A statement from the US department of justice said an indictment has been unsealed in a Manhattan court charging David Stockman, the former president and CEO of bankrupt components maker Collins and Aikman Corporation (and one time budget director for president Ronald Reagan), and seven other former members of C&A’s management.


US attorney Michael Garcia for the southern district of New York, and Ron Walker, inspector-in-charge of the New York division of the US Postal Inspection Service (USPIS) said in a statement that the indictment charges Stockman with conspiracy, securities fraud, bank fraud, wire fraud, and obstruction of an agency proceeding, in connection with his participation, from December 2001 through May 2005, in a scheme to conceal from investors and lenders the truth about C&A’s declining operating performance and financial results.


The indictment also charges former C&A chief financial officer Michael Stepp; former controller David Cosgrove; and former director of purchasing Paul Barnaba. Four felony informations charge other C&A executives with related crimes.


Garcia also announced a non-prosecution agreement between his office and Collins & Aikman Corporation.


The indictment alleges that starting in December 2001, Stockman, Stepp and others knew that C&A’s true operating performance and financial results were not meeting internal and external expectations. Rather than reveal C&A’s true condition, which might trigger default on the financial covenants governing C&A’s credit facilities and impede C&A’s ability to raise additional capital in the debt markets, Stockman, Cosgrove, Stepp, Barnaba and others joined in a scheme to defraud C&A’s investors, banks and creditors by manipulating C&A’s reported earnings.


From December 2001 through 2004, Stockman, Stepp, Cosgrove, Barnaba, and their co-conspirators schemed to misrepresent C&A’s true operating performance and financial results by causing C&A’s reported figures for EBITDA (earnings before interest, taxes, depreciation, and amortization), operating income, and other financial metrics to be falsely and fraudulently inflated through the systematic premature recognition of cost reductions based on supplier rebates.


According to the indictment, to further the scheme and conceal the fraud, Stockman, Stepp, Cosgrove, Barnaba, and their co-conspirators caused C&A to file financial statements with the US Securities & Exchange Commission (SEC) that presented a misleading picture of C&A’s operating performance and financial results, including quarterly and annual reports that misrepresented C&A’s expenses, operating income, and earnings per share.


At the end of 2004 and the beginning of 2005, C&A’s true operating results substantially deteriorated, causing an unprecedented liquidity crisis. The indictment charges that Stockman directed a scheme to further defraud C&A’s creditors by, among other things, misrepresenting to General Electric Capital Corporation (GECC) the nature of C&A’s portfolio of accounts receivable, against which GECC was permitting C&A to borrow over a $US100m on a daily basis.


Also in the beginning of 2005, as C&A’s improper rebate accounting practices came under scrutiny from its auditors, Stockman directed a scheme to further defraud C&A’s investors and creditors by making numerous false statements to the public and to C&A’s creditors concerning: (a) C&A’s current liquidity situation, (b) C&A’s forecasted EBITDA for the first quarter of 2005, and (c) the scope of the improper rebate recognition practices that C&A’s outside auditors and audit committee were beginning to examine.


In early April 2005, Stockman repeated many of these false assurances to Credit Suisse First Boston (Credit Suisse), in order to secure $75m in additional financing. These additional funds, however, were not sufficient to meet C&A’s needs and were depleted by late April 2005, according to the indictment.


In May 2005, the board of directors discovered that C&A had run out of cash and had, at Stockman’s direction, misled C&A’s investors about C&A’s true operating performance. When the truth about C&A’s operations and finances was revealed, C&A went into bankruptcy, its common stock became nearly worthless, and the value of its bonds plummeted, resulting in hundreds of millions of dollars in investor and creditor losses.


The eight-count indictment charges Stockman, Stepp, Cosgrove, and Barnaba each with one count of conspiracy to commit securities fraud, make false filings with the SEC, falsify books and records of C&A, commit wire fraud, commit bank fraud, and obstruct justice, and with three counts of securities fraud. Stockman alone is charged with two counts of bank fraud (arising from fraud on GECC and JP Morgan Chase) and one count of wire fraud. Stockman and Stepp together are charged with obstruction of an agency proceeding.


The conspiracy charge carries a maximum sentence of five years in prison and a fine of the greater of $250,000, or twice the gross gain or loss resulting from the offence. Each of the securities fraud counts carries a maximum sentence of 20 years in prison and a fine of the greater of $5 million, or twice the gross gain or loss resulting from the offence. Each of the bank fraud counts carries a maximum sentence of 30 years in prison and a fine of the greater of $1 million, or twice the gross gain or loss resulting from the offence. The wire fraud count carries a maximum sentence of 20 years in prison and a fine of the greater of $250,000, or twice the gross gain or loss resulting from the offense. Finally, the obstruction of an agency proceeding count carries a maximum sentence of five years in prison and a fine of the greater of $250,000, or twice the gross gain or loss resulting from the offence.


Non-prosecution agreement


In light of C&A’s cooperation with the government’s investigation and the current financial situation of C&A, among other factors, the government has entered into a non-prosecution agreement with C&A. C&A will continue to cooperate with the government as a condition of that agreement.


The justice department noted that the charges contained in the indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.


Collins & Aikman confirmed separately in a statement it had reached the non-prosecution agreement with the United States attorney for the southern district of New York.


The agreement removes the threat of an indictment of Collins & Aikman by the United States government for any such conduct, the bankrupt supplier said in a statement.


C&A also confirmed it had reached a settlement with the US Securities and Exchange Commission (SEC). Under that, the company agreed, without admitting or denying any wrongdoing, to avoid future violations of the securities laws.


The SEC did not impose civil monetary penalties against Collins & Aikman, noting the significant remedial steps and extensive cooperation provided by the company. The SEC settlement was effectuated by the SEC commencing and simultaneously settling a lawsuit alleging violations of federal securities laws. The lawsuit and settlement relate to matters that were the subject of an audit committee investigation of, among other things, the company’s accounting for certain supplier rebates and the company’s forecasts for the first quarter 2005, as well as the company’s accounts receivable securitisation facility.


“Since their inception, we have cooperated fully with the government’s investigations and will continue to do so. We are pleased to put The Department of Justice and SEC investigations behind us and consider this a significant milestone as we focus on completing our restructuring activities,” said John Boken, Collins & Aikman’s chief restructuring officer.