DETROIT – A jury today cleared former Delphi CEO J.T. Battenberg III of the most serious claims against him stemming from allegations of financial fraud at the auto parts supplier in 2000.
The jury said Battenberg didn't commit fraud related to a $237 million payment Delphi made to former parent General Motors in 2000. The Securities and Exchange Commission said Battenberg intentionally mischaracterized that payment in SEC disclosures to make Delphi's finances look better than they were.
Battenberg was cleared of two claims alleging fraud, one claim related to SEC disclosure rules, and one violation of bookkeeping rules. Jurors found him responsible for three claims involving improper bookkeeping and misrepresentations to accountants.
"The finding of no fraud is extremely gratifying," Battenberg told The Associated Press.
The verdict from the 10-person jury caps an 11-week trial and more than four years of legal proceedings, during which more than 1 million pages of court documents were filed. Avoiding a finding of fraud helps Battenberg -- once a titan of the automotive industry as chief executive of what was then the world's largest parts supplier -- repair some of the damage to his reputation stemming from the SEC's lawsuit, originally filed in 2006.
Former Delphi chief accountant Paul Free also was cleared of fraud claims stemming from the GM transaction. But the jury found Free responsible for two fraud claims related to the sale of $200 million worth of inventory to Bank One.
The SEC said Free participated in a scheme for Delphi to temporarily sell the materials to boost earnings, then bought back the materials without any product ever changing hands.
“We are pleased with these verdicts that send a clear message that filing false public statements and misleading investors will not be tolerated," Gregory Miller, SEC assistant chief litigation lawyer, said in a statement.
The SEC likely will recommend that both Battenberg and Free be fined. An SEC spokesman said any fines would be assessed later by a federal judge.
The government argued that the actions of Battenberg and Free misled investors as to the true financial state of Delphi during the company's pivotal early quarters after it was spun off from GM as a public company in 1999.
Battenberg was Delphi's CEO when the giant auto supplier was spun off. He retired in 2005, a few months before the company filed for Chapter 11 bankruptcy protection.
Battenberg and Free demanded a trial to clear their names even though Delphi and 11 others former Delphi executives and vendor executives charged in the case settled with the government after the allegations were announced in 2006.
Battenberg, a long-time top executive at GM before leading Delphi in the spinoff, was one of the first CEOs nationally to sign financial statements after passage of the Sarbane-Oxley Act of 2002 strengthened regulations governing public-company disclosures.
Throughout the trial, Battenberg counsel William Jeffress argued that Battenberg relied on company CPAs and outside auditors as to the propriety of the 2000 financial accounting. Free's attorneys made similar arguments.
Accusation of parts trades
In addition to the GM warranty episode, Free also was accused of participating in so-called round-trip trades of parts and materials with suppliers.
In those trades, Delphi temporarily sold the materials to boost earnings, then bought back the materials without any product ever changing hands, the government alleged.
Free also was accused of misstating a $20 million loan in 2001 from an information-technology vendor by reporting it as a cash rebate.
Testimony from dozens of witnesses during the trial provided a window into the intense friction that existed between what was then the world's largest automaker and its former parts unit.
Upon the spinoff, GM gave Delphi a $53 million reserve to pay future warranty claims -- then within a year demanded as much as $800 million for faulty parts Delphi supplied before it split from GM, several witnesses said.
GM executives threatened to cut off Delphi from new business if it didn't pay up, Battenberg and other witnesses testified.
Battenberg and top GM executives eventually reached a deal: Delphi agreed to pay $237 million to settle warranty claims and “certain open issues,” including spinoff-related pension and benefit costs that GM got stuck with but which should have been covered by Delphi.
How that $237 million payment was accounted for on Delphi's books was at the heart of the government's case against Battenberg.
The SEC said the payment should have been recorded as a warranty expense, all of which would have come out of its net income that quarter. Instead, Delphi booked $202 million as an adjustment to pension expenses, spread over many years, thus inflating its earnings.