DETROIT -- Delphi's former top lawyer testified today that he warned CEO J.T. Battenberg III in October 2000 that “covering up” certain details of a major settlement with General Motors could violate federal securities laws.
Logan Robinson, who was Delphi's general counsel at the time, said during Battenberg's civil securities-fraud trial that he was worried that the Securities and Exchange Commission would flag Delphi's disclosure of a $237 million payment it made to GM in early October 2000.
The SEC did just that, later suing Battenberg and others at Delphi. The SEC says the entire payment was to compensate GM for faulty parts Delphi had supplied to the automaker. Delphi purposely disguised most of it as pension-related costs stemming from the supplier's separation from GM, artificially inflating its profits, the SEC says.
Delphi's accounting and disclosure of that payment lie at the heart of the SEC's case against Battenberg, now 67.
“I know the market won't like it, but I truly believe we shouldn't downplay our warranty problems” in an upcoming SEC filing, Robinson said on a voice-mail message left for Battenberg and then-Delphi CFO Alan Dawes on Oct. 1, 2000.
Earlier in the message, Robinson said: “On the one hand, we made a large warranty payment to GM but avoided the hit to earnings” through the pension payment.
‘If we start covering up …”
He added: “If we start covering up what [GM is] doing to us, we will be the ones in trouble with the SEC, even though [GM] caused the problem.”
In 2005, Delphi restated its earnings for that period, recording the entire $237 million as a warranty payment. In 2006, the SEC sued Battenberg and several other Delphi executives for fraud related to the company's disclosure of the GM transaction.
Robinson's quotes, read to a 10-member jury, came from notes he prepared before leaving the message for Battenberg and Dawes. Robinson told the courtroom that the notes, which Battenberg's defense attorney fought to keep out of the case, matched what he actually said on the message.
It was the first time during the nearly four-week trial where testimony revealed concerns at the highest levels of Delphi about how the company would disclose the GM payment in its SEC filings. It's also the first time jurors have heard that Battenberg was at least kept in the loop on how the disclosure would be handled.
Robinson said Battenberg received the voice mail and instructed him to “work through the issues” with Dawes.
Based on his attorney's opening statements, Battenberg's defense boils down to this: The GM agreement became a much broader settlement during eleventh-hour negotiations. It was expanded beyond the warranty spat to resolve other long-simmering issues between Delphi and its erstwhile parent company.
Today, Robinson backed up that story. He recounted a Sept. 5, 2000, meeting he attended with top GM brass, along with Battenberg and Dawes.
“They wanted the $250 million but were willing to offer a much broader settlement and an improvement in the relationship, which could lead to much more business for us,” Robinson said.
In addition to warranty claims and pension costs, Robinson said the deal also included a commitment by GM to steer more business to Delphi and to help Delphi squeeze Tier 2 suppliers that had been partly responsible for some of the faulty parts.
He said GM executives suggested the companies deploy an “asymmetrical accounting” arrangement, whereby GM booked the $237 million as warranty claims and Delphi booked it mostly as pension costs. Each method was the most favorable treatment for the companies' bottom lines, the SEC says.
Robinson said the GM deal was scoured by his own legal department and outside securities attorneys from a major law firm.
“The conclusion,” he said, “was the settlement was legal and completely defensible.”