DETROIT -- At a lunch with top General Motors brass on July 27, 2000, then-Delphi CEO J.T. Battenberg came armed with a laundry list of contentious issues that were percolating between the parts maker and its former parent company.
Battenberg and then-Delphi CFO Alan Dawes ran through a chart-and-graph presentation, covering the fledgling supplier's financial health and gripes related to Delphi's spinoff from GM the year before.
They discussed just about everything but the one item GM Vice Chairman Harry Pearce had come to discuss: how Delphi would compensate GM for $526 million in costs from nearly two dozen recalls on parts that Delphi had sold to the automaker.
“About 95 percent of the presentation wasn't relative to what we were there to do,” Pearce told a courtroom here yesterday, the opening day of Battenberg's civil fraud trial. “The issue was how to determine the respective faults” of GM and Delphi on the warranty issue.
The resolution, decided later that summer, is what landed Battenberg in court now, a decade later, fighting to clear his name of civil securities-fraud charges.
In a lawsuit filed in 2006, the Securities and Exchange Commission accused Battenberg and other former Delphi executives of improperly classifying $202 million in warranty payments to GM as pension and retiree cost charges related to Delphi's 1999 spinoff from GM. The SEC contends that booking the payment as a loss on Delphi's pension plan allowed Delphi to bypass its quarterly income statement, artificially inflating its profits by more than $130 million that quarter.
Pearce testified that he had been dispatched by then-GM CFO Michael Losh to resolve the warranty issue with Delphi. Executives agreed at the July lunch to have joint teams of Delphi and GM engineers huddle to determine “on a percentage basis, who was at fault” for each of the recalls, Pearce testified.
By the end of August, they had the answer: Delphi was responsible for $247 million in warranty claims. In a Sept. 12 meeting at GM headquarters, Battenberg agreed to pay that amount, which was later lowered to $237 million, Pearce testified. Delphi later accounted for the settlement as $202 million in pension and post-retirement expenses, and only $35 million in warranty payments.
In court today, Pearce said the issue of pension or post-retirement costs never came up during any of his meetings with Battenberg. SEC attorneys tried to hammer home that point to bolster their claim that the pension issue simply was used as an accounting gimmick to mask a profit-damaging warranty payment.
“Was the $247 million for anything other than the 27 warranty claims?” SEC attorney Jan Felona asked Pearce today.
“No,” he replied.
In his cross-examination of Pearce, Battenberg attorney William Jeffress highlighted the Sept. 22, 2000, two-page agreement showing that GM had released Delphi from certain pension and employee-benefit claims in addition to the 27 warranty claims.
Jeffress questioned how the final agreement could have included pension costs if Pearce, GM's point man on the deal, never discussed the issue with Delphi executives. Pearce said he hadn't reviewed the agreement at the time: Once the sides had a verbal deal, he left the drafting of the two-page document to GM's financial and legal teams, he said.
Defense cries foul on GM
Defense attorneys also sought to cast GM as the villain. Jeffress said the $237 million GM received from Delphi allowed the automaker to beat Wall Street's earnings forecast by one penny a share that quarter.
“It is true that getting that money in the third quarter was important? Jeffress asked Pearce.
Pearce, a former U.S. Air Force captain who spent many years as GM's general counsel before becoming vice chairman, brushed off the insinuation that the automaker was demanding a specific amount simply to hit a profit target.
“It was important for the company to be paid for any account payable,” Pearce said. “It would be up to the accountants to decide when it's booked.”
With the jury out of the court room, defense attorney Deborah Kovsky-Apap, a lawyer for former Delphi controller and chief accounting officer Paul Free, was less subtle.
“Defense believes GM was going to get this money from Delphi whether through warranty, (pension-related expenses) or extortion,” she told U.S. District Judge Avern Cohn.
Cohn said there has been nothing in the evidence so far, including Pearce's testimony, to suggest GM was trying to extort Delphi. He told defense attorneys he doesn't view GM's finances as relevant.
At another point during testimony, Cohn snapped: “GM isn't on trial here.”