The SEC charged that between 2000 and 2004, the company put into place a handful of fraudulent schemes to project a healthy financial faÃ§ade even though it actually had severe problems and was heading for US Bankruptcy Court (See DB Pension Freeze Part of Delphi Restructuring ). As part of the schemes, Delphi lied about the true state of its finances in filings with the commission, securities offering documents, press releases, and other documents and statements, the SEC said.
“This case demonstrates again that the commission will take strong action when a company and its officers engage in accounting fraud in order to hide the company’s financial difficulties from investors, analysts, and others,” Linda Chatman Thomsen, the director of the commission’s Division of Enforcement, said in the statement. “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.”
A Delphi executive put out a statement saying the company was happy the matter could be settled. “We have cooperated fully with the Commission’s investigation and will continue to do so. 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 Miller.
Meanwhile some institutional shareholders have accused Delphi, which was spun off by GM in 1999, of masking its true financial condition.“Delphi was cooking the books from the moment it was publicly born,” Sean Coffey, a senior partner at the New York law firm of Bernstein, Litowitz, Berger & Grossmann, told the New York Times. Coffey represents the Mississippi Public Employees Retirement System and other institutional shareholders who sued Delphi after the value of its shares plummeted. Even though Delphi did not admit wrongdoing, the SEC charges should help shareholders make their case against the company, Coffey said.
Specifically, according to the SEC:
- In 2000, Delphi engaged in two fraudulent accounting and disclosure schemes to hide a $237 million warranty claim asserted by its former parent company, inflating its net income by $202 million.
- In the fourth quarter of 2000, Delphi entered into two improper inventory schemes, through which it agreed to sell approximately $270 million of metals, automotive batteries and generator cores to two third parties at year end, while simultaneously agreeing to repurchase the inventory in the following quarter for the original sales price, plus interest charges and structuring fees. The purpose and result of the schemes was for Delphi to inflate its cash flow from operations by $200 million, engineer $270 million in inventory reductions and improperly report $80 million in net income.
- In the fourth quarter of 2001, Delphi solicited a $20 million lump sum payment from an IT company in return for Delphi providing new business to it. Delphi agreed to repay the $20 million over five years, with interest, which made the payment, in substance, a loan to the IT company. However, in order to meet earnings forecasts for the quarter, Delphi improperly accounted for the $20 million payment as if it was a nonrefundable rebate on past business, rather than a liability.
- From 2003 to 2004, Delphi hid up to $325 million in factoring, or sales of accounts receivable, in order to improperly boost measures of Delphi’s financial performance that were relied upon by investors, analysts and rating agencies.
Regulators announced that they had already worked out settlements with both the bankrupt Michigan company and six of 13 individual defendants charged in the case along with the company as a corporate defendant, according to a SEC news release .
The complaint charges seven former Delphi employees and two others with actively participating in or aiding the company's fraud scheme:
- J.T. Battenberg, III of Bloomfield Hills, Michigan and Naples, Florida, the former chief executive officer of Delphi and chairman of its Board of Directors;
- Alan Dawes of Palm Beach Gardens, Florida, the former chief financial officer of Delphi. Dawes agreed to a five-year officer-and-director bar and to pay disgorgement of $253,000 plus prejudgment interest of $134,000, and a penalty of $300,000;
- Paul Free of Oakland, Michigan a former controller and chief accounting officer of Delphi;
- John Blahnik of Bloomfield Hills, Michigan a former treasurer and senior vice president of Delphi;
- Milan Belans of Farmington Hills, Michigan a former director of Capital Planning and Pension Analysis at Delphi;
- Catherine Rozanski of Troy, Michigan a former director of Financial Accounting and Reporting at Delphi;
- Judith Kudla of Bloomfield Hills, Michigan a former director of Finance in Delphi's information technology department;
- Scot McDonald of Carrollton, Texas, an employee of a Texas information technology company;and
- B.N. Bahadur of West Bloomfield, Michigan who was the founder, owner and principal of a Michigan-based private management consulting company. Bahadur agreed to pay disgorgement of $350,000 with prejudgment interest of $139,257 and a penalty of $80,000.
Also charged by the SEC were four individual defendants who regulators said helped the company cover up the scheme and lie on official records:
- Atul Pasricha of Bloomfield Hills, Michigan a former assistant treasurer at Delphi. Pasricha agreed to pay a penalty of $55,000.
- Laura Marion of Rochester Hills, Michigan a former director of Financial Accounting and Reporting at Delphi. Marion agreed to pay a $40,000 penalty;
- Stuart Doyle of Rochester Hills, Michigan a former client executive supporting the Texas IT company's relationship with Delphi. Doyle agreed to pay a $40,000 penalty; and
- Kevin Curry of Hilton Head, South Carolina, who was also a former client executive supporting the Texas IT company's relationship with Delphi. Curry agreed to pay a penalty of $25,000.