Facts Leading Up to Stockman Indictment

In March 2007, US District Attorney, Michael J. Garcia, filed an indictment against David Stockman, J. Michael Stepp, David R Cosgrove, and Paul C Barnaba. The indictment alleges that all four persons acted either alone or conspired together to commit a series of violations. The list of accusations includes conspiracy to commit securities fraud, false statements in annual and quarterly reports, false entries in books and records, lying to auditors, bank fraud, wire fraud, and obstruction of an agency proceeding.

Both Stockman and Stepp were employed at Collins and Aikman, Inc. Stockman served as the CEO and Chairman of the Board. J. Michael Stepp served as the CFO and advisor to Collins and Aikman. Both defendants were partners in a private equity firm which was the largest single shareholder in Collins and Aikman. Cosgrove served as Group Controller and Vice President and later took on the position as Senior Vice President of the Financial Planning and Analysis Group. Lastly, Barnaba served as the Director of Financial Analysis.

Collins and Aikman was in the business of providing companies around the world a broad range of automotive supply parts. The company owned and operated factories in North America, South America, and Europe, and supplied parts to both domestic and foreign auto manufacturers, such as Ford, General Motors, and DaimlerChrysler. By 2005, Collins and Aikman had grown to be one of the largest automotive parts suppliers in the world.

The companies’ ability to leverage capital was conditioned upon complying with certain covenants as negotiated in their lender agreements. For example, Collins and Aikman had to maintain a level of performance predetermined by their investors. Failure to comply would constitute a default on such agreements and warrant a demand for immediate payment of the full amount of its credit obligations. Maintaining these performance levels also determined whether or not lenders would provide the company with additional financing in the future. Beginning in 2001, Collins and Aikman faced increasing pressures in its business operations, which, along with other issues, threatened to cause Collins and Aikman’s financial performance to fall to levels that might trigger a default on the financial agreements. Such a default would cut off funding that the company desperately needed and also require the company to repay creditors in full the amounts that Collins and Aikman had previously borrowed.

In order to stave off total insolvency, prosecutors allege that Stockman lied to banks about the firm's financial condition, inducing them to loan the company money it couldn't repay. He began structuring transactions as "rebates" that involved masking loans, which were supposed to be repaid as income. He exaggerated the manufacturer's prospects, knowing his claims were untrue, which led people to buy company securities that quickly became worthless.

In May 2005, the Board of Directors discovered that Collins and Aikman had run out of cash. Finding itself on the verge of financial insolvency, the Board was forced to file for bankruptcy. The prosecution asserted that Collins and Aikman’s financial situation occurred largely under Stockman’s direction, and the Board of Directors seemed to agree. Soon after the Board discovered that the company had run out of money, it immediately requested that Stockman resign. By this time, Collins and Aikman’s common stock became nearly worthless. The indictment alleges that the actions of the defendants- which include engaging in securities fraud, lying to auditors, and “cooking” the company books- resulted in hundreds of millions of dollars in investor and creditor losses. Currently, officials are selling off the company in pieces, a process that may be complete long before the Stockman case is set to go to trial in the later part of 2008.

The primary materials for this case may be found on the DU Corporate Governance website website.