitment, event, or uncertainty is likely to occur, and where such a determination cannot be made, must an objective evaluation be made regarding the consequences of such an occurrence assuming that it will occur?

    Held.

    [Judge not stated in casebook excerpt.]  Yes.  Disclosure is required when it is likely that a known trend, demand, commitment, event, or uncertainty is likely to occur, and where such a determination cannot be made, an objective evaluation must be made regarding the consequences of such an occurrence assuming that it will occur.  Defendant’s disclosure should have discussed the impact of the expected changes in CSA on the overall results of Defendant’s operations.  In addition, its annual and quarterly reports should have discussed the uncertainties of future CBSA operations and the possible risk of Defendant’s having considerably lower earnings as a result and, to the extent reasonably practicable, quantified the impact posed by the risk. Defendant failed to do so.

    Discussion.

    The intention of the MD & A is to give the investor an opportunity to look at the company from management’s point of view by providing both a short-term and a long-term analysis of the company’s business.  Defendant failed to include required information about CBSA in its MD & A, which left investors with an incomplete picture of Defendant’s financial condition and results of operations.  Investors were therefore not provided the opportunity to view the company from management’s point of view.


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