Friday, November 10, 2006

Another Delphic moment for GM

Yes, this is already a week old news, but Guambat lives in a bit of a time warp and considers this too interesting to be left unposted:

U.S.: Delphi deals phony
Faked papers. Sham deals. Misleading comments to investors and analysts.

Federal regulators on Monday said those were the tactics that former Delphi Corp. executives, including former Chairman J.T. Battenberg III, used to mask the company's deteriorating financial health from 2000 to 2004.

The U.S. Securities and Exchange Commission filed civil fraud charges against nine executives and Delphi in Detroit federal court and also charged four employees of outside firms with helping Delphi fake certain transactions, seeking fines from all.

The suit spells out some of the inappropriate transactions and accounting that federal regulators said were all too routine at the largest Michigan company to file for bankruptcy court protection. Former owner General Motors Corp. was complicit in one transaction, regulators said.

But Delphi's current CEO said the filing helps clear the way for his company to put the matter behind it.

Lawyers for former shareholders say it bolsters their claims for their own class action.

The settlement bars the company from future violations of securities law, and Delphi still must contend with a plethora of shareholder lawsuits from the accounting scandal.

"The company's bankruptcy was not caused by these issues," said Peter Henning, a Wayne State University law professor and former SEC enforcement attorney. "It put off the day of reckoning."

The 79-page complaint describes Battenberg, Dawes and other top Delphi executives resorting to several tactics -- including one they termed "asymmetrical accounting" -- to hide weak earnings or growing liabilities on Delphi's balance sheet. It seeks unspecified fines against those charged and to bar Battenberg and former Delphi treasurer John Blahnik from serving as officers in a public company.

The complaint also singles out GM for its role, saying the automaker went along with Delphi's plan to hide costs from parts warranties as a pension expense. GM, which is the target of its own SEC investigation, declined to comment.

Neither the company nor the people who settled their charges admitted or denied the SEC's allegations. Delphi Chairman and Chief Executive Steve Miller said the settlement was an "important step in our transformation process."

The SEC's charges involve four examples of questionable accounting:

• In May 2000, GM told Delphi it wanted $350 million to $800 million for defective parts sold to GM before the spin-off in 1999.

Battenberg and Dawes thought GM shouldn't be able to claim those costs post-spinoff. After GM refused to budge, Delphi increased the money it set aside for warranty claims by $112 million but mislabeled the move on its balance sheet, boosting earnings by $69 million.

By September, the SEC said, Battenberg, Dawes and two other former Delphi executives knew GM wouldn't accept less than $237 million. To hide the bad news, Delphi labeled $202 million of its payment as a pension expense, allowing it to spread the cost over several years.

The complaint goes on to say that GM recorded the payment in its books as warranty costs but signed an agreement with Delphi saying it involved pension accounting, helping Delphi cover its tracks. The move boosted Delphi's earning in that quarter from less than $15 million to $148 million.

• Seeking to improve weak earnings at the end of 2000, the SEC says, Dawes and other executives used two sham sales to boost the company's results. In December, Delphi sold $200 million of precious metals to Bank One and $70 million in batteries and generators to BBK, a financial consulting firm run by B.N. Bahadur, agreeing to buy them back one month later at the same price.

In both cases, Delphi executives drew up documents that hid the true reasons behind the deals from the company's auditors. The sales improved Delphi's earnings by $80 million and inflated its cash flow by $200 million.

Bahadur settled his charges and agreed to pay $569,257 in fines and penalties; no one from Bank One, later sold to J.P. Morgan Chase, was charged.

• At the end of 2001, the SEC says, Dawes had Delphi mislabel a $20-million loan from a technology company, which Delphi later said was EDS Corp., to boost earnings by suggesting that Delphi would not have to repay the money.

With the help of an EDS executive, Delphi generated fake work orders for "administrative services" to help disguise the payments from auditors. Two former EDS employees settled charges of faulty bookkeeping; one apparently current executive was charged with participating in the alleged fraud.

• From 2003 to 2004, Delphi misled Wall Street analysts and credit rating agencies by hiding up to $325 million in financing at its European operations, making cash flow and liquid assets appear better than they were.

The charges against Battenberg stand in contrast to his public stance as a leading proponent of tougher disclosure rules for corporations and executives in the wake of the WorldCom and Enron scandals. Delphi was the first company to file financial statements with a signed letter from its chief executive pledging that its accounting was accurate.

"We needed to say something to our employees. They want to know, 'Oh, my gosh, is my CEO in trouble? Is my management team in trouble?' We want to tell them emphatically, 'No,' " Battenberg told the Associated Press in July 2002.

Brad Beckworth, a Texas lawyer who is suing Delphi on behalf of shareholders, said the SEC charges corroborate the allegations in the federal case.

The class action, pending in U.S. District Court in Detroit, alleges that several Delphi executives and third-party companies misled shareholders about the financial health of the company for years after it was spun off from GM.

"The allegations regarding the conduct of Bahadur and J.P. Morgan Chase, in particular, as spelled out in the SEC complaint, directly mirror what we allege in our complaint, and we think it's definitely a step in the right direction in bringing the individual defendants and the third-party defendants to justice," Beckworth said.

J.T. Battenberg III, former chairman and chief executive, faces federal civil fraud charges. The SEC wants him barred from serving as an officer in a public company. He says he did nothing wrong and cooperated fully in the investigation.

Alan Dawes, former chief financial officer of Delphi, faced -- and settled -- federal civil fraud charges. Without admitting any guilt, Dawes agreed to pay $687,000 in fines and penalties.


Here are the rest of the people charged by the Securities and Exchange Commission on Monday, along with details on those who settled their charges:

• Paul Free, Delphi's former controller and chief accounting officer

• John Blahnik, former Delphi treasurer and senior vice president

• Milan Belans, former director of capital planning and pension analysis at Delphi

• Catherine Rozanski, former Delphi director of financial accounting and reporting

• Judith Kudla, former director of finance in Delphi's information technology department

• Scot McDonald, who had served as manager of U.S. GAAP consulting and reporting at EDS

• B.N. Bahadur, owner of BBK, a consulting firm. Settled charges and paid $569,257 in fines and penalties

• Atul Pasricha, former Delphi assistant treasurer. Settled charges for a $55,000 fine

• Laura Marion, former director of financial accounting and reporting at Delphi. Settled charges and is to pay a $40,000 penalty

• Stuart Doyle, former client executive for EDS. Settled charges and is to pay a $40,000 penalty

• Kevin Curry, also a former EDS client executive. Settled charges and is to pay a $25,000 penalty

Ever wonder where all those fines and penalties go?



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