Ex-Delphi execs face civil fraud charges

The U.S. Securities and Exchange Commission is expected to file civil fraud charges this month against up to a dozen former Delphi Corp. executives following a 27-month investigation into accounting fraud at the bankrupt Troy auto supplier, people familiar with the situation said.
Among those expected to face civil charges are John Blahnik, the former Delphi vice president of treasury, mergers and acquisitions; Laura Marion, who had served as director of financial accounting and reporting; and Paul R. Free, former chief accounting officer, the people said.
The SEC also is expected to file civil charges against several officials at other companies involved in improper transactions with Delphi, The Detroit News has learned.
Those charged, if they are found liable, could face hefty fines and be barred from serving as a board member or corporate officer at publicly traded companies. Delphi spokeswoman Claudia Piccinin declined to comment Wednesday, except to say that the company continues to cooperate with the SEC.
Last year, Delphi acknowledged several instances of improper accounting and restated several years of earnings.
The SEC's investigation has found that Delphi used varied improper methods to inflate earnings, cash flow and revenue, which hid the declining health of the company, according to people familiar with the matter.
Several large transactions weren't accounted for properly, including a $237 million payment Delphi made to its former parent, General Motors Corp.
The SEC has concluded that Delphi also called some loans from suppliers "rebates" and engaged in false transactions by claiming it had sold precious metals or scrap materials to boost cash flow.
Delphi also failed to notify its board or credit rating agencies about $300 million in European lines of credit it held between 1999 and the end of 2004.
Thanks in part to the now-discredited transactions, Delphi met or exceeded Wall Street earnings expectations in every quarter between 1999 and 2003.
"It's clear they were trying to make that last penny of earnings," said Peter Henning, a Wayne State law professor and former SEC and Justice Department lawyer.
As a result of the accounting errors, Delphi lowered its 2001 earnings by $265 million, cut 2002 net income by $24 million and adjusted its 2003 net loss by $46 million. It said its cash flow was improperly boosted by $200 million in 2000.
Lawyers for many of the former Delphi executives under scrutiny have argued to the SEC that there is no evidence they personally profited from the improper accounting. They also contend that before the Enron debacle and the 2002 corporate reforms, some of the accounting practices in question were commonplace.
It was biggest supplier in '99
After its spinoff from GM in 1999, Delphi was the world's largest auto supplier with revenue of $29 billion.
Last October, Delphi filed for bankruptcy protection and announced plans to close 21 of its 29 U.S. factories, including several in Michigan.
The company is in talks with GM, the UAW and several large investors to finalize a settlement of claims and to allow Delphi to emerge from bankruptcy protection in the second quarter of 2007.
Most of those now restated transactions took place in 2000 and 2001 when Delphi said it was selling off hundreds of millions of dollars in scrap materials and precious metals -- generating income and cash flow -- when in reality the supplier had agreed to buy back the same assets in the future.
Delphi has acknowledged that these were financing transactions and not sales. In another case, Delphi allegedly booked sales of scrap material destined for landfills as expensive electronic inventory as a way to boost its cash flow.
In December 2000, Delphi recorded a $200 million sale of precious metals to Bank One, which improperly boosted its income by $100 million. Delphi didn't disclose that the precious metals never left the factory floors or that it had a contract to repurchase the materials at a fixed price.
In March 2005, following a 10-month internal investigation led by an outside law firm, Delphi ousted Free and its chief financial officer, Alan Dawes, and said many of the company's financial statements were inaccurate.
Most of the former executives under investigation by the SEC agreed to waive the statute of limitations until Oct 31. Several lawyers close to the case have been told to expect SEC charges by then. The commission is scheduled to meet next week in Washington to approve the filing of the complaints in U.S. District Court in Detroit.
It's not clear if Dawes or ex-Chairman and CEO J.T. Battenberg III -- who both have been subjects of the SEC investigation -- will be among those named in the civil complaints. Battenberg was questioned by the SEC earlier this year.