In the Matter of Caterpillar, Inc.

Caterpillar Brasil, S.A. (CBSA) was a subsidiary of Caterpillar Inc. (defendant). In 1989 CBSA accounted for 23 percent of Caterpillar’s net profits. Several items contributed to CBSA’s unusually high profits in 1989, including currency translation gains, export subsidies, interest income, and Brazilian tax loss carryovers. By February 1990, two weeks before Caterpillar filed its 1989 Form 10-K with the Securities and Exchange Commission (SEC) (plaintiff), management was aware that CBSA’s future performance was difficult to predict, and that there were uncertainties as to whether CBSA could repeat its 1989 earnings in 1990. At a board meeting in February 1990 the board of directors was told that CBSA’s impact on Caterpillar’s overall 1990 forecast was so significant that management felt it necessary to explain it to the directors in detail. In March 1990 a new administration took office in Brazil and instituted sweeping economic changes. In April 1990, at another board meeting, management discussed with the directors the likely negative effects of these changes on CBSA’s sales and profits, and noted that profits in Brazil would be substantially lower than in 1989. After reviewing its April and May 1990 results, Caterpillar concluded that CBSA would suffer significant losses in 1990. The Management’s Discussion and Analysis of Financial Conditions and Results of Operations (MD & A) sections of Caterpillar’s 1989 Form 10-K and its Form 10-Q for the first quarter of 1990 did not disclose the extent to which CBSA affected Caterpillar’s results in 1989, or the risk of lower earnings for CBSA in 1990 and the negative impact that would have on Caterpillar’s overall results in 1990. Administrative proceedings were instituted within the SEC to determine whether Caterpillar failed to comply with the MD & A requirements of section 13(a) and Rules 13a-1 and 13a-13 of the Securities Exchange Act.