Speech by SEC Staff:
Remarks at Press Conference
Linda Chatman Thomsen
Director, Division of Enforcement
U.S. Securities and Exchange Commission
New York, New York
March 26, 2007
In addition to the criminal charges that have just been described, today the Commission filed a civil fraud action against nine former officers and directors of Collins & Aikman Corporation: David A. Stockman, former CEO and Chairman of the Board; J. Michael Stepp, former Chief Financial Officer and Vice-Chairman of the Board; Elkin B. McCallum, a former member of the Board; David R. Cosgrove, former Corporate Controller; John G. Galante, former Treasurer; Christopher M. Williams, a former Executive Vice President of the Business Development Group; Gerald E. Jones, former Chief Operating Officer and Executive Vice President of the Fabrics Division; Paul C. Barnaba, former Vice President and Director of Purchasing; and Thomas V. Gougherty, former Controller of the Plastics Division. The Commission also filed a settled civil injunctive action against the company itself.
The Commission's complaint alleges that starting in late 2001 Mr. Stockman, with the assistance of Mr. Stepp, fabricated phony earnings by persuading Mr. McCallum to loan money to Collins & Aikman, which the company reported as income from its operations. You don't need to be an accounting expert to know that borrowed money isn't income. When Collins & Aikman's Audit Committee investigated these transactions, Mr. Stockman lied about them, and directed others to do the same.
As alleged in our complaint, Mr. Stockman, assisted by Messrs. Cosgrove and Barnaba, also embarked on a separate scheme to inflate the company's earnings by accounting improperly for supplier rebates. The defendants asked their suppliers to lie for them by soliciting false confirmation letters that were intended to deceive the company's auditors and justify bogus accounting.
From 2001 to 2004, Mr. Stockman's private equity firm was paid approximately $45 million in fees by Collins & Aikman. Of that approximately $45 million, approximately half went directly to Mr. Stockman.
The complaint further alleges that when aspects of these frauds were questioned by the company's auditors, Mr. Stockman tried to cover up his earlier misconduct. In March 2005, he directed a sham investigation of the supplier rebate accounting that was designed to conceal Mr. Stockman's role and to minimize the extent of the fraud.
At the same time, the complaint alleges, Mr. Stockman, with assistance from Messrs. Galante and Cosgrove, made a series of false and misleading public statements designed to falsely reassure investors, the public and potential financiers that Collins & Aikman remained a viable company, when in fact the company was in financial crisis. A little more than a month later, Collins & Aikman declared bankruptcy.
The ultimate futility of engaging in financial fraud is apparent in the facts of this case. The schemes the defendants used to inflate Collins & Aikman's income simply exacerbated its overall financial problems. The defendants created a vicious cycle that required them to engage in financial fraud on an ever increasing scale to attain the earnings numbers that would allow Collins & Aikman to obtain the capital it continually needed to survive. The schemes could not be sustained and eventually collapsed, leaving injured investors in their wake.
Simultaneously with filing today's complaint, the Commission has asked the District Court for the Southern District of New York to approve a settlement pursuant to which Collins & Aikman would, without admitting or denying the allegations of the Commission's complaint, consent to an injunction prohibiting future violations of the federal securities laws.
I would like to congratulate Christopher Conte, Susan Markel, Mark Kreitman, David Fielder, Robert Peak, and Jim Eichner who investigated this matter, and SEC trial attorneys Michael Semler and Robert Blackburn. I also would like to acknowledge and thank Mr. Garcia and his team at the United States Attorney's Office for the Southern District of New York, David Esseks, William Johnson and Helen Cantwell, as well as Ron Walker, John Feiter and Adam Golden at the United States Postal Inspection Service - for their assistance in connection with their own separate, parallel investigation of this matter.
The Commission's investigation is continuing.