Sunday, May 20, 2007

SEC wrapping up GM investigation

Thursday, May 10, 2007
SEC wrapping up GM investigation
David Shepardson / Detroit News Washington Bureau

WASHINGTON -- The Securities and Exchange Commission is nearing the end of its 2 1/2-year investigation into accounting errors at General Motors Corp. following the testimony of more than a dozen current and former GM executives.

The SEC may decide whether to bring civil charges by the end of the summer, people familiar with the investigation told The Detroit News on Wednesday.

The previously disclosed probe centers on GM's relationship and transactions with its former parts unit, Delphi Corp., as well as GM's use of credits from other suppliers. The SEC also has investigated whether GM improperly sought to influence Delphi and whether it properly spun off the unit in 1999. Nobody at GM has been accused of any wrongdoing.

Since first receiving a subpoena in October 2004 as part of an inquiry into pension practices at large companies, GM has been forced to repeatedly restate its financial results and has admitted to numerous accounting errors. The company vowed to improve its balance sheet and hired a new controller, a new chief accounting officer and a consulting firm to shore up its financial practices.

The SEC has repeatedly expanded its investigation into other areas of GM's accounting. The SEC has also sought information about GM's pension obligations for Delphi employees in the wake of the Troy-based supplier's 2005 bankruptcy filing, among other issues.

The U.S. Attorney's Office in New York, aided by a federal grand jury, has been looking into GM's accounting for supplier credits since early 2006.

GM spokeswoman Renee Rashid-Merem reiterated the company's position Wednesday that it is cooperating with the investigations but declined to discuss details of the investigations.

The SEC has essentially concluded its interviews with current and former GM officials, along with people at other companies who were involved in transactions with the Detroit automaker.

Within three months, the SEC could be ready to decide whether to bring civil charges against the automaker or any current or former executives, said people familiar with the investigation.

Before that, GM could engage in settlement talks, especially in the wake of its admissions in March that its accounting had suffered "material weaknesses."

Peter Henning, a Wayne State University law professor and former SEC attorney, said GM likely will seek a settlement that carries only an administrative penalty.

Henning said the accounting problems at GM have never risen to the level of those at Delphi, which resulted in the eventual departure of former Delphi Chairman and Chief Executive J.T. Battenberg III and other executives. "My sense is that was at a lower level at GM," he said.

The most troubling accounting issue for GM is its use of "supplier credits," which are rebates that help boost revenue or earnings, and whether that use misled investors.

The issue is at the heart of a number of auto sector-related accounting investigations.

The SEC has said large auto suppliers -- including Delphi and Southfield-based Collins & Aikman -- have pressured suppliers to kick back money in order to meet earnings targets or used fraudulent accounting tricks to boost revenue.

The SEC has settled allegations of accounting misconduct against both auto suppliers, while filing civil charges against former executives at both companies.

GM chairman and CEO Rick Wagoner has testified before the SEC -- though not in connection with the accounting probes at GM, people familiar with the investigation said. It is not clear what the focus of that testimony was.

Wagoner told shareholders in the company's annual report "that management is focused on continuing to strengthen our internal accounting resources and financial reporting."

In October, the SEC charged Delphi and nine former company officials, including Battenberg, in a wide-ranging accounting fraud complaint. The Justice Department is continuing a parallel criminal investigation into the conduct of former Delphi officials.

In early 2000, a dispute between GM and Delphi arose when GM demanded $800 million in pre-spinoff warranty claims.

In a recent court filing, Battenberg's lawyers said the request was without merit. When GM spun off Delphi in 1999, it established only a $53 million reserve for warranty claims, and warranty claims had averaged just $30 million a year prior to the spinoff.

Battenberg admitted that senior GM officials suggested in September 2000 that the two companies account for a "settlement asymmetrically," allowing both companies to benefit.

In March 2006, GM admitted to a number of accounting mistakes, including overstating net income in 2001 by $405 million -- or 35 percent -- because it incorrectly recorded supplier credits, mainly involving Delphi.

GM subsequently restated earnings for 2002-05, and for the first three quarters of 2006. "Errors that require restatements are unacceptable and embarrassing for the corporation and for me personally," GM Chief Financial Officer Frederick "Fritz" Henderson wrote in an e-mail to employees in January, when the latest restatements were announced.

GM has reviewed millions of pages of records and turned over hundreds of thousands of pages of records to the SEC. Lawyers for GM have interviewed dozens of GM finance and accounting workers while collecting documents and e-mails in connection with requests by the SEC.

GM has hired a number of lawyers to represent the company and its executives in the probe, including Anton Valukas, a former U.S. attorney in Chicago, and Thomas Newkirk, a former associate director in the SEC's division of enforcement.

You can reach David Shepardson at (202) 662-8735 or

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