DETROIT -- A few days before Christmas in 2000, BBK Ltd. founder B.N. Bahadur got a call from an assistant treasurer at Delphi.
The Delphi manager, Milan Belans, was gauging Bahadur’s interest in “financing” up to $100 million worth of batteries and generator cores sitting in Delphi’s inventory, Bahadur testified today in the civil securities-fraud trial of three former Delphi officials, including Belans and former CEO J.T. Battenberg III .
Bahadur, now retired from the suburban Detroit financial consulting firm, said he initially was puzzled by the request: He assumed the giant parts maker could easily get a bank loan against its inventory.
“Why do you want me to do it for you?” Bahadur recalled saying.
The Securities and Exchange Commission, in a lawsuit filed in 2006, alleges Belans and other Delphi officials improperly engineered the deal to look like a $70 million inventory sale, which artificially boosted its earnings and revenue for that quarter. It should have been recorded as a loan, the SEC alleges.
Bahadur said Belans assured him that Delphi would buy the inventory back, which it did a few weeks later.
“Was there any doubt in your mind this was simply a financing transaction?” rather than a sale, SEC lawyer Terence Healy asked.
“No doubt in my mind,” Bahadur said.
The BBK deal is one of four transactions from 2000 and 2001 that Delphi misrepresented in its accounting to prop up its financial results, the SEC alleges.
On trial are Battenberg, Belans and Paul Free, Delphi’s former chief accounting officer. Several other executives settled charges years ago without admitting wrongdoing.
The fraud allegations against Battenberg stem from another transaction involving GM. The SEC doesn’t allege he was involved in the BBK deal, but says he was “reckless” in signing SEC financial disclosures that included improper accounting.
Defense lawyers for Belans and Free countered by showing a copy of the agreement Bahadur signed, which described the transaction as a sale. And Bahadur acknowledged that Delphi never agreed in writing to buy the inventory back, but relied on verbal assurances.
Bahadur agreed to pay back the $350,000, plus interest of $139,257 and a penalty of $80,000, in an SEC settlement in 2006. He didn’t admit any wrongdoing.
A fourth defendant who went to trial, former accounting director Catherine Rozanski, has settled with the SEC, her lawyer said today.
“Both sides were finally able to come to a resolution,” lawyer David DuMouchel said.
Battenberg, Free and Belans would have to pay damages and repay any "ill-gotten" gains if the jury decides he violated securities laws; the SEC hasn't specified an amount. The trial is expected to last more than a month.