David Stockman, the former budget director in the Reagan White House, was charged in an indictment unsealed Monday with overseeing a sweeping fraud at a troubled auto parts supplier that he led before the company collapsed into bankruptcy.
Stockman, 60, was one of four former top Collins & Aikman Corp. executives named in the federal indictment. Four other former company employees including a former treasurer have already pleaded guilty in the case, prosecutors said.
At a news conference, U.S. Attorney Michael Garcia said Stockman and his co-defendants “resorted to lies, tricks and fraud” from 2001 to 2005 to hide the truth about his failing company from investors and creditors.
Garcia said Stockman let the company’s employees mislead creditors about the company’s revenues and the ability of Collins & Aikman to pay its bills until the company was forced to enter bankruptcy proceedings in May 2005.
The government said Stockman personally decided which of the company’s suppliers and creditors would get paid and personally managed all of C&A’s liquidity during the crisis.
Collins & Aikman made auto interiors, carpets, acoustics, fabrics and convertible tops.
The company, based in Southfield, Mich., cooperated in the investigation and was rewarded with a non-prosecution agreement calling for it to continue to help the government, prosecutors said.
The indictment charged Stockman and three others with conspiracy to commit securities fraud, making false statements in annual and quarterly reports, making false entries in books and records, and lying to auditors as well as committing bank fraud, wire fraud and obstruction of an agency proceeding.
The others charged in the indictment were J. Michael Stepp, 62, of Charlotte, N.C., David R. Cosgrove, 48, of Rochester, Mich., and Paul C. Barnaba, 37, of Orion, Mich. All three pleaded not guilty and were released on $500,000 bail. They did not immediately comment.
After he was freed on $1 million bail, Stockman walked out of the courthouse smiling.
“I have done absolutely nothing wrong, except to help save this company from a very dire circumstance,” he told reporters. “All of my actions were motivated by an effort to save the company.”
Stockman’s attorney, Elkan Abramowitz, said the evidence would show there was no looting or phony transactions, only disputes over accounting transactions. “We think this is not a crime,” Abramowitz said.
Craig A. Stewart, a lawyer for Cosgrove, said he would “discourage anybody from rushing to judgment” in the case.
Four others faced charges related to the scandal in separate court papers and had pleaded guilty, prosecutors said.
Separate civil fraud charges were filed by the Securities and Exchange Commission.
A spokesman for Collins & Aikman said he had no immediate comment.
The indictment said the crimes occurred as Stockman served on the board of directors of Collins & Aikman from 2000 through May 2005. He was chairman of the board from August 2003 until May 2005. Stepp was vice chairman of the board of directors. Cosgrove and Barnaba also were employed by C&A.
Garcia said Stockman and the others knew that C&A was in financial trouble in December 2001 and began manipulating the company’s earnings reports to hide information that could trigger defaults in its deals with bondholders and banks.
From December 2001 through 2004, the four indicted men joined with co-conspirators to misrepresent the company’s true financial picture by falsely inflating earnings.
According to court papers, Stockman responded to a financial crisis at the company in 2005 by directing it to delay paying its bills as long as possible.
The indictment also accused Stockman of misleading investors, saying he wanted to hide his own and other senior management’s involvement in a fraudulent scheme to skew the company’s accounting to hide its troubles.
If convicted, the defendants could face up to 30 years in prison on the most serious charge.
Stockman told reporters he had personally lost $13 million in the company’s collapse and a business he owned lost $360 million as he tried to rescue the company from a “brutal financial squeeze” by the three big domestic automakers.
“This wasn’t any kind of a joy ride,” he said of efforts to save Collins & Aikman which included moving into a motel next to headquarters, working long hours without pay and spending millions of dollars of his own money on company expenses. “This was a disaster.”
He added: “I didn’t line my pockets in any way.”
Stockman was Reagan’s budget director from 1981 to 1985. He created a storm early in his tenure when he told an interviewer that he thought Reaganomics were a “Trojan horse” for the rich, and predicted huge budget deficits. He said later he was summoned to the White House “woodshed” for his comments.
Stockman apologized and kept his job until 1985, when he resigned and wrote a book of scathing criticism of Reagan and his top aides.