DETROIT -- A former Delphi financial manager testified today that she objected to a plan in late 2000 to sell precious metals earmarked for General Motors catalytic converters. But her arguments that the sale could disrupt production were overruled.
The sale, and later repurchase of those metals, artificially inflated Delphi's profits, the Securities and Exchange Commission alleges in the civil securities-fraud trial of former Delphi CEO J.T. Battenberg III.
Asked why she thought the sale took place, Katherine Bellis said, “My understanding was that targets had to be met in order for executives to be paid bonuses.”
In late 2000, Bellis, then a financial manager in Delphi's energy and chassis division, got a call from a manager in the supplier's corporate treasury department.
Bellis was asked several questions about nearly $200 million worth of precious metals her division had in inventory to make catalytic converters for General Motors. Delphi corporate intended to sell the metals, Bellis testified.
Bellis, who was in charge of tracking her division's inventory, immediately raised concerns with the corporate manager.
It wasn't excess supply, she said, but was earmarked entirely for GM catalytic converters. Selling it would cause a major supply disruption, she said. Plus, the metals were in various stages of production, scattered across plants in Kentucky, Alabama, Germany and elsewhere.
‘Production would be shut down'
“We had a commitment to our customer to continue to supply them,” said Bellis, who left Delphi this year for a job at Dow Chemical Co. “Our production would be shut down.”
The SEC says Delphi officials never intended to sell the metals. Instead, they used financial engineering masked as a sale of $200 million worth of inventory to Bank One so it could inflate profits.
Delphi repurchased the same metals from Bank One about a month later, in late January 2001, the SEC says.
Battenberg, who the SEC says wasn't directly involved in the metals sale, is accused of fraud for signing false financial disclosures and for his role in a separate deal between Delphi and GM.
Milan Belans, a former assistant treasurer at Delphi, and former accounting director Paul Free also are on trial for their part in several allegedly fraudulent transactions, including the metals transaction.
Under Wall Street pressure
Bellis' story was the latest testimony from SEC witnesses to portray Delphi executives as under intense pressure to hit Wall Street's profit expectations in late 2000, the supplier's first full year as a standalone spinoff from GM.
SEC attorneys today showed the 10-member jury an internal Delphi document from late 2000 that stressed reducing inventory “to meet net income targets.”
When asked why she thought Delphi was looking to sell those metals even though she saw no reason to do so, Bellis said: “Commitments were made to Wall Street. These initiatives would allow us to meet those.”
She added, “My understanding was that targets had to be met in order for executives to be paid bonuses.”
Defense: A legitimate sale
When questioned by defense attorneys, Bellis acknowledged she wasn’t involved in negotiations that led to the metals deal and never discussed it with Free or Belans. She also said she had “no personal knowledge” that the effort to cut inventory related to executive bonuses.
In opening statements last month, defense attorneys said the precious-metals deal was a legitimate inventory sale. They said Bank One was actively involved in commodities trading at the time, took full ownership of the metals and was free to sell or trade them.
“There was a valid business need to sell excess inventory so the company's money wasn't tied up for no good reason,” lawyer Matthew Lund, who represents Free, said during his opening statement.
Battenberg, Free and Belans would have to pay damages and repay any “ill-gotten” gains if the jury decides securities laws were violated; the SEC hasn't specified an amount. The trial, now in its third week, is expected to last several more weeks.