Accounting & Tax

SEC Charges 8 Ex-Delphi Finance Execs

Top finance officials, including the one-time CFO, treasurer, and controller, were included in the alleged fraud charges.
Stephen TaubOctober 30, 2006

The Securities and Exchange Commission charged 13 individuals, including eight former finance executives, for the roles they played in a massive fraud at Delphi Corp. In addition, the regulator settled financial fraud charges against the auto parts giant covering the years 2000 through 2004. Under the deal, Delphi did not admit or deny the Commission’s allegations.

In addition, the Commission simultaneously settled with six individuals, who also neither admitted nor denied the Commission’s allegations. “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,” said Linda Chatman Thomsen, the Director of the Commission’s Division of Enforcement, in a statement.

Thomsen asserted that the case facts “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.”

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The SEC’s complaint charges seven former Delphi employees and two others with participating in, or aiding and abetting Delphi’s fraud. The charged executives include J.T. Battenberg, the former chief executive officer of Delphi and chairman of its board. The other six former Delphi employees worked in the finance department: Alan Dawes, former CFO; Paul Free, a former controller and chief accounting officer; John Blahnik, a former treasurer and senior vice president; Milan Belans, a former director of capital planning and pension analysis; Catherine Rozanski, a former director of financial accounting and reporting, and Judith Kudla, a former director of finance in Delphi’s information technology department.

The two other individuals being charged work for a Texas IT company and a Michigan-based private management consulting company, respectively.

The complaint also charges four individuals with aiding and abetting Delphi’s reporting and books-and-records violations. They include two former finance executives—Atul Pasricha, a one-time assistant treasurer, and Laura Marion, a former director of financial accounting and reporting—as well as two individuals who work for the Texas IT company.

The SEC’s alleges that between 2000 and 2004, Delphi and its executives engaged in several schemes that resulted in the auto parts maker materially misstating its financial condition and operating results in filings with the regulator.

Specifically, the SEC alleges that in 2000, Delphi engaged in two fraudulent accounting and disclosure schemes, which resulted in the company hiding a $237-million warranty claim asserted by its former parent company, and inflating its net income by $202 million. According to the charges, Delphi also entered into two improper inventory schemes in the fourth quarter of 2000, through which it agreed to sell roughly $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 alleged deals enabled 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.

The SEC also alleged that 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 the IT company. The SEC claims that 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,” the regulator added.

Finally, from 2003 to 2004, the SEC claimed that Delphi hid up to $325 million in factoring—sales of accounts receivables—to improperly boost non-GAAP, pro forma measures of Delphi’s financial performance. Hiding the factoring allowed Delphi to overstate materially its “Street net liquidity,” a pro forma measure, during that two-year period, according to the SEC.

Explaining why the regulator did not impose a penalty on the company, Fredric D. Firestone, an associate director in the SEC’s Division of Enforcement, stated, “Despite engaging in widespread fraudulent conduct, Delphi took significant remedial steps and cooperated extensively with the Commission’s investigation.” He added that this is consistent with the principles announced by the SEC in January 2006 regarding financial penalties, which rewards companies for remediation and cooperation, among other things.

Under the individual settlements, the SEC said 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. Pasricha agreed to pay a penalty of $55,000.

In connection with the civil action, Marion and two non-finance executives each agreed to the institution of settled administrative cease-and-desist proceedings against them.