SEC targets 7 ex-Delphi officials
Tuesday, June 06, 2006
SEC targets 7 ex-Delphi officials
Former executives, employees under scrutiny are notified of charges in accounting fraud investigation.
David Shepardson / Detroit News Washington Bureau
The U.S. Securities and Exchange Commission has sent target letters to at least seven former Delphi Corp. officials, a sign that its wide-ranging investigation into accounting fraud at the auto supplier is gaining steam.
Two lawyers familiar with the nearly 2-year-old investigation told The Detroit News that the formal target letters -- known as "Wells notices" -- had been sent to former officials under scrutiny.
A Wells notice notifies a prospective defendant of the substance of the charges that SEC investigators plan to recommend to the commission. If the commission approves, the target could be subject to fines and other civil penalties.
The targets of the investigation are given an opportunity to submit a written statement in their defense.
Six Delphi executives and several lower-level employees were forced to leave the company in the wake of the accounting probe -- including the company's vice chairman and CFO Alan Dawes, former treasurer Pam Geller and Paul Free, who was the company's chief accountant and controller.
John Blahnik, a vice president for treasury, mergers and acquisitions, also was forced to leave.
At least some of those officials are believed to have received Wells notices.
Lawyers for all four declined to comment.
In addition to the SEC's civil probe, the U.S. Justice Department is conducting a criminal investigation into Delphi's accounting.
In late March, federal prosecutors notified several former executives they face criminal fraud and conspiracy charges if they didn't agree to plead guilty and cooperate.
To date, it isn't believed that any former executive has agreed to cooperate and admit wrongdoing.
Jonathan P. Scott, the lead SEC lawyer assigned to the case, declined to comment. Joseph Papelian, Delphi's assistant general counsel, also declined to discuss the matter.
"We continue to cooperate with the SEC," Papelian said Monday.
The notices come as the SEC has been completing the taking of testimony from dozens of witnesses in Washington. J.T. Battenberg, the company's former CEO, testified in April, according to several officials.
His lawyer, William H. Jeffress, declined to comment Monday.
Troy-based Delphi has acknowledged widespread financial errors, restated earnings and admitted to improperly accounting for transactions that helped the company achieve earnings targets.
It is the subject of more than a dozen shareholder and employee retirement lawsuits.
"By any measure, the fraud at Delphi -- which hid Delphi's slide into bankruptcy -- is among the most egregious schemes to defraud investors in recent history," the plaintiffs said in a recent 147-page court filing in Detroit signed by Southfield lawyer Debra Pevos.
The lawyers noted that through June 2005 all of Delphi's prior financial statements were deemed by the company to have been inaccurate.
The Delphi officials "engaged in a wide-ranging fraudulent scheme designed to artificially boost Delphi's revenues in order to make Delphi appear more profitable and successful."
The filing suggested there were $440 million in sham transactions designed to boost revenue and cash flow and purposely underrecorded inventory.
The SEC and Justice Department investigation has expanded to include a review of accounting missteps at General Motors Corp.
Federal prosecutors in New York and Washington are reviewing GM's actions and numerous GM employees have been questioned in the investigation.
The Justice Department and SEC investigations are centered on whether Delphi officials doctored financial results to reach internal earnings targets and hide the company's declining financial condition. Delphi filed for Chapter 11 bankruptcy on Oct. 8, 2005.
They also look at whether Delphi booked revenue as a stand-alone rebate that was actually a loan or tied to future contracts.
They are also looking at whether Delphi used phony transactions to improve earnings.
No evidence has emerged of any personal fraud by former executives, though lawyers for the shareholders suing note that many -- but not all -- former employees under investigation received large bonuses.
As a result of the accounting errors, Delphi has lowered its 2001 earnings by $265 million, reduced 2002 net income by $24 million and adjusted its 2003 net loss by $46 million.
The News reported in December that the SEC had subpoenaed more than a dozen current and former Delphi executives to testify about improper accounting at the bankrupt auto supplier.
The SEC cannot force people to testify but can use that refusal against the executives if the SEC later brings civil suits against them seeking to bar them from serving as officers of publicly traded companies.
The SEC has also scrutinized Delphi transactions including Bank One Setech Inc. and an $89 million transaction BBK, a Southfield-based turnaround firm.
A series of transactions involving $200 million in precious metals sold to Bank One are under examination, in part because Delphi never actually gave the metals to Bank One -- they sat on plant floors.
Delphi had forwarded contracts to buy back the metals at the same price -- regardless of market fluctuations -- raising serious questions about whether the assumption of risk in purchasing the asset had passed to Bank One.
You can reach David Shepardson at (202) 662-8735 or dshepardson@detnews.com.
© Copyright 2006 The Detroit News. All rights reserved.
SEC targets 7 ex-Delphi officials
Former executives, employees under scrutiny are notified of charges in accounting fraud investigation.
David Shepardson / Detroit News Washington Bureau
The U.S. Securities and Exchange Commission has sent target letters to at least seven former Delphi Corp. officials, a sign that its wide-ranging investigation into accounting fraud at the auto supplier is gaining steam.
Two lawyers familiar with the nearly 2-year-old investigation told The Detroit News that the formal target letters -- known as "Wells notices" -- had been sent to former officials under scrutiny.
A Wells notice notifies a prospective defendant of the substance of the charges that SEC investigators plan to recommend to the commission. If the commission approves, the target could be subject to fines and other civil penalties.
The targets of the investigation are given an opportunity to submit a written statement in their defense.
Six Delphi executives and several lower-level employees were forced to leave the company in the wake of the accounting probe -- including the company's vice chairman and CFO Alan Dawes, former treasurer Pam Geller and Paul Free, who was the company's chief accountant and controller.
John Blahnik, a vice president for treasury, mergers and acquisitions, also was forced to leave.
At least some of those officials are believed to have received Wells notices.
Lawyers for all four declined to comment.
In addition to the SEC's civil probe, the U.S. Justice Department is conducting a criminal investigation into Delphi's accounting.
In late March, federal prosecutors notified several former executives they face criminal fraud and conspiracy charges if they didn't agree to plead guilty and cooperate.
To date, it isn't believed that any former executive has agreed to cooperate and admit wrongdoing.
Jonathan P. Scott, the lead SEC lawyer assigned to the case, declined to comment. Joseph Papelian, Delphi's assistant general counsel, also declined to discuss the matter.
"We continue to cooperate with the SEC," Papelian said Monday.
The notices come as the SEC has been completing the taking of testimony from dozens of witnesses in Washington. J.T. Battenberg, the company's former CEO, testified in April, according to several officials.
His lawyer, William H. Jeffress, declined to comment Monday.
Troy-based Delphi has acknowledged widespread financial errors, restated earnings and admitted to improperly accounting for transactions that helped the company achieve earnings targets.
It is the subject of more than a dozen shareholder and employee retirement lawsuits.
"By any measure, the fraud at Delphi -- which hid Delphi's slide into bankruptcy -- is among the most egregious schemes to defraud investors in recent history," the plaintiffs said in a recent 147-page court filing in Detroit signed by Southfield lawyer Debra Pevos.
The lawyers noted that through June 2005 all of Delphi's prior financial statements were deemed by the company to have been inaccurate.
The Delphi officials "engaged in a wide-ranging fraudulent scheme designed to artificially boost Delphi's revenues in order to make Delphi appear more profitable and successful."
The filing suggested there were $440 million in sham transactions designed to boost revenue and cash flow and purposely underrecorded inventory.
The SEC and Justice Department investigation has expanded to include a review of accounting missteps at General Motors Corp.
Federal prosecutors in New York and Washington are reviewing GM's actions and numerous GM employees have been questioned in the investigation.
The Justice Department and SEC investigations are centered on whether Delphi officials doctored financial results to reach internal earnings targets and hide the company's declining financial condition. Delphi filed for Chapter 11 bankruptcy on Oct. 8, 2005.
They also look at whether Delphi booked revenue as a stand-alone rebate that was actually a loan or tied to future contracts.
They are also looking at whether Delphi used phony transactions to improve earnings.
No evidence has emerged of any personal fraud by former executives, though lawyers for the shareholders suing note that many -- but not all -- former employees under investigation received large bonuses.
As a result of the accounting errors, Delphi has lowered its 2001 earnings by $265 million, reduced 2002 net income by $24 million and adjusted its 2003 net loss by $46 million.
The News reported in December that the SEC had subpoenaed more than a dozen current and former Delphi executives to testify about improper accounting at the bankrupt auto supplier.
The SEC cannot force people to testify but can use that refusal against the executives if the SEC later brings civil suits against them seeking to bar them from serving as officers of publicly traded companies.
The SEC has also scrutinized Delphi transactions including Bank One Setech Inc. and an $89 million transaction BBK, a Southfield-based turnaround firm.
A series of transactions involving $200 million in precious metals sold to Bank One are under examination, in part because Delphi never actually gave the metals to Bank One -- they sat on plant floors.
Delphi had forwarded contracts to buy back the metals at the same price -- regardless of market fluctuations -- raising serious questions about whether the assumption of risk in purchasing the asset had passed to Bank One.
You can reach David Shepardson at (202) 662-8735 or dshepardson@detnews.com.
© Copyright 2006 The Detroit News. All rights reserved.
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