U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 19891 / October 30, 2006

Accounting and Auditing Enforcement Release No. 2504 / October 30, 2006

SEC v. Delphi Corporation, J.T. Battenberg, III, Alan Dawes, Paul Free, John Blahnik, Milan Belans, Catherine Rozanski, Judith Kudla, Scot McDonald, B.N Bahadur, Atul Pasricha, Laura Marion, Stuart Doyle and Kevin Curry, United States District Court for the Eastern District of Michigan, SEC v. Delphi Corporation, et al., Civil Action No. 2:06-cv-14891 (AC) (E.D. Mich. Oct. 30, 2006)

SEC Charges Delphi Corporation and Nine Individuals, Including Former CEO, CFO, Treasurer and Controller, in Wide-Ranging Financial Fraud; Four Others Charged with Aiding and Abetting Related Violations; Delphi and Six Individuals Settle

The Securities and Exchange Commission today filed settled financial fraud charges in federal court in Detroit against Delphi Corporation, a Troy, Mich. auto parts supplier. In its complaint, the Commission charges Delphi with engaging in a pattern of fraudulent conduct between 2000 and 2004. The Commission also charges thirteen individuals for their alleged roles in the fraudulent conduct and/or in related reporting and books-and-records violations by Delphi.

The complaint charges seven former Delphi employees and two others with participating in or aiding and abetting Delphi's fraud.

  1. J.T. Battenberg, III of Bloomfield Hills, Mich., and Naples, Fla., the former Chief Executive Officer of Delphi and Chairman of its Board of Directors;
     
  2. Alan Dawes of Palm Beach Gardens, Fla., the former Chief Financial Officer of Delphi;
     
  3. Paul Free of Oakland, Mich., a former Controller and Chief Accounting Officer of Delphi;
     
  4. John Blahnik of Bloomfield Hills, Mich., a former Treasurer and Senior Vice President of Delphi;
     
  5. Milan Belans of Farmington Hills, Mich., a former Director of Capital Planning and Pension Analysis at Delphi;
     
  6. Catherine Rozanski of Troy, Mich., a former Director of Financial Accounting and Reporting at Delphi;
     
  7. Judith Kudla of Bloomfield Hills, Mich., a former Director of Finance in Delphi's information technology department;
     
  8. Scot McDonald of Carrollton, Texas, who is employed by a Texas-based information technology company and formerly served as its Manager of U.S. GAAP Consulting and Reporting; and
     
  9. B.N. Bahadur of West Bloomfield, Mich., who, in the relevant period, was the founder, sole owner and principal of a Michigan-based private management consulting company.

The complaint also charges four individuals with aiding and abetting Delphi's reporting and books-and-records violations.

  1. Atul Pasricha of Bloomfield Hills, Mich., a former Assistant Treasurer at Delphi;
     
  2. Laura Marion of Rochester Hills, Mich., a former Director of Financial Accounting and Reporting at Delphi;
     
  3. Stuart Doyle of Rochester Hills, Mich., a former client executive supporting the Texas IT company's relationship with Delphi; and
     
  4. Kevin Curry of Hilton Head, S.C., also a former client executive supporting the Texas IT company's relationship with Delphi.

The Commission's complaint alleges that, between 2000 and 2004, Delphi engaged in multiple schemes that resulted in Delphi materially misstating its financial condition and operating results in filings with the Commission, offering documents, press releases, and other documents and statements. The allegations include the following.

  • In 2000, Delphi engaged in two fraudulent accounting and disclosure schemes, which had the purpose of and ultimately resulted in Delphi hiding a $237 million warranty claim asserted by its former parent company and 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 the IT company. 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 non-GAAP, pro forma measures of Delphi's financial performance that were relied upon by investors, analysts and rating agencies. Hiding this factoring allowed Delphi to overstate materially its "Street Net Liquidity," a pro forma measure, during that two-year period. In addition, in one quarter, Delphi also manipulated the hidden factoring to create a false $30 million boost in its "Street Operating Cash Flow," another pro forma measure.

Delphi simultaneously settled the charges, without admitting or denying the Commission's allegations, by consenting to the entry of a final judgment permanently enjoining it from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.

The Commission simultaneously settled with six individuals, who also neither admitted nor denied the Commission's allegations.

  • 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. He also consented to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder.
     
  • Pasricha agreed to pay a penalty of $55,000. He also consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
     
  • In connection with the civil action, Bahadur agreed to pay disgorgement of $350,000 with prejudgment interest of $139,257 and a penalty of $80,000, Marion and Doyle each agreed to pay penalties of $40,000, and Curry agreed to pay a penalty of $25,000. Additionally, Bahadur, Marion, Doyle and Curry have each agreed to the institution of settled administrative cease-and-desist proceedings against them. The Commission's Order as to Bahadur orders him to cease and desist from committing or causing violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In addition, the Commission's orders as to Bahadur, Marion, Doyle and Curry, order each of them to cease and desist from causing violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder.

Each of the settlements is subject to court approval, and Delphi's settlement is also subject to approval by the U.S. Bankruptcy Court overseeing Delphi's bankruptcy.

The Commission's complaint alleges that the non-settling defendants Battenberg, Free, Blahnik, Belans, Rozanski, Kudla and McDonald violated and/or aided and abetted Delphi's violations of the federal securities laws as follows:

  • Battenberg violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and aided and abetted Delphi's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder;
     
  • Free violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and aided and abetted Delphi's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder;
     
  • Blahnik violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted Delphi's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-11 thereunder;
     
  • Belans violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted Delphi's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder;
     
  • Rozanski violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted Delphi's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder;
     
  • Kudla violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted Delphi's violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-1 thereunder; and
     
  • McDonald aided and abetted Delphi's violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-1 thereunder.

As to all of the non-settling defendants, the complaint seeks permanent injunctions against future violations of these provisions, disgorgement of ill-gotten gains, with prejudgment interest, and civil penalties. The complaint also seeks officer-and-director bars against Battenberg and Blahnik.

The Commission acknowledges the assistance and cooperation in this investigation of the U.S. Department of Justice, Criminal Division, the U.S. Attorney's Office for the Eastern District of Michigan, the U.S. Postal Inspection Service and the Federal Bureau of Investigation.

The Commission's investigation is continuing.

SEC Complaint in this matter; Administrative Proceeding Nos. 34-54665, 34-54666, 34-54667 and 34-54668