Former Delphi Corp. Chief Executive Officer J.T. Battenberg III misled investors about the company’s financial condition, a lawyer for the U.S. Securities and Exchange Commission told a jury at the start of a trial.
The SEC sued Battenberg and three other ex-Delphi executives in the trial in 2006, alleging they engaged in “fraudulent accounting or disclosure schemes” before the auto-parts supplier entered bankruptcy protection in 2005. The trial began today before U.S. District Judge Avern Cohn in Detroit.
The defendants “had a responsibility to fairly and accurately report the financial performance of the Delphi Corp.,” said Jan Folena, an SEC lawyer. “While the employees at Delphi were engineering auto parts, their executives were engineering numbers.”
Delphi, once the largest U.S. auto-parts supplier, filed for bankruptcy after failing to win wage cuts and financial aid from its former parent, General Motors Co. It emerged from bankruptcy last year.
The jury began hearing the SEC’s claims against Battenberg; Paul Free, a former Delphi controller and chief accounting officer; Milan Belans, a former director of capital planning and pension analysis; and Catherine Rozanski, a former accounting director.
The agency earlier settled cases against the company and John Blahnik, a former treasurer. The SEC is seeking fines and disgorgement of any proceeds gained from the remaining defendants’ alleged misconduct.
The SEC claims Delphi artificially inflated share prices by issuing misleading statements in the years before the bankruptcy. Battenberg, Free and Belans were responsible for false statements or omissions of material fact in Delphi’s 10-K for 2000, its filing for the third quarter of 2000 and an 8-K on May 31, 2001, the government says.
Lawyers for the defendants said today there was no attempt to mislead investors and their clients didn’t commit fraud.
The SEC says that Battenberg, Free and Belans violated federal securities laws through improper accounting for a $237 million payment Delphi made to General Motors as part of a settlement agreement over warranty claims.
“Delphi improperly recorded $202 million of the total amount” as a pension and other post-employment benefit payment to the former parent company, “and only $35 million as a warranty charge,” the SEC said in its complaint.
“The $202 million portion of the payment had no impact on Delphi’s income statement because Delphi treated the $202 million payment as an actuarial loss in its pension fund,” the SEC said.
This enabled the company to report $148 million in net income in the third quarter of 2000, instead of a net of $15 million, according to the SEC. Delphi later restated, “recording the entire payment as a warranty charge,” the agency said.
This wasn’t evidence of fraud, Battenberg’s attorney William H. Jeffress Jr. said today.
Delphi believed GM’s warranty claims were inflated, the lawyer said.
“The evidence will show that neither J.T. Battenberg or anybody else believed that Delphi owed GM $237 million for these warranty claims,” he said.
The $237 million settlement agreement with General Motors explicitly covered retiree benefits and warranty claims, Jeffress said.
The regulators claim Free and Belans were responsible for improper accounting of $270 million of inventory as sales, despite agreements to buy back the material for the original price.
Delphi reported a sale of $200 million of precious metals used in catalytic converters to Bank One, later acquired by JPMorgan Chase & Co., at the end of 2000, the SEC said.
“As agreed at the time of the sale, Delphi repurchased the identical metals from the bank before the end of January 2001,” the agency said in court papers. Delphi agreed to pay the bank a fee, making it a financing transaction and not a sale, the SEC said.
Through the transaction, “Delphi improperly recognized $54 million in net income” and “improperly boosted its cash flow from operations by approximately $200 million,” the SEC said in the complaint.
Delphi sold $70 million in generator cores and batteries to a consulting company at the end of 2000. The company bought back the inventory nine days later, the SEC said.
Transactions Called Proper
There was nothing improper with these transactions, lawyers for Free and Belans said today.
The precious metals transaction was used to free up funds because “Delphi had too much inventory in 2000,” said Matthew J. Lund, Free’s attorney. Delphi’s auditors were “fully aware Delphi was selling the metals and agreeing on the same day to purchase them back,” he said.
The buyback agreement enabled Delphi to reduce inventory and receive money, while ensuring that the company would have access to the metals when needed, Lund said.
“When Delphi sold the metals, it actually made $6 million in profit in book value,” said attorney Charles E. Murphy, who represents Belans. His client was a “junior level” level employee who was “too remote” from any decisions made by executives at the company, Murphy said.
Rozanski and Free were responsible for recording as income a $20 million loan Electronic Data Systems made to Delphi, the SEC said.
$20 Million Payment
The EDS payment wasn’t a loan, Rozanski’s attorney said. EDS paid $20 million to Delphi to keep the company as a customer, part of a custom within the auto industry of clients requiring suppliers to pay “blood money” to retain business, said lawyer David F. DuMouchel. Delphi later paid EDS about $20 million for services, not as a loan payment, he said.
The case is SEC v. Battenberg, 2:06-cv-14891, U.S. District Court, Eastern District of Michigan (Detroit).