Ex-CEO at Delphi charged
Tuesday, October 31, 2006
Ex-CEO at Delphi charged
SEC: Former execs, others inflated supplier's earnings
David Shepardson / Detroit News Washington Bureau
Charged in case
J.T. Battenberg III, former CEO and chairman of the board at Delphi
Alan Dawes, former chief financial officer (settled fraud charges, agreeing to a five-year ban on serving as an officer or director of a publicly traded company and to pay $687,000 fine)
Paul Free, former controller and chief accounting officer
John Blahnik, former treasurer and senior vice president
Milan Belans, ex-director of capital planning, pension analysis
Catherine Rozanski, former director of financial accounting and reporting
Judith Kudla, former director of finance in Delphi's IT department
Laura Marion, former director of financial accounting and reporting (settled aiding and abetting Delphi's reporting and books-and-records violations and agreed to pay $40,000 penalty
Atul Pasricha, former assistant treasurer at Delphi (settled aiding and abetting charge and will pay $55,000 penalty)
Scott McDonald, EDS accounting official
Stuart Doyle, former EDS client executive, will pay $40,000 to settle.
Kevin Curry, ex-EDS client executive, will pay $25,000 to settle.
B.N. Bahadur, owner and CEO of BBK Ltd., will pay $569,257 to settle, including $350,000 improperly earned from Delphi.
WASHINGTON -- In a stunning fall from grace, J.T. Battenberg III, the once highly respected ex-chairman and CEO of Delphi Corp., was among 13 people charged Monday after a 27-month probe by the Securities and Exchange Commission into rampant accounting fraud at the bankrupt auto supplier.
In a civil complaint filed in U.S. District Court in Detroit, the SEC detailed a laundry list of fraudulent accounting moves by Delphi that inflated the company's earnings and misled investors about its declining financial health.
Battenberg and former chief financial officer Alan Dawes were among nine ex-Delphi executives accused by the SEC of participating in or aiding and abetting a fraudulent accounting scheme from 2000 to 2004.
Four other executives were charged -- including the CEO of a Southfield turnaround firm and the former vice president and controller of Texas-based EDS.
The SEC filing raises questions about the conduct of Delphi's former parent, General Motors Corp., in a 2000 transaction that is the subject of a separate SEC probe.
The SEC also charged Troy-based Delphi in the complaint. The company settled with the SEC without admitting or denying wrongdoing and will not face penalities, partly because it cooperated with the investigation.
"The facts here are particularly troubling because of the number of fraudulent schemes engaged in by Delphi, the length of time over which they occurred, and the number of Delphi employees, including senior officers, who carried out the schemes," said Linda Chatman Thomsen, the SEC's enforcement director.
Six agree to fines
Six of the people charged Monday, including Dawes, have agreed to settle with the SEC and pay fines and costs totaling $1.4 million. They didn't contest the allegations.
Dawes agreed to $687,000 in fines and a five-year ban on serving as an officer or director of a public company.
Delphi, which filed for Chapter 11 protection in October 2005, hopes to emerge from bankruptcy next year after closing or selling 21 of its 29 U.S. factories.
"We are pleased to put the SEC investigation behind us and consider this settlement an important step in our transformation process," said Delphi Chairman and CEO Robert S. "Steve" Miller.
The charge against Battenberg, who denied wrongdoing Monday, had been expected but was nonetheless jarring given his status as one of the preeminent Detroit auto executives of the past two decades.
Erudite and no-nonsense, Battenberg capped a distinguished career at GM when he took the top job at Delphi in 1995.
He then guided Delphi through the 1999 spinoff from GM that made it the world's largest auto supplier and led an expansion into emerging markets such as China.
He drew praise in July 2002 when he was the first executive to personally certify the accuracy of his company's financial results as part of the Sarbanes-Oxley reforms instituted after the Enron scandal.
Battenberg announced his retirement in February 2005, just before the company disclosed the severity of the accounting issues.
The SEC seeks to bar Battenberg and John Blahnik, Delphi's ex-treasurer and senior vice president, from serving as officers of a publicly traded company. From the pair and four others, it seeks the return of improper financial gains -- likely salary or bonuses.
Criminal charges remain a possibility. A parallel Justice Department investigation of Delphi's accounting led by its fraud unit in Washington is ongoing.
The Detroit News has learned the Justice Department plans to interview a cooperating former Delphi executive next month as it decides whether to seek indictments.
Delphi routinely met or exceeded Wall Street expectations in the first years after its spinoff from GM, partially due to improper accounting that boosted revenue.
But its facade of financial health began crumbling 18 months ago, in March 2005, when the company fired Dawes and said it had overstated its cash flow by $200 million in 2000 and 2001 and its earnings by $61 million.
Five more executives were broomed after the disclosures.
The SEC's complaint says that Delphi used a series of accounting tricks to boost its revenue, such as recording a $20 million loan from EDS as a rebate.
EDS said its controller, Scot McDonald, agreed to step down in July after he received notice that he likely would face SEC charges. He remains at EDS in another job.
The SEC complaint suggests that Battenberg and Dawes pointed the finger at GM, which some creditors and investors say had too much influence over its former parts unit. GM declined comment.
The SEC said Delphi concocted a scheme to minimize a $237 million warranty claim owed to GM.
Battenberg and Dawes said GM had suggested an "asymmetrical" accounting of the transaction to allow both companies to record it favorably, the SEC said.
Delphi earmarked $202 million of the money as pension obligations to minimize the effect of the warranty claims.
Payment restated
Had Delphi properly accounted for the expense, it would have reduced its third-quarter earnings in 2000 to $15 million instead of $148 million. In June 2005, Delphi restated the entire payment as a warranty charge.
In another transaction, Delphi boosted cash flow by purporting to sell Bank One $200 million in precious metals in December 2000.
In reality, the metals never left the factory floor, and Delphi had agreed to buy them back the next month at the same price. Delphi paid the bank $3.5 million for the transaction, which allowed it to overstate income by $54 million.
A separate $70 million transaction with Southfield-based turnaround firm BBK Ltd allowed Delphi to book $27 million as income in exchange for a $900,000 financing charge. It was listed in a memo as "off-balance sheet financing" to sell automotive batteries.
BBK Ltd's owner, B.N. Bahadur, agreed to forfeit the $350,000 he earned in the transaction in settling the SEC charge against him.
In the most recent transactions, Delphi hid up to $325 million in factoring -- sales of accounts receivable -- between 2003 and 2004 to boost its balance sheet. In another quarter, it boosted a cash flow measurement by $30 million.
In a statement, Battenberg said he cooperated with the SEC. Referring to the GM warranty transaction, he said, "I believed and continue to believe (it) was entirely lawful and proper."
Paul Free, Delphi's former chief accounting officer who was allegedly involved in several of the transactions, also denied wrongdoing. "We intend to vigorously defend the allegations," his lawyer Richard Rossman said.
John Blahnik also denied improper conduct. "Another side of story is to be told," said his attorney, Tom Cranmer.
David DuMouchel, a lawyer for former Delphi accounting executive Cathy Rozanski, said she did "nothing that she thought was contrary" to proper accounting.
You can reach David Shepardson at (202) 662-8735 or dshepardson@detnews.com.
© Copyright 2006 The Detroit News. All rights reserved.
Ex-CEO at Delphi charged
SEC: Former execs, others inflated supplier's earnings
David Shepardson / Detroit News Washington Bureau
Charged in case
J.T. Battenberg III, former CEO and chairman of the board at Delphi
Alan Dawes, former chief financial officer (settled fraud charges, agreeing to a five-year ban on serving as an officer or director of a publicly traded company and to pay $687,000 fine)
Paul Free, former controller and chief accounting officer
John Blahnik, former treasurer and senior vice president
Milan Belans, ex-director of capital planning, pension analysis
Catherine Rozanski, former director of financial accounting and reporting
Judith Kudla, former director of finance in Delphi's IT department
Laura Marion, former director of financial accounting and reporting (settled aiding and abetting Delphi's reporting and books-and-records violations and agreed to pay $40,000 penalty
Atul Pasricha, former assistant treasurer at Delphi (settled aiding and abetting charge and will pay $55,000 penalty)
Scott McDonald, EDS accounting official
Stuart Doyle, former EDS client executive, will pay $40,000 to settle.
Kevin Curry, ex-EDS client executive, will pay $25,000 to settle.
B.N. Bahadur, owner and CEO of BBK Ltd., will pay $569,257 to settle, including $350,000 improperly earned from Delphi.
WASHINGTON -- In a stunning fall from grace, J.T. Battenberg III, the once highly respected ex-chairman and CEO of Delphi Corp., was among 13 people charged Monday after a 27-month probe by the Securities and Exchange Commission into rampant accounting fraud at the bankrupt auto supplier.
In a civil complaint filed in U.S. District Court in Detroit, the SEC detailed a laundry list of fraudulent accounting moves by Delphi that inflated the company's earnings and misled investors about its declining financial health.
Battenberg and former chief financial officer Alan Dawes were among nine ex-Delphi executives accused by the SEC of participating in or aiding and abetting a fraudulent accounting scheme from 2000 to 2004.
Four other executives were charged -- including the CEO of a Southfield turnaround firm and the former vice president and controller of Texas-based EDS.
The SEC filing raises questions about the conduct of Delphi's former parent, General Motors Corp., in a 2000 transaction that is the subject of a separate SEC probe.
The SEC also charged Troy-based Delphi in the complaint. The company settled with the SEC without admitting or denying wrongdoing and will not face penalities, partly because it cooperated with the investigation.
"The facts here are particularly troubling because of the number of fraudulent schemes engaged in by Delphi, the length of time over which they occurred, and the number of Delphi employees, including senior officers, who carried out the schemes," said Linda Chatman Thomsen, the SEC's enforcement director.
Six agree to fines
Six of the people charged Monday, including Dawes, have agreed to settle with the SEC and pay fines and costs totaling $1.4 million. They didn't contest the allegations.
Dawes agreed to $687,000 in fines and a five-year ban on serving as an officer or director of a public company.
Delphi, which filed for Chapter 11 protection in October 2005, hopes to emerge from bankruptcy next year after closing or selling 21 of its 29 U.S. factories.
"We are pleased to put the SEC investigation behind us and consider this settlement an important step in our transformation process," said Delphi Chairman and CEO Robert S. "Steve" Miller.
The charge against Battenberg, who denied wrongdoing Monday, had been expected but was nonetheless jarring given his status as one of the preeminent Detroit auto executives of the past two decades.
Erudite and no-nonsense, Battenberg capped a distinguished career at GM when he took the top job at Delphi in 1995.
He then guided Delphi through the 1999 spinoff from GM that made it the world's largest auto supplier and led an expansion into emerging markets such as China.
He drew praise in July 2002 when he was the first executive to personally certify the accuracy of his company's financial results as part of the Sarbanes-Oxley reforms instituted after the Enron scandal.
Battenberg announced his retirement in February 2005, just before the company disclosed the severity of the accounting issues.
The SEC seeks to bar Battenberg and John Blahnik, Delphi's ex-treasurer and senior vice president, from serving as officers of a publicly traded company. From the pair and four others, it seeks the return of improper financial gains -- likely salary or bonuses.
Criminal charges remain a possibility. A parallel Justice Department investigation of Delphi's accounting led by its fraud unit in Washington is ongoing.
The Detroit News has learned the Justice Department plans to interview a cooperating former Delphi executive next month as it decides whether to seek indictments.
Delphi routinely met or exceeded Wall Street expectations in the first years after its spinoff from GM, partially due to improper accounting that boosted revenue.
But its facade of financial health began crumbling 18 months ago, in March 2005, when the company fired Dawes and said it had overstated its cash flow by $200 million in 2000 and 2001 and its earnings by $61 million.
Five more executives were broomed after the disclosures.
The SEC's complaint says that Delphi used a series of accounting tricks to boost its revenue, such as recording a $20 million loan from EDS as a rebate.
EDS said its controller, Scot McDonald, agreed to step down in July after he received notice that he likely would face SEC charges. He remains at EDS in another job.
The SEC complaint suggests that Battenberg and Dawes pointed the finger at GM, which some creditors and investors say had too much influence over its former parts unit. GM declined comment.
The SEC said Delphi concocted a scheme to minimize a $237 million warranty claim owed to GM.
Battenberg and Dawes said GM had suggested an "asymmetrical" accounting of the transaction to allow both companies to record it favorably, the SEC said.
Delphi earmarked $202 million of the money as pension obligations to minimize the effect of the warranty claims.
Payment restated
Had Delphi properly accounted for the expense, it would have reduced its third-quarter earnings in 2000 to $15 million instead of $148 million. In June 2005, Delphi restated the entire payment as a warranty charge.
In another transaction, Delphi boosted cash flow by purporting to sell Bank One $200 million in precious metals in December 2000.
In reality, the metals never left the factory floor, and Delphi had agreed to buy them back the next month at the same price. Delphi paid the bank $3.5 million for the transaction, which allowed it to overstate income by $54 million.
A separate $70 million transaction with Southfield-based turnaround firm BBK Ltd allowed Delphi to book $27 million as income in exchange for a $900,000 financing charge. It was listed in a memo as "off-balance sheet financing" to sell automotive batteries.
BBK Ltd's owner, B.N. Bahadur, agreed to forfeit the $350,000 he earned in the transaction in settling the SEC charge against him.
In the most recent transactions, Delphi hid up to $325 million in factoring -- sales of accounts receivable -- between 2003 and 2004 to boost its balance sheet. In another quarter, it boosted a cash flow measurement by $30 million.
In a statement, Battenberg said he cooperated with the SEC. Referring to the GM warranty transaction, he said, "I believed and continue to believe (it) was entirely lawful and proper."
Paul Free, Delphi's former chief accounting officer who was allegedly involved in several of the transactions, also denied wrongdoing. "We intend to vigorously defend the allegations," his lawyer Richard Rossman said.
John Blahnik also denied improper conduct. "Another side of story is to be told," said his attorney, Tom Cranmer.
David DuMouchel, a lawyer for former Delphi accounting executive Cathy Rozanski, said she did "nothing that she thought was contrary" to proper accounting.
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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