Delphi Corp.'s admission that accounting errors caused it to overstate earnings has spawned at least 11 lawsuits and could force the struggling auto supplier to pay millions in settlements to angry shareholders, employees and retirees.
In a statement filed March 4 with the U.S. Securities and Exchange Commission, the Troy-based company said improper accounting caused it to overstate cash flow by $200 million in 2000 and overstate its pretax income by approximately $61 million in 2001. The company, which is still under SEC investigation, has said it will have to restate earnings for those years and others.
In the week since the announcement, at least 11 law firms have filed suit in federal courts in Michigan, New York and Ohio. They include the New York firms of Wolf Popper, which won a $65 million settlement for shareholders of Service Corp. International in 1999, and Milberg Weiss Bershad & Schulman, which won a $560 million settlement in a similar case filed by shareholders and pension beneficiaries against Lucent Technologies Inc.
Some Delphi lawsuits have been filed in the name of shareholders who say they were misled by the company's inflated earnings. Others have been filed on behalf of retirees and employees who lost retirement savings when Delphi's stock plummeted after the announcement.
The lawsuits filed against Delphi, the world's largest automotive supplier, are standard practice when a high-profile company discloses wrongdoing, said Peter Henning, a former SEC attorney who now teaches at Wayne State University Law School.
Henning said many law firms will file suits on behalf of shareholders or employees in the hope that a judge will eventually consolidate them into one class-action case.
"You've got to get into the race by filing," he said.
Henning said most suits filed by shareholders are settled before they go to trial. He expects Delphi will settle once the SEC finishes its investigation and assesses any penalties against the company. A Delphi spokesman said the company doesn't comment on pending litigation.
Adam Pritchard, an expert on securities fraud at the University of Michigan Law School, said the average settlement in a securities fraud class action suit is between $15 million and $20 million.
Sometimes, companies will pay much less to settle a nuisance lawsuit, Pritchard said. But they could end up paying much more. Frankfurt-based Deutsche Bank AG on Thursday agreed to pay $325 million to settle claims in a class action lawsuit filed by investors in WorldCom Inc.
Pritchard said attorneys typically get 25 percent to 30 percent of the settlement.
Barry Adler, a Michigan attorney who has filed a lawsuit on behalf of Delphi retirees and employees, said he's gotten calls from retirees who are upset that the money they invested in Delphi pension plans has disappeared as Delphi's stock has fallen to its lowest level since General Motors Corp. spun off the company in 1999. He said up to 20,000 employees and retirees at Delphi eventually could be considered part of his suit.
"The plan administrators knew or should have known the stock price was overvalued based upon false information about the revenues of the company," Adler said. "Therefore, they become liable for advising the participants that this was a sound investment."