Saturday, December 09, 2006

Feds dig for Delphi data

Friday, November 24, 2006
Feds dig for Delphi data
Government may decide by January whether to seek criminal charges in the accounting fraud probe.
David Shepardson / Detroit News Washington Bureau

WASHINGTON -- Federal prosecutors expect to decide by January whether to seek criminal charges in the wide-ranging accounting fraud probe into the conduct of former Delphi Corp. executives.

Jack Patrick, a veteran prosecutor in the Justice Department's fraud section in Washington, was in Detroit earlier this month seeking further cooperation from witnesses in his bid to build a criminal case. But he faces several obstacles:

None of the potential criminal defendants committed any personal fraud or directly profited from any misconduct.

It is not clear how much Delphi's board of directors knew about the questionable transactions.

Officials familiar with the probe say officials of the U.S. Attorney's Office and FBI in Detroit have started raising questions about whether the government should proceed with any criminal case.

Meanwhile, the Securities and Exchange Commission has taken the unusual step of delaying court action in the civil securities complaint charging nine former Delphi executives and four others with accounting fraud in a move apparently intended to give Patrick and the Justice Department more time to build a criminal case.

Delphi and six of the 13 defendants in the civil case have already settled with the SEC. For the other seven, who have been waiting for more than two years to learn whether they will face charges, the delay means they will be forced to wait longer before starting the process of defending themselves.

Delphi and the six defendants agreed not to contest the allegations in settlements that were approved by a federal judge on Nov. 7. Delphi doesn't have to pay a fine, but the six executives completed payment of fines and costs totaling $1.4 million Tuesday. Before the SEC will agree to a settlement, defendants are required to place the amount owed in escrow.

According to court records and interviews with lawyers for the executives, the seven remaining defendants haven't yet been served with copies of the civil complaint.

Getting the papers would allow the lawyers to seek evidence that might also help the executives' defense in a criminal case.

Jonathan P. Scott, an SEC attorney, declined to say when the agency will serve the papers.

Alan Gershel, the acting U.S. attorney overseeing the Delphi case in Detroit, also declined comment. As soon as they are served, lawyers for the former Delphi executives will quickly ask the judge to compel the SEC to turn over evidence such as deposition transcripts, summaries of FBI interviews and interview notes from Delphi's 10-month internal investigation conducted by the Washington law firm Wilmer Hale.

But if the Justice Department gets a grand jury indictment, the government can delay handing over material in the SEC matter until the criminal case is resolved.

In the meantime, the Justice Department can continue trying to build a case and the SEC avoids having to answer questions from the judge overseeing the case about the status of the criminal probe.

Although the SEC has 120 days to serve the defendants with papers, legal experts say the agency typically moves quickly because the cases can take years.

"The delay is very unusual," said Wayne State University law professor Peter Henning, a former SEC attorney. "It shows a close coordination between the Justice Department and the SEC."

Patrick may need more time.

For the first time, it has emerged that Patrick's prospective case is built in part on the cooperation of several lower level financial analysts at Delphi and accountants at the company's former accounting firm, Deloitte and Touche. These accountants were close to discredited transactions and have pointed to high level executives at Delphi, people familiar with the matter said.

Additionally, it appears Patrick can connect Delphi's board to having some knowledge of the questioned transactions.

The minutes of a November 2000 Delphi strategy board meeting suggest the board had been informed about some of moves to boost cash flow that Delphi now says were improper. Among board members, only former Delphi Chairman and CEO J.T. Battenberg III faces civil charges.

The delay serving the defendants with the complaint, and recent Justice Department contacts with the defendants' lawyers, are the first tangible signs in recent weeks that the criminal investigation is continuing. The SEC and Justice Department have worked together on the Delphi case since early 2005, after the SEC made a criminal referral to the Justice Department's fraud section.

The SEC alleges that Delphi used a series of accounting tricks to boost its revenue and cash flow, such as recording a $20 million loan from EDS as a rebate.

Delphi developments

Oct. 30: SEC sues Delphi and 13 individuals, including former CEO J.T. Battenberg III and eight other former Delphi executives, for participating in or aiding and abetting securities fraud related to accounting practices.

Oct. 31: Battenberg resigns from Sara Lee's board of directors, citing the SEC case.
Nov. 7: U.S. District Judge Avern Cohn approves SEC settlements with Delphi and six of the 13 individual defendants.

Tuesday: Six settling individuals complete payment of $1.4 million in fines and costs.

January: Justice Department expected to decide by this month whether it will file criminal charges in the case.

Sources: Detroit News research, court records

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