DETROIT -- In the opening salvo of J.T. Battenberg III's civil fraud trial today, his attorney said the former Delphi CEO was too focused on the challenges of running the massive young parts supplier to have had direct involvement in a book-cooking scheme alleged by federal regulators.
Battenberg, now 67, spent “less than 24 hours” negotiating a $237 million warranty payment to former parent company General Motors in 2000, defense attorney William H. Jeffress Jr. said. That payment is at the heart of the government's fraud charges against the former CEO.
Battenberg relied on others to record the deal on Delphi's books, Jeffress said.
“Mr. Battenberg is not an accountant, but he knows the difference between right and wrong,” Jeffress said. “He's known that all his life.”
The government claims Battenberg and other executives intentionally masked that payment in order to boost Delphi's profits.
“You'll find Mr. Battenberg played no role in that [accounting] process, but signed off because that was what was recommended by the professionals,” including an outside auditor, Jeffress told the 10-member jury during his opening statement.
Attorneys for the Securities and Exchange Commission said Battenberg and other Delphi executives intentionally misled investors about the company's financial health, and had good reason to do so.
In its first full year as a standalone company, Delphi was falling short of financial targets it had set for Wall Street analysts, SEC attorney Jan Felona told the jury. Battenberg and other executives were seeking to paper over the financial warts and give “a false impression of what was going on at Delphi,” Felona said.
And, because Delphi's executive bonuses were based on profit benchmarks, Battenberg and other executives had a personal interest in inflating earnings, she said.
“Money went into their pockets because of the false reporting that went into this warranty transaction,” Felona said.
In all, the SEC alleges four fraudulent transactions occurred between 2000 and 2004, artificially boosting Delphi's earnings, and thus its share price. Battenberg is accused of helping orchestrate only the allegedly improper accounting from the GM warranty payment.
Felona said the government plans to call “top executives at GM and lawyers and accountants,” who will testify that the $237 million Delphi paid to GM was for faulty parts “and nothing else.”
GM, Delphi at odds
Delphi executives fiercely resisted paying the warranty claims because they stemmed from parts delivered to GM while Delphi was still part of the automaker, Jeffress said. And GM set aside only $53 million for Delphi to cover potential warranty claims before the parts unit was spun off.
Because the companies were at loggerheads on the warranty issue in mid-2000, they opened the negotiations to other issues, including a long-simmering disagreement over how much Delphi owed GM for employee pension and retirement benefits related to the spin-off, Jeffress said.
He said the $237 million payment became “a global settlement,” which included much more than just warranty claims. During the trial, Jeffress plans to show jurors language from the agreement that says the payment was intended to resolve “certain open issues” between Delphi and GM, an indication that it was meant to encompass more than the warranty issue.
Delphi booked $202 million of that payment as pension and retirement expenses, and just $35 million as warranty expenses. The SEC claims that decision allowed it to inflate its profits that year by more than $200 million. GM booked the entire $237 million as a warranty payment, the SEC said.
Others on trial
On trial along with Battenberg are Paul Free, former Delphi controller and chief accounting officer; Milan Belans, former director of capital planning and pension analysis; and Catherine Rozanski, former accounting director.
The SEC alleges Free and Belans also were involved in fraudulent accounting on the GM warranty deal, and in fraud involving $270 million in inventory sales in late 2000 and early 2001.
Delphi sold $200 million in precious metals to Bank One while agreeing to buy back the same amount, plus interest and fees, a month later, according to the SEC's complaint, originally filed in 2006. Recording it as a sale, rather than a financial transaction, improperly inflated Delphi's revenue by $200 million, the government says.
Delphi also sold $70 million in batteries and generator cores to consulting firm BBK of suburban Detroit, buying back the parts nine days later. Delphi fraudulently recorded that as a sale, too, the SEC says.
Attorneys for Free and Belans told jurors their clients were not directly involved in engineering those deals, and merely followed the lead of superiors or outside auditors. Regardless, they said, evidence will show those transactions were clean.
“The evidence will show Paul Free performed his accounting duties honestly, openly and respectably,” his attorney, Matthew Lunt, told the jury.
For Belans, “there was no financial motive” to inflate profits because he was a “mid-level employee” who didn't get a bonus tied to earnings, said his attorney, Charles Murphy.
An attorney for Rozanski said she was kept in the dark about the full nature of a $20 million payment to Delphi from an information-technology firm that Delphi had done business with for years. Delphi recorded the payment as income in late 2001, but should have booked it as a loan, because Delphi had agreed to repay that amount in monthly installments over five years, the SEC says.
Rozanski was assured by people inside Delphi that the company hadn't agreed to pay back the $20 million, but instead would allow the vendor to recoup that amount by winning future business from Delphi, her attorney said.
A 10-member jury of six men and four women, including a nurse, a Ford retiree, an elementary school teacher and a department store manager, will decide the case. The trial is expected to take more than a month.
Battenberg is likely to take the stand. Belans' attorneys plan to call him as a witness, and the government, according to court filings, “may call” the former CEO