By Jorge Barrera and Kenneth Jackson
APTN National News
Canadian National Railway was allegedly “engaged in criminal conduct by defrauding shareholders” and U.S. “federal regulators” by “manipulating” data to boost its efficiency and, by extension, its share price, according to a whistleblower complaint filed in U.S. federal court.
The complaint also alleges that CN has an unwritten policy of “retaliating against whistleblowers” and that the alleged criminal conduct was endorsed by a senior official in CN’s head office to keep the company’s share prices high.
The case was filed in early August with the U.S. federal court’s Western District of Tennessee by a former trainmaster employed by wholly-owned subsidiaries of CN, Wisconsin Central and Illinois Central Railroad. CN consolidates the financial statements of both rail firms within its own financial statements.
Timothy Wallender alleges that he was fired in September 2012 by CN for blowing the whistle on “widespread fraud” committed by the century-old Canadian railway company.
Wallender alleges that the fraud was committed under the direction of CN’s former executive vice-president and chief operating officer Keith Creel, who is now with Canadian Pacific, according to the complaint filed with the U.S. court.
None of the allegations have yet been proven in court.
CN said it would not comment on the individual allegations.
“As this is a pending litigation matter and particularly as CN has not been served with the federal court complaint, CN has no comment at this time. Please note that Keith Creel is no longer a CN employee. He is president and chief operating officer at Canadian Pacific Railway,” said CN spokesperson Mark Hallman.
A spokesperson for CP said the company would not be commenting on the court action.
“As this is a matter currently before the courts, CP has no comment at this time,” said Ed Greenberg in an emailed statement.
Creel, who joined CP in February 2013 and is its president and chief operating officer, has been issued a summons, along with Andrew Martin, the general superintendent of the Harrison Yard in Memphis, Tenn., Wisconsin Central and Illinois Central Railroad.
“The litigation is just starting, and I don’t expect to hear anything until they get served,” said one of Wallender’s lawyers Eugene Laurenzi, who is with Memphis-based law firm Godwin Morris Laurenzi and Bloomfield.
Wallender’s allegations centre around the alleged manipulation of the “terminal dwell time” of rail cars in the Harrison Yard. Terminal dwell time is based on the amount of time a rail car spends in the yard before it’s hooked into another train for transport. The times are key indicators to a rail company’s performance and impact its share price, according to Laurenzi.
CN claimed in Oct 2012 that it has “a 20 to 25 per cent advantage relative to its peers, in terms of train speed and dwell time,” according to Wallender’s complaint which quotes from the Brokerage Research Digest.
CN’s CEO Claude Mongeau said in the company’s 2011 report to shareholders that “we work hard to run more efficient trains, reduce dwell time at our terminals and improve overall work velocity,” the complaint states.
CN outperforms six other major railroads in North American on dwell times, according to online data tracked by Railroad Performance Measures. CN’s times are based on nine of its yards, including the Memphis yard, five yards in Canada and three other yards in the U.S.
“Canadian National’s supposedly favorable statistics on terminal dwell at Harrison Yard are based on persistent and pervasive fraud,” according to Wallender’s complaint.
Wallender claims Martin, his supervisor, ordered employees to change the program on CN’s computers to automatically show trains departing 30 minutes earlier than they actually left, create records showing lower than actual dwell times in the yard, falsely list trains as having left the yard while they sat on the tracks, and report non-defective cars as defective, among other orders.
“By using this scheme, Canadian national was able to create records that falsely showed lower than actual dwell time for Hunter yard,” the complaint said.
Wallender also claims Martin ordered CN employees to not report derailments and collisions to the Federal Railroad Administration.
Despite complaints against Martin and two investigations by CN’s human resources department, the supervisor was never fired, the complaint alleged.
Wallender claims that Martin “told employees at the Harrison Yard that he had a green light and carte blanche from Creel to implement his schemes for using false records to show lower than actual dwell time” at the yard.
“Creel protected Martin from being fired so his share-based compensation would not be impaired,” according to the complaint. “A significant part of Creel’s compensation depended on his ability to inflate the price of Canadian National’s shares.”
In 2011, Creel had a salary of $558,842, a restricted stock award of $872,583, stock option awards of $676,706, a non-equity incentive plan compensation of $713,947 and, as of the same year, unexercised options for 43,250 CN shares.
Despite his complaints Wallender was fired on Sept. 30, 2012, for listing “a train as having arrived before it was physically present.”
Wallender, however, believes he was fired as a result of CN’s “unwritten anti-whistleblower policy” because he tried to complain about “mail, wire and securities fraud” along with “violations of SEC rules on regulations and violations of federal laws relating to fraud against shareholders.”
Wallender is seeking reinstatement at the same level, back pay with interest, general and special damages and reimbursement for litigation costs.
The court document