DETROIT -- A $20 million “rebate” that Delphi squeezed out of its information-technology supplier in late 2001 was actually a loan that the parts maker never should have booked as income, a former manager from the technology company testified today.
Delphi managers assured Electronic Data Systems that the $20 million would be repaid but were reluctant to put that commitment in writing, former EDS manager Kevin Curry testified in the civil securities-fraud trial of former Delphi CEO J.T. Battenberg III.
“In all my discussions with Delphi, it was a loan,” Curry told the 10-member jury.
Delphi fraudulently booked the payment as a reduction in its information-technology expenses, misleading investors by artificially boosting Delphi profits 24 percent that quarter, the Securities and Exchange Commission alleges.
Battenberg, who the SEC says wasn't directly involved in the EDS transaction, is accused of fraud for signing false financial disclosures and for his role in a separate deal between Delphi and General Motors.
Former accounting director Paul Free also is on trial for his part in several allegedly fraudulent transactions, including the EDS deal. Both men face SEC fines if found liable.
Defense attorneys have characterized the $20 million payment as “blood money,” or the practice of demanding a payment from a supplier who has received ample business over the years. Delphi thought it had overpaid EDS for years, so it went after the firm for a big payment, defense attorneys have said.
Under questioning from defense attorneys, former Delphi information technology manager William Harper said today that the $20 million payment was discussed internally as a “rebate,” not a loan. He said Delphi thought EDS' prices had been higher than the going rate for years.
Jurors were shown a copy of an EDS work order signed by Free and other Delphi officials a few weeks after the $20 million payment, agreeing to pay EDS $333,333 a month over five years for administrative services. It was a sham work order to disguise repayment, the SEC has said.
Instead of paying EDS interest, Delphi officials agreed to accelerate payments on other contracts to compensate the company, Curry testified.
Catherine Rozanski, a former Delphi accounting director, also testified today that she thought the payment was a rebate, not a loan. She was surprised to learn years later, once Delphi was under SEC investigation, that her boss, Free, signed the work order.
“This looked to me kind of like we had an obligation to pay that $20 million back,” Rozanski said. “It upset me.”
Free's attorneys have said he had no involvement in the EDS negotiations. He signed the work order because the information technology division presented it as payment for legitimate work EDS had performed.
The SEC is expected to call its final witness by the end of this week. The defense's case is likely to take several weeks.