March 26 (Bloomberg) -- David Stockman, President Ronald Reagan's budget director, was indicted for defrauding investors and banks of $1.6 billion while chairman of Collins & Aikman Corp., an auto-parts maker that collapsed days after he quit.

Stockman, who was also the company's chief executive, is accused of issuing fraudulent statements to raise capital and avoid defaulting on credit agreements. An indictment unsealed today in Manhattan federal court charges him and other former company executives with conspiracy, bank fraud, securities fraud, wire fraud and obstruction.

``They resorted to lies, tricks, and fraud,'' New York U.S. Attorney Michael Garcia said at a press conference today. ``Stockman did not only have money at stake. He had his reputation on the line as well.''

Stockman, 60, pleaded not guilty and was released on $1 million bond. He is the first CEO of a bankrupt U.S. auto parts company to be charged after regulators began probing the industry. Five of the companies filed bankruptcy in the last two years. Axle-maker Dana Corp. and ex-officials of Delphi Corp., the largest U.S. auto-parts maker, are being investigated by the Securities and Exchange Commission over financial restatements.

20 Years

Collins & Aikman went bankrupt in 2005, five days after Stockman resigned. A resident of Greenwich, Connecticut, he faces up to 20 years in prison if convicted of the most serious charges. Collins & Aikman entered an agreement with prosecutors that will avoid criminal charges against the company. Details of the settlement weren't revealed.

The SEC in a parallel suit filed in the same court accused Stockman, the company and eight others of improperly inflating earnings between the fourth quarter of 2001 and early 2005. Collins & Aikman said in a statement that it settled the SEC claims by agreeing not to violate securities laws. Under the agreement, which must be approved by a judge, the company would pay no fine and admit no wrongdoing.

Federal prosecutors claimed that, as Collins & Aikman's business deteriorated in 2001, Stockman orchestrated a sweeping fraud in which he lied to auditor KPMG LLP and lenders including JPMorgan Chase & Co. and Credit Suisse Group.

The former CEO also engaged in a phony rebate scheme with suppliers and obstructed an internal probe of company finances in 2003, according to the indictment. Also indicted were former Collins & Aikman Vice Chairman J. Michael Stepp, 62; ex- Controller David Cosgrove, 48; and Paul Barnaba, 37, a former director of financial analysis.

`Nothing Wrong'

``I have done absolutely nothing wrong,'' Stockman said after his court appearance. ``All of the statements I made publicly were based on good business judgment.''

Stockman said in a statement posted on his law firm's Web site that the company's collapse ``was the consequence of an industry melt-down,'' not fraud.

Collins & Aikman spokesman David Youngman said the company is continuing to cooperate with the federal investigation.

``I would discourage anyone from rushing to judgment,'' said Cosgrove's lawyer, Craig Stewart of Washington-based Arnold & Porter.

``Mike Stepp is innocent,'' said his lawyer, Gandolfo DiBlasi, of New York-based Sullivan & Cromwell. ``The charges in the indictment involve the minutiae of rebate accounting. Mr. Stepp is not an accountant and never worked as one.''

Sol Wisenberg, a lawyer for Barnaba, said his client is ``innocent of the charges, and we intend to fight them.''

Alleged Crimes

Prosecutors are seeking the return of at least $1.35 billion from Stockman and the other defendants. Assistant U.S. Attorney Helen Cantwell said lenders lost more than $1.6 billion.

Stockman said he and his fund suffered a $360 million loss from the Collins & Aikman collapse, and that he personally lost $13 million.

Four other people who were Collins & Aikman employees at the time of the alleged crimes were also charged. All have pleaded guilty, prosecutors said. Stockman's attorney Elkan Abramowitz said they are likely cooperating with prosecutors.

They are Thomas Gougherty, ex-controller for the company's plastics group; John Galante, ex-company treasurer; Chris Williams, a former executive in charge of some customer relationships; and Gerald Jones, who was in charge of fabrics manufacturing operations, according to Garcia's office.

Heartland

All eight of the criminal defendants and the company were sued by the SEC. The agency also named Elkin McCallum, a former Collins & Aikman director, as a defendant in its suit. At the time of the alleged scheme, he was chairman and CEO of Joan Fabrics Corp., a Tyngsboro, Massachusetts-based supplier in which Collins & Aikman purchased a stake. Joan Fabrics lent the company $14 million disguised as rebates, according to the complaint.

McCallum's lawyer, Denis King of Goulston & Storrs in Boston, didn't return a call seeking comment.

Heartland Industrial Partners LP, the Greenwich-based buyout firm Stockman co-founded in 1999, bought a controlling stake in Southfield, Michigan-based Collins & Aikman in 2001 and expanded the car-flooring company through acquisitions. Collins & Aikman said in its bankruptcy filing that it ran short of cash after the U.S. automakers that bought its parts cut production.

Stockman ran into trouble after saddling Collins & Aikman with too much debt, said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan.

``Collins & Aikman was one of the first companies to get into real difficulty'' in the U.S. auto-parts industry, he said.

Two Terms

Collins & Aikman is dismantling itself after abandoning plans to exit bankruptcy as a standalone business. The maker of automotive fabric, trim parts, door panels and floor mats had 23,000 employees when it went bankrupt.

Stockman served two terms as a member of the U.S. House of Representatives from Michigan before Reagan, a Republican, appointed him as director of the U.S. Office of Management and Budget in 1981. The federal deficit swelled following Reagan's tax cuts and defense buildup, prompting Stockman to voice concerns in the media that caused a furor in Washington.

He said the budget deficit ``will be stuck at $200 billion as far as the eye can see,'' according to a May 12, 1983, report by the Washington Post.

The criminal case is U.S. v. Stockman, U.S. District Court, Southern District of New York (Manhattan). The SEC lawsuit is SEC v. Collins & Aikman Corp., 07-2419, U.S. District Court, Southern District of New York (Manhattan). The bankruptcy case is In re: Collins & Aikman, 05-55927, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: David Glovin in U.S. District Court in New York at dglovin@bloomberg.net and; Thom Weidlich in New York at tweidlich@bloomberg.net.

Last Updated: March 26, 2007 17:29 EDT